It is a pleasure to be in Bogota when you celebrate 100 years of aviation. Air transport performs a vital role in Colombia and around the world connecting economies and people and creating the global village in which we all live.
State of the Industry
The last decade was really hard for the global aviation industry. Between 2001 and 2009, airlines lost over $50 billion. We had everything, including war, diseases, terrorism and the global economic crisis. Airlines worked hard to survive. Over the last decade, they restructured and re-engineered their businesses to improve labor productivity by 63%, increase fuel efficiency by 20% and cut sales and distribution costs by 19%.
IATA helped with programs that saved the industry over $55 billion since 2004. This includes $15.9 billion in fuel savings by shortening over 2,000 routes and spreading best practice in fuel management, $19 billion in reduced taxation and by asking our airport and air navigation partners to deliver greater cost efficiencies and over $17 billion by using technology to reduce costs and improve efficiency with our Simplifying the Business program. The global industry today is unrecognizable compared to what it was just a decade ago. Nevertheless, despite this enormous change, the industry is financially sick. In 2010, the global airline industry made $16 billion in profits. After a decade of losses any black number in the end balance is a welcome change.
But the impressive reality is even if this has been a “good year” it only generated a pathetic 2.9% margin. This year, we expect profits to fall by 46% to $8.6 billion with a 1.4% margin. The rising price of oil is once again destroying our profitability. The average price of oil last year was $79 per barrel and accounted for 26% of our costs structure. This year, we are forecasting $96 per barrel and 29% of industry costs. Today, the price is well over $100 and for each dollar that it rises, the industry has to recover $1.6 billion in additional costs. Fortunately, economic growth is still healthy and GDP forecast has been revised upwards to 3.1%. This gives us confidence that capacity increases of 6.0% will be closely matched by 5.7% demand growth.
If the above is a reality, we will see passenger yields rising by 1.5% and cargo yields by 1.9%.
However, the big risk, to even our small profit, is if high oil prices stop economic growth. Even with two consecutive years of profit, the industry is still very fragile.
State of the Latin American Industry
Within this context, Latin America is one of the industry’s stars with three consecutive years of profits, $500 million in 2009, $1 billion in 2010, but moving to $300 million in 2011.
Strong economic growth, liberal market access policies and industry consolidation are driving these positive results in difficult times. One of the major successes is the proposed merger by TAM and LAN. It shows the ability of the region’s airlines to innovate and lead much needed changes even within the restrictions of the industry’s archaic bilateral system. A good indication of the importance of this change can be seen in how investors evaluate the investment opportunities of Latin American carriers.
Latin American aviation carries about one-quarter less of the passengers that US carriers do but their market capital is about a half and the combined LAN-TAM airline with $12 billion, which ranks third in the world. Another way of looking at this is the price-to-earnings ratio for US carriers is 10 times, but for Latin American carriers it is 19 times. Investors clearly see potential in this region and Colombia is taking part in this success. Between 2009 and 2010, Passenger numbers grew by 23.6% and the TACA-Avianca group delivered a profit of $100 million.
IATA and Colombia
IATA has a close relationship with Colombia. Our offices were established here in 1991. The IATA settlement system is the financial backbone of aviation, serving 31 airlines and over 500 accredited travel agents. Last year, we handled over $1.3 billion of the industry’s money safely in the IATA settlement system. IATA’s country manager, Juan Carlos Villate, is the local contact to access all of IATA’s industry programs.
Colombia and Aviation
I am impressed with President Santos’ ambitious agenda to strengthen the travel and tourism market. Today, this sector supports 4.9% of Colombia’s GDP and nearly one million jobs. Moreover, it is the third largest earner of foreign exchange for the Colombian economy. President Santos has set three ambitious goals for civil aviation in Colombia over the next four years. These goals are to double the number airline seats in the market, to increase visitors from 2.8 million to four million and to make the travel and tourism Colombia’s number one foreign exchange earner.
The President has a clear understanding of the ability of aviation to act as an economic catalyst.
This vision must be supported by strong government policies to improve aviation’s competitiveness and to facilitate profitable growth. I am a very keen follower of aviation in this region. I can see that the government has some policies that are absolutely on the right track but there are many areas that require major changes. Let’s start with the positive.
Liberalization
The government’s liberal policies are supporting growth. The government has understood that aviation is a business that must be profitable in a globally competitive environment. It has created an environment where everybody wants to invest in Colombia. It did this first by opening the market to cross border investment opportunities. The mergers that have taken place have strengthened the competitiveness of the main carriers that serve the Colombian market. The 2009 merger of Avianca with TACA created critical mass and the region’s third largest airline after LAN-TAM and GOL. LAN’s acquisition of Aires is expanding the market and making air travel more accessible with low cost options. And COPA has integrated Aerorepublica into its operations as COPA Airlines Colombia.
On top of creating more competitive companies, the government is opening the Colombian market with policies leading to open skies. The Open Skies agreement with the United States in November last year was a major milestone. The United States accounts for about one-quarter of Colombia’s arrivals. Liberalizing this significant market from 2012 will create opportunities
for carriers with this important economic relationship.
I congratulate the government and particularly, the Minister Germán Cardona and our friend Santiago Castro, Director General of Aerocivil, for this great achievement. I encourage them to make a quick follow-up on liberalization in the region as well. With these policies, Colombian business and tourism will be better connected to world markets than never before. This is in line with the major free trade agreements that are expected to be ratified for Colombia this year with the United States and Canada. And by letting business get on with business, the economic outlooks are very positive. We expect GDP growth of between 4.4% to 5.0% between now and 2015. It is a great opportunity for aviation that we must not miss.
Infrastructure
But market opening policies can only deliver benefits if they are supported by cost-efficient infrastructure capable of handling the growing demand. Here, I am a little more pessimistic.
Airports
Let’s start with the airport infrastructure. Bogota’s El Dorado International Airport is the critical element in Colombia, handling 43% of passengers and 70% of Colombia’s cargo. In 2006, the concession to manage Bogota’s airport was awarded to the Operadora Aeroportuaria Internacional for a 20 years. The joint venture of Grupo Odinsa and Zurich Airport agreed to pay 46% of gross income to the government. In four years, passenger numbers have jumped from 11.7 million to almost 19 million.
After that, we need to solve many things such as non-regulated costs that increase quickly. In some cases, we saw proposals for 280% increases on specific items. And services level dropped. The Bogota Chamber of Commerce did a survey about customer satisfaction at the airport - on a five point scale, it dropped from 3.66 in 2009, to 3.44 in 2010. And the promised investments in airport development have not kept pace with demand. All aspects of the airport terminal are saturated, including ramps, parking and immigration areas as well as baggage handling capability. Counter to the government’s vision to increase air traffic, the airport is turning away business from airlines that want to increase flights and from those foreigners that want to visit Colombia.
Even when current construction is completed, there will not be sufficient capacity to satisfy demand. Concessions can be an efficient tool for governments to develop airport infrastructure but they are only successful if there is a strong regulatory framework that manages investments, service levels and costs. There is an urgent need to review this concession, update the master plan and put in place economic regulatory oversight to ensure quality, efficiency and capacity.
Air Traffic Management
The problems are not just on the ground, as air traffic management is in need of reform. Colombia’s air traffic management needs a major overhaul. Firstly, Colombia’s air traffic management procedures must be brought into the modern era. I am concerned about the implementation of Performance Based Navigation. Airlines have invested in design and have equipped their airplanes to support more efficient flying. But we cannot get full return on our investment until air traffic controllers can operate on the same technological platform. Along with speeding up the implementation, we must find a process to continuous improvement based on analysis of performance data against agreed performance targets.
In 2006, IATA, the Asociación Colombiana del Transporte Aéreo, the Latin American and Caribbean Air Transport Association and Aerocivil signed an agreement to address Colombia’s inefficient air traffic management. An IATA study identified short-term measures that could increase Bogota’s air space capacity by 30%. The measures included more efficient use of the parallel runways, revising approach and departure procedures, enhanced training for controllers and further development of navigation procedures.
The study was completed five years ago and we have not seen full results. I urge our friend Santiago Castro to make this a priority. Along with this, we must find a way to open more military air space to civilian use. We also need more transparency on costs and charges, eliminate the differential for domestic and international operations and stop the unfair practice of adjusting dollar denominated charges for inflation calculated in Pesos. Finally, there also needs to be a transparent and equitable slot policy to improve departures and arrivals in Bogota.
We must also have a mechanism to ensure that air space can be developed in line with the actual traffic demand. We need a structure that allows for quick actions to take advantage of opportunities as they develop.
If we can achieve these improvements, I trust that Colombian air space will be able to well support the government’s vision.
Vision 2050
IATA is aligned with the Colombian government vision in looking ahead to build a stronger air transport sector. We are taking the window of opportunity of two years of profitability—however weak, to look ahead and beyond the crises and shocks that have dominated air transport over the last decade. Over the last 40 years, aviation generated a net margin of just 0.1%. This could be good for a charity association but not for a sustainable business. And without the buffer of margins that at least cover our cost of capital—7-8%, every crisis is body blow to the industry.
At our last Annual General Meeting (AGM), I launched IATA’s Vision 2050. We worked closely with Harvard University’s Professor Michael Porter. His reaction to the industry situation was simple -- “What a mess”. With his expertise and knowledge, the inspirational leadership of Singapore’s Minister Mentor Lee Kuan Yew and the contributions of 35 leaders and strategic thinkers, we will present a Vision 2050 to this year’s AGM. It will address to the key issues of the mess: structuring for profitability, environmentally sustainable technology and efficient infrastructure so that the industry can effectively meet the needs of the 16 billion passengers and 400 million tonnes of cargo that will travel by air in 2050.
I hope that some of the ideas that we have showed can assist Colombia in achieving its own long-term vision for air transport.
Working together
This will be my last visit to Colombia as Director General and CEO of IATA as I will retire later this year. But I will continue to watch closely the developments in Colombia from different roles in the industry, including boards and teaching. At the end of June, I will handover to Tony Tyler, CEO of Cathay Pacific who I know will continue to pay special attention to this wonderful part of the world.
Aviation is important to Colombia and it is particularly hopeful to have a President and his government staff with a vision to make it successful. The President’s ambitious vision is a positive motivating force for much needed change.
IATA is here to help achieve that vision with ideas, actions and global expertise. We are fully committed to supporting changes to help aviation in Colombia meet the challenges of the President’s vision and drive the economy forward while growing safer, greener and more profitable