In a few days, 2009 will end. For aviation it was an Annus Horribilis and it will bring to an end a Decennis Horribilis: the 10 worst financial years in aviation history. Losses for 2000-2009 stand at US$49.1 billion. That’s an average loss of US$5 billion a year for a decade. Next year, the industry will be another US$5.6 billion in the red. That’s smaller than the US$11 billion that we will lose this year.
The worst is likely behind us. However, the challenges continue. The year 2010 will look much like 2007. The same 2.3 billion passengers and oil at US$75 is similar to US$73 in 2007. But revenues will be US$30 billion less than in 2007. The traditional solutions are: conserve cash, cut costs and effectively manage capacity. Over the last decade, airlines cut non-fuel unit costs by 9%. Further major cost cuts will be possible, but difficult.
Airlines have raised a cash cushion of US$38 billion since the start of the year. I don’t see the threat of major bankruptcies but smaller airlines have difficulty accessing credit. As a result, they are fragile. This will continue a trend that we have seen in our US$350 billion financial systems. So far in 2009, we had to suspend 30 airlines from participating in our financial system because they could not pay their bills. Of these,14 have disappeared.
Poor yields are driving industry losses. In 2009, yields plummeted—12% for passenger and 15% for cargo. They won’t improve in 2010.
With two years at exceptionally low levels, consumers and corporate travel buyers will expect travel to remain cheap. To understand how this plays out in the regions, it is important to understand the global economic picture. Government stimulus will drive most economies out of recession. But that is not the end of the problems. The private sector remains in debt and taxes will have to rise to pay for the massive government intervention. Developing economies such as China may see a V-shaped recovery. But the recovery prospects for developed economies are less certain and a W-shaped recovery is very likely.
How will airlines do by region? Airlines in the developed world will have the biggest losses: US$2.5 billion in Europe and US$2.0 billion in North America. In both markets, travel is being held back by debt and unemployment. On the strength of growth in China, balanced by continued difficulties in Japan, Asia-Pacific carriers will cut losses to US$700 million. Middle Eastern carriers will cut losses to US$300 million. African carriers will see losses unchanged from 2009 at US$100 million. Latin American carriers will be the only region in the black, with a profit of US$100 million, primarily based on the strength of the region’s commodities. The question for all regions is how to move from the Decennis Horribilius to a wonderful decade—a Decennis Mirabilis with sustainable profitability. This will require even more hard work and the courage to push for even more and bigger change.
Our members are looking for IATA to play a strong role. Last Friday, our board congratulated IATA on its 2009 results and set IATA’s 2010 priorities in four areas:
- Simplifying the Business
- And financial
In the search for Decennis Mirabilis, let’s examine each of these.
We will start with safety, our number one priority. Unlike our financial performance, safety has experienced a great decade of continuous improvement. As of the end of November, the industry’s accident rate has never been lower. So far this year, we have had one accident for every 1.75 million flights. That is a 38% improvement from the same time in 2008 and it is almost half the accident rate we saw in 2000. The year 2009 has also brought a sobering reminder. Three accidents with a particularly tragic scale have led to 680 fatalities. That is more than the 502 fatalities for all of 2008. Flying is safe but every fatality reminds us that our duty is to make flying even safer.
We have some regional challenges. The accident rate in Africa is 12 times the global average and Middle East and North Africa is five times the global average. We also have some great success stories. China is headed for its third year of zero hull losses. Latin America and Russia/CIS also have no hull losses so far in 2009.
For IATA, 2009 marked a milestone in our commitment to make flying safe everywhere. From 1 April, all IATA members qualified for the IOSA registry. This was a major effort and we are working to bring the 21 airlines that did not make the standard in line with IOSA requirements. We are now applying our auditing expertise to ground handling, with 100 ISAGO audits conducted.
What are the next big issues? Let me highlight two. First is to find a global standard, through ICAO, for fatigue risk management. The second is data sharing. Data is what will identify risks and drive progress on safety. Later today Guenther will give you a preview of the IATA Global Safety Information Centre. This gathers IATA’s safety information into a single database.
We are thinking even bigger. Earlier this year, ICAO Secretary General Benjamin called for greater sharing of safety data—I fully agree. EASA, FAA and ICAO are rich in safety dataas is IATA. I hope that we have made significant progress on a platform to share data among these organizations, by the ICAO High-Level Meeting on Safety in March.
The industry’s approach to environment has also made great steps forward as we approached Copenhagen. Our united approach to environment includes airlines, airports, air navigation service providers and manufacturers. Together, we will reduce emissions by investing in technology, flying smarter, building efficient infrastructure, and using positive economic measures. Since 2004, we have saved over 70 million tonnes of CO2 with this strategy, optimizing over 2,000 routes, helping our members with fuel efficiency, implementing continuous descent approaches and so on. Considering the annual industry CO2 output is 670 million tonnes, these savings are significant.
Biofuels hold the greatest potential. Five airlines have tested them and we expect certification within 2011. To be successful, we must also work with governments. While industry focuses on reducing emissions, some governments are raising taxes. Instead of reducing emissions, taxes rob the industry of the money needed to invest in new technology like our US$1.5 trillion commitment for new aircraft over the next ten years. By raising its Air Passenger Duty to collect GBP 2.7 billion annually, the UK is the worst tax offender. That could offset all the UK’s aviation emissions five times. Now the government admits that it is just a tax to pay bankers’ bonuses, completely unrelated to the environment.
The industry is staying focused on reducing emissions. We are committed to:
- A 1.5% average annual improvement in fuel efficiency to 2020
- Stabilizing emissions from 2020 with carbon neutral growth
- And a 50% net reduction in emissions by 2050 compared to 2005
On behalf of the industry, I presented these targets to ICAO, Nobel Prize winner Dr. Pachauri, Chairman of the IPCC, the Secretary General of the United Nations, Ban Ki-moon and to COP-15 in Copenhagen last week. All recognized aviation as a role model for others to follow and far ahead of its regulators. In fact, we are the only industry invited to Copenhagen that can present such an ambitious agenda.
We are asking governments in Copenhagen to agree a global sectoral approach that preserves a level playing field. This should be developed through ICAO as foreseen by the Kyoto Protocol. What is a global sectoral approach? First, global aviation emissions must be fully accounted for as a global industrial sector. Second, we need global coordination to ensure that we pay for our emissions once, not several times. And third, we need access to global carbon markets.
Let me be absolutely clear, aviation is not looking for a free ride. We have a team in Copenhagen dedicated to making aviation a part of the global solution for climate change. Accommodating the needs of the developing world is at the core of the Copenhagen debate. Aviation has successfully delivered global solutions on safety and noise. I am confident that if treated as a sector, we can find a global solution for emissions. Our Copenhagen message is clear:
- Industry is committed to cut its emissions in half by 2050
- ICAO should be given a mandate to report back by COP-16
- With a global framework that accommodates the needs of developing states and allows the aviation industry to deliver CO2 reductions
If we can achieve these results, it will be a Decennis Mirabilis for aviation and for the environment. Paul Steele, who is leading our team in Copenhagen, will report on progress this afternoon.
Simplifying the Business
We started Simplifying the Business (StB) in June 2004, with a goal of reducing costs and making travel more convenient. Since then we have implemented 100% e-ticketing, saving US$3 billion and making common-use self-service kiosks a global standard available at 139 airports, saving US$1 billion.
We have two projects with important 2010 deadlines. The first is e-freight. By the end of next year, our target is to have capability in markets that represent 80% of cargo capacity. This will make it the global standard with the critical mass to move forward on the steam of the US$4.9 billion in bottom line improvement that it will bring to the industry. That means covering 44 locations and converting 20 international air cargo documents to electronic format. We also hope to wrap up bar coded boarding passes in 2010. We already have 82% capability and by next year we will deliver 100% capability with US$1.5 billion in savings.
We have grouped five project areas into Fast Travel. With self-service, passengers can already scan their travel documents using kiosks at 117 airports and self-tag their bags with 22 airlines. Some16 airlines allow passengers to register mishandled baggage at kiosks without standing in line and 15 airlines have the capability for self-boarding. Behind the scenes we are moving fast to make baggage handling more accurate. We have taken our Baggage Improvement Program toolkit to 25 airports.
A new project for 2010 is to make all transactions between airlines, agents and passengers completely paperless with Electronic Miscellaneous Documents (EMD). In total, we are targeting US$16.9 billion in savings with StB. Later on, Philippe Bruyère will provide more details. We are also looking at the whole passenger experience.
It has been a horrible decade for getting passengers through the airport. Security processes became a nightmare after September 11. They have improved and the cost to airlines and passengers has increased to US$5.9 billion. But in many places, security remains a bad dream that won’t end.
Behind the scenes, airlines still face a maze of regulations for passenger data. Our priority for the year is to harmonize message standards for advanced passenger information and access to passenger name records. This could save at least US$150 million. We need to do much more to integrate and harmonize the security requirements into an experience that is effective, efficient and convenient. Later on, Ken Dunlap will provide some background on the most important security issues that we are handling.
Improving efficiency is not just in industry processes. Since becoming IATA Director General in 2002, user charges have been a topic of special interest and I believe that we have made some solid progress in 2009. Our major achievements on user charges include:
- Singapore Changi Airport for a 25% reduction in charges
- Malaysian Airports for their 50% reduction
- Toronto Pearson Airport for a 10% discount
- Copenhagen Airport and Aeroports de Paris agreed to freeze charges in 2010
But we have had many disappointments:
- India increased airport charges by US$587 million
- Eurocontrol states increased unit rates equal to US$360 million in costs
- Dubai increased passenger fees by US$227 million
- Heathrow increased its charges by US$161 million
- South Africa is proposing a 133% increase in charges for 2010-2011
In total in 2009, we expect to save our members US$1.7 billion in charges for airports, air traffic management and fuel. Despite the progress, we took US$1.9 billion in cost increases, of which 90% from airports. So the battle continues and Jeff Poole will update you with the specifics of our 2010 initiatives.
Finally, we need to look at the industry’s structure as a cause of the horrible decade. The bilateral system was absolutely appropriate for 1945. Air travel was a luxury reserved for 9 million people, with controlled pricing. Today, we live in a deregulated and very competitive world. The result for consumers is positive. It is 30% cheaper to fly today than a decade ago. But the hand of government still prevents airlines from operating as normal businesses.
A few weeks ago we had a reminder with an interpretation by the European Court of Justice on compensation for delays and cancellations. The court extended financial compensation to also include delays, with a potential annual cost of EUR 5 billion. For example, a four-hour delay for an Airbus A319 could require almost EUR 40,000 in compensation. In a normal competitive industry, consumer choice, not regulation, is the most effective consumer protection.
The bilateral system is another example. It prevents cross border consolidation, keeping the industry financially crippled. In the 60-plus years since the first bilateral was signed, airlines made a return of 0.3%. This does not even cover our cost of capital, which is 6-8%. Consolidation is happening within political borders.
- Air France/KLM
- British Airways/Iberia
- Cathay Pacific/Air China
But ownership restrictions in the bilateral system prevent consolidation across political borders. Last month, the IATA Agenda for Freedom took an important step forward. Seven governments and the European Commission signed a multilateral statement of policy principles, focused on liberalizing ownership, market access and pricing. The starting point is a level playing field. This is a government responsibility that is emphasized in the principles.
In today’s context, the most important issue to move forward quickly is ownership. The year 2010 presents another big opportunity, with the US-EU Second Stage talks. To make the next ten years a Decennis Mirabilis, it is time to change. Liberalization of ownership between the US-EU would be a strong signal that this industry is becoming a normal industry.
What conclusions can we draw for 2010? If we have to do the work of 2007, with US$30 billion less cash, change is needed. IATA is helping airlines to find the efficiencies that the industry needs with Simplifying the Business and our user charges campaigns. Since 2004, we have saved our members at least US$34 billion in costs. In Simplifying the Business, fuel costs and user charges, we are also helping to build a sustainable future, by reducing emissions, improving safety and normalizing the industry. If we can achieve all of this, a Decennis Mirabilis may be possible.