Good afternoon. And thank you for the kind invitation to address you today. It is always a pleasure to visit Japan. Thank you to our hosts Mr. Yoshiyuki Yamaya and Mr. Emanual Menantau and the Kansai Airport team.
As you know, IATA represents airlines—some 265 worldwide. And our members deliver about 83% of global connectivity. They come from all parts of the world. And they represent all business models. And that includes a growing number of budget carriers as well. Our Board has asked us to become even more diverse in our representation. The growth of the low cost sector in Japan is another indication of why we are pursuing that strategy. I look forward to hearing the remarks of Mr. Shinichi Inoue, CEO of Peach later this afternoon.
Recent years have seen great change in Japanese aviation and the industry globally. Much of that change is positive. At the global level, airlines are finally earning their cost of capital. It’s been a great struggle. It’s a competitive business with a lot of capacity. That drives fares down. Since 2000 average air fares have fallen by 45%. That’s great value for the passenger. And more people than ever are flying. We expect traveler numbers to reach 4 billion this year. And that number will effectively double in the next two decades. To remain profitable, airlines will need to continue to reduce costs and improve efficiencies.
And, I should mention that we expect 2017 to be more difficult than 2016. At the global level, the profitability of your airline customers is expected to deteriorate slightly from about $35.6 billion to $29.8 billion. The majority of that profit is being generated by North American carriers—some $18.1 billion. We see your airline customers based in Asia earning a collective net profit of $6.3 billion, down from $7.3 billion last year. The industry will still earn its cost of capital—but just barely – with a profit of $4 per passenger in this region. And, given the many political and economic uncertainties in the world today, maintaining profitability will be a struggle.
To quickly re-cap the challenges to be successful in a very competitive environment, I see three big ones:
- Your airline customers need the capacity to grow
- They rely on efficiencies to bolster competitiveness
- And they are focused on managing real cost reductions
Those challenges map pretty much exactly onto what airlines expect of their airport partners. We need you to provide sufficient capacity. The facilities you provide must be at the leading edge of efficiency. And airports—overall—must be affordable places for airlines to do business. Let me share some thoughts on each of those, before engaging in the most critical activity for airlines and airports—discussion. Airlines are your customers. And we are your partners. Success in both those relationships requires consultation and discussion. Everyone benefits when we are aligned.
Let’s start with capacity. While Japan is a mature market, we have seen that the lifting of capacity constraints has done things. First it has unleashed pent-up demand. And second it has facilitated greater competition, including new entrants operating low-fare point-to-point services. This is all positive.
As Japan’s top international airports, I would encourage you to look to future capacity development carefully. I don’t believe that “build it and they will come” can apply indefinitely in all cases of airport development. For sure, more capacity will be needed. On top of the phenomenal growth of inbound tourism in recent years, the 2020 Olympics will be an added boost to growth. The numbers are astonishing. From 24 million visitors in 2016 the target is to attract 40 million in 2020 and 60 million in 2030. That won’t happen without airport capacity built in the right place, at the right time and, of course at the right price. You get those things right by understanding your customer. That comes through consultation—a process that IATA is always happy to facilitate.
In the Osaka area, the joint holding of Kansai and Itami allows for coordination. And the roles of the region’s airports are fairly-well defined. For Tokyo, on the other hand, there is a need for a mechanism to ensure joined-up thinking on the future of Narita and Haneda, especially as Tokyo will continue to be the primary gateway for visitors to Japan. It’s more difficult because Narita and Haneda have different ownership and management structures. But it’s not impossible. Government has a role. I encourage the government to engage in a dialogue with the industry—airlines and airports—so that all stakeholders can agree on the best long-term strategy to meet the needs and desires of business and travelers.
Efficiency should play a role in this consideration. Building infrastructure is costly. So our thinking of the future should not just be about new construction—we also need to look carefully at maximizing current capacity. I have some concerns.
First is the trend to build dedicated “low cost” terminals. Kansai and Narita have one each. And I understand that Chubu is considering building one as well. I think that it is fair to say that all airlines want the lowest costs possible for their operations—of course while keeping up quality standards. So before building dedicated infrastructure for low cost airlines, it is prudent to make sure that the existing terminal infrastructure is used to its fullest. And do make sure there is a long term commitment from the users of these terminals before you spend money to build them!
The same is true for runways. The capacity at Haneda is artificially constrained by airspace restrictions. The gradual opening of airspace over central Tokyo is a positive development. And, while a solution to open up US military airspace to civilian traffic seems unlikely, we have high expectations that the Collaborative Actions for Renovation of Air Traffic Systems (so called CARATS) will deliver on its aim to double airspace capacity. And that needs to be a major consideration in plans for the development of new runways.
We also need to consider the efficiency of what is going on inside the terminal building. I am pleased to hear of progress on Smart Security initiatives—a joint IATA-Airports Council International project. Kansai is in the lead, having installed a Smart Security lane in January; and there are plans for multiple lanes at Itami. Narita is planning major innovations based on a Smart Security assessment last year. Well before the Olympics open, I am hopeful that it will be a model for others to follow. And we are making progress at Haneda following an assessment late last year.
We are here to support you in these developments. And the tour of Kansai’s Smart Security System later today will be an opportunity to learn from each other. Sharing experiences is a key element of improvement. Thinking even bigger, I would encourage you to have a look at the one-stop security initiatives being rolled out in Europe. With mutual recognition of standards between Europe and both Canada and the US, millions are benefitting from smoother travel. There is also a real upside for security because resources can be allocated where the need is greater.
Our members would like to see Japan’s airports also do more to improve the efficiency of passenger processing. On the domestic side, Japan is a clear leader in automation and self-service while both Narita and Kansai have ambitious plans. Haneda domestic is a leading airport in implementing Fast Travel options. But many popular developments are not yet available for international travelers. I would encourage all Japan’s airports to have a look at the efficiencies that the domestic services are generating and replicate them for international. Mobile boarding passes, home printed bag tags and kiosks throughout the terminal can enable passengers to travel more efficiently. And our teams in Tokyo and Singapore are here to help with lots of experience on implementations from around the world.
Efficiency plays a role in affordability, so do the charges airports levy for their services. Japan is a good news story in the making. Japan’s airports used to be at the top of the charts of the world’s most expensive airports. Last year Narita was ranked at 23 and Kansai at 13, according to the league table of Leigh Fisher. That’s progress that should be recognized. And I was pleased to hear that agreements have been signed with both Kansai and Sendai airports just last week for reductions in charges. But it is not job done. It never is! I can also tell you that we have high hopes for the changes in airport ownership structures that Japan has embarked upon. As I mentioned before, over the last 10 years, ticket prices have fallen by an average of 45% globally. And airport costs have risen by 29%. So I can tell you categorically, that the imperative to reduce airport costs remains critical.
As every airline knows, the job of cost management is never-ending. Narita has been reducing its costs for the last 10 years and we look forward to even more improvements. And to be very candid, the pricing at Haneda—Japan’s most expensive airport--is a concern. It has an advantageous location. In French we would say that should not give them the unchecked ability to set charges.
For me, the most interesting story of the moment is playing out in Kansai where billions of dollars of infrastructure have been transferred to a private concessionaire—our hosts Kansai Airports. Airlines appreciate the customer focus. The entrepreneurial approach to incentivizing new routes is helping to grow connectivity. Airlines appreciate the recent reduction in landing charges. And overall, my message is that airlines are hoping for more.
We are sure the new management team can and will do even more to improve competitiveness. But, I am concerned that there is no formal regulatory framework to keep costs low. I hope that you will find a magic formula to reduce costs without regulation. The attention of the world is on Japan. IATA is here to help make it a success story. And that role includes being a constant reminder to improve on costs for our mutual success.
At the end of the day, capacity, efficiency and affordability are the components of competitiveness. That is what your customers expect. Passengers originating in Japan will always begin and end their journey at a Japanese airport. It’s a captive market. Essentially you have a monopoly. So my last thought is to explain why I think competitiveness is important.
First, it is about what the air transport industry contributes to Japan. The more competitive that you are on these parameters, the more you can, and will, contribute to the Japanese economy. Current air transport accounts for 1.8% of GDP. In South Korea aviation is 3.1% of GDP. So there is upside to be gained.
The second, is to recognize that you operate in a region that is full of potential. Japan has long functioned as a hub for traffic flow between North America and Asia. Technology means that direct service is possible for more city pairs. More carriers are overflying Japan. Japan’s growth is being driven by low cost short-haul services. That is adding value to the economy. But an economy the size of Japan needs global connectivity—a good balance between regional and long-haul. Competitiveness plays a role in that.
And lastly, we should recognize that we are in what I call the business of freedom. Our success makes the world a better place by connecting people, enabling exploration, linking businesses and growing economies. And that should motivate us all to be as competitive as possible in this great industry.