“Working Together for a Sustainable Future”

Good evening. I am honored to have been invited to deliver this prestigious lecture on a subject that means a great deal to me. Since taking on this job almost one year ago, I have used it as a bully pulpit to emphasize the importance of joining together as an industry to address the major challenges to aviation’s sustainability. We work in a complex industry. And partnerships are the key to success.

Fortunately, we have ample precedent to guide us. Aviation was built on cooperation and teamwork, beginning with the invention of heavier-than-air flight by two business partners who happened to be brothers. I’m also reminded of the close relationship between William Allen and Juan Trippe that was so important to the launch of the Boeing 747; and that between Donald Douglas and C.R. Smith that resulted in the DC-3, the immortal machine that made it possible for airlines to carry passengers at a profit without mail subsidies.

Europe’s most successful airplane builder, Airbus, was of course, created as a partnership among the aerospace manufacturing sectors of four nations. And the groundwork for that immense achievement was arguably laid in the Anglo-French collaboration that gave us the world’s most exciting transport aircraft, the Concorde. And let’s not forget the founding partners of the legendary firm that is hosting us tonight, Charles Rolls and Henry Royce.

Aviation’s “working together” ethos also exists outside the boardroom door. Roughly 80,000 times a day, we witness a remarkable choreography of cooperation among employees belonging not just to one organization, but to two or three or more, working in harmony (most of the time) to get an airplane and its passengers safely into the air – and back on the ground. Safety is our top priority. And by working together we have made it the safest way to travel. With one Western-built jet hull loss for every 2.7 million flights in 2011, the industry has never been safer. Compared to 2002, that’s a 61% improvement.

All of which is to say that working together is part of the DNA of our industry. It lies at the heart of everything we do. But it also challenges us. Some 98 years after the first scheduled passenger flight, commercial aviation is not an activity in which a singular individual--a Steve Jobs--can invent new markets and pathways to growth and profits out of whole cloth. There are too many moving parts. And there are too many different players responsible for keeping those parts moving smoothly and safely. Our license to grow depends on working together to make flying even safer, more secure and more sustainable.

And for the good of the global economy, we must not fail. According to Oxford Economics, aviation supports nearly 57 million jobs worldwide and has a global economic impact of $2.2 trillion. Some 48 million tonnes of cargo worth $5.3 trillion is shipped by air. That’s over a third of world trade by value. And providing mobility to nearly 3 billion passengers annually, it is a force for good in our world—uniting families and friends in a global community, facilitating access to global markets, spreading wealth and prosperity, and fostering business, educational, and cultural opportunities in every corner of the planet. As Flight International said in last week’s editorial – “Air travel has become attainable for ordinary Chinese, Czechs and Chileans, creating a global village where millions can trade, holiday or work across time zones. Mobility for the many will be the jet age’s main contribution to mankind in the 21st century.”

I would like to focus on how partnerships with suppliers, governments and infrastructure providers are critical for our industry to continue to play its important role in modern life.

Suppliers

Let me start with suppliers—an appropriate choice as we are being hosted by Rolls-Royce. As a former airline CEO with more than 30 years in the business, I can attest to the enormous advances in aircraft technology that have played a critical role in making aviation so safe.

Aircraft and engine manufacturers have also been great partners in our efforts to become greener and more efficient. Aircraft noise has been reduced 75% since the first jets took to the skies in the 1950s and fuel efficiency is up 70% since the 1960s. Each new design typically provides a double-digit improvement in operating efficiency and this is achieved despite the fact that the technology tree has been picked clean of its low-hanging fruit.

Where our industrial partners occasionally fall short—and I have personally experienced this—is in fully aligning with their customers from a commercial and financial standpoint. Aviation is an enormously difficult business at the best of times. And these definitely are not the best of times. Our net profit margin this year will likely be around 0.5%, which means that after generating revenues of $631 billion, we will carry just $3 billion to the bottom line.

To achieve even that meager result, airlines need to be at the top of their game:

  • Flying our published schedules
  • Cancelling or delaying as few flights as possible
  • Wringing every minute of utilization we can from our hugely expensive aircraft
  • Protecting our investments in our brands, and
  • Keeping our very demanding passengers satisfied with innovative products and services that more than meet their expectations.

What I am saying is that, to the greatest extent possible, we need to eliminate the unexpected from our operation. If the in-flight entertainment system does not work, the airline may lose a customer. If someone driving a belt loader misjudges the cargo door clearance it could mean taking a $100 million aircraft out of service for several days—or longer. And in the worst case, it can mean grounding an entire fleet of aircraft because of a safety-related design flaw or manufacturing error.

Let me illustrate this with a reflection on an experience that I have had with engines. Given that this audience is heavily populated by Rolls-Royce employees, I hope that it is one that will provide some valuable insight into the thinking and pressures of your airline customers.

The modern power plant is a marvel of engineering. I am not an engineer, so perhaps this increases the awe in which I hold engines. Thousands of parts, manufactured to extraordinarily fine tolerances, capable of withstanding enormous temperatures, subject to massive loads and stresses, producing enough thrust to lift hundreds of tonnes off the ground, and propel it for thousands of miles, for hour after hour after hour and trip after trip. The work that Rolls-Royce and other engine manufacturers do is nothing short of amazing.

However, when something goes wrong in an engine, it’s often spectacularly wrong. Measured against years of near-flawless operation, you might describe an inflight failure as just a statistical glitch. But with hundreds of passengers on board and in full view of the global media—I can assure you that when something unexpected happens with an engine, things become very difficult for your airline customer. Airlines don’t operate in a laboratory; they operate in a world of perceptions and human emotions. Reputations built over decades can be lost in a few hours.

A passenger experiencing a serious inflight event—a fan blade failure or worse—is going to think long and hard before booking with that airline again, even if the incidents aftermath is well managed. Customers are not interested in hearing about the statistical improbability that it would ever happen again. Or that the aircraft can fly safely on one engine. They just know it should not have happened at all. And they are right.

Whether you believe that the customer is always right or not, if he or she perceives that there is a problem then there is indeed a problem. And the airline needs to listen. The same has to apply to our suppliers when airlines say there is a problem with a component, large or small. This is a different skill from engineering excellence, but to your customer-partners it can be just as important. And the way to react is with acknowledgement that something is wrong, followed by quick action to find—not an excuse—but a solution. I’ll leave it at that for now and step back to a broader view of partnerships between airlines and those who make the aircraft and engines that enable our business.

The enormous concentration among our supplier partners is a challenge. Whereas there are approximately 800 airlines in the world, we currently have a handful of airframe manufacturers of large transport aircraft and three major Western engine makers.

Few airframes offer more than two engine choices, and on some we have no choice at all. The situation is similar when it comes to major systems suppliers—avionics and flight management systems, wheels and brakes, and of course even away from the aircraft – for instance, Global Distribution Systems (GDSs). Now, competition is good for everyone. For customers, it results in increased quality and pricing.

For suppliers, competition drives innovation and a relentless focus on cost control. Certainly this is the case in the airline industry, where ticket prices in real terms have fallen 7% since 2000 and 62% since 1970. I wonder how many of our suppliers can make the same claim with regard to the products we purchase? Certainly airlines—at the center of the aviation value chain—don’t benefit from anything equivalent to guaranteed price escalation clauses which are built into so many equipment purchase contracts.

This concentration of supply options has for several years been extending into the maintenance, repair and overhaul (MRO) sector, as manufacturers expand their reach into the aftermarket. This has impacted airlines’ ability to control MRO expenses, which have been rising—despite the fact that modern aircraft require far less maintenance than earlier designs. For example, according to a forecast by Aviation Week, engine MRO costs represented around 42% of total MRO costs in 2007. By 2011, this had risen to 46%. And the magazine forecasts that by 2016, engine MRO will represent nearly half of the maintenance pie.

We read lots of articles in the media about the brutal price competition among our suppliers for our business. But, at the end of the day, our suppliers do reasonably well overall—certainly better than most of their customers. Keep in mind that the best profit margin airlines have achieved as an industry over the last 10 years is 2.9%. And between 2002 and 2011 aggregate airline revenues totaled $4.6 trillion--and we lost $16 billion.

It all comes back to value delivered and understanding your customer. If the value equation of a new aircraft does not add up, our ability to continue to purchase them will be limited. And given the enormous investment that each aircraft represents, airlines are not in a position to accept either the unexpected or an ever rising maintenance bill tied to escalating prices for airframes and engines or components and maintenance.

Governments

When it comes to working together with government partners to achieve sustainable growth, the template should be our close cooperation on safety and security. An example of the former is the 2010 agreement among IATA, the International Civil Aviation Organization (ICAO), the US Department of Transportation and the European Commission (EC) to form the Global Safety Information Exchange to share safety information.

We should also build on the success of our Checkpoint of the Future concept to make the airport screening experience more secure with less hassle for passengers. This will take a risk-based approach supported by data that is already used for immigration purposes. And it will make use of technology to eliminate the hassles of unpacking, removing shoes and clothes, and intrusive checks.

Checkpoint of the Future has received support from the US Department of Homeland Security, the EC, China, Interpol, and another 17 governments. We recently achieved a major breakthrough to boost cargo security, when seven years of hard work by governments and stakeholders was rewarded in a landmark agreement to align air cargo security measures between the US and EU.

Underlying our cooperation should be recognition by governments that the true value of aviation is not as a source for tax receipts to shore up wobbly treasuries, but as a catalyst for economic growth. Taxing aviation stifles growth. The UK’s Air Passenger Duty grew from GBP 331 million in 1995 to GBP 2.6 billion last year. It is the biggest aviation tax in the world. So it is no wonder that UK aviation is growing at a slower pace than its Continental neighbors.

Likewise, governments need to work with all stakeholders to address operational issues, such as flight delays and cancellations, rather than drafting punitive and inflexible rules. However well-intended, EU Regulation 261 and the tarmac delay rule in the US do not address the underlying issues that lead to flight disruptions, but rather place all the responsibility and liability for such events on airlines.

This approach, while perhaps politically-satisfying, shows that governments misunderstand the problem. Airlines don’t cause thunderstorms, blizzards or volcanic eruptions and we don’t regulate the airspace in which we operate. Airlines hate delays as much as passengers do, and fines don’t address their root causes—including bad weather, insufficient airport and airspace capacity, strikes, third party technical problems and the like, many of which are influenced if not even caused by governments themselves. The market forces of choice and competition empower passengers and are the best way to drive up service levels so long as governments also do their part.

We also have important partnerships to help governments ensure that regulation reflects modern capabilities. For example the Royal Aeronautical Society, ICAO and the International Airline Pilots Association have joined forces with IATA on the mutual recognition of licensing by civil aviation authorities. With the goals of improving safety, quality and efficiency we are seeking to exploit every opportunity to facilitate international agreement on a common set of pilot and maintenance training, instruction and evaluation standards and processes. This builds on IATA Training and Qualification Initiative work. Global license harmonization will be a critical element in supporting growth while improving safety.

Infrastructure

This brings me to our next opportunity for cooperation: airport and airspace infrastructure. Our pathway to sustainable growth means working closely with airports and air navigation service providers (ANSPs). At the tactical level, most ANSPs are very good at using the tools they have to enable us to fly the most efficient routes currently available. But in Europe they are falling short when it comes to the strategic necessity to take costs out of the system while boosting capacity.

Europe needs a Single European Sky (SES) to improve competitiveness by cutting costs and increasing capacity. Unfortunately, it’s been decades since it was first conceived as a concept and 12 years since it was formally proposed. But in reality it has not moved much beyond a drawing room discussion.

The EC, the European Parliament and Vice President Siim Kallas are strongly pushing for the SES. And these have the full support of the industry to take a tough love approach with our ANSP partners and national governments, including significant penalties for those that don’t meet their targets.

Looking beyond Europe, we are eager to work with the US Federal Aviation Administration (FAA) to make NextGen a reality, now that Congress has passed a funding bill. NextGen is the US program to upgrade its air navigation capabilities. But before airlines commit to spending billions of dollars on new cockpit technology, we need to be sure that the benefits of NextGen will exceed the equipage cost.

To support the business case, it would be nice to have some early wins. In that regard, it is encouraging that FAA is accelerating the pace at which it rolls out Required Navigation Performance approaches; but these need to be more than simple overlays of existing approach paths; and first movers need to know that they will not have to wait for everyone else to be equipped before they see any return on their investment.

There is a saying that experience is learning from your own mistakes, while wisdom is the ability to learn from the errors of others. Asia has a great opportunity to show wisdom by not repeating the mistakes of Europe and the US when it comes to managing its airspace, but rather learning from them to implement solutions before growth leads to gridlock in the skies.

Airspace capacity to meet expected growth will not mean a whole lot without new runways, taxiways and affordable terminal space. The airline/airport relationship is occasionally contentious: airports are natural monopolies and a large part of their revenues are airline costs; but one cannot exist without the other. The challenge is to find ways to work together to enable aviation connectivity to drive economic growth.

This is easier in some places than in others. The Middle East North Africa region has invested more than $100 billion on airport projects and China is adding 70 new airports by 2015. Contrast this to the situation in

  • The UK, where the government has rejected a third runway for Heathrow,
  • Or in Germany where night flights, critical to cargo operations, have been banned in Frankfurt and where voters rejected the construction of a third runway at Munich
  • Or India which cannot take advantage of enormous growth potential, because a 346% increase in charges at Delhi is compromising the airport’s viability. Moreover, the Mumbai’s much-needed new airport does not stand a chance of opening on schedule in 2014--construction has not even begun.

Aviation can deliver economic benefits, but only if we have the cost-efficient infrastructure capacity to do so.

Environment

No discussion among aviation people today is complete without talking about carbon emissions. The entire aviation industry is committed as partners to three climate change goals: 1.5% annual fuel efficiency improvements until 2020 and carbon-neutral growth from then onwards, and the aspirational goal of cutting net emissions by half from 2050 compared with 2005 levels. Meeting these targets helps establish our license to grow.

We are making solid progress on improving efficiency and certainly new Rolls-Royce engines will continue to play a large part in us getting there. The second will be more difficult, and a lot will have to happen to meet our third goal. The unity that we have achieved on these goals—among airlines, airports, ANSPs and manufacturers—has been extremely helpful in ensuring that aviation is correctly understood as a responsible industry committed to sustainability.

It is critically important that we maintain this unity and a common focus on our environmental goals and our strategies. Sharing the heavy lifting is also important. We rely of course on the original equipment manufacturer (OEM) sector to deliver much of the technology that will drive improvements. But airline end-users also need your vocal support in the political and public spheres.

The hot topic of the moment is the inclusion of international aviation in the unilateral and extra-territorial European Union Emissions Trading Scheme (EU ETS). Market-based measures are part of our four-pillar strategy that also includes technology, operations and infrastructure. But, such measures must be coordinated globally through ICAO.

The EU ETS is not a stepping stone in that direction. It’s a political roadblock preventing progress. So, it’s encouraging that OEMs are being heard in opposition to the ETS. But how much better if that had happened six years ago, before adoption and not only now, when the prospect of a trade war threatens new orders?

Manufacturers stand to profit greatly from airline investments in more efficient and environmentally-friendly equipment. The other side of the coin is that unless airlines can grow, they can’t buy new engines or lucrative after-sales maintenance. Through the Air Transport Action Group and other bodies we now have stronger institutions through which to coordinate our partnership efforts and we need to make good use of them, so that we can be more effective than we have been in the past.

Conclusion

We are here tonight because we share at least one big thing in common: a deeply-held belief that aviation is a force for good in the world and that the world is a far better place because of aviation. As someone who has made his career in aviation, I feel strongly the responsibility this view conveys.

Sir Henry Royce once remarked that “Small things make perfection, but perfection is no small thing.” Aviation is a bit like that. Working together, we have to get a million small things right, every day, in the hopes of creating that perfect experience for our customers. I don’t know how often it happens. But there is one thing I do know: Everyone over the age of three or four remembers their first airplane flight. That simple truth speaks to the universal magic of air travel.
I believe that aviation has a very bright future, but we must not take it for granted that this future will arrive without our efforts. Our license to grow depends on working together. By doing that well—in many small things—we can ensure that the second century of commercial flight is as full of magic as was the first.

Thank you