First of all I thank ACI for its support of IATA's activities and for this opportunity to present the airlines' situation. It is also an excellent opportunity for me to congratulate Bob Aaronson on his new, important job.
The air transport industry is still recovering from the terrible consequences of the economic recession and September 11. Dark clouds are making our future difficult to predict.
It is most appropriate that we are meeting in the Asia Pacific region. Not only is it showing the strongest rebound, but Asia Pacific is also the most dynamic part of the world in terms of infrastructure development.
Many of the airports and governments of this region are to be congratulated for the powerful infrastructure growth. Altogether, a capacity for 350 million passengers a year is being added to meet demand in the year 2020.No other region of the world can boast such a record. We must not forget, however, that the industry, as a whole, is not in good health.
First of all, let's look at the financial crisis.
THE FINANCIAL CRISIS
September 11 turned an uneasy situation into an economic crisis. 400,000 aviation-related jobs were lost. 200,000 of these lost jobs were airline jobs. The financial losses were huge in 2001 and will be severe in 2002. It has been said that the airlines have lost more in two years than they ever made since World War II.
Globally, airlines lost 18 billion dollars in 2001 – 12 billion on international scheduled services and 6 billion on domestic services. Our outlook for 2002 anticipates losses of 5 billion dollars on international scheduled traffic. The US domestic market is expected to show a loss of at least 7 billion dollars. Globally then, we can expect to see losses between 10 and 12 billion dollars for 2002. Looking forward, and all things remaining equal, we hope to see a small profit in 2003 on international scheduled traffic.
THE REGIONAL PICTURE
Let's look at the regional components of this global picture. The US is the most affected by the crisis. First half 2002 US traffic remains 10 to 15% below levels for the first half of 2001.
In Europe the British-based airlines have the greatest exposure to the US market and were most affected by the events of Sept. 11. While traffic is picking up, yields are recovering more slowly. Those airlines less exposed to the U.S. market, such as Air France, Iberia and Lufthansa, are expected to report profits in 2002 while others should see their losses reduced.
Flexible fleets, efficient hubs and regionally balanced networks are all essential to survive. Overall European traffic is down about 11% on the first half of the year, but aggressive capacity cuts have helped maintain yields.
Recovery has been the strongest in the Asia-Pacific region. Carriers including Cathay Pacific, Singapore Airlines and Qantas have reported promising results for the first half of 2002. China remained almost unaffected by the downturn. Traffic in the first half of 2002 is up about 13% over 2001. In Japan, however, the recovery is being slowed down by a weak domestic economy.
The situation in the Middle East is both good and bad. Security concerns are having a negative impact on demand to traditional tourist destinations. And concern about discriminatory treatment overseas is also depressing outbound demand from this region.
But intra-regional travel is strong.The Latin-American scene is being strongly influenced by the depressed US market. North/South traffic is therefore still weak. The financial crisis in Argentina and the spill over effect in Uruguay and Brazil are also affecting the regional picture negatively. Let's turn now to some of the common elements throughout the regions.
THE COMMON ELEMENTS
The tension over Iraq is pushing fuel prices up. This is depriving the airlines of one of the few comforts they had enjoyed at the end of 2001. Every one-cent per gallon increase in the price of jet fuel costs the airlines 600 million dollars per year. Now, of course many airlines have hedged their fuel requirements so that any jump in fuel costs would not translate into a direct cost impact.
Only financially stable airlines will be able to sustain a sudden increase.Security, insurance and environmental concerns all affect the way airlines and airports manage the present and imagine the future. For the healthy future of our industry, we need to build a new partnership between airlines, airports and air traffic control authorities.
All three partners are important and must work together. Could anyone conceive of a divergent destiny between stations, tracks and trains in the railway industry? Could one of these elements exist productively without the others? Today, I want to speak frankly about the common ground and the differences between airlines and airports.Let's look first at safety and security.
SAFETY AND SECURITY
Safety and security are air transport's top priorities. Without public confidence that flying is safe and secure, there is no future for our industry. However, the "hassle factor", as it is called in the US, is now one of the main reasons why people there are reluctant to fly. Our colleagues at Delta estimate that loss of business resulting from the so-called "hassle factor" will amount to over 600 million dollars in 2002.
So, what can we do?
SIMPLIFYING PASSENGER TRAVEL (SPT)
By using existing modern technology, we can make security both more effective and more convenient.
The IATA-led Simplifying Passenger Travel (or SPT) program has brought the security stakeholders together to implement more efficient ways to process travellers. For example, biometrics can contribute to the positive identification of passengers and employees.
I also believe that "trusted flyer programmes" can help. ACI and individual airports have worked closely with IATA and the airlines in this program. Our host today, the Narita Airport Authority, along with both JAL and ANA, I am proud to say, are partners in the SPT effort.
I would urge everyone here to become partners in shaping the future of travel through the SPT programme: leveraging technology to ensure secure and convenient air travel.
SECURITY MEASURES AND THEIR COST
One point, however, must remain clear: Aviation was not the target of the terrorist attacks of September 11, it was an attack against a state or a society. Security is the responsibility of states.
Security should apply equally to people in their homes, on the streets, in parks, riding in the subway or flying in aeroplanes. The airlines and their passengers pay taxes and should not be asked to contribute beyond that to be protected from terrorism!
Governments must take full responsibility for the protection of their citizens and bear the costs of doing this. The total cost for the airlines of added security measures in 2002 is about 3 billion dollars. My friend, Don Carty of American Airlines, recently stated that the increased costs of security and insurance, combined with the impact of the hassle factor is 6.5 billion dollars.
There have been also suggestions in the US that flight crews should carry firearms. IATA, along with IFALPA firmly opposes such measures. A pilot's duty is to fly an aircraft safely. The reinforced cockpit doors are there to secure the cockpit during any potential incidents.
Let's have a look at the insurance situation. Insurance is a challenge that affects all air transport partners.
In September 2001, all aviation insurers issued a seven-day notice of cancellation of the air transport industry's third-party war risk liability insurance. It threatened the immediate shut down of the entire aviation industry.
What followed is history: negotiations, stop-gap government assistance in some countries, exorbitant rates in others, but no permanent solution. Insurance premiums will reach 6 billion dollars this year, six times higher from what they used to be.
Although the airlines were not liable for what happened on September 11, the commercial market is not willing to provide third party coverage. IATA demands affordable, global, non-cancellable and non-discriminatory third-party war risk insurance. IATA's work with ICAO, individual governments and private insurers, resulted in a global plan for a not-for-profit insurance company.
Airlines and others would contribute to an international fund to provide 1.5 billion dollars of third party war risk insurance. Governments will provide guarantees to back this new company should there be a claim in excess of the fund. Airports and other industry partners would also be covered under this global scheme.
On 15 October, ICAO will tell us whether the plan has received the required support of States representing 51% of ICAO funding. Last week, the European Transport Ministers agreed to recommend that their States support this global initiative.We appreciate the leadership European countries are demonstrating on this issue. Other countries must also quickly decide whether they will support aviation in its hour of crisis.I especially call on Japan's support at this critical time.
Time is running out: I would urge each of you to remind your respective government how urgent and crucial this matter is to keep the air transport industry running.
In the meantime, governments must continue to support airlines in covering the costs of this insurance until a global solution is finalized.
The environment is an issue that has often led to misunderstandings between airlines and airports. As industry partners we should refrain from fuelling emotions on this issue. A number of amendments recently adopted by the European Parliament, supported by a number of ACI members would make noise charges at all EU airports compulsory. Generalised charges will do nothing to reduce noise. They will just make it more difficult for airlines to modernise their fleets.
AIRLINES AND AIRPORTS: A NEW PARTNERSHIP
I said that I would be frank in addressing the issues related to the airport-airline partnership. Let me start with a simple but relatively bold statement. If one partner is losing his shirt while the other is counting his money, it is no longer a partnership!
If we look at the "value chain" in air transport, there is a disparity between the returns of the airline industry and those of its main suppliers. Historically, airline profitability has always been low. The airlines' cumulative net profit margin between 1947 and 2001 was less than 1%! You may legitimately ask why airlines are so bad at making money.
Is it that airports got all the good managers and airlines the poor ones? I do not think so.
Let me attempt a short analysis: The airlines operate in a highly competitive global market, yet their hands are tied by over-regulation. Competition and government interference produced a fragmented industry, unable to find global solutions.
Airlines are both capital and labour intensive. However, because of restrictive national ownership rules, access to the international capital market is limited. Airlines are labour intensive and depend on a highly specialised, heavily unionised workforce. Practically any benefit related to productivity is passed on to the consumers and the employees with very little left for investors.
While the airlines struggle to earn a profit they sometimes deal with unregulated monopoly suppliers Airline Business magazine, in a survey covering 2000 and 2001, showed that the operating margins of the different industry sectors were as follows:
- Airports 27.6%
- Selected ATS providers 23.4%
- Top CRS's 14.7%
- Major manufacturers 11.8%
- and only 4.8% for the top 150 airlines.
According to ACI, airports recorded earnings before interest, taxes, depreciation and amortisation of 34% on their total revenues in the year 2000 and only slightly lower in 2001. In fact, the most recent report of the Transport Research Laboratory lists operating profits for some airports that are truly amazing:
- Auckland 57% of total revenues
- South African Airports 50%
- London-Heathrow 41%,
- Frankfurt 32% and so on and so forth.
There is something structurally wrong with our partnership. We are all in the same industry, yet many airports and ATC suppliers are posting record profits and airlines are losing billions. Some are facing bankruptcy. Are we really talking about a partnership when the airlines are cutting 17% of their work force and hardly anyone is being laid off at the airports.
I am not criticising our commercial suppliers because they make better returns than the airlines. Consumers do not mind the amount of profits a supplier makes on a product, as long as the price goes down over time. This is what has happened for consumer electronics, airline tickets or phone calls. And this is why I don't accept the pricing policies of those who basically operate as monopolies.
What the airlines need is a strong, independent and neutral economic regulator who reviews proposed user charges, not just in a few isolated countries but everywhere. The airlines are delivering "more service and cheaper fares". Governments, however, are increasing the cost of travel with new taxes and fees. Higher airport and ATC charges add to the burden.
There is still a lot that can be done jointly, for the sake of a healthy partnership, to restore balance to the "value chain". A joint ACI/IATA group is discussing service level agreements between airports and airlines. This is a step forward in seeking to improve accountability and partnership. Of course, one thing is to meet and the other is to do something together: so, let's do it! .
The total paid by airlines for the use of airports and ATS infrastructure world-wide amounts to more than 40 billion dollars and it's growing. Of this, 15.2 billion dollars was paid for ATS and airport charges for international operations. That is about 10% of the airlines' international operating costs. I strongly believe that these amounts are in excess of what the airlines should be paying.
The airlines and their customers cannot pay for inefficiencies. We know that many airports are well managed and efficient, offering good value-for-money. However, airport tariffs and charging policies in different countries are very inconsistent.
Often, there is not a reasonable relation between charges, the costs of the facilities and services, and airport profit targets. IATA and the airlines insist on a better transparency from airport operators. We are currently carrying out an airport benchmarking exercise with a view to highlighting such disparities.
Within weeks, we will be challenging service levels, and demanding greater attention from airports and ATS shareholders. We need greater efficiency in order to achieve more reasonable charges and rates. In order to single out airports and ATS providers that are giving the airlines "value for money", we created the "Eagle Award". Some of you represent airports that have received this Award. This year IATA awarded "Eagles" to four airports – Singapore, Hong Kong, Cyprus and Hawaii. BAA, Dallas Fort Worth, Manchester were amongst the past winners.
THE JAPANESE SITUATION
I would like to comment on some of the issues that we have with Japanese airports. Again, forgive me if I am too frank but we are here as business people Japan is at a crossroads.
The Ministry of Land Infrastructure and Transport is considering the privatisation of Japan's three major international gateways—Narita, Kansai and Nagoya. IATA does not object to privatisation efforts that bring greater transparency and efficiency. With the right economic regulation we can expect lower charges. We have no patience for privatisations that lead to inefficient monopolistic behaviour.
There have been successful examples of privatisation and there are many bad examples too. Past experience has taught us that successful privatisation requires:
- That ICAO policies be followed
- That there is an open and transparent process in which airlines have a role
- That there be proper economic regulation
If the Government of Japan goes ahead with the privatisation of airports, we would like to see the ICAO criteria applied fully. Otherwise, the privatisation will not be successful and it will be difficult to attract international investors. I have been encouraged by recent reports here that our concerns are being addressed.
THE NARITA SITUATION
Narita in particular is the highest cost airport in the world. Narita charges were set in 1984 at 2400 yen per tonne and have not changed since then. Airlines have reduced their costs and passed this on to consumers with yields that are on average 40% lower than they were in 1984.
It is now time for Narita and the Japanese Government to wake up to the competitive realities of business. In the past decade Narita has fallen from its position as the leading international airport in Asia to the fourth position, after Hong Kong, Singapore and Bangkok.
Unless the Japanese government makes some hard decisions it will continue to fall in importance. This will have an impact on Japan's economy. Narita and the Japanese Government need to show the world a strong sign of transparency, cost effectiveness and value for money.
Narita and the Japanese Government must:
- Return to negotiations and agree to reduced charges reflecting the true cost of services provided
- Allocate appropriate national funding to airport infrastructure
- Pursue airport privatisation in a manner that encourages efficiency
We have stated our concerns to the Japanese authorities at every level, from the Prime Minister to the Ministry to our friends at the Narita Airport Authority. IATA was recently recognised by the Japanese Government for its role in Japanese aviation. We are proud of our many past contributions and I can assure that we look forward to continue to be an active player. On the issues that I have noted above we will also be a noisy player.
In conclusion, ladies and gentlemen, our challenge is right in front of us. If we want to establish a new partnership between airports and airlines, we must do it in the interest of our customers, our stakeholders and the communities we serve.
We must deliver together the best quality of service at a reasonable price. We at IATA, are looking forward to this new and fruitful partnership with ACI and its members. And I would like to take this opportunity to congratulate Bob Aaronson once again on his appointment as Director General.
The future of our industry is bright, but only if we work together in the true spirit of partnership.
Thank you very much.
At Airports Council International (ACI): "Airports and Airlines: A Need For a New Partnership"