I am honoured to give the 5th APAMA Aviation Lecture. After 6 years and over US$40 billion in losses, this year will see the industry return to profitability. In fact, today we are raising our profit outlook for 2007 to US$3.8 billion. There is a lot of hard work still ahead, and it is a good time to discuss a longer-term view for the industry focusing on Asia – the most interesting part of the aviation world. That long-term view is based on two facts:
Air transport in Asia is a big part of the aviation world. By 2010 intra-Asia traffic will be the largest market in the world and over a third of the world’s traffic will be to, from or within Asia. Air transport already plays a critical role in this region supporting 9.8 million jobs and nearly US$690 billion in economic activity. This region is home to some of our biggest players and results from Singapore Airlines, Cathay Pacific and QANTAS are among the best in the industry.
Asian service standards are legendary. Some of the top airports in the world are here - Singapore Changi among them. Nearly all major recent green field airport projects were Asian: Shanghai, Beijing, Guangzhou, Hong Kong, Kuala Lumpur, Nagoya, Seoul and Bangkok. The achievements of aviation in this region are truly remarkable. They are the result of strong airline management and forward-looking governments, particularly with respect to airport infrastructure. Singapore is a classic example. But more than anything else, aviation in this region is built on strong economic growth. I see the region a bit like the “Wild East” – you struck gold and things boomed naturally.
The carriers used good commercial common-sense to grow their businesses but there was no great policy vision for aviation in the region. Policy originated in Europe and the US and it was absorbed in the region at the operational level along with global standards. Now the centre of gravity for the industry is shifting East. Over a third of the industry is here. And with that critical mass comes the responsibility to take a greater leadership role on the world stage. Leadership requires a vision to tackle the issues of the day but more importantly to shape the future. I see opportunities for Asian leadership in 3 broad areas: technology, policy and the environment.
Asia is at the leading-edge of the industry on service standards. In some cases this is achieved using labour-costs as a competitive advantage. But don’t get too comfortable—the gap is closing. European and North American carriers have reduced the cost of labour 20% and 30% respectively. Since 2001 labour is about 27% of total costs in Europe and the US. It is 15% and rising in Asia Pacific. As the labour cost gap narrows, technology is key to competitiveness.
Simplifying the Business
IATA’s Simplifying the Business programme anticipated this development, and using technology to reduce industry costs by US$6.5 billion a year, while improving convenience. The programme is centred on 5 core projects:
- 100% e-ticketing in just 271 days
- Bar-coded boarding passes to enable web check-in
- Common-use kiosks
- RFID for baggage management
- And e-freight
China is the top performer on e-ticketing. At 95% it is well ahead of the global average of 78%. The rest of Asia-Pacific is a disappointment. At 68% it is the same level as Africa. This is largely because of a slow uptake in Japan, the region’s biggest market, and a slow start in Malaysia. We will make our target but it will require a major effort by some carriers to catch-up.
On e-freight, Asia will lead a revolution that will take paper out of freight processing by 2010. Over half the world’s cargo flows to, from or within the region. So it is no accident that two of the first five e-freight pilot locations, Singapore and Hong Kong, are in Asia. Their role is to lead global change starting at home. And that role must be repeated in other areas, such as passenger processing.
Simplifying Passenger Travel
In 2010 Asian airports will have to handle 250 million more passengers than today. Building infrastructure is a costly part of the solution. We need effective systems to get passengers through the system and technology can help. IATA worked with ICAO on a biometric standard for passports that was adopted in 2003. Singapore, Malaysia, Hong Kong and a few others have limited programmes using biometrics to speed-up immigration.
The programmes improve security with more accurate identification and move people through airports more quickly and with fewer hassles. Currently, they are primarily targeted at local residents and not linked together systematically. Why not? ASEAN agreed to visa-free travel. China waived visa requirements for a growing group of countries: Japan, Singapore and Brunei. The challenge for governments in the region is to talk to each other, incorporate biometrics into all travel documents and link them – and make Asia a world model for a new way to travel.
Air Traffic Management
Technology can also help Asia lead the world in air traffic management. The region is a patchwork of different technologies and standards. Some are industry leading like Australia which has implemented GPS based systems. Routes to Asia are flexible—changing daily to gain efficiencies from wind patterns.
Others are far less advanced. Airlines fly over multiple air traffic regions and different levels of technology mean that we must operate at the lowest common denominator.
At the same time, rising demand is challenging air traffic management throughout the region.
And finding trained controllers is a serious issue. Technology can provide part of the solution. We must make better use of capabilities of the aircraft, particularly the on-board systems and avionics in which airlines have invested millions of dollars. By relying more on advanced aircraft capabilities, we let the aircraft operate more independently and more accurately. This reduces the need for expensive and labour intensive ground based facilities, improving safety and efficiency while increasing airspace capacity.
Many air traffic regions, including the US and Europe, are working on next generation systems. They won’t be implemented for at least another decade. IATA’s job is to remind governments of the ICAO roadmap so that we have a seamlessly harmonised environment. The challenge for Asia is to implement cost effective technology in line with global standards.
There are policy implications for regional implementation of global standards, technology or otherwise. Which leads me to the next challenge – to develop a regional policy approach to address our most pressing issues from safety to liberalisation.
Safety is our top priority and last year was our safest year ever with 1 accident for every 1.5 million flights globally, and 1 for every 2 million flights if you look just at IATA members. Asia-Pacific carriers performed right on the world average in 2006 and China, which had big problems in the 1990s, has been accident free for the past 4 years.
This is all good, but reality is harsh for a growing industry. The accident rate must decrease just to stand still. Recent tragedies in Indonesia remind us that there is much work to do. We are sending a mission to Indonesia to look for ways to assist them. Let’s be honest in assessing the situation: governments in the region are not all at the same level in safety oversight. Regional policy begins with global standards that are maintained by all.
IATA is bringing part of the solution to the table. The IATA Operational Safety Audit (IOSA) is the first global standard for airline safety management. Governments are responsible for safety and IOSA is a tool to help them. Already we have 143 airlines on the registry. The IOSA registry is on our website, transparent for all to see, and it is a condition of IATA membership. By the end of this year all IATA airlines must complete the audit and all findings must be closed by the end of 2008. If an airline misses either deadline, they are out of IATA. We are absolutely serious. I already terminated 6 airlines that did not meet the first deadline.
Many Governments are already using IOSA. The FAA accepts IOSA results for US codeshares. Chile, Egypt, Madagascar and the Arab Civil Aviation Commission have made it a condition of their air operators certificate. Turkey, Nigeria, Jordan, Tunis, Mexico, and Hungary are planning to do the same. Switzerland and France use it to assess foreign carriers. Where are Asia’s governments? To continue to drive the accident rate down Asia’s governments must be proactive and start incorporating IOSA into their oversight programmes.
Air transport needs a new set of rules that go beyond the outdated bilateral system. While the US and Europe Open Skies agreement was a step in the right direction it fell short of the fundamental change that the industry needs. I will be very candid. We need Asia to step in and help move the industry forward, because Europe and the US have lost the vision that made them the natural leaders.
In Europe, debates focus on what we cannot do. The government takes the easy road and micro-management is too often a substitute for sound policy. The EU legislation on passenger rights with respect to denied boarding, delays and cancellations is a good example. It penalised airlines for all kind of things beyond our control, but it failed to deal with fundamental issues within the EU’s control like implementing a Single European Sky to reduce delays with better air traffic management.
In the US, the approach is political and opportunistic. Look at the debate on passenger rights following a snow storm. Politicians, approaching an election year, want to score political points with consumers and re-invent a part of the system that only needs some fine-tuning that commercial discipline can deliver. Meanwhile the big and hard decisions are being ignored. The result is that we have too much regulation of competitive airlines and too little regulation for our monopoly providers.
Neither the US nor the European approach is going to generate and deliver great new ideas. So, the future is yours to shape and that future must be defined by liberalisation. Airlines are businesses and commercial freedoms are critical. Don’t import the policy mistakes of Europe and the US. Asian governments must have a plan for liberalisation that is more than just a reaction to what is going on across the Atlantic.
There is no reason why Asia cannot achieve what the US and Europe have failed to – an open aviation area with liberalised ownership rules. Asia has already liberalised some very strategic industries. India opened up its TV market and consumer choice expanded from 1 channel in 1991 to 300 in 2005. Singapore liberalised banking making it a global financial centre. And the market respected the decision with increases in market capitalisation for OCBC of 4% and 9% for UOB.
Japan liberalised telecoms resulting in a pricing drop of 70% between 1976 and 1996. Productivity increased and profits remained solid. What has happened with aviation? Not much. The flags on the tails of our aircraft are much too heavy and they are sinking the industry. There are some attempts to liberalise. For example, ASEAN has a plan to bring regional liberalisation by 2015. And there are open bilateral arrangements between some states. Last week Japan started talking about limited liberalisation for secondary cities.
A staged approach is good but let’s remember that business is changing rapidly and this is an enormous and important region. 60% of the worlds population, with five big pillars: ASEAN, Austral-Asia, Japan, China and India. Asia must start thinking much bigger and much faster. The fundamental challenge remains how to transfer the success stories from other industries to aviation. And take a leadership role in pushing the agenda on liberalisation.
And remember that this is not just a story for the big countries. Look at Cambodia. A US$800 million investment in airport capacity with limited liberalisation of traffic rights resulted in a US$100 million a year boost to the economy, which is a 2.5% return on investment. The next question then is how do we move forward?
The challenge for Asia is to establish a framework to facilitate a regional vision and approach to industry issues. Giving the annual Directors General of Civil Aviation Conference more teeth? Charging ASEAN or APEC with the task? Or developing a new institution to handle this? It is up to the region to decide what is the most appropriate structure. But the goal is to drive innovation and change that will have a global impact.
A good first test case could be a regional approach to the environment. Beating up on aviation for its record on the environment has become a professional sport in the UK and much of Europe. By 2012, the results will be exported to the rest of the world, when all airlines serving Europe will likely be brought into the European Union Emissions Trading Scheme.
The environment is a serious issue and airlines are approaching it in a responsible manner. The billions being invested in new aircraft will make aviation 25% more fuel efficient by 2020. We are working with governments, airlines and air traffic control to reduce inefficiencies that are costly to the environment. Our efforts last year achieved a 15 million tonne reduction in CO2 and there are at least 73 million more tonnes to be saved simply by making the system more efficient.
And we are working hard to oppose short-sighted environment taxes that supposedly benefit the environment. The insane doubling of passenger duty in the UK adds a billion pounds to the treasury, but I cannot get an answer from the government when I ask how many trees will be planted with the cash. At the same time, we are working closely with ICAO to achieve guidelines for emissions trading that will allow it to be implemented globally, where governments see fit, without creating market distortions.
So what’s this got to do with Asia? First, you have a great technology story to tell. The Asian fleet averages 10 years old, compared to a global average of 12. That makes you more fuel efficient and environmentally friendly. Secondly, it gives you a leadership opportunity. I was pleased to speak at an Orient Aviation conference on Greener Skies for Asia last week and it isencouraging to see the industry starting to take a proactive stance. We are moving to a common vision for the future, but where are the governments of the region? What is their vision for Asia’s approach to environment?
Governments were conspicuously absent from the discussion. The challenge now for Asia is three-fold. To tell your story more effectively than we did in Europe, To continue to invest in fuel efficient technology as you grow and to join the rest of the industry in pushing your partners to do their part as well. Governments must implement efficient infrastructure with a vision for the future. The APEC transport Minister’s meeting in Australia pledged support for efficiency measures. Particularly in air traffic management. We now need to turn the words into results. Manufacturers must produce more efficient equipment. And oil suppliers need to do more research into alternative fuels.
By nature I am an optimist. It helps when you are in the airline industry! But for Asia I believe that it is difficult to be over-optimistic. The future of our industry is in your hands. You have great airlines, great markets and a great enthusiasm for innovation.
Asia’s growing importance is defining a new leadership role. The US and Europe have led the industry’s development with a common vision on technical issues. Short sighted politics has robbed them of leadership on liberalisation. And that is an opportunity that cannot be missed for this region, provided you are guided by a solid and common vision for our industry’s most important issues.
Aviation is the world’s most exciting industry and I congratulate APAMA for its work on focusing attention on aviation and improving the quality of coverage.