This is my first visit to Israel as IATA Director General and CEO. But I have been following developments in Israel since my days at Alitalia and particularly in 2003, when El Al was privatized. It is good to see that El Al reported a second quarter 2010 profit with a traffic expansion of 6% and load factors over 80%.
IATA is proud to be the global association for 230 international airlines including Israel’s Arkia Israel Airlines, C.A.L. Cargo Airlines, El Al and Israir Airlines. To explain a bit more, IATA is a very strange animal. On the one side, we are a traditional trade association representing the interests of our members. But at the same time, we are industry partners.
Our $280 billion settlement system is the financial backbone of global aviation. We also negotiate over half of the $54 billion in airport and air navigation charges paid by airlines. Our commercial, safety and security standards help airlines improve efficiency and fly passengers safely. On top of this, our job is to lead industry change with programs like the conversion to 100% e-ticketing or the conversion to 100% bar coded boarding passes by the end of this year.
During this trip, I will have the pleasure to congratulate Ben Gurion Airport for already achieving 100% bar coded boarding passes.
State of the Industry
Today, I met with Minister Katz. First, we discussed the state of the industry. After a decade of losses that totaled $50 billion, we expect airlines to make $8.9 billion this year. Asia-Pacific is leading with expected profits of $5.2 billion. North America will also show a profit of $3.5 billion. Europe is the weak link with losses of $1.3 billion. But overall the news is positive.
First, because the airlines have been much wiser in matching capacity to demand. This year, we see an 11% demand increase being met with a capacity increase of 7%. That is driving a 7% to 8% yield improvement. Alongside this, government stimulus monies supported inventory re-stocking. This cycle is largely complete but jobs have not been created and governments are giving mixed signals on the economy. The US is pumping money into the economy while European governments introduce austerity measures. The industry is already a victim of higher taxes in Europe, ironically where the industry is weakest. The UK increased its Air Passenger Duty to $3.8 billion. Germany added another 1 billion Euros in a departure tax and Austria has followed with its own tax to eventually collect another 90 million Euros annually.
We are already seeing evidence that the traffic recovery is losing steam. September freight volumes were 6% below the recovery peak in May. Passenger traffic usually follows this trend with a few months lag. And as we carry 35% of the value of goods traded internationally, the freight slowdown tells us that 2011 will also be a tougher year for the global economy. The industry’s 2011 performance will also be negatively affected by a 6% capacity increase that will outstrip demand growth of just 5%. The imbalance will see yields stop growing and the industry’s profits will fall to $5.3 billion which is a margin of just 0.9%.
It is clear that the industry remains fragile even after a decade in which airlines improved efficiency tremendously.
That is why we are looking ahead for long-term solutions to build a sustainable industry. In February 2011, I have invited a group of industry leaders to gather with Harvard University’s Professor Michael Porter and Singapore’s Minister Mentor Lee Kuan Yew to look ahead to 2050.
The historical profit margin of airlines is around 1%. That would be good if aviation was a charity association. But is does not even cover our cost of capital which is 7-8%.
Our goal in Vision 2050 is to develop some long-term ideas on which we can build a sustainably profitable industry. But in the meantime, we have some near-term challenges that must be addressed.
First, regardless of the industry’s financial health, safety and security are always our top priorities. In 2009, we had one accident for every 1.4 million flights. Air transport is the safest way to travel.
But safety is a constant challenge requiring governments and industry to work together with global standards.
IATA’s four Israeli member airlines have met the global standards of the IATA Operational Safety Audit. But I expressed my strong concerns to the Minister that Israel has been in Category 2 of the US Federal Aviation Administration’s International Aviation Safety Assessment since 2008.
This is an international embarrassment for the civil aviation authority. It is a costly situation for the country’s reputation and it is damaging Israel’s airlines because they cannot grow their US operations or accept passengers from US carriers in code-share arrangements.
I urged the Minister to make returning to Category 1 a top priority and I offered any assistance IATA can provide. And I also encouraged the Minister to join the growing list of countries mandating or using IOSA audit data. This would be a strong signal that Israel is serious about improving safety oversight.
Also on safety, I asked the Minister for his urgent attention to finding an alternate airport for Ben Gurion within Israeli territory. Closing Ovda as the alternate airport makes little sense while it remains open to charter aircraft. Airlines are now using Larnaca as the alternate. This is a huge cost to airlines for the extra fuel that they have to carry. I understand some options are under consideration, including an upgrade of Ovda or naming a military facility. But each day that we wait for a decision is wasted time and money.
Security is as critical as safety. Aviation is much more secure today than it was in 2001.
But as with safety, security is a constant challenge but more complicated because of changing threats. We were reminded of this in December 2009 with the attempted bombing of a Delta flight to Detroit and again last month, with the bomb scare from Yemen.
These were both wake-up calls for all stakeholders. The US is one of the biggest players in international aviation security. Over the last year, under the leadership of Secretary Janet Napolitano at the head of the US Department of Homeland Security, the emphasis has been on international cooperation. This is a major step in the right direction. Last week, I met with the US Transportation Security Administration Administrator John Pistole to discuss the way forward, focusing on air cargo. I also discussed with Secretary Napolitano areas where IATA could assist.
Governments handled the Yemen incident well. Intelligence was shared to stop the plot and measures were targeted and coordinated. Even as the investigation continues, I emphasized to both US officials the industry’s willingness to cooperate with governments.
Our vision for cargo security is based on a combination of measures: a supply chain approach, technology and information to support intelligence. Israel is a leader in security. As we once again could face a re-examination of security measures, I encouraged the Minister to play an active role by sharing best practices.
We also need technology that can scan standard pallets and large items. Right now no government has any certified technology to handle this and we are putting pressure on regulators to speed the process to move technology from the laboratory into operations.
We must also make better use of the information that we have. With IATA’s e-freight program, we converted 20 shipping documents to electronic format. This will save the industry $4.9 billion a year and give governments a very clear picture of who is shipping what and where. We have the capability to cover 80% of shipments already. Now governments must use it for outbound security screening as well as for inbound processing. I am pleased that Israel will go live with e-freight on 1 December.
Israel has a long history of leadership on aviation security for passenger operations. For example, your pioneering work on behavior monitoring is being put to use at many airports around the world. Globally, we must take a different approach on passenger screening which was designed to stop hijacking using technology that was available 40 years ago.
My long-term vision is for passengers to be able to get from the door of the airport to the door of the aircraft in a seamless and uninterrupted process. A biometric identifier such as your fingerprint along with your mobile phone and a radio-frequency identification (RFID) equipped passport could be access keys to a walk through a tunnel of technology that uses databases to assess risk level, checks you in and assigns seating, completes immigration processes and screens for prohibited objects.
This is obviously not going to happen tomorrow. But I would challenge everyone with a stake in aviation security to leave their silos and work towards a radically different more convenient and effective airport process. And with Israel’s acknowledged leadership on security, I hope that it will contribute to the development.
At the same time, I am concerned when I see measures that ignore international standards. Here I am referring to Israel’s Security Code Program for entering Israeli airspace. No other country has a similar requirement. The logistics are complex and difficult to keep secure. I encouraged the Minister to abolish the program. I also asked the Minister for a more effective dialogue with airlines. For example, I have seen press reports that the requirement is being lifted for some carriers but no direct confirmation. Our interests are aligned. Governments don’t want terrorists in their country and we don’t want terrorists on our planes. Governments are the experts on understanding threat but effective implementation requires us to work together. We can only do that with effective communications.
I updated the Minister on environment. Aviation will go to the Cancun environment meetings with its homework done. As a united industry of airlines, airports, air navigation service providers and manufacturers, we have agreed to some tough targets. We will improve fuel efficiency by an average of 1.5% annually to 2020, cap emissions from 2020 with carbon-neutral growth and cut emissions in half by 2050 compared to 2005.
Last month, governments achieved an historic milestone through the International Civil Aviation Organization (ICAO) which will cap emissions from 2020. So we are aligned as we approach Cancun. I encouraged the Minister to continue to support aviation’s aggressive approach which UN Secretary General Ban Ki-moon commended as a role model for others to follow.
And I urged him to join the many states voicing their opposition to Europe’s unilateral plans to bring aviation into its emissions trading scheme in 2012. It is illegal under the Chicago Convention.
Europe should support ICAO’s efforts to achieve a global framework for economic measures at its 2013 Assembly.
Finally, I wanted to make a few comments on infrastructure costs. You will all be familiar with the very public debate that we had with the Israel Airports Authority (IAA) on charges. IAA wanted a 51% increase and we opposed this. The Parliamentary Economic Affairs Committee knocked this back to 5% in 2009 and 5% in 2010. In April, we were assured by IAA that there would be no increase in 2011. I noted to the Minister the progress that we have made.
I also encouraged him to formalize the consultation process and align Israel to ICAO directives so that airlines and IAA can avoid the very difficult situation that we faced with the 2009 and 2010 discussions.