Good morning! As always, it’s a pleasure to be in Singapore—one of the great aviation capitals of the world. And during this very special week of the Singapore Airshow the industry is gathering to look ahead. At the Airshow itself civil aviation will be looking at the latest technology—technology that improves safety, increases efficiency and takes us closer to sustainability. And at this Summit, we will be focusing more on the key issues of how civil aviation can use that technology most effectively in our businesses.
IATA is honored to be partnering with the Singapore Ministry for Transport, Civil Aviation Authority of Singapore and Experia Events, the organizer of the Singapore Airshow, to host this gathering. It is a long-standing partnership and today promises to be another great day of expert discussion. Just look around the room at the depth of industry knowledge that is gathered here—and with a geographic range that covers pretty much all continents except Antarctica. So I will begin with an advance thank you for your participation.
IATA’s vision is to help the air transport industry to be safe, secure and profitable as it sustainably connects and enriches our world. So I feel very close to our program for today which covers issues of:
- What makes a hub successful today and into the future
- Safety, with an examination of the challenges and opportunities that drones present
- And sustainability as we review progress on the road to carbon-neutral growth from 2020.
Value of Aviation/Importance of Asia
I have a few thoughts on each of those that I would like to share with you in order to get the discussion started. Before I do that, I want to reflect on a theme about which I take every opportunity to remind people. We are privileged to be the leaders of an industry that is a force for good in our world. Many industries contribute to the global community in which we live. But we are the only one that gets you around it to do important things—sealing deals, generating ideas, creating business opportunities, expanding minds with new experiences; and building the mutual understanding and appreciation of each other and our cultures, which seems particularly relevant today.
In making all these things happen, the workings of the economy are churned. Globally, the 3.8 billion people and 53 million tonnes of air cargo that airlines will safely carry to destinations this year has an enormous impact on the global economy. We estimate that this supports $2.4 trillion in economic activity and some 58 million jobs. In Asia-Pacific, the corresponding numbers are over $700 billion in GDP and 33 million jobs.
Those are big and relevant numbers. And this Leadership Summit is taking place in a region with enormous potential for growth. Today 34% of global travel is within the Asia-Pacific region. That will grow to 42% by 2034. China, which is already an aviation powerhouse, will be even more pivotal with the journeys of one in five travelers being either to, from, or within its geography.
In fact if we go back to the 3.8 billion air travelers figure for 2016 and extrapolate that forward to 2034 it becomes 7.0 billion. That’s 3.2 billion new travelers in less than two decades. Of these, 1.8 billion will be in Asia-Pacific—the vast majority on routes linked to China. If we can realize that growth potential, then jobs and economic activity will follow. In two decades, we could easily see aviation in Asia-Pacific supporting over 70 million jobs and some $1.3 trillion in economic activity. But that’s dependent on the industry having sufficient infrastructure.
Asia-Pacific has traditionally done well in this area, but as the industry grows, ensuring that infrastructure keeps pace with demand will become a bigger challenge. To help governments and infrastructure providers to focus on the importance of this issue, we have recently completed a Value of Aviation study for the region which includes these impressive top line numbers. Our intention is to roll out the study progressively in discussions with key stakeholders so that we are all on the same page with respect to what is needed for aviation to maximize its contribution to the region’s overall development.
The gathering we have here today should give us confidence in the long-term role of aviation in driving healthy economies. Paradoxically, it is no secret that for all the value we deliver, airlines have always struggled to turn a healthy—or sustainable—profit for their investors. With hard work and the confluence of some critical factors, we expect that airlines will deliver a $36 billion profit in 2016, for a 5.1% net margin. Even more significantly, airlines are starting to provide a normal return to their investors—without whose support we cannot meet the forecast demand for air travel. The average cost of capital is estimated at around 7.0% this year. And for the second year in a row—and only the second time in our history—airlines collectively are set to deliver a return in excess of that—8.6%.
What has happened? Certainly lower oil prices have helped—but that impact has been delayed and diluted in many parts of the world due to forward hedges at higher than market levels, as well as the rise of the US dollar against local currencies. Efficiency gains across the board are also making a significant and sustainable difference. Airlines now regularly fill over 80% of their seats. Newer generation aircraft are 15-20% more fuel-efficient. Consolidation, joint ventures and alliances are giving consumers more choice and helping airlines to be more efficient. Finally, demand for our product remains very strong. Last year we saw the strongest traffic growth in five years. And the ever-falling price of air travel is helping more and more people to take to the air.
But, I should also put some perspective on that profitability. First, on a per passenger basis airlines are making less than $10 for each passenger carried. So airline profits are still fragile in the face of any new taxes that our partners in government might be planning. Or higher prices being planned by many of our infrastructure partners.
Furthermore, the profitability is not evenly distributed. The majority of the industry’s profits are being generated in North America--$19.2 billion. On a per passenger basis they will retain over $21. Asia-Pacific airlines are expected to generate a $6.6 billion profit which equates to just over $5 per passenger.
Let me provide some even more dramatic numbers. Preliminary results for 2015 show average EBIT margins for Southeast Asian carriers at 0.3%--the lowest among all regions except Africa, where losses were being generated. By comparison, we see the Middle East average at 10.8%, Europe at 5.9% and North America at 13.8%.
Why is this region, with so much potential, lagging in profitability? It is, after all, home to many well-managed airlines that enjoy excellent reputations for good customer service. I suggest these are some of the reasons:
- First, fuel prices have fallen, but over the last 18 months US dollar has risen by 20%. As carriers in this region purchase fuel in US dollars, this has significantly limited the positive impact of the fall in fuel prices.
- Secondly, Asia-Pacific accounts for some 40% of global air cargo and the business has never been so tough. Globally, air cargo revenues peaked at $67 billion a few years ago. This year we anticipate revenues of $50 billion. Capacity growth has put huge pressure on yields, too. I am still a long-term optimist on cargo, but there are severe challenges to improve the value proposition with improved technology and processes.
- And thirdly, this region is home to ever-intensifying competition.
- At the regional level, so-called “low cost” competition has a 54% market share—the highest in the world.
- In parallel, the super-connectors of the Gulf have increased competition on what was a traditional market for Southeast Asian carriers—routes from Europe to Asia and down to Australia.
Of course competition is always a good thing. Consumers are getting a great deal. And it will get even better as airlines respond to changing consumer demands with innovation. But preserving a healthy air transport sector in Southeast Asia—and the economic and social benefits that it delivers—is much wider than an airline challenge. Governments and infrastructure providers will also need to contribute with efforts to keep costs low and efficiency high.
All that makes for a great background to today’s discussions—which are truly global in nature.
No discussion of aviation is complete without looking at our number one priority—safety. It unites all industry partners in a common goal—to make travel ever safer. We can be proud that air travel is safe.
If you look at the last two years, the industry’s safety record has been marred primarily by events that could be classified as “unthinkable”. In 2014 we had the mysterious loss of an aircraft with no obvious cause and another tragically shot down over a conflict zone. In 2015 the headlines focused on two terrible air disasters: One in which a pilot deliberately took his own life and those of all on-board; and one in which the aircraft was destroyed by an act of terrorism. There are no simple solutions to the issues raised by these tragedies. But we must honor those who lost their lives, and their friends and loved ones, by re-dedicating ourselves to making flying even safer.
We are being successful in that effort. Today we will announce our analysis of the industry’s 2015 safety performance showing steady progress. If we look at jet aircraft, in 2015 we had one major accident for every 3.1 million flights. That’s a significant improvement on the five-year average (2010-2014) of one accident for every 2.2 million flights.
Continuous progress only comes with constant vigilance. Later today we will discuss the evolving threat of drones, often referred to as Remotely Piloted Aircraft Systems, or RPAS, to use the ICAO term. It’s great that many children have their first taste of the excitement of flying with a toy drone. I am as excited as anybody about the prospect of having pizza delivered by a drone. We are only beginning to discover the many potential commercial applications of this technology. And it would be naïve to think that States and military forces will reduce their use of drones. They are here to stay. But we cannot allow them to be a hindrance or safety threat to commercial aviation.
We need a sensible approach to regulation and a pragmatic method of enforcement for those who disregard rules and regulations and put others in danger. The issue is real. We have plenty of pilot reports of drones where they were not expected—particularly at low altitudes around airports. A simple Google search will provide plenty of dramatic media commentary on the growing number of these safety incidents.
There is no denying that there is a real and growing threat to the safety of civilian aircraft. Appropriately, there is a lot of work in this area. IATA is supporting the “Know Before You Fly” campaign to educate prospective users about the safe and responsible operation of drones. And we are working closely with the International Civil Aviation Organization (ICAO) as well as stakeholders representing airports, air navigation services providers and pilots, to agree a common approach. I hope that our discussion today takes us closer to a durable solution.
Alongside with safety, our industry faces a common challenge to keep improving its sustainability. I am always proud to represent our industry—and especially on the issue of sustainability. Our four-pillar strategy—concentrating on technology, operations, infrastructure, and market-based measures—gave us the courage to become the first global industrial sector to commit to carbon targets of:
- A 1.5% annual average improvement in fuel efficiency to 2020
- Capping net emissions with carbon-neutral growth from 2020
- And cutting net emissions in half by 2050 as compared to 2005 levels
Evidence of our work in this area is clear. Fuel efficiency is improving around 2% a year. Sustainable fuels for aviation have matured with the knowledge that they are safe and since they are being produced from waste, we can help solve that problem too. And earlier this month a CO2 standard was agreed that will institutionalize the continuous technical improvements that come with every new generation of aircraft and engines.
All of this is good—significant—progress. But it is not enough. We need the help of a market-based measure to meet our targets. And the industry is united in asking governments for a global mandatory carbon offset scheme to be in place in time for 2020. Working through ICAO, the technical standard arguments and issues are being progressively resolved. I have to thank ICAO, in the person of Dr. Aliu, the President of the Council, for the organization’s tireless efforts and open engagement with industry to find the right solution.
All of that will come to a head in September/October of this year at the 39th ICAO Assembly. Later today, we have a great panel of key players in that debate lined up to review the political hurdles that we need to overcome in order to achieve success. And our membership is doing all that it can to be supportive. Essentially we are talking about a tax on future growth. IATA is working with its members on how best we can equitably divide the bill—taking into account the circumstances of mature airlines and of those that are still growing fast. I look forward to a very interesting debate.
Global Air Hubs
Lastly, we have a focus on the business with a look at air hubs. We would not have the industry that we do today were it not for the significant investments made in hubs.As I mentioned before, Singapore is a great example. Establishing successful hubs involves much more than laying concrete for a runway and building a terminal.
From the airline perspective, there is a long list of variables: the market, the cost, available capacity, access through bilateral agreements, availability of transfer traffic, the quality of the passenger experience, the cost and quality of suppliers available, the technology available and cost of operation, and efficient access with available airspace capacity. And that is nowhere near a complete list! Running a hub is a very complex and demanding business.
The rise of the Gulf carriers demonstrates how quickly change can happen when you get it right with many of those factors. Most governments in the Asia-Pacific region value highly the economic contribution of connectivity enabled by aviation. For example, Singapore’s third runway is already in place (although not yet operational for commercial operations) and plans for new terminals are well underway. Another example is Hong Kong where progress on a third runway continues—although we remain concerned about how it is being funded. Even Japan—where capacity has long been an issue—is now ahead of the game with improvements at both Haneda and Narita, which are fueling the positive economic impact of a tourism boom.
It will be a challenge to keep up this pace of development—and to ensure that that skies can still operate efficiently as the industry grows. That is a growing challenge for the Gulf hubs where much more coordination in airspace management is needed. Europe probably faces the greatest risk in this context. Air traffic management is an expensive and disjointed mess as a result of governments’ protection of narrow domestic interests at the expense of Continental success. And it seems that the timeline to build new airport infrastructure now extends into multiple decades. And a Eurocontrol study estimates a potential 12% airport capacity shortfall by 2035.
So there will be much to discuss when looking at hubs.
Before I conclude, the presence here today of so many senior government and regulatory authorities is too good an opportunity for me not to return to another of my favourite themes. That is, before taking decisions or making rules which will have a big impact, please ask advice from industry practitioners, and listen to it. We all want the same thing – connectivity benefits delivered safely, sustainably and profitably. We in the industry can help you achieve your goals and avoid creating unexpected problems. The fact that you have come here today is a positive sign that you are willing to listen to the industry. Thank you for coming, and I look forward to seeing the positive results of what we will all share in today’s discussions.