Good morning. And thanks for joining us today. We are very happy that you will be spending the day with us. I know that some of you have traveled very long distances. Today’s program is rich with news and information. So I am sure that it will be a productive day.
Safety
Aviation’s top priority is safety. Guenther Matschnigg has shared with you the exceptional safety performance as at the end of November. With the excellent track record that we have achieved, we maintain the right to continue calling aviation the safest mode of transportation. But there is always room to improve. The safer the industry gets, the more critical it becomes to isolate the areas needing improvement. That is why we are investing so much in safety data. Analyzing how aircraft are flown and how they behave in specific situations gives us great insight into how we can enhance our safety performance.
And the second dimension on safety that I would like to emphasize is the importance of improving safety in Africa. I believe that 2013 will present a historical opportunity to fix the continent’s safety deficiencies. Next month, the Abuja Declaration goes before the African Union. That will commit governments to action—including better safety oversight—with the goal of achieving world class safety performance by 2015.
Committing to make the IATA Operational Safety Audit a standard for operating in Africa will be a key contributor in translating the initiatives outlined in the Abuja Declaration into better safety performance. Already we have seen that in 2011 the accident rate of African carriers on the IOSA registry was aligned with the global trend and as at 30 November they had no accidents.
Lastly, I would like to reflect on the fact that even though airlines had a very difficult decade in terms of financial performance, they have continued to improve safety. It’s the top priority—bar none. And the numbers clearly demonstrate that. Air is the safest way to travel. And we are going to make it even safer.
Financial Performance
Now I would like to turn to financial performance. In October we had anticipated a $4.1 billion profit for the industry in 2012. That was based on the very weak performance in the first quarter which had improved slightly in the second quarter. Financial performance in the third quarter improved considerably and that was despite some big challenges.
On the cost side, high fuel prices have become a “fact-of-life” for the business. Jet fuel has averaged nearly $130 per barrel for two years now. And on the demand side, economic growth has been weak, particularly in Europe and North America. If you have been following our monthly traffic announcements, you will have seen that passenger traffic has continued to grow, although at a slowing rate. And you will have noted that cargo growth has been basically stagnant or in decline.
Within that mix, airlines have been restructuring and consolidating. This is starting to have a positive impact on the business. And that is one of the contributing factors for an upgrade of our forecast that we are announcing today. We now expect the airline industry profits for 2012 to be $6.7 billion. And, as we look into 2013 we see that rising to about $8.4 billion.
Before I hand it over to our Chief Economist to explain in greater depth, I do want to caution you on the numbers.
First…it is good news that the outlook is moving in a positive direction. But let’s keep the figures in perspective. After taking in an expected $637 billion in revenues a net profit of $6.7 billion is a net profit margin of 1.0%. And $8.4 billion on expected revenues of $659 billion in 2013 will mean a net profit margin of 1.3%. The industry is keeping its head above water. But only just.
Secondly, this is a $2.6 billion upgrade from our October 2012 outlook. . While that may sound large…and it is good news, we must also realize that it is a shift equal to less than half a percent of revenue. Things are moving in the right direction. But the positive shift is not moving airlines anywhere near the 7 to 8% that would be needed to cover the industry’s cost of capital. It’s a tough business working hard to make it through tough times.
With that I will turn it over to Brian Pearce…..
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Thanks Brian. It certainly looks like 2013 will be another challenging year.
Benefits of Aviation
As Brian mentioned, one of the drivers of performance has also been demand growth. I would like to reflect on that a bit. Even in these difficult economic times, it is clear that the demand for global passenger connectivity is rising. It is a demand that only aviation can efficiently meet. And it is sufficiently reliable and accessible for it to be taken for granted—particularly by policy-makers. If you look closely at our forecast for 2013, we expect that—for the first time—the industry will handle over 3 billion passengers….3.1 billion to be more precise. And, almost exactly 100 years ago that number was precisely zero. The first commercial flight took place on 1 January 1914. So 2013 will be the 100th year of commercial aviation. And in that space of time, aviation has truly changed the way that the world works.
To help us understand the impact that aviation has on our world, last year we commissioned a series of reports from Oxford Economics. The aim was to quantify the benefits of aviation—particularly on jobs and in generating GDP. These have been rolled out for nearly 60 countries. And the Air Transport Action Group built on the research to come up with a global study which showed that aviation supports some 57 million jobs and $2.2 trillion in economic activity. Put simply….airline growth is a catalyst for jobs and economic expansion. For today’s policy- makers…particularly those in Europe….that information is vital.
And the good news is that the industry’s potential to continue to grow is strong. Last week we released the Airline Industry Forecast for 2012-2016. In 2016 we expect some 3.6 billion travelers to take advantage of aviation’s connectivity. And the majority of that growth will take place in developing markets.
If we look at a snapshot of the industry’s expected structure in 2016, we would see that 38% of global air travel will focus on routes to, from, or within Asia-Pacific. That is up from 34% in 2011. And although small as part of the global percentage, the expectation is that the traffic from Africa to Europe will double from 1% of the total to 2%. This is helping to drive economic growth in Africa, which has become a focus of global interest.
A growing aviation industry is good news for the global economy—and for jobs. But the license to grow must first be earned—with the highest levels of safety, security and sustainability. And then it must be facilitated with the right regulation, tax and infrastructure. You will be hearing about this throughout the day. But let me set the scene by addressing those briefly before taking your questions.
Environment
We have already talked about safety, so I will move directly to Environment. Growth must be environmentally sustainable. And, as you know, the industry takes its environmental performance very seriously. It was the first to make global commitments on carbon emissions:
- To improve fuel efficiency by 1.5% annually to 2020
- To cap net emissions from 2020 with carbon-neutral growth
- And to cut net emissions in half by 2050…compared to 2005…and just for emphasis that is a net figure that takes into account growth
Over the last year, you have heard a lot about Europe’s Emissions Trading Scheme—the EU ETS. That was Europe’s unilateral attempt to impose an economic measure on the international aviation industry. Airlines understood early that managing the emissions of a global industry needed to be done on a global scale. And they recognized that to be successful we would need a combination of tools—advances in technology, better operations, more efficient infrastructure and economic measures. You will recognize this as our four-pillar strategy.
And we have been working closely with the International Civil Aviation Organization (ICAO) and its member states on fulfilling it. As you will remember, in the Kyoto protocol, ICAO was given the responsibility to manage emissions from international civil aviation. That makes sense. Climate change is a global issue. And ICAO is the institution that has rallied states around global standards for aviation for nearly seven decades.
One of the most important achievements of 2012 for the environment was Europe’s decision to stop the clock on the EU ETS. Europe can take credit for raising the issue on the global agenda. But the unilateral plans to implement the EU ETS had polarized the world. States outside of Europe were not interested in agreeing to a global approach to market-based measures while the EU proposal was on the table.
With the clock stopped, negotiations have moved into high gear at ICAO in preparation for agreement at their 2013 Assembly. You will get an update from Paul Steele who is at a high level meeting at ICAO this week with the goal of gaining political agreement for a global approach to market-based measures.
And the progress at ICAO is putting some pressure on the airlines. How to fairly divide up the responsibility for market-based measures among airlines to achieve carbon-neutral growth from 2020 will be a challenge. The current and future environmental performance of each airline has its own unique characteristics. Fuel efficiency varies by fleet age and composition. And future projections for emissions will vary widely if a carrier is based in a growth market or one that is mature. IATA’s job—and it will be a challenging one—is to help facilitate the fairest possible compromise. The industry is united in its approach…and I am sure that this unity will carry through to facilitate a successful compromise.
And alongside that….we will continue to push for all of the elements of our strategy—biofuels, more efficient routes, better air navigation and so forth.
On that note, it is vital that we see swift progress on Europe’s long delayed Single European Sky (SES). Achieving the Single European Sky will generate at least EUR5 billion in savings for airspace users. And it will reduce unnecessary CO2 emissions by millions of tonnes. These targets are achievable, but Europe’s political leaders—particularly at state level—need to push forward reforms. Last week we witnessed the completion of the nine Functional Airspace Blocks which are meant to be a stepping stone to the SES. But so far they are just bureaucratic agreements that have produced very little in the way of real efficiencies.
Regulation
We are also keeping a close watch on regulation. Just as the solution for aviation and the environment (and safety for that matter) is global standards, the same is true for much of the way that the industry is regulated.
Some areas which have been particularly newsworthy over the past year are slots and passenger rights.
Europe presented initial proposals for an Airports Package of legislation which included some very positive changes such as the introduction of greater competition for ground handling services at European airports.
But it also proposed changes to the regulation of slots which would have taken Europe away from some basic principles of global best practice which are codified in the Worldwide Slot Guidelines. Among other things, the use-it or lose-it rule would have been changed to 85-15 from the globally accepted 80-20. As a priority, the IATA Board of Governors asked us to defend the global system. And yesterday we had good news from the European Parliament that the cornerstones of the Worldwide Slot Guidelines have been maintained.
And it is not just Europe. We are working in China, Colombia, India, Mexico, Poland, the UK and the US, among other countries, to defend the appropriate application of the global system.
Passenger Rights also present a challenge. Airlines live in a very competitive world. Consumers have choices and this commercial discipline—as far as we can see—is the most effective protector of consumer rights. Arguably aviation is already the most regulated consumer-facing industry in the world. Nonetheless many governments have implemented additional consumer protection measures. IATA has long been very public in its criticism of EU Regulation 261 which places a very large burden on airlines for delays irrespective of the fact that many of them are outside of the airline’s control—weather, air traffic control, airport slots etc. In the extreme example, airlines even footed the bill for a volcanic eruption in 2010.
And the situation is getting more complicated. Israel recently implemented passenger rights legislation that covers all travelers bound for Israel. So, if you are a passenger who is denied boarding in New York on a flight to Israel making a connection in Europe, the regulations in Europe, the US and Israel could be applied. The result is of course confusion—for the passenger and the airline. And it is getting worse. The Philippines could be the next state to develop its own approach later this month. Recognizing this, our Board set a 2013 priority for IATA to press for the adoption of harmonized and reasonable approaches to passenger rights legislation and regulation.
Taxes
IATA’s Board also noted the need to protect industry growth from being compromised by excessive taxation. This was a key point coming out of the Benefits of Aviation studies. The long-term benefit to government finances of connectivity-enabled economic growth far outweighs the short-term gains from punitive taxes on aviation.
The bête noire of the industry on taxes is the UK’s Air Passenger Duty (APD). Collecting around GBP2.9 billion annually, it is scheduled to increase to GBP3.3 billion by 2015/16. Without a doubt, it is the biggest tax on aviation in the world.
It is difficult to isolate the impact of the tax in the UK because—despite a great history as a leader in the aviation industry—it has no aviation policy on the books. The latest attempt to produce one has been repeatedly delayed. And what can be inferred from the reality of high taxes and insufficient infrastructure is that the government has not understood the strategic importance of aviation or appreciated the 1.4 million jobs and 3.6% of UK GDP that is supported by aviation. The impact of the poor policy environment is becoming clear in traffic. October demand was marred by Hurricane Sandy. Heathrow traffic was down by 0.1%.
Heathrow estimated that it would have been up 1.7% under normal circumstances. Compare that to the 2.3% growth for all European carriers in the same month—and without adjusting for the impact of Sandy. And of course, each traveler that is discouraged by the UK’s high taxes is a lost economic opportunity.
We will continue to try to convince the UK government to reduce the crippling APD burden (as well as fighting departure taxes in Germany and Austria) and will be vigilant in providing strong arguments against other governments wishing to increase the tax burden.
Infrastructure
Growth can be facilitated or inhibited by infrastructure. There are two dimensions to this—cost and availability. Later on Rob Eagles will give you a presentation on air navigation, so I will confine my comments to airports.
As governments struggle with tight budgets, many are looking to the private sector for help in developing airport infrastructure. India, for example, developed Delhi into a first class hub airport with the participation of private partners. The facilities are great. But the structure of the concession agreement requires the concessionaire to return 46% of top line revenue to the government. And this year, after a long process, the regulator approved a 346% increase in charges. That’s unacceptable for the industry. And a more realistic concession agreement might have prevented it.
Brazil is also looking at private participation to help develop their airports. An initial auction of the concession rights for three airports brought in $14 billion to the government—five times the minimum bid. Not all charges are regulated at the airport. And clearly somebody sees a big opportunity to extract a lot of cash. Airports should be profitable. But it is important that governments ensure that privatization is well regulated. In the long-term, the airport is a critical piece of infrastructure. The tax receipts from the economic activity generated through aviation-enabled connectivity far outweigh the short-term economic gain of a misguided privatization.
We have seen progress in both India and Brazil since our protests. In India, the Minister has directed the airports to remove airport development fees. That challenge now is to get that implemented. And a second tranche of airport privatizations in Brazil will use a set of evaluation criteria more focused on long-term prospects for the airport’s development.
Staying vigilant and working closely with governments on this issue will be important. South Korea, Vietnam, Indonesia and the Philippines are among countries that have recently announced plans for private sector participation in airport infrastructure. We will be working hard to ensure that these follow global standards and recommended practices set out by ICAO.
There are many ICAO principles….and they are all important—cost relatedness, no pre-financing, transparency and so on. But among these the one that has the greatest power to solve problems and ensure a good result in any infrastructure development is user consultation.
Since joining IATA, I have emphasized strong partnerships as the way forward with our value chain partners. That is easier in areas where we agree and have a common interest—safety for example. But is also critical in areas where our interests diverge—as they do on charges. Airline costs are airport revenues, so tension is to be expected. But if the airport has a clear understanding of our needs….and invests in consultation with its customers (the airlines) to meet those needs with agreed costs, the results should be positive for both airlines and the airport.
There are a few other updates that I would like to provide before opening-up to your questions.
Security
First is security. It is no secret that security is a big bottleneck in the travel process. Keeping terrorists off aircraft is a top priority for both industry and government. We need to do that effectively and efficiently. Passengers still tell us that the security experience is the most stressful and unpleasant part of the travel experience. So there is plenty of scope for improvement compared to what we have today.
That is the goal of the Checkpoint of the Future (CoF). When we discussed it last year, it was little more than a concept. A lot has happened in the interim. Over the past year we have worked with stakeholders around the world to develop detailed definitions for its various components. That is largely done. We now have approved blueprints to develop the checkpoint capabilities in three phases. Component tests were completed in Amsterdam, Heathrow and Geneva airports over the last few months. These focused on identity and document verification. In 2014 we hope to have the first version being tested operationally in airports. There will be another interim stage in 2017 and by 2020 we expect to have the full concept operational.
I should note that a checkpoint in Heathrow may look very different from one in the remote outback of Australia or in Bangkok or Lagos. But the CoF will give us a blueprint based on desired outcomes that will be common. And that is a critically important mindset shift that is starting to take root among regulators—from prescribing specific process and systems to defining outcomes. Later today Ken Dunlap will update you on CoF and our other security programs.
Simplifying the Business
In October we reviewed our Simplifying the Business (StB) program. In the beginning StB was focused on improving service and cutting costs. With that we delivered e-ticketing, bar-coded boarding passes and self-service kiosks. Those enabled a wave of Self-Service options that we called Fast Travel covering key processes—check-in, document check, bag tagging, boarding, re-booking and baggage tracing. Already over 100 airport-airline combinations are working to make these available for travelers. And by the end of next year we hope to have these available to 20% of eligible passengers. We will have an update this afternoon.
At the World Passenger Symposium in October we added a new dimension to our approach to StB. Along with cutting costs and improving the passenger experience, we also want to help grow opportunities to add value to the travel experience. We produced an interesting White Paper looking at what travel might be like in 2020. This describes our future vision and I encourage you to have a look at it. It will also be explained later today.
Our new flagship program is the New Distribution Capability (NDC). A year ago it was a concept. In October the foundation standard was established in cooperation with industry stakeholders. And now we are working to put together the detailed technical standard—also in a process of broad consultation with our travel chain partners who have the technical expertise to contribute.
What exactly is NDC? I cannot draw you a picture of it or even describe it accurately in words. We are developing standards with a vision to enable airlines to provide more information to their customers to help them make informed decisions on air travel. That will enable innovation and invite competition into the distribution space. And that will make the shopping experience for travel products much more modern.
If you go to an airline website, you will find lots of fully described options for buying air travel. But if you buy through a travel agent…they are getting their information through a global distribution system (GDS)…and the information is limited.
With NDC we want to unleash innovation so that the shopping experience at a travel agent is as robust as what you would get on Amazon.com, for example. The way that we are going to do it is by creating a set of open standards for airlines to provide their product information and inventory. And we expect that developers—including today’s GDSs—will seize the business opportunity to develop much more modern distribution systems. And just as the smart phone standard setters would not have imagined that they could be used to turn on the coffee machine in the morning….the degree of innovation that will result is difficult to predict.
But it is certain that the result will be a better and more efficient shopping experience for the customer. And I can say that with the certainty of knowing what competition does to markets. NDC will facilitate new entrants into the market as well as creating new opportunities for the GDSs. And that alone has got to be good for consumers who will also benefit from greater consistency in products and services offered across the different distribution channels. Eric Leopold will provide further updates this afternoon.
With that, I will draw my remarks to a close. And I am happy to take your questions.
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