Geneva - Welcome to our fourth annual Global Media Day and thank you all for attending. It is an incredibly interesting time for air transport.
As Brian Pearce said this morning, the industry will turn a US$5.6 billion profit this year. It’s our first black figure since 2000 and it follows over US$40 billion in losses. It reflects a lot of hard work by the airlines. Since 2001, non-fuel unit costs have dropped 16%, labour productivity increased 64%, and sales and marketing unit costs decreased 25%. But the bottom line is still peanuts. With a 1.1% net profit margin more change is critical and the challenges in 2008 will be more difficult.
Labour costs dropped from 28% in 2001 to 23% but with the first signs of profit already we are seeing strikes from France to Japan. Revenues will come under pressure with yields dropping 3.5% in real terms. This is greater than the expected 3.2% drop in non-fuel unit costs and partly reflects the anticipated impact of the credit crunch on corporate travel budgets. Capacity will also play a role. Traffic growth is expected to slow from 5.9% this year to 4% in 2008. At the same time aircraft deliveries will rise from 1,041 this year to 1,281 in 2008.
Fuel costs are also increasing. We expect a bill of US$149 billion next year, which is US$14 billion more than 2007 and 30% of our total costs. The bottom line is that 2008 profits will drop to US$5.0 billion, which is lower than the US$7.8 billion we had anticipated and less than our profits this year. The peak of the business cycle is over and we are still US$190 billion in debt. So we could be headed for a downturn with little cash in the bank to cushion the fall.
So what are IATA’s priorities for 2008? Safety, Simplifying the Business, Security, Infrastructure and Environment.
Safety is our number one priority. The IATA Operational Safety Audit (IOSA) is the global standard for airline safety management and a condition of IATA membership with specific deadlines. In 20 days all our members must conclude audits. Already 225 members are audited and 12 more are expected to complete by year-end. That means that 97.5% are on board. We will be strict with the deadline and all members who do not complete an audit by 31 December are out of the Association, just like the six that did not make the first deadline at the end of last year.
Our focus is on raising the bar on safety, not reducing our membership so we are strengthening the programme. On Friday, our board approved an important change. From 2008 IATA will fully fund the cost of IOSA audits for members.
This is an annual investment of US$5 million for IATA demonstrating our commitment to safety and enhancing quality control. We are also asking governments to use IOSA as it’s a free and effective tool to improve safety oversight. Turkey, Costa Rica and Mexico are the latest countries to incorporate IOSA into national legislation, but governments need to move faster
Progress and Targets
We measure our success in safety with the hull loss rate. 2006 was our safest year ever with 0.65 accidents per million flights or one accident for every 1.5 million flights. Russia’s accident rate was 12 times the global average. I met the Russian Minister of Transport early this year and we agreed on an action plan including IATA’s Partnership for Safety Programme. The results are in the numbers. There have been no accidents with Western-built jets so far this year.
Russia joins North America and Europe where safety improved in 2007. But accidents in Brazil, Indonesia and Africa pushed the global hull loss rate to 0.83 hull losses per million flights. As with Russia we are responding with targeted programmes including Partnership for Safety.
There are also three global areas of concern and the first is to expand our audit programmes. The IATA Safety Audits for Ground Operations (ISAGO) will help mitigate the US$4 billion cost of ground damage. Our target is to conduct the first 60 ISAGO audits within 2008 and we see the possibility to expand our experience to maintenance, repair and overhaul. The second is improving runway safety with better weather and airport information for pre-flight planning.
A newly developed IATA toolkit will support more effective decision-making by pilots. The third is licensed personnel. There are 16,000 aircraft on order through 2020 and we need to train 17,000 new pilots a year to fly them. That’s 40,000 more than current capacity. The goal is to ensure that training standards are maintained and enhanced. As training programmes are ramped up to meet demand Juergen Haacker and Mike O’Brien will provide details this afternoon.
Simplifying the Business
2007 will be a great year for Simplifying the Business. Last month, 6 e-freight pilot projects started in Singapore, Hong Kong, Sweden, The Netherlands, The UK and Canada covering 20 major trade routes. Eliminating paper from the shipping process is critical. We still ship goods with the same documentation we used 60 years ago. It takes us one day to move the goods and five days for the paper work. The result is that air transport is losing competitiveness. World trade is growing by 10% and sea freight is growing at 12%. The impact of fuel prices is less for sea shipping than for air cargo and faster ships are narrowing the speed gap. So air cargo is only growing by 4%. E-freight will help regain competitiveness. Aleks Popovich will update you on how we are building critical mass.
With our 2008 target for eight additional projects on the passenger side, we are making history. Electronic ticketing will be over 92% by year-end. And in 171 days - on 31 May 2008 - the paper ticket disappears. If you have a paper ticket, frame it and donate it to a museum. This is a truly amazing accomplishment. In some developed markets it was easy. In others, local culture - or government regulations provided special challenges. And one airline -Kenya Airways - proved that ET could work even on an island airport with no electricity. With determination, we achieved it.
The other projects are ahead of schedule. 93 airlines are able to use 2-dimensional bar coded boarding passes. The target is for all airlines to be capable by 2008 and 100% implementation by 2010. We have also recently introduced a 2-D standard for mobile phones. 83 airports are using Common-Use Self Service and we will increase that to 130 by the end of 2008. RFID is live in 4 airports. So where do we go from here?
Improved Baggage Management
First we have a problem to solve. With the restrictions on liquids and gels there is more checked baggage. The system cannot cope. We are still 98.2% accurate in handling over 2 billion bags a year. But this must improve. Our Board approved a strategy to improve baggage management. IATA developed a toolkit of 40 solutions from big projects like RFID or integrating baggage and flight information systems to better passenger education on bag labeling because every airport is different. IATA Go Teams will visit targeted airports spreading best practice solutions matched to local needs.
Beyond StB Strategy
Consumers are demanding more control over their travel experience with self-service. Today we are launching the IATA Travel Centre, helping travelers with vital information for their travel plans. More importantly, we need to tie the technology elements of Simplifying the Business into a seamless process. Our board last week approved a strategy that will re-shape travel. Philippe will present details later but here are the highlights. The core of the strategy builds on the success of kiosks. We want to make them work harder by placing them in the airport departures hall to handle irregular operations, by getting ready for biometric identification so that we can automate boarding, and by putting them in the arrivals hall so that you don’t have to wait in line if your bags are mis-handled. And finally by expanding them outside the airport geography so passengers can check-in at train stations, hotels etc.
CUSS is a robust technology and our ultimate vision is to integrate them with facilitation and security processes. The US-EU Open Skies agreement earlier this year includes harmonisation of the security processes. New technology must be a part of this discussion and the Middle East could become a model area for security. We are looking to launch an initiative to harmonise airport security across the region, beginning with the Gulf States and technology will play a big role.
As you can see, security remains a big part of our agenda. It is still a costly and uncoordinated mess. We are more secure than we were in 2001 but the annual bill is now US$5.9 billion, which is US$300 million over our previous estimates. I see more hassle than value for this cost. Instead of becoming smarter, faster and simpler, too often we make it more difficult and more complicated. We made progress with the common approach to liquids and gels but there is no common approach to screening: 1 bag or 2? Laptop in or out? Shoes on or off? How can passengers have confidence in the process? Governments must talk to each other. We made progress with the US-EU PNR agreement but now Europe has decided that it needs a unique PNR programme that is decentralised - with up to 27 different data requirements. There is one Europe - we need one PNR system that is harmonised with a global standard. Georgina Graham will give you an update on this and other security issues.
We are also making progress on infrastructure costs. After five years of shouting politely, many of our partners realise that we are serious. In 2007, IATA achieved US$1 billion in cost reductions and avoided US$1.3 billion in cost increases saving our members a total of US$2.3 billion. This is across the areas of taxation, monopoly infrastructure charges for airports, ATC and fuel supply.
Our major successes include Argentina, where a Presidential decree has allowed us to end charging discrimination and achieve an average 20% landing fee reduction. In China, our work with the CAAC is expected to produce a new charging regime that addresses the discriminatory pricing between foreign and domestic carriers. In Toronto we achieved a 3.1% decrease in landing charges and in Seoul we turned a proposal to increase Incheon landing charges by 86% into a 10% reduction. We are still working on the European charges directive to bring effective regulation to monopoly airport charges without cost-efficiency targets. Even independent regulation cannot be effective. There is still much to do and our board set a target to achieve a further US$1.5 billion in savings during 2008.
Our biggest new challenge is the environment, specifically aviation’s role in climate change. To help us address this issue, we were pleased to welcome Paul Steele as Director for Aviation and the Environment. Paul joins us from WWF where he was COO.
What is the issue? Aviation is 2% of global carbon emissions. We are growing by 5% a year and efficiency measures limit the growth in our carbon footprint to 3%. But a growing carbon footprint is not acceptable for any industry.
IATA’s four-pillar strategy addresses climate change:
- Invest in new technology
- Build and operate efficient infrastructure
- Fly planes effectively
- And once we have achieved all of that consider economic measures from tax credits for re-fleeting to offset programs and emissions trading.
The strategy is producing results with shorter routes, best practices in fuel management and better operational procedures. IATA achieved up to 15 million tonnes of CO2 saving in 2006 and in 2007 we achieved a further 10 million tonnes in savings. Within this, route improvements are playing a major role - 350 routes in 2006 saved 6 million tonnes of CO2. We expect 4 million tonnes of savings from 357 routes in 2007.
Aviation is committed to doing much more. In June, I announced a 50-year vision for air transport, to achieve carbon neutral growth leading to a zero emission, carbon-free future. We are actively working with our partners to make this a reality. I am confident that aviation will be the benchmark for all industries on environmental performance. We can only achieve this if governments support global solutions. So, we took our strategy and goals to ICAO, where all member states endorsed the IATA strategy and our interim fuel efficiency target to achieve a 25% improvement in fuel efficiency by 2020. Moreover, ICAO invited IATA to lead an expert group to map out the options to achieving carbon neutral growth and to develop a strategy to guide the efforts of governments, airlines and manufacturers.
The big disappointment was Europe. Europe supported the global strategy but they are taking a unilateral approach to emissions trading that is irresponsible and politically motivated and I would add, hypocritical. Achieving a Single European Sky would save 12 million tonnes of CO2 a year but Europe has been dragging its feet for nearly two decades. We have had enough of hot air - it’s time for political will and action!
Let’s remember that emissions trading is not a solution for reducing emissions, it is a multi-billion dollar stick. But politicians forget that our US$149 billion fuel bill is the biggest financial incentive of any industry to improve environmental performance and unilateral application of ETS is a breach of the Chicago Convention. I fully support any challenges by states including the US at ICAO, WTO or elsewhere.
Let me be absolutely clear - we are prepared to accept economic measures as a political reality but they must be implemented as a global scheme that is fair and voluntary. In fact, our Board mandated us to work on a voluntary carbon offset scheme with a common emissions calculator and globally credible standards. We are working with the leading groups in the environmental lobby on this and eventually we may develop a global voluntary carbon offset scheme for any airline to participate in.
But we must also keep focused on our ultimate goal: zero carbon emissions. Economic measures will not achieve it. Only technology can bring us to zero emissions. Some potential building blocks for a carbon-free future are here today; solar power, bio-fuels and fuel cells. The manufacturing community backs the vision from Airbus and Boeing to GE, Pratt & Whitney and Rolls Royce and also our fuel suppliers. Nobody has all the answers but let’s remember that we went from the Wright Brothers to the jet engine in 50 years. And today - fifty years after that - we are a safe global mass transport system for 2.2 billion passengers with commitment and common goals. I am convinced that a carbon-free future is absolutely possible. Brian, Philippe, Paul and Juergen will engage you in a detailed discussion on this later today.
I am sure that you will have many questions so to conclude, let me say that challenging times continue for the aviation industry. IATA is a unique and integral part of the industry. We are driving change in critical areas. Our US$310 billion settlement system is the financial backbone of the industry and US$2.3 billion in user charges savings contribute to industry profitability. Our 25 million tonnes reduction in CO2 emissions over two years improves industry environmental performance and the US$6.5 billion Simplifying the Business savings is only the beginning of a revolution in travel. Finally, our safety programmes deliver results where they are needed most. Our agenda for 2008 is ambitious and relevant to the industry’s success. I hope that you will follow developments closely and that you will join us for a mid-year report at our AGM to be held in Istanbul.