It is great to be here in Seattle. A great aviation city with some of the industry’s leading players: Boeing, Alaska Airlines and SeaTac Airport. It is estimated that air transport directly contributes about 35,000 jobs to the economy of Seattle and the State of Washington. Globally aviation generates 29 million jobs and we are the US$450 billion heart of an industry. That supports nearly US$3 trillion in economic activity. When we look at air transport it is important to keep in mind that what we see locally is part of a global system.
For some of you less familiar with IATA, we represent some 250 international airlines that are 94% of scheduled international traffic. Like all trade associations we defend our industry by promoting and enhancing global standards and harmonization. But unlike most trade associations we are part of our members’ business running relevant industry processes. Our industry settlement systems handle over US$270 billion. And the combination of these two functions allows IATA to play a relevant leadership role in critical areas.
Industry Recovering from Crisis
It is no secret that the industry has been in crisis since 2001. Global losses totaled over US$40 billion since then. Enormous efforts across the industry will lead to our first profit since 2000 this year - US$2.5 billion. Progress at US airlines has been incredibly impressive. Between 2001 and 2005 we saw 30% unit cost reductions in almost all major cost centers: crewing, maintenance, aircraft ownership and distribution.
And we are managing capacity better. Last year global passenger traffic expanded by 5.9% but capacity only grew by 4.6%. US airlines led the industry with 80% load factors. I am sure that you are interested in our outlook for aircraft orders and it is no secret that there is a boom. The increased fuel efficiency promised by the 787 and A380 will be a key tool to deliver profitability with fuel prices in the US$60 range.
Unlike previous booms, it looks like we may avoid the problems of over-capacity. Deliveries this year will add 5.9% to the global fleet. That is lower than the 7% recorded in previous booms in ‘99 and ’91. High fuel prices are forcing more aircraft into retirement. And more than 50% of the new capacity will be deployed within Asia, fueled by the incredible growth in China and India. All this is good news - now let me spoil the party.
US$2.5 billion profit is a 0.5% return on revenue. It’s peanuts. The theme for 2007 as far as I can see is efficiency, efficiency and more efficiency. We need to re-think the industry from top to bottom. And that includes IATA.
Simplifying the Business
The IATA Simplifying the Business Programme is changing the way that people travel and ship by improving convenience, reducing costs and using technology effectively. The five projects, that will eliminate US$6.5 billion in costs, are:
- 100% e-ticketing globally
- Bar coded boarding passes for web check-in
- Common-use Self-service kiosks for check-in
- Radio frequency identification for baggage management and
- Taking the paper out of cargo with e-freight by 2010
You can see the results. The paper ticket will take its final bow in 297 days. Alaska Airlines was among the early adopters of e-ticketing. And the U.S. is at 96%. We are driving that efficiency to all corners of the globe. If you have one - put it in a frame as a souvenir.
Five e-freight projects will be in operation by year’s end and if you have been to SEA-TAC recently you will see some of the future taking shape. The check-in area is being redesigned around new industry processes. This is only the beginning.
More Change is Needed
Change is what air transport needs most. We have done a lot but there is much more to do. The broad agenda is to do more with less. Today I would like to discuss four areas where IATA is taking a leadership role in forcing change: liberalization, environment policy, safety and security.
The most meaningful change that we can make is to change the rules of the game. The US began the process with deregulation in the 1970s and the industry around the globe changed for the better. Travel became more accessible. Now we are a mass transit system used by 2.2 billion travelers each year. But the forward thinkers on deregulation did not break outside of domestic markets, and we are stuck with a 60-year old bilateral system for international services that constrains consolidation and limits the markets we can serve.
Our customers - not governments - should tell us what markets need service. Last year we did a study with Boeing on liberalization. If we liberalized 320 restrictive bilateral air service agreements we would increase traffic by 60%, create 24 million new jobs and add US$490 billion to global GDP. Boeing forecasts a demand for 27,210 aircraft in the next 20 years. If airlines cannot operate with normal commercial freedoms I do not believe that we can absorb that many aircraft economically.
Liberalization is only the first step. I mentioned that IATA represents 250 airlines, the majority of an industry with a turnover of US$450 billion. We are too fragmented as a result of ownership restrictions imposed by the bilateral system. Compare us to the auto industry: there are 48 manufacturers for a US$2.6 trillion industry. Sustainable profitability needs consolidation domestically and across borders. You cannot change an industry overnight. Governments must anticipate and lead change but instead they are losing opportunities.
The US and the EU represent 60% of the industry. They concluded a draft agreement on open skies - we welcome the agreement, it was a step in the right direction. But we lost the opportunity to fundamentally change the industry. Now we are urging politicians to think bigger and move ahead with the next planned phase of discussions. And it is not just about liberalization. I am pleased that security is also on the agenda. I urge both governments to focus on harmonization around the One Stop Check concept.
But even if politicians are slow to change, business is not. By 2010 Asia will be the world’s largest market for aviation fueled by a liberalization of bilateral agreements in India and China. So we are starting to re-focus our efforts from markets of the past to markets of the future. And that is good news for Seattle - a natural gateway to Asia.
The current debate on climate change has drawn attention to aviation. It is an extremely important issue. Unfortunately, politicians- particularly in Europe - are turning mis-information into mis-regulation. So let met start the discussion with some facts:
- A change in carbon levels contributes to climate change
- The UN attributes 2% of carbon emissions to aviation
- Aviation is growing by 5-6% a year
- But efficiency gains are improving our performance
- New aircraft currently on order will improve fuel efficiency 25% by 2020
- And the UN estimates that our contribution will grow to 3% by 2050
No matter how you look at it air transport is a small part of climate change. But that is not an excuse to do nothing. Air transport like all industries must be committed to environmental responsibility. We started long before long before the Kyoto protocol and have improved fuel efficiency by 70% over the last 40 years. So where do we go from here?
First, we are working with our airlines to spread best practice in fuel efficiency. It is part of IATA’s comprehensive fuel savings programme. Not only are we spreading best practice, we are also working directly with our airlines in GO-Teams that are identifying double digit fuel savings that directly benefit environmental performance.
Second we are working with our partners in air traffic management. The UN has identified 12% inefficiency in ATM globally. That means that we are burning US$13.5 billion in unneeded fuel which generated 73 million tonnes of carbon emissions. This corresponds with IATA’s efforts to straighten routes and improve efficiency. By doing this we saved up to 15 million tonnes of carbon emissions last year alone.
Here are some examples. Our efforts cut :
- Half an hour off round-trips between Europe and China
- 30 minutes each way of trip between Singapore and London
- Up to 7 minutes off flights between North America and Europe
Each has a direct benefit to the environment. But each is a battle with governments to achieve. It is a win:win solution and governments need to come on board. I am pleased that the FAA is taking on board the need for change in the re-authorization discussion. The air traffic management system in the US is 30% more cost efficient than the bureaucratic mess we have in Europe. The inefficiency of failing to unite Europe’s divided skies costs nearly US$5 billion a year and wastes 12 million tonnes of CO2 emissions.
With US growth expected at 4.5%, you will have the same problems and costs here unless you plan for change. So we are very pleased that the FAA, Boeing and others are looking at next generation systems. Without getting technical, I offer a polite reminder that whatever is implemented locally must be harmonized globally and the cost burden must be shared fairly by all users.
Third, carbon is not a local issue. Science tells us that carbon emitted in China impacts China, the US and Europe equally. So common-sense tells us that we need a global solution. Some governments see green and think cash - instead of the environment. How else would you explain the US$2.5 billion in new taxes we saw in the name of the environment in the last 2 months? It is short-sighted governments at their best, robbing us of the cash to invest in more fuel efficient technology.
The EU is pursuing emissions trading schemes. This is more effective than taxation but if they continue with their unilateral and extra-territorial approach all that I see is a diplomatic brick wall. The US rightly objected. And I am hopeful that a UN technical agreement on a global approach for emissions trading guidelines will move us in the right direction.
Finally, in the meantime, we have launched a campaign to shout politely about the hypocrisy of governments that are always quick to tax but slow to deliver on critical efficiency.
Safety has always been the number one priority of our industry. And the results are impressive. Last year was our safest year ever. The global accident rate was 0.65 per million sectors. That means one accident for every 1.5 million flights. IATA members did much better - one accident for every 2 million flights. Even as the industry went through the worst financial crisis in our history, we improved our safety record. The challenge, until there are no accidents, will always be the same: to do even better. And the tragic accident in Indonesia earlier this week was a reminder of that goal.
Global standards are absolutely essential. Working with manufacturers like Boeing, our members, the FAA and other regulators we developed the IATA Operational Safety Audit (IOSA). It is the first global standard for airline safety management. Because we want to improve safety everywhere, the standards are free to any airline - member or non-member of IATA. Governments, the FAA included, are making use of the audit results to enhance safety oversight.
Consumers can see the list of IOSA registered carriers on our website. It is completely transparent. And we are making IOSA a condition of IATA membership. By the end of the year all our members must be audited. And by the end of next year they must be on the registry. We are a quality industry and IATA is serious about being a quality association. I have already terminated the memberships of 6 airlines that did not make the first deadline last year. Naturally our goal is to raise the bar on safety, not lower our membership numbers, so we are working in a targeted way with a Partnership for Safety program. This will help our members in areas where the accident rate is high: Africa, Latin America and Russia. The goal is to make the industry safe -everywhere.
If safety is our greatest example of the positive impact of global standards, security is the poster child for failure. Make no mistake, flying is much more secure today than it was in 2001 but we have forgotten about the passenger who rightly expects both security and convenience.
And governments are still passing the buck on security. Globally, airlines and our passengers each year pay US$5.6 billion for extra security measures since 2001. If US proposals for 100% screening of cargo go through the inconvenience and cost will be passed to the cargo sector as well.
The foiled terrorist plot in the UK last summer had some positive results. It re-enforced the fact that intelligence is the most effective way to fight terrorism and it moved the US and Europe closer to harmonization on some screening measures. But 6 weeks after the terror plot we were all up at midnight as the US-EU agreement on access to passenger data ran out. An interim solution was reached but it runs out in July.
Europe mandated its negotiators. The issue is complex and 105,000 passengers a day could be affected. We need a solution, and legal certainty, with enough time to alter systems and for passengers to be informed. And remembering also that it is those same passengers who have to run the security gauntlet each time they travel.
The new leadership at TSA has made a big difference improving the process but there is much more to be done. First, we need to stop wasting time and effort re-screening all connection baggage. It is not needed if the US can form agreements with countries able to apply equal standards. Political micro-management makes change difficult but the costs are real. Travelers will choose different connection points. It’s a cost to the economy with no security benefit.
Second, we need to do better on processes. We have started to harmonize the approach to shoes, liquids, laptops, cabin baggage and US requirements for biometric passports are a step in the right direction. But let’s put the whole process together and design something that thinks about the passenger ensuring both safety and security. Six years after 9.11, we are much wiser. It’s time that we put that knowledge to work to give flyers the comfort and security they deserve.
Our common vision must be for an efficient, liberalized, environmentally responsible, safe and secure air transport industry - locally and globally. Seattle is at the leading edge of putting all of the pieces together: a great manufacturer and an airport that works well with its customers driving efficiency with technology. But local success means nothing if it is not shared.
The challenge will be to connect the dots of like-minded communities into a global system that meets passenger needs and expectations. That’s a tough job and a tall order. But if we are successful the economic and social benefits are enormous. It’s worth making the effort!