Eduardo, Ladies and gentlemen, good morning. It is a pleasure to be with you in this historic destination, the site of one of the oldest Spanish settlements in the Americas, with a history that dates back almost 500 years. This is my fifth ALTA Airline Leaders Forum in five years, so you can tell that I really enjoy attending this meeting—and not only because Geneva can be chilly and sunless at this time of year.
IATA and ALTA have a strong relationship. We have many members in common and we are able to combine our expertise on many of the key challenges and issues affecting aviation connectivity in the Latin American and Caribbean region--which I will refer to as this region, for short.
Furthermore, this region has a special connection to commercial aviation and to IATA. It was 70 years ago this year that the visionary leaders of 57 airlines—including several from this region--came together in Havana, Cuba, to form IATA. The goals of the Association were clear. IATA was to benefit the peoples of the world and foster commerce by promoting safe, efficient, and economical air transport. We would also be a vehicle to support the development of the standards and best practices necessary for the safe and efficient operation of the global air transport network.
The tag line for our 70th anniversary celebration is “Flying better. Together.” This reminds us that IATA was created to be a forum for industry collaboration and partnership through which our members create value. We are proud of our connection to this region. From San Juan, I will travel to Havana, to meet with some of Cuba’s aviation leaders and celebrate IATA’s formation, where the inspiration of our 57 founding members led to 70 years of progressively flying better together.
Our anniversary year is, by historical measures, a very good one for aviation. The hard years of industry restructuring and consolidation have put us on the right path. Demand for connectivity is strong and fuel prices have fallen significantly. In June we estimated industry earnings of $29.3 billion on revenues of $727 billion, for a net profit margin of 4%. This would generate a return on capital of 7.5%. What this means, is that for the first time, the industry on average will be creating value for its equity investors.
Now, I know that this positive global picture is quite different from the reality that many in this room are experiencing, where the battle to keep revenues above costs is a daily struggle. The steep rise in the value of the US dollar against local currencies means there is little if any benefit from the decline in fuel prices, while other dollar-denominated expenses have risen dramatically. Furthermore, many of the region’s economies are struggling, in part owing to the broad decline in commodity prices. And there is rising uncertainty and concern that the policy decisions being made by some governments risk exacerbating the current downturn.
The situation in Brazil is dire; airlines there had combined losses of nearly $500 million dollars in the first half of 2015. The problems facing Brazil’s carriers are threefold: the economy is in deep recession with rising unemployment; the Real has lost more than a third of its value against the US Dollar in the last 12 months, and most importantly, government policies impose crippling costs on the industry. Taken together, these conditions have created a perfect storm that demands government action to protect the benefits of aviation connectivity, by granting relief from high taxes, exorbitant fuel costs and onerous regulation.
While the Brazil situation is a burning platform calling for immediate action, the same fundamental industry issues are present—to a greater or lesser extent—in many parts of this region. Few governments work to create an environment in which aviation can flourish and deliver the transformational benefits of connectivity.
This is a highly perplexing situation—for two reasons. First, the region’s vast distances, numerous islands and lack of well-developed highway and rail infrastructure means there are very few alternatives to air for the movement of goods and people over long distances. This region is dependent on air transport.
The second reason is that we have seen how, in places like China, Singapore, the Middle East and even within this region, a thriving aviation sector can deliver enormous value to the economy. And the formula necessary to create a thriving aviation sector is not exactly a state secret—we’ve been talking about it for at least as long as I’ve been with IATA. So there is no reason that more regional governments cannot apply it to enable aviation to deliver a powerful economic boost at a time when many countries are struggling.
What are the key ingredients? The recipe isn’t long or complicated. It includes:
- Adequate infrastructure
- A fair regime for taxes and charges
- A supportive regulatory structure; and
- Environmental sustainability
Let’s look at each in turn, beginning with Safety.
Safety is aviation’s highest priority, and it is also our industry’s greatest success story. Last year was the best performance in history, with just one major accident for every 4.4 million flights. Although we have not attained an equivalent level of success in this region, we managed a better than 50% reduction in jet hull loss accidents last year, compared to the average of the previous five years.
The IATA Operational Safety Audit (IOSA), which is a requirement for IATA and ALTA members, is playing an important role. In fact, airlines in this region that are on the IOSA registry have not experienced a fatality in more than seven years.
Not all operators can qualify for the IOSA registry, either because of the aircraft type they operate or because their business model does not allow conformity with IOSA standards. So earlier this year we launched the IATA Standard Safety Assessment (ISSA). While ISSA is not a substitute for IOSA, it is a valuable operational benchmark. Later today, I will present the first ISSA Certification to Tropic Air, based in Belize. Tropic Air was among the first airlines to express interest in ISSA and they helped us to beta-test the standard, so congratulations to Tropic Air.
And thanks too to ALTA – it was primarily at the request and suggestion of ALTA’s member airlines that we started down the road that has led to ISSA. I hope you will now support our efforts to grow the ISSA registry among airlines in this region.
Although we are making solid progress, we still have much work to do on safety. And, like most aspects of the industry, success requires a team effort of industry and government. Through instruments like the 2014 Port-of-Spain Declaration, government and industry are committed to achieve a 50% reduction in the fatality risk for air travel by 2020 compared to 2010. With this combined effort, we will continue to make critical improvements in the region’s performance.
Our success in safety is proof that the partnership of government and industry is powerful. We need to apply this formula to the other areas--and infrastructure would be a good place to start.
Inadequate aviation infrastructure is an economic handicap. For the year 2034, we forecast regional demand of 525 million annual passengers. That’s more than double the 240 million passengers expected this year. Yet, key airports in Argentina, Brazil, Colombia, Ecuador, Mexico, and Peru already face growth constraints.
The story is clear in The World Economic Forum’s 2015 Travel and Tourism Competitiveness Report. Brazil ranks 112th in the quality of its air transport infrastructure among 141 economies. Mexico ranks 63rd, which is highest among the region’s largest economies. Colombia is at 78, Chile is at 45 and Argentina is at 106.
Infrastructure investment must be accelerated while avoiding the missteps of the past. What do I mean by that? Here are just a few examples
- The modern new international terminal at Bogotá is great, but it is already at capacity.
- The new airport that opened in Quito is smaller than the one that it replaced and charges went up significantly upon opening in 2013.
- And the much needed expansion of Lima’s airport almost certainly will not be completed by 2022 as intended.
On a more upbeat note, in June, IATA and Mexico’s Ministry of Communications and Transportation signed a Memorandum of Understanding (MOU) through which IATA will provide technical and operational assistance for the design and construction of Mexico City’s new airport. The agreement also encompasses IATA offering technical and professional advice for the current airport to ensure it continues to operate efficiently until the new facility opens. I hope we can apply this formula to future infrastructure projects in this region.
Capacity issues will not be resolved overnight. So managing the shortfall effectively is also a priority. The worldwide slot guidelines (WSG) provide a globally recognized standard to ensure fairness. And because they are used globally, even small local deviations can cause big problems. The WSG is a winning formula that cannot be changed unilaterally. But that message may be lost in translation in two major markets:
- Mexico is still using a bespoke system despite many commitments to use the WSG.
- And, Brazil is going its own way with Slots Regulation 338 which includes troublesome punctuality requirements that appear in no other jurisdiction.
- On the positive side, we have had good news in Colombia as Bogotá airport has agreed to transition to a full slot coordination process in accordance with the WSG.
Taxes and User Charges
The development of adequate infrastructure and the introduction of the globally-accepted WSG at constrained airports are vital ingredients, but it is even more important that governments recognize that aviation’s greatest contribution is not in providing tax receipts to the treasury but in the growth and development it stimulates. The region is rife with unreasonable tax and charges policies that hurt travel and inhibit economic development.
Venezuela is the poster child for this approach, as the government continues to block the repatriation of $3.8 billion in airline money and has added fuel to the list of items that airlines are required to purchase in dollars instead of in Venezuelan Bolivars. This goes against the non-discriminatory spirit of the Chicago Convention which Venezuela has signed. It is particularly problematic, as purchasing fuel and paying for other local services such as air navigation charges is one of the few avenues airlines have for spending accumulated local currency that cannot be repatriated.
The negative impact of these government policies is dramatic. Passenger traffic for Venezuela fell 17% in the 12 months through 31 August 2015 compared to the prior 12 month period. This is in sharp contrast to other key economies in the region which have reported growth. I know all of us have great sympathy for the difficulties of the Venezuelan people, but crippling the air transport sector only deprives them of the economic benefits that aviation could bring.
When I spoke here last year I noted that there was a risk that Argentina was headed down the same path as Venezuela. While airlines are being allowed to repatriate some funds, the amounts are now being limited. Understandably, some airlines are taking measures to reduce their exposure such as restricting inventory for forward sale. We are seeking to meet the new government as soon as it is in office to find a solution that will preserve connectivity and the vital economic benefits it brings.
Venezuela and Argentina are at the top of a list of misguided policies and decisions that we are engaging governments across the region to reverse. For example:
- Panama plans to raise overflight charges 97% over three years beginning in 2016, with no proper consultation with industry.
- Brazil increased the Terminal and Approach air navigation charge by 72%--and bypassed the consultation process in doing so.
- Peru levies an unjustified 16% VAT on ATC charges, which goes against International Civil Aviation Organization (ICAO) policies.
- And Ecuador is looking at imposing a fuel price parity scheme—similar to what we see in Brazil—that could raise fuel costs by as much as 30%. Already fuel prices in the region average 14% above global levels—and 17% above in Brazil.
- In Peru, passengers can endorse tickets to other travelers, raising fraud and security concerns.
- In Colombia, passengers are allowed to cancel their flights up to 24 hours before departure and the cancellation fees cannot exceed 10% of the ticket price.
- In Brazil airlines must provide accommodation for passengers if a flight is delayed or cancelled, regardless of the reason for the delay.
Let’s be clear: airlines, governments and passengers share a common goal of getting to destinations safely, reliably and on-time. Airlines already have many policies in place to ensure passengers are looked after. IATA members have unanimously agreed core principles on consumer protection that are aligned with ICAO. We stand ready to partner with governments in order to have a balanced approach to consumer protection.
Finally, a word on sustainability. Sustainability is our license to grow. As an industry we are committed to achieving carbon neutral growth from 2020, with a 50% reduction in net CO2 emissions by 2050 compared to 2005. And we will do that with improvements in technology, operations, infrastructure, and the implementation of a global market-based measure (MBM).
This too is a team effort. For example, the solid work that the industry has done to prove that sustainable aviation fuels are safe and effective must be followed-up by governments with measures to ensure that it is commercially viable. Some carriers in this region are participating in the Sustainable Aviation Fuels User Group and I congratulate you on your commitment to accelerate the development and commercialization of sustainable aviation biofuels.
And we are counting on governments to achieve a historic agreement at the 39th ICAO Assembly next year on a framework for a global mandatory MBM. We are in a crucial period and I urge everyone in this room to ask your governments to commit to a workable solution. We must remain united and true to our vision and commitments to support governments to do their part.
IATA remains committed to this region. I have traveled here often to express this support and will continue to do so. In March I will be in Santiago, Chile for our Wings of Change 2016 conference. I look forward to seeing many of you there.
The air transport sector makes an enormous contribution to this region. It supports 4.9 million jobs including tourism-related jobs and contributes $153 billion to GDP. But I believe aviation can do far more if governments adopt the winning formula that has brought so much success elsewhere. I’ve said this before, but it bears repeating: A decade ago, Latin America generated more air traffic than the Middle East. Today Middle East airlines carry twice the amount carried by Latin American carriers.
Of course, the Middle East has an enormous geographic advantage in terms of capturing long-haul connecting traffic between Europe and Asia. However, it also has a much smaller home market with a population of 200 to 300 million versus an estimated 630 million in Latin America. But governments in the Middle East—particularly in the Gulf—recognized the invaluable role aviation could play in developing their economies and supported its development.
This is a formula that, with a few exceptions like Chile and Panama, has yet to be applied here. This region has been home to an airline industry for nearly 100 years and we’ve been your partner for 70 of them. It’s long past time for governments to put this enormous resource to good use on behalf of their economies and people.