It is a pleasure to be here in Tokyo. For IATA it is like home. The IATA BSP was born here in 1971 and is now largest part of our US$310 billion settlement systems. We have four important Japanese members - ANA, JAL, JALways and NCA, 63 of our members fly here and Tokyo hosted our Annual General Meeting in 2005.
But even if Tokyo is quite familiar, Valentine’s Day is an unusual backdrop to discuss the difficult issues that airlines face. It is a wonderful industry that I am passionate about. So in the spirit of tough love I have to say that after 6 and a half years of crisis the industry is still in desperate need of change.
Since 2001 airlines have done an impressive job of re-building their business
- 64% improvement in labour productivity
- 25% reduction in sales and marketing unit costs
- 16% reduction in non-fuel unit costs
A robust economy throughout most of 2007 supported international passenger traffic growth of 7.4%. Oil was the big story. Last year airlines paid a US$135 billion fuel bill, over three times what it was in 2002. That’s 29% of operating costs. Impressively, airlines returned a profit of US$5.6 billion. This is peanuts for a US$490 billion industry, but after US$40 billion in losses at least it is a black figure.
And we are also starting to see some meaningful consolidation. Two major mergers in Europe are proving that cross border consolidation can deliver solid results: Lufthansa and SWISS, Air France KLM. If merger rumours in the US are correct, we could deliver some much needed change there as well. But the failure to address ownership issues in the recent US-EU Skies Agreement has ruled out trans-Atlantic mergers for now. Nonetheless, the writing is on the wall. Airlines are businesses like any other business. We need the same commercial freedoms that other industries take for granted to sell our products where markets exist and to merge or consolidate where it makes business sense.
The growing challenges that airlines will face in 2008 re-enforce the need for change. In December we predicted a US$5.0 billion profit for 2008 with two important uncertainties in the calculation. Oil prices will remain high. Even with an optimistic average price of US$78 per barrel the bill will grow by US$14 billion to US$149 billion. The fallout from the US credit crunch is widening and revenues will be hit. Predictions of a recession are more frequent. In December US traffic dropped 3.4%. The January global numbers—particularly for premium traffic will give us a better idea of the global impact.
Already it is clear that 2008 will be difficult for the global industry. Japan will not have much of a buffer with heavy reliance on oil imports and the US consuming 22% of its exports. Booming China could be a small buffer as it takes 20% of Japanese export. But China also represents increased competition. Japan is a mature market in a fast developing industry. There is growing competition in Asia. With 54 million international passengers annually, Japan is the largest aviation market outside of the US and Europe. Project out to 2011and China will have 68 million passengers, 2 million more than the 66 million we expect for Japan. Already the markets are similar in scale with Japanese travel markets generating US$51 billion in revenues and China US$40 billion. And a little further away India will grow from 25 million to 35 million over the same period. Double digit growth is not likely to stop in either market. The gap will continue to narrow. A difficult agenda faces the industry and Japan.
The good news is that Japan is well positioned to play a leadership role on our most important issues
- Infrastructure and
Our top priority is safety. The IATA Operational Safety Audit—IOSA—is the global standard for airline safety management and a condition for IATA membership from 2009. Japan’s record is excellent. It has been nearly a quarter of a century since the last fatal accident and all four of our member airlines completed IOSA. IOSA results are transparent. Consumers can see the 190 airlines already on the registry, easily found on our website. We will be tough. Airlines that don’t make the global standard have no place in IATA. Governments respect this approach. From Mexico to the US and France they are using IOSA to enhance their safety oversight. I encourage the Japanese government to come on board and make good use of this effective tool.
Security is a sister priority to safety. The industry is much more secure than in 2001. But the system remains an uncoordinated mess that costs airlines and their passengers US$5.9 billion a year. For that price we deserve better service. Those that travel frequently will see some improvement with the common approach to liquids and gels. But that’s not enough. Every airport has its own process. Shoes on or off? Laptop in or out? And what do you do with your coat and belt? How can passengers have confidence in the system when the answers are different each time.
Moreover, governments do not mutually recognise standards. So we screen, and re-screen at each stage of trip and the piles of confiscated duty-free liquids grows higher by the day. The only exception is the agreement between Singapore and Europe that jointly recognises security standards for duty free products. Japan has a significant amount of traffic to both Europe and the US - markets with similar levels of security technology and skills. And with traffic concentrated at three main airports mutual recognition of standards should be possible. In fact, Japan is uniquely placed to develop a template that others could follow.
Yesterday I experienced Japan’s new facilitation procedures, fingerprinting of all foreign nationals on entry. Congratulations to both industry and government for working together on a smooth implementation! And for quickly adjusting the system to expedite foreign nationals living in Japan—many of whom are in this room. The automated border control system reduces some of the volume. It works well. So why limit it to just Japanese and foreign residents? I encourage the Ministry of Justice to expand this quickly to all frequent travelers.
This fits nicely with one of our top programmes - Simplifying the Business. This means using technology more effectively to make travel and shipping more convenient. You will be familiar with many of the results of our work. E-ticketing is now at 91% globally and we will be 100% in just 108 days. Japan had a slow start and at 82% it is still behind. But I am confident that plans are in place for a smooth transition on 31 May. Many of our carriers are already using bar coded boarding passes, bringing customers the convenience of checking-in at home. And Japan has been a leader in using bar codes on cell-phones. Narita Airport terminal 1 is a model for check-in procedures with over 160 common use kiosks and Japan has been a part of our RFID trials for baggage management from the beginning.
Unfortunately, the requirement for Japanese-language customs documentation limits our ability to bring e-freight to Japan. This year we will have major cargo hubs using e-freight. As e-freight expands the competitive disadvantage for Japan will grow. Going forward customs modernisation should be a priority.
With the basics of Simplifying the Business in place we have delivered added convenience to customers and are well on the way to saving US$6.5 billion in costs. Now we are looking beyond the individual technology components to process improvements that will give passengers even more self-service options. We call this Fast Travel. You have seen a preview of this already at Haneda Airport. Kiosks and bar codes on cell phones provide passengers with convenient service options and help airlines reduce costs. In the coming years IATA’s Fast Travel will bring this experience…and more…to the world.
Of course all of this has an impact on infrastructure. It must be effective and cost-efficient. In the crisis that followed 2001 we worked hard to bring our airport partners in line with the need to reduce costs. We fought hard to raise awareness and deliver results that were critical for airlines fighting to survive. In 2007 IATA achieved cost reductions with airports of US$371 million and we avoided cost increases totaling US$1.3 billion. So our efforts are bearing fruit. And I am pleased to say that the 10% reduction at Narita has been a springboard to a better relationship.
Now we are working with all three major airports to further improve Japan’s airport infrastructure. Our needs are not rocket science:
- Adequate capacity to ensure that markets are well served
- Service levels that meet customer expectations
- And prices that reflect efficiency
The privatisation process at Narita is a unique opportunity to deliver on these three essential criteria. Recently, there has been much discussion in Japan about foreign ownership of airports, particularly whether this should be capped. I will be honest. I don’t care who owns the airport. An airport is important for what it delivers not who owns it. Providing the right incentives is the most critical part of the privatisation process. We have seen too many privatisations fail because governments sold the crown jewels without appropriate guidance to the new owners.
What can result? Look at London Heathrow. Failed regulation allowed for a 42% profit margin
The new Spanish owner is happy but Londoners suffer with terminal facilities politely described as a national embarrassment. There is no need to repeat the mistakes of others. We all want a successful Narita. Effective, transparent economic regulation is in the interest of everybody, including the potential new owners. They will want to understand clearly what they are buying and what the expectations are, I look forward to working closely with MLIT and the airports to ensure that the world’s largest airport privatisation to date will be the most successful!
The last issue that I want to explore is environment which is at the top of the industry’s political agenda. All industries are being asked to deal more effectively with the important issue of climate change. That includes air transport, even if our track record is good - 70% improvement in fuel efficiency over the last 40 years. And even if our contribution is relatively small - 2% of man-made CO2 emissions.
The industry is aligned with a strategy on climate change based on four pillars
1. Invest in new technology
2. Fly planes effectively
3. Build and operate efficient infrastructure
4. And use positive economic incentives
This starts with tax credits for technology purchases and grants for research into alternative fuels. And it could include a global approach to emissions trading. Moreover we have a target of 25% improvement in fuel efficiency by 2020. Our strategy is already delivering results. Every minute that we can save on a flight saves 60 litres of fuel and 160 kg of carbon. So by working to straighten routes and improve operations IATA’s efforts in 2007 saved 10.5 million tonnes of CO2. Japan plans to implement new navigation procedures at its top 20 airports by 2012. It is fully in line with our efforts and will reduce fuel burn by 2% with annual savings of 162,000 tonnes of CO2. The next step will be continuous descent approaches to expand the savings further.
IATA’s strategy and fuel efficiency target was endorsed by 179 states that attended the International Civil Aviation Organization’s Assembly in September 2007. Unfortunately, when it comes to emissions trading Europe is acting independently. The politically motivated European emissions trading scheme is definitely wrong. Unilateral actions make a global solution more difficult. The legal challenges that the US and others will mount will distract people from the real issues. And despite the billions of Euros that it will cost annually, the impact will be limited. At the same time, Europe has achieved very little on a Single European Sky that could deliver up to 12 million tonnes of CO2 savings annually. The simple message is: fixing the infrastructure saves CO2, taxing passengers does not.
I believe that Japan can play a leadership role in the debate on climate change and aviation. Japan’s basic approach is aligned with the IATA strategy. Last year the APEC transport Ministers announced a programme to improve environmental performance with operational measures. As a core member of that grouping I encourage Japan to not only deliver on the concepts that were discussed but to introduce targets and timelines to ensure that the discussions yield results.
In June last year, I announced a vision for our industry that we should achieve carbon neutral growth leading to a carbon-free future. It shocked the industry. When the Wright Brothers first flew in 1903 nobody could have predicted the jet engine in 50 years. And today we are an industry that safely flies over 2.2 billion people a year. With the level of technology we have in aviation I am convinced that nothing is impossible provided we have the political will and commitment to achieve. Japan will host the G8 this summer. Climate change will be a key focus. I encourage the Japanese government to push the G8 to aim high and to build the political will to achieve a zero emissions industry so that industry and government are perfectly aligned on this important issue.
This is a critical time for air transport. We have put our financial house in order. But with US$190 billion in debt airlines are financially fragile. The challenges of safety, security, efficiency, infrastructure and the environment can only be met with a common vision shared by governments and industry. Japan is the largest market in Asia Pacific. But the honour will soon be shared with the fast growing markets of India and China. Effective leadership on these critical issues will deliver economic benefits to Japan and help shape the successful future of Asia Pacific aviation.