It is great to be back in New York City. I loved my time in this city as a young banker at First National Citibank in the 1970s and I appreciate the invitation and opportunity to return here to address the Wings Club for a third and last time as IATA’s Director General and CEO. My successor, Tony Tyler, spoke here last month as CEO of Cathay Pacific. After nearly 10 years at IATA, I am looking forward to seeing the industry from the perspective of boards and teaching and I am confident that Tony will take IATA to even greater heights.
The Last Decade
Today I would like to reflect on how the industry has changed since the start of this millennium. We have seen it all, including terrorism and war, SARS and other potential pandemics, rising oil prices and free-falling economies. More recently, we have seen the tragedies of earthquakes and tsunamis and also a volcanic eruption. Losses mounted to nearly $50 billion. This has been the most challenging decade in the history of aviation.
The industry responded with enormous change. Labor productivity is 63% better today than in 1999, sales and marketing unit costs are down 19% and fuel efficiency Improved by 20%. IATA contributed to these changes with over $55 billion in savings achieved since 2004. E-ticketing and the Simplifying the Business program have saved over $18 billion. IATA worked with industry partners to shorten over 2,000 routes, spread best practice in fuel management and reduce operating costs to save another $18 billion. Finally, we challenged our monopoly providers to deliver greater efficiency contributing $19 billion in savings from charges, taxes and fuel fees.
We also kept the industry’s money safe. Over the last decade, we settled over $2.5 trillion with 99.99% accuracy. But even more important, we helped the industry improve safety by 42% since 2001. The 2010 global accident rate for Western-built jets was one accident per 1.6 million flights. IOSA has been a condition of IATA membership since 2008, and IATA airlines outperformed the industry average with one accident per four million flights.
But despite the great record on safety and the tremendous gains in efficiency, the bottom line is still peanuts, a 2.9% profit margin in 2010 that will shrink to 1.4% this year. On $594 billion in revenues, we expect airlines to show a net profit of just $8.6 billion in 2011. And that was estimating with the assumptions of GDP growth of 3.1% and an average oil price of $96 per barrel for the year. Since then, we have seen human tragedy in Japan that will also have an economic cost and the events in the Middle East that have pushed the oil price to around $115 per barrel. It is going to be another tough and uncertain year for the world’s airlines.
Some regions are financially stronger than others. Europe’s airlines are the weakest with expected profits of just $500 million. The United States is doing better with expected profits of $3.2 billion as capacity adjustments during the 2008 oil price spike saw yields improve by 28%.
Cost reduction has been dramatic and now the challenge is to renew the fleet which has an average age of 15 years compared to a global fleet of 14 years. But the US carriers are emerging from the crisis stronger and more competitive.
Latin America is the only region that made money for three consecutive years with a $300 million profit expected this year. But the brightest star today is Asia with anticipated profits of $3.7 billion. China is amazing. The country built 45 new airports since 2006 and it plans to spend $230 billion to develop aviation, including 52 more airports by 2020. Asia-Pacific is not the future, it is today. In 2009, it eclipsed North America as the largest regional market by a few million passengers with an equal market share of 26%. By 2014, 800 million more people will fly, 360 million of those will be in Asia, bringing its market share to 30%. A slower-growing North America will see its share slip to 23%.
A New World Order
The industry’s center of gravity is shifting eastward. Ranked by market capital, three of the top five passenger airlines are in Asia. Air China at $18 billion, Singapore Airlines at $13 billion and China Southern at $10 billion. In third place is the combined South American entity of LAN and TAM at $12 billion and only after that do we see Lufthansa at number 5 with just under $10 billion ($9.55b), Southwest with just over $9 billion ($9.4b) and Delta at $8 billion.
Finding a place in this new world order will be a challenge for traditional leaders like the United States and Europe. The US airlines rebuilt their businesses over a decade of crisis. Aviation ties the US together, connects it to the world, supports 11 million US jobs and drives $1.2 trillion in US economic activity. But aviation does not even rank among the top 20 White House strategic priorities. And, to be very blunt, there is no long-term vision. Instead, the US aviation policy agenda is dominated by short-sighted half-measures that focus on micro-management.
Let’s look at the policy agenda, NextGen air traffic management and the Federal Aviation Administration (FAA) Reauthorization Bill, the Proposed Passenger Rights legislation, liberalization and security.
NextGen and FAA Re-Authorization
When I started at IATA, I was briefed on the US NextGen program. By 2018, NextGen should reduce delays 35 percent, save 1.4 billion gallons of fuel and cut 14 million tonnes of CO2 annually. This will help the industry deliver on its commitment to improve fuel efficiency by 1.5% annually to 2020, cap net emissions from 2020 with carbon-neutral growth and cut net emissions in half by 2050 compared to 2005. NextGen would be a million times more effective than Europe’s illegal proposals for an emissions trading scheme. I am pleased to see the US opposing and I encourage that opposition to become more vocal.
But NextGen needs to happen. The FAA Reauthorization Bill, which funds NextGen, lapsed in 2007 and 18 extensions followed. As an observer, it is difficult to imagine how such an important program to improve competitiveness could be tied-up in politics. Earlier this week, I met with Congressman Mica who assured me the new bill is better than the 2010 version. But it needs to be passed quickly so that we can achieve the savings and improve travel.
Passenger Rights Legislation
The slow pace of the FAA Reauthorization stands in stark contrast to the quick progress on passenger rights legislation. President Obama recently announced his vision for government regulation which is to promote economic growth, reduce uncertainty and stand-up against a cost-benefit analysis. Department of Transportation (DOT) Secretary LaHood is planning to release a final version of the June 2010 DOT Rule on Passenger Protections as early as next month.
But the proposed draft legislation must change to align with this vision. Let’s remember that most people arrive at their destination without incident. And when things go wrong, being a hyper-competitive industry provides every incentive to treat passenger well. Fines—no matter how large—will not melt snow, stop thunderstorms, free-up airport gates, build new infrastructure or deliver more customs personnel.
If made final, this rule will be money wasted and will possibly have counter-productive results. The 200% compensation for over-booking may stop the practice that inconveniences one out of 10,000 passengers. But the resulting empty seats will increase costs for all passengers. Airlines want to provide good service and are eager to work with DOT to improve reliability. But the DOT proposal will not do that nor will it promote economic growth, reduce uncertainty or pass a cost-benefit analysis. It needs serious re-drafting.
The United States approach to liberalization shows how easy it is to get lost in the weeds. The United States fathered some of modern aviation’s greatest ideas. Fred Kahn’s deregulation changed the face of aviation everywhere. I congratulate the US for recently achieving the 100th Open Skies agreement formalized yesterday with Colombia. The next logical step is to liberalize ownership restrictions.
The US-EU Agreement on Open Skies was our greatest opportunity to throw off four decades of 0.1% profitability and start to become a normal business. The US opposition to opening up investment made it a missed opportunity. National ownership restrictions in a slow-growing mature market are not “protection”. The industry’s opportunities are global—in Asia, Latin America, and elsewhere.
The global village that airlines helped to create has facilitated global business and global brands but there is not a single passenger airline in the top 100 of the Interbrand global brand equity survey. Kleenex, Kentucky Fried Chicken and Campbell’s Soup are there alongside Google, GE and IBM. National ownership restrictions of the bilateral system have restricted airline development as profitable global brands. Campbell Soup participates directly in 120 country markets, Google in 160 and IBM in 170. But even our biggest airlines—United or Delta, serve only around 65 countries directly.
Airlines need normal commercial freedoms to complete profitably as global businesses in a globalized world. China and India will surely soon recognize that the system designed in 1945 is not fit for purpose in this millennium. The choice for the US and Europe is to lead, change, or to be left behind.
I have not completely lost hope in a US policy agenda dominated by micro-management and paralyzed by politics. The global approach of Homeland Security Secretary Janet Napolitano on security is refreshing and effective. New York City understands the impact of terrorism and the need for effective aviation security. This year will mark a decade since the 9/11 tragedy. More recently, the Nigerian underwear bomber and famous Yemeni printer cartridges remind us that security is a constant challenge for governments and industry.
I spent the first years of my mandate at IATA discussing with a Department of Homeland Security (DHS) that was completely closed to the international community, to industry expertise and to offers of help. The DHS theme was “We decide…and you implement.” Secretary Napolitano is taking a different approach by engaging industry—at home and globally.
I see two priorities for security. The first is to make the system convenient for passengers and more effective at finding terrorists. Each security crisis has resulted in new rules and added another layer of process and bureaucracy. What is needed is an overall review of what has been created.
A few months ago, I proposed to completely re-think the process and develop an airport checkpoint of the future. Today’s checkpoint was designed 40 years ago to stop hijackers carrying metal. Today, everybody is equally challenged to prove themselves innocent.
My vision for the checkpoint of the future combines technology and intelligence to end this one-size-fits-all approach. Passengers will walk through tunnels of technology appropriate to the risk-level identified with background screening without stopping, stripping or unpacking. The International Civil Aviation Organization and 19 governments are now working on design, testing and implementation. The United States is among them. Secretary Napolitano is talking about a “Checkpoint for Tomorrow” and Transportation Security Administration Administrator John Pistole is calling for the end of the one-size-fits-all process. I applaud them for seizing this policy initiative. Already a set of IATA screening principles is being circulated among governments and I urge the US to quickly endorse them.
Cost is the other priority that must be addressed. Today, we estimate that airlines are spending $7.4 billion annually on security. This is a 25% increase from our previous estimate of $5.9 billion.
The bulk of the increase is for increased data collection and transmission, air marshals and air security officer programs, capital expenditure and the costs of security delays and diversions. These should not be airline costs. Aviation security is national security that should be a government responsibility like security in public parks, on subways or in hockey arenas, football stadiums and ballparks. Governments must bear the cost and I hope that the US can play a global leadership role in rebalancing the costs and responsibilities.
It has been an incredible decade that has changed everything, airlines and governments included. With two years of profitability, however weak, we are starting to see some light at the end of the tunnel. The US industry is emerging into this new reality with improved competitiveness but that competitiveness must be earned and improved everyday. The old PanAm building here in New York City is a great reminder of the need for constant change.
As I end my time with IATA, it is an opportunity to thank the industry and, yes, even governments, for their support in navigating this terrible decade. At my last Annual General Meeting which will be in Singapore in June, I will present the results of Vision 2050. With 35 strategic thinkers, including Singapore’s Minister Mentor Lee Kuan Yew and Harvard University Professor Michael Porter, we looked ahead four decades. I hope that this will motivate airlines, partners and especially governments to make the much needed changes.
This is particularly important for traditional leaders like the US that have played such a big role in defining this industry’s history. The US must bring its experience to help shape the industry’s future with a balanced and forward-looking big picture policy agenda. It is the responsibility of everyone involved in this fascinating, crazy and wonderful industry to turn it into a normal business that is even safer, greener and more profitable.