It is a pleasure to be in Santiago for my first Wings of Change event. Thank you to all the participants. And special appreciation goes to our sponsors who have made this gathering possible. We are meeting concurrently with the FIDAE air show. Together these events are a great reminder of the importance of aviation to Latin America and the Caribbean (LatAm or the region).
Flying here from Europe, I was reminded of how big this region is. Nearly 11,000 km separate Tierrea del Fuego from Tijuana. In-between are powerful rivers, formidable mountains, and vast plains. Air transport is the only effective means to link it together. And it is a critical air bridge integrating the region into the global economy.
Aviation's activity has enormous consequence. The travel of over 250 million people annually touches the region. And the industry supports over 5 million jobs and generates some $170 billion in regional GDP.
And there are valuable intangibles. Our industry helps people to lead better lives. Journeys of exploration open minds to new ideas and experiences. Vacations help us to recharge our batteries, discover new places, or reconnect with families and friends. Cargo flights power global trade. And business travel develops markets and grows prosperity.
Aviation empowers change and growth. That is why I call it the business of freedom. Everyone connected with aviation can be proud of enabling the benefits of our globalized world.
This conference is entitled Wings of Change. The ability to change, adapt, evolve and innovate is critical to the survival of any business. Aviation is no different. But before looking at change, I would like to highlight five fundamentals.
- First, aviation must be safe. Globally we had a stellar year in 2017. And that was reflected in this region as well. But there are always ways to improve. Although there were no fatalities in the region, there were a small number of accidents--fewer than one for every 500,000 flights. And the global average is for one accident per million flights. Our aim in the region is a 50% improvement on 2010's performance by 2020. With so few accidents, data analysis will guide our efforts. And, as our predictive analysis skills grow, I would like to imagine a future for aviation with no accidents.
- Second, aviation needs borders that are open to people and trade. We must be a strong voice in the face of those with protectionist agendas. And I would like to imagine a future for aviation where airlines are as free as possible to meet the demands for connectivity.
- Third, aviation thrives on global standards. A common set of rules underpins the aviation industry's success—in everything from safety to ticketing. But in this region many governments choose to slip away from global standards—especially in the area of passenger rights. Brazil, Mexico and Colombia are among the biggest concerns for deviations on passenger rights. And, we continue to push for the release of $3.8 billion of airline money blocked in Venezuela—in contravention of bilateral obligation and international agreements. I would like to imagine a future where these global standards continue to be strengthened by the cooperation of airlines and governments through institutions such as ICAO, IATA and national governments.
- Fourth, aviation must be sustainable. The historic agreement on a Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is one of four pillars in a common strategy by industry and governments to ensure that aviation meets this responsibility. We urge all countries in Latin America to enthusiastically embrace this ground-breaking measure and to support the adoption of the necessary ICAO Standards so that the scheme can be implemented on time on January 1st 2019, In parallel we continue to advance with new technologies, improved operations and more efficient infrastructure. Our commitment to cut emissions to half of 2005 levels by 2050 is ambitious. And I would like to imagine a future where our net carbon impact is zero.
- And lastly, aviation must be profitable. Globally, airlines are doing better than at any time in their history. We are in the ninth year of profitability since 2010. And, more importantly, this will be the fourth consecutive year in which airline earnings will exceed their cost of capital—in other words a normal profit. The expected $38.4 billion profit in 2018 translates to $8.90 per passenger. Carriers in the region are expected to make about $3.00 per passenger. Although lower than the global average, it is contributing to a huge improvement on past performance. Airlines have made themselves more financially robust through massive transformations. But it is still a very thin buffer against shocks. I would like to imagine a future where airlines generating normal profits is the norm, not a rarity!
Mindful of these fundamentals, today's question is what must change to make aviation in this region even more successful.
The industry is changing—dramatically. Latin America is home to some very successful airlines. Our host, LATAM, has achieved its highest operating income ever in 2017 and is expanding rapidly. Both LATAM and Avianca are leaders in building trans-national brands to meet evolving consumer demands. COPA has achieved amazing connectivity through Panama. Aeromexico is deepening its partnership with Delta to better serve its most important international market. And the low cost sector—after pioneers like GOL and Azul—is expanding rapidly with many new entrants.
Consumers are benefitting. The region's travelers are taking advantage of a 64% fall in global ticket prices compared to 1990. And the number of travel options has increased exponentially—with new routes, and new products and services.
The LatAm industry of 2018 bears little resemblance to what it was at the turn of the century. In the last decade alone the number of passengers carried by the region's airlines has more than doubled. And over the next 20 years we expect 4.2% average annual growth so that over 750 million journeys are expected to touch the region by 2036.
That's great news. But is not guaranteed. We need
- Effective infrastructure to accommodate growth
- Reasonable costs and taxes that don't kill growth, and
- A modern regulatory framework that supports growth.
On infrastructure, I am deeply concerned. Demand is growing faster than we are able to build airports or upgrade air traffic management. We are headed for a global crisis.
That will impact this region as well. The capacity challenges at key hub locations such as Buenos Aires, Bogota, Lima, Mexico City, Havana and Santiago are well documented. Unless they are addressed, the region's economies will suffer. If planes cannot land, the economic benefits that they bring will fly elsewhere.
Mexico City is the most critical of the bottlenecks. The current airport was designed for 32 million passengers. Today it serves 47 million. The solution is a new airport—already under construction. But its future has been politicized in the current presidential election.
- First, the critical need for the new airport is understood by all.
- Secondly, the new airport must be affordable. More engagement with the industry is needed to agree on optimal levels for operational and capital expenditure. And one of the messages that we must get across to the government is the need to bring an experienced airport operator into the management structure.
- Thirdly, the redesign of airspace for the new airport must be done in consultation with the users—the airlines.
We also have concerns for Chile—long a beacon for the benefits of a progressive approach to aviation in the region. The aviation success story is at risk. Much-needed terminal capacity in Santiago is being built. But service levels have suffered. Costs are rising. And there is insufficient transparency to understand why. We support the goal of doubling the airport's capacity to 30 million. And, in doing so, we expect efficiencies of scale to drive costs down, not up!
The rising cost of infrastructure—particularly airport infrastructure—is shining a light on the impact of airport privatization. This region was a pioneer in airport privatizations. Collectively we have been disappointed with the results of most airports—rising costs and falling service levels.
These frustrations are now being felt the world-over. We had high hopes that private sector management would improve the relationship between airports and airlines. In many cases infrastructure was built, but the expected benefits of greater efficiency and higher service levels have not fully materialized.
We are asking governments to be cautious when considering new privatizations. The root cause is the regulatory structure. It has not worked. Privatized management has rewarded the investors with the fruits of efficiency gains. All that is left for consumers, communities and the airlines are rising costs. So we also ask governments to work with us on a regulatory structure that better balances the interests of the investor with those of the community and travelers.
Our needs are not complicated—sufficient capacity, affordable costs and service quality or technical excellence aligned with user needs. To meet those requirements governments must work with industry to develop a long-term strategy and vision to capitalize on aviation's powerful and positive impact on the economy.
The industry, too, must work together. We have a close partnership with ACI-Latin America & Caribbean to address issues in the region. Together with ALTA we formalized our joint work for safe, efficient and sustainable operations in a Memorandum of Understanding. And we are all eager to produce great results from our work together.
Speaking of working together, I want to make special mention of the importance of the Worldwide Slot Guidelines (WSG). Capacity issues will not be resolved overnight. Airports will become more congested and slot allocation will become even more important. The WSG is the accepted global standard for managing slots. And over many decades it has proved its value to both consumers and the industry by avoiding chaos when capacity does not meet demand.
It is very encouraging that Bogota and Lima adopted WSG to manage their congestion issues. Mexico has also recognized the need to align with global standards and we look forward to quick WSG implementation.
But we recognize the WSG need must evolve in a changing world. That is why IATA launched a major strategic review of the WSG, with airlines, airports and independent coordinators to clarify and enhance their transparency, and ensure they are fit for purpose for the future.
The second issue is costs—beyond infrastructure. This is an expensive place to do business. Taxes, fees, and government policies create a great burden. Here are some examples
- Brazil fuel pricing policy adds $800 million in costs annually.
- Ecuador and Colombia suffer from the exorbitant costs charged by monopoly fuel suppliers—made all the worse in Ecuador where there also is a 5% fuel tax.
- Colombia has a connectivity tax, an exit tax and now the municipal mayors are planning to tax air travelers $5.00 to subsidize road infrastructure.
- Peru has a tourism tax and collects VAT on overflight charges and international tickets.
- Argentina has high passenger fees made worse by the monopoly pricing and poor service of its only ground handling company.
- In St. Lucia new and increased taxes and charges now amount to $63 per passenger. Adding insult to injury, the Airport Development Charge is being used to repair roads and construct a cruise ship terminal.
- In fact tourism taxes are a rash across the region: Mexico, Colombia, Ecuador, Peru, Nicaragua, Jamaica and Costa Rica, to name just a few. All are deterring travelers by raising the cost of travel.
I am sure that the region's airlines could all contribute further examples to this list. What this tells us is that governments see aviation as a revenue source. What they need is a change of mindset to enable them to see aviation as a revenue catalyst.
There is proof within this region. In 2015 Cartagena airport reduced its airport fee from $92 to $38. What happened after that? Tourism arrivals rose by 38%. And the additional tourist spend will do much more for the local economy than the airport fee ever could. There is a solid lesson in that for governments across this region.
The last change that I would like to call for today concerns the overall regulatory structure in the region. It is nationally based and, to be very frank, there has been insufficient effort to harmonize requirements.
The region is conceptually leading the world with airline brands operating in several markets across the region—LATAM and Avianca are great examples. But the regulation of their activity is still nationally based. For example, technical crew and aircraft cannot be utilized flexibly to maximum efficiency because of safety policies do not recognize common standards across the region.
What public policy benefit does this serve? Make no mistake, safety, as I have said, is our top priority. But safety is not improved with redundant processes. If an airline's crew is certified to a commonly agreed standard in Peru, is there a safety reason to prohibit them from operating domestically on routes in Argentina? Or vice versa? And if an aircraft is certified in Brazil to a commonly agreed standard, why should it need to be re-registered in Chile to operate?
We need a comprehensive dialogue among the governments and airlines of the region to look for the efficiencies that can be generated through mutual recognition of common standards. With much of the industry already integrated across borders, this is the next logical step. And it could have a very big and positive leadership impact globally.
We have a lot to discuss over the next days. As we do so, I hope that you will keep in mind the three challenges to address with change:
- Building effective infrastructure to accommodate growth
- Achieving reasonable costs and taxes that don't kill growth, and
- Evolving a modern regulatory framework that supports growth.
If we can achieve these, I am confident that the next decade will bring even greater opportunities to expand aviation's benefits in the region. And this conference is a great opportunity to align on growing the business of freedom safely, efficiently, sustainably and profitably.