Good afternoon, and thanks to the FCCJ for the kind invitation. Since 2002, when I became the Director General of IATA, I have taken a special interest in Japan. One of my first duties was to receive an award from the Government of Japan recognizing IATA’s role in post-war Japanese aviation. Shortly after that, I delivered a speech at an airport meeting here, demanding that Narita reduce its charges. This signaled the start of building a new and more equitable partnership with airports, that resulted in an 11% reduction in Narita charges in 2005.
In 1971 IATA’s settlement operations began in Japan: our very first location. Today it is a $300 billion global system, of which $20 billion is handled by our Japan office. And in 2005 we hosted our Annual General Meeting (AGM) in Tokyo. Of course Japan’s main carriers, All Nippon Airways, Japan Airlines and Nippon Cargo Airlines are members of IATA, and 109 more IATA airlines serve this market.
Having played such a special role in my time at IATA, I am very pleased to be here for a last visit, before I retire to take on other roles in the industry - namely teaching and boards. Before addressing Japan-related issues let me start by looking at where the industry is globally, on safety and financial performance.
Safety is aviation’s number one priority. Today we are announcing our 2010 global safety performance. We measure safety in hull losses per million flights for Western-built jet aircraft. A hull loss is an accident where the aircraft is written-off. In 2010, the hull loss rate was the lowest in the history of aviation, at 0.61. That means we had one accident for every 1.6 million flights. That’s significantly better than the 0.71 recorded in 2009, and a 42% improvement over the decade. In total there were 17 hull losses on 28.4 million jet flights, down from 19 in 2009. IATA members outperformed the industry with a rate of 0.25, or one accident for every 4 million flights. IATA Operational Safety Audit - IOSA - is improving safety. Safety is so important that we made IOSA compliance a condition of membership from April 2009. IOSA registration is now the global standard for airline safety management, and open to all airlines. In total, 356 airlines are on the IOSA registry, including all 234 IATA members.
Of course safety is a constant challenge. There were 786 fatalities in 2010, with 2.4 billion travelers, compared to 1945 when we had 9 million passengers and 247 fatalities. You can see the positive results of our commitment, but every fatality is a human tragedy that reminds us that we must do even better. Data-driven measures will ensure further improvements in safety. Last year, we launched an historic program to share safety information among IATA, the International Civil Aviation Organization (ICAO), the United States Federal Aviation Administration and the European Union. Putting together all of this information will allow us to design specific programs, and make an already very safe industry even safer.
Unfortunately our good safety performance is not matched by our financial performance. Over the last 40 years the industry’s profit margin was 0.1%. Last year we celebrated a $15.1 billion global profit. It was welcome relief after losing $50 billion over the last decade. But it was just a 2.7% margin, which will shrink to 1.5% this year, with industry profits falling to $9.1 billion. And this forecast was made with oil at an average of $84 per barrel for the year. Today’s prices are over $100, and airlines face the challenge of recovering $1.6 billion in added costs for every dollar that the price increases.
On top of this challenge, we must also remember that this industry, with $598 billion in annual revenues, is carrying $200 billion in debt. And this is after a decade of transformation, during which airlines improved productivity 63%, reduced sales and distribution unit costs 19%, and improved fuel efficiency by 20%.
IATA played a critical role throughout the decade of crisis. First, we kept the industry’s money safe, processing $2.5 trillion of the industry’s money, with a success rate of 99.999%. And we saved big money by driving efficiency. Nearly $16 billion in fuel, $19 billion in infrastructure user charges, $2.5 billion in operational costs, and $17.5 billion by Simplifying the Business with programs like e-ticketing.
Since 2004, the cumulative total is over $55 billion. And still the margins are pathetic. More change is needed, and needed fast.
Change is one of the themes of IATA’s Vision 2050 initiative. Two consecutive years of profitability are a window of opportunity for long-term strategic thinking; so on 11-12 February I hosted a meeting with 35 strategic thinkers in Singapore. The group looked to 2050, when we expect to transport 16 billion people and 400 million tonnes of cargo.
At our AGM in Berlin last June, I announced a vision centered on serving our customers sustainably (in both financial and environmental terms) with the right technology, and efficient infrastructure. The group challenged and further developed this vision. We benefitted from the inspirational leadership of Singapore’s Minister Mentor Lee Kuan Yew, and the competitiveness expertise of Harvard University’s Professor Michael Porter.
The initial reaction of Michael Porter on the state of our industry was to say….”What a mess”! Over the coming months we will be putting together a compelling story to present at our June AGM. Our goal is to get people and governments to care enough about aviation’s benefits – it supports 32 million jobs and $3.5 trillion in economic activity - to join us in driving change.
One area that is changing fast is Asia as aviation’s center of gravity shifts eastward. Asia Pacific’s carriers are the most profitable, with $7.7 billion in 2010, and $4.6 billion forecast for this year. Of the 800 million new passengers who will fly by 2014, 360 million of them will be in Asia Pacific and 214 million of those in China alone. Asia Pacific overtook North America as the largest aviation market in 2009. The difference was small, and both had a 26% market share. But by 2014, Asia will account for 30% of global traffic, while North America will fall to 23%.
Investors see the opportunity. The five top airlines by market capitalization are
- Air China at $20 billion
- LAN-TAM when they combine will be $15 billion
- Singapore Airlines at $14 billion
- Cathay Pacific at $12 billion, and
- China Southern is at $11 billion
Where is Japan in this vision of a changing world? In 2009, with 54 million passengers, it was number seven for international travel, ahead of China at 49 million. By 2014, we expect it to fall to number nine, with 72 million passengers, behind China with 82 million. Japan is increasingly focused on China, now its largest trading partner. China’s growth is creating business opportunities, and changing the world. Between 1999 and 2008, Japan’s trade with China increased four times, to $268 billion. China is now Japan’s largest air service partner, with 617 scheduled flights a week. The big question for Japan, and Japanese aviation, is how to compete with China?
According to the Economist Intelligence Unit, a comparison with China shows major gaps with Japan in competitiveness. Labor costs of $25/hour are ten times more expensive than China. The purchasing power parity of the Japanese yen is 25% overvalued, and the Chinese yuan is 70% undervalued. The answer has been development of high productivity, high value-added international industries. Their success relies on a competitive and financially healthy air transport sector.
Like the airline industry Japan has a debt problem. At 200% of GDP it is the biggest in the world, managed with low bond yields and massive domestic savings. With GDP growth at 1.6% this year, growing out of these problems is not an option. Prime Minister Kan has made some interesting proposals that show courage and leadership. Whether they are ultimately the right solution will be judged by voters and by history. But I am confident that a national aviation policy focused on competitiveness could play a big role in recovering lost economic ground. But to do that we need a more effective airports policy in Tokyo, a level playing field with more open markets, and an approach to environment including sustainable biofuels.
Let’s start with airports. The traditional problem has been a politically-driven construction agenda that put capacity where demand was limited. That is still an issue, but the Tokyo situation is changing. It now has two main airports that are competing and adding capacity. Haneda still needs to work out effective public transport arrangements to support its international operating hours. But overall the improved Tokyo airport situation is good for Japan’s competitiveness. It is stimulating new business models, and we are seeing the development of low cost competition. It is stimulating more tourist arrivals: 2010 saw a record 8.5 million visitors. It should also stimulate innovation, leading to lower costs that would support Japan’s competitiveness.
But the airports are still about 75% more expensive than Seoul’s Incheon, and more than double Singapore’s Changi. The government is destroying the international competitiveness of Haneda and Narita, by milking them like cash cows.
What needs to change? For competitive forces to do their magic we must move away from cross-subsidization, unjustified fees, and unnecessary government involvement. First, there needs to be true competition between the airports. For Haneda we need a level playing field with common charges for domestic and international operations. International operations are 50-75% more expensive than domestic flights for the same service. The cross-subsidization that follows completely ignores international principles for charging, set by ICAO.
Second, the Japanese Government must stop plans to increase Haneda costs with security charges of JPY 170 per passenger or JPY 300 per tonne of cargo. If the airport needs more income, it should put more emphasis on commercial services to generate revenues that benefit everybody. For example, the airport’s restaurants and shops are not open when potential customers arrive to check-in for early morning international flights.
Third, Narita needs to respond to the constant pressure on airlines to reduce costs. The 11% reduction in 2005 was a landmark event. But cost competitiveness is a constant challenge. And to compete with the Haneda option airlines will need to make Narita more attractive, with prices that compensate passengers for their time and higher ground transport costs. In the past, Narita has provided temporary discounts; we are working together with my friend Mr. Morinaka and his team, to find a balanced and permanent solution.
Level Playing Field and Open Markets
On the airline side my vision for the industry is simple: a level playing field with no commercial distortions, access to markets, and access to global capital. I congratulate Japan on its growing list of Open Skies agreements, including the United States, Korea, Singapore and Malaysia. For the first time ever, Narita has excess capacity. This is a golden opportunity to further open markets. Increased competition will bring productivity gains and stimulate economic activity. I also believe that the slot allocations at Haneda need to be progressively liberalized. Restricting the bulk of international activities to early morning and late evening, ensures that Haneda will never achieve the efficiency of a true hub.
At the same time, Japan must ensure a level playing field among its home carriers. The Japan Airlines (JAL) restructuring under the Enterprise Turnaround Initiative Corporation (ETIC) began over a year ago. In the process, we need to guarantee a level playing field. The restructuring plan was agreed in December, and delivering the agreed results is the top priority of JAL’s management. And I know that the ETIC and the creditors will be demanding a fast follow-up. Otherwise, we risk the competitiveness of the whole market
Finally, a few words on environment. Airlines, airports, air navigation service providers and manufacturers are working together to achieve the most aggressive climate change commitments of any industry. An environment stand on display at Kansai International Airport is a good example of our working together, and in March it will move to Narita. As an industry we have committed to a 1.5% average annual improvement in fuel efficiency to 2020; capping net emissions from 2020 with carbon-neutral growth; and cutting net emissions in half by 2050 compared to 2005.
Sustainable biofuels, tested by airlines including JAL, will play a key role. With certification expected in a couple of months, the next challenge is commercialization - but “Big Oil” is more interested in continuing to cash $13.7 billion in aviation refinery margins, than investing in biofuels. Governments must provide encouragement with a fiscal and legal framework that supports quick commercialization. With virtually no domestic energy sources a sustainable biofuels industry, focused on algae, could help Japan meet its climate change commitments, and improve energy security. Globally coordinated economic measures will also play a role in achieving our climate change goals.
The European Union’s unilateral intention to bring international aviation into its emissions trading scheme from 2012 is Illegal, will not reduce emissions, but will penalize Japan’s airlines. I congratulate Japan for its early opposition. As we approach 2012, I encourage it to become much more vocal.
The challenges are growing. Recent developments show that Japan is capable of change: Agreeing an Open Skies agreement with the United States, extending Narita’s second runway and developing Haneda into an international hub.
I am encouraging Japan to think more strategically about its aviation industry, to improve its competitiveness, and to turn around from two decades of decline. This requires a comprehensive and coherent plan, focused on a freer, more efficient and competitive industry. Success will give Japan a stronger voice in the Asia Pacific region - the industry’s largest market. As Asia takes on roles equal to its 30% market share it must take leadership in changing this industry’s 65 year old rules.
On a level playing field, airlines need the commercial freedom to fly where markets exist, to merge or consolidate when it makes business sense, and to access global capital markets without nationalistic restrictions. The Chicago Convention guides aviation on safety, security and technical issues effectively and efficiently. Complementing the Chicago Convention, my personal hope and idea is to see an ‘Asia Convention’, which will introduce a new age of competitiveness, with a multilateral approach to the industry’s international commercial framework. And I hope that all this region’s major markets, including Japan, Korea and China, will be key players in driving change to make the industry stronger.
And IATA is here to help to build a safer, greener and more profitable industry.