It is a pleasure to be in Panama City. The famous Panama Canal, a great achievement of technology and hard work, will soon celebrate 100 years of linking the Atlantic and the Pacific oceans. At the same time, many Latin American countries are already celebrating 100 years of aviation around personalities from Peru’s Jorge Chavez to Argentina’s Jorge Newbery, to Chile’s Comodoro Arturo Benitez and Brazil’s Alberto Santos-Dumont.
These great historic accomplishments continue with tremendous changes. A decade ago, Latin America was a mess. Many carriers were state-owned financial basket cases. The accident rate was nearly seven times the global average and infrastructure was suffering from poorly structured privatizations. There were big airline casualties including Varig and more recently Mexicana. Your hard work transformed the region. For Latin America, 2009 was a year with no Western-built jet hull losses and a $500 million profit. This year, Latin America will make $1 billion and a $600 million profit is expected in 2011. You will be the only region in the world to deliver a profit for 2009, 2010 and 2011.
Market capitalization reflects this success. Since 2000, market capital for US and European carriers fell by two-thirds and one-half, respectively. Asia is up 20% but LAN is up 19 times and GOL and COPA have doubled. Congratulations to all. I thank Pedro Heilbron, CEO of COPA and the host of this Leaders Forum and Roberto Kreite, The Latin American and Caribbean Air Transport Association (ALTA) Chairman and TACA’s CEO for the invitation to celebrate your success and share thoughts on the way forward.
State of the Industry - 2010
This year, we expect a global profit of $8.9 billion. Having lost $50 billion since 2000, a black number is reason to celebrate. The recovery has been faster than anybody anticipated and supported by enormous change.
Since 2001, labor productivity improved 53% and sales and marketing unit costs fell 15%. Over the last six years, IATA delivered $48 billion in industry savings including $15 billion with Simplifying the Business and $16 billion in fuel costs by shortening 2,000 routes and spreading best practice on fuel management. We also saved $4.3 billion in user charges in 2009, including $313 million in Sao Paolo parking charges, $153 million by delaying the Federal Aviation Administration (FAA) overflight fee increases, $121 million through price cap regulation in Peru, and a $24 million savings in Mexican Air Traffic Control charges.
Together we have achieved a lot but there is much more to do. On revenues of $560 billion this year’s $8.9 billion profit represents a margin of 1.6%. That’s good for a charity association but not for a serious business. Unfortunately, this year will be the peak of a recovery driven by three factors. First, oil today is around $90 per barrel, cheaper than its $99 price in 2008. Second, capacity is increasing by 7% against an 11% rise in demand and effective capacity management is pushing yields up 7%. Third, government stimulus packages drove a restocking cycle supporting an over 20% increase in cargo activity.
State of the Industry - 2011
We believe 2011 will be more challenging. Oil prices are rising, cargo demand is already down 6% from its May 2010 peak and because the jobless recovery has not improved consumer confidence, the US is adding $600 billion more to its stimulus funds. But Europe is slashing spending and gave aviation three tax presents. The UK increased Air Passenger Duty to $3.8 billion, Germany introduced a EUR 1 billion departure tax and Austria is following with a EUR 90 million tax. Finally, we don’t see yield growth because a capacity increase of 6% will outstrip expected demand growth of 5%. The result? Margins will backtrack to 0.9% and profits will fall to $5.3 billion.
Vision 2050 and Latin America’s challenges
Our small industry profit at the end of a decade of change is a signal to look further ahead. At the last IATA Annual General Meeting (AGM), I launched Vision 2050. Working with Harvard University’s Professor Michael Porter and with the support of Singapore’s Minister Mentor Lee Kuan Yew, we will gather a small group of key leaders in Singapore next February. By 2050, passenger volumes will increase from 2.3 billion to 16 billion and cargo from 40 million tonnes to 400 million. Vision 2050’s goal is to spark a debate on building an industry that will be safer and more secure, a leader on environmental responsibility and sustainably profitable.
I will report the results at our next AGM. In the meantime, we must address regional challenges, improving safety, reducing taxes and improving Brazil’s competitiveness. And Latin America must play a leadership role in addressing global issues, security, liberalization and climate change.
Let’s start with safety, which is our number one priority. Latin America’s 2009 perfect record for Western-built jet hull losses has not continued in 2010. Four accidents through the end of October pushed the accident rate to 3.2 times the global average. We must work with regulators to increase implementation of area navigation (RNAV) and required navigation performance (RNP) procedures, find solutions to runway excursions and improve congested and inefficient airspace in the Gulf of Mexico, Bogota and Sao Paulo.
Latin America is taking a leadership role in promoting IOSA among governments. In September, the Latin American and Caribbean Air Transport Association (LACAC) and my good friend General Huepe started a process to make the IATA Operational Safety Audit (IOSA) mandatory for all carriers flying to, from and within the region. Panama, Brazil, Chile, Costa Rico and Mexico are already on board and I look forward to quick progress working with new LACAC President, Luis Rodriguez Ariza of the Dominican Republic.
Aviation is critical to Latin America’s economy, supporting 2.7 million jobs and $157 billion in economic activity. Governments should understand that we are not a cash cow. Incredibly, the Caribbean countries, dependant on tourism, want to make it $287 million more expensive with planned aviation taxes. Nicaragua is considering a tourism tax and Panama recently put on hold a new transit tax. In the Netherlands, a EUR 318 million departure tax cost the Dutch economy EUR 1.2 billion in lost business. The Dutch had the good sense to abolish it. Latin America should learn from this.
Because of high taxes, Brazil, Chile and Peru rank 45, 57 and 74 on the World Economic Forum’s travel and tourism index. These low rankings clearly show that high taxes are hurting competitiveness. We must all shout much louder to re-focus governments from taxing us to death and to driving economic growth with a healthy air transport sector.
Brazil is Latin America’s largest and fastest growing economy but air transport infrastructure is a growing disaster. Thirteen of Brazil’s 20 largest domestic airports cannot accommodate demand in existing passenger terminals. And the situation is critical in Sao Paolo, the region’s biggest international hub. Earlier this year, the Empresa Brasileira de Infraestrutura Aeroportuária (INFRAERO) proposed closing one runway at Sao Paolo Guarulhos airport for a large part of 2011 for improvement work. That would have cut capacity in half. We shouted and the government is now looking for another solution.
To avoid a national embarrassment, Brazil needs bigger and better facilities for the 2014 FIFA World Cup and the 2016 Olympics. But I don’t see progress and the clock is ticking. The time for debate is over. We must get all the stakeholders at the table to finalize a plan and get working.
Infrastructure costs are also an issue. INFRAERO proposed to increase charges 200% for sub-standard airport facilities. We shouted and the regulator took notice. The National Civil Aviation Agency of Brazil (ANAC) launched a major overhaul of the regulatory structure. I hope that the results will be a model for other governments in the region.
In the meantime, IATA is beefing up its resources in Brazil and I have appointed Carlos Ebner as Country Director for Brazil. Carlos starts on 1 December with a mission to deliver a comprehensive approach to support aviation’s success in Brazil.
At the global level, last month’s events in Yemen reminded us that security is a constantly evolving challenge. We are making progress. Governments responded to Yemen threat by sharing information and intelligence to support targeted and coordinated measures based on risk. Moreover, under the leadership of Secretary Janet Napolitano, the US Department of Homeland Security (DHS) is focused on working globally with the industry.
Even as the Yemen investigation continues, we are reminding governments that effective cargo security must be based on a combination of measures. First, we need a supply chain approach to secure cargo from the factory to the airplane. The US, UK and others have programs in place.
The industry Secure Freight program is a template for other countries to use. This must be complemented with technology to scan standard pallets and we must leverage e-freight information to help government intelligence with a clear picture of who is shipping what and where. Colombia and Chile are already e-freight live with Mexico to follow shortly. We must encourage other countries to follow.
On the passenger side, it’s time to update our approach to passenger screening that was developed 40 years ago to combat hijacking. In the short-term, we must develop a checkpoint that combines intelligence and technology in a risk-based process.
Longer-term, a more comprehensive approach is needed. My vision is for an “IATA security tunnel.” This will allow passengers to get from the door of the airport to the door of the aircraft in a seamless and uninterrupted process. Your fingerprint, mobile phone and Radio-frequency identification (RFID) passport would grand access to the tunnel. As the passenger walks through, he or she will complete check-in, security and immigration procedures without stopping.
I challenge all stakeholders to work together towards integrated, convenient and effective airport processes.
We have talked for decades about the need for liberalization. While we talked, Latin America’s airlines developed successful multi-national brands, multi-hub international operations and trans-national ownership structures. The merger of LAN and TAM is the latest bold step. The market is impressed. LAN/TAM’s market capital is $14 billion and that‘s bigger than British Airways/Iberia at $5.5 billion, the Lufthansa Group at $10.4 billion, Air France/KLM at $5.7 billion, Delta at $11.2 billion or United/Continental Airlines at $8.8 billion.
Latin America now has several players that could take a leading role in global consolidation. How do we move forward? First, let’s bust the bureaucracy of outdated ownership rules and work towards a 21st century regulatory structure that gives aviation access to global capital.
Second, we must further integrate Latin America’s economies with an open aviation market. We must use the region’s success stories of LAN/TAM, GOL, COPA and TACA/Avianca to give governments the courage to change. We must not lose this opportunity to take leadership in achieving normal commercial freedoms for all airlines.
This brings me to climate change. In a few weeks, our industry will go to Cancun with our homework done. Airlines, airports, air navigation service providers and manufacturers are committed to 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. No other industry has agreed targets across the whole supply chain.
We also have impressive results. Since 2004, IATA saved 76 million tonnes of CO2 by shortening 2,000 routes and helping airlines improve fuel efficiency. For example, optimized routes between Lima to Madrid and Panama and Buenos Aires are saving one million tonnes of CO2 a year. And soon, TAM will be the first Latin American airline to test biofuels. Our achievements are so impressive, that UN Secretary General Ban Ki-moon commended aviation as a role model.
What about governments who are critical to our success? The Kyoto Protocol gave the International Civil Aviation Organization (ICAO) the responsibility to manage aviation’s international emissions. The new United Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary Christiana Figueres has been very supportive in confirming this.
ICAO took leadership to help governments achieve the first global government agreement to manage the emissions of an industrial sector. This resolution at ICAO last month puts ICAO at the forefront of UN agencies dealing with climate change. In line with our targets, governments agreed to cap emissions from 2020. Moreover, the ICAO Assembly adopted 15 principles for market-based measures that minimize market distortions, treat air transport in line with other sectors, ensure that our emissions are accounted for only once, recognize past and future efforts and allow for the special needs of developing states.
One key question is: Will the ICAO agreement be enough to stop the European Union Emissions Trading Scheme (EU ETS)? We are on solid ground to challenge the ETS implementation. If you have not done so already, you should write to register your opposition.
We must all fully support ICAO as it turns these principles into a global framework on economic measures by their next Assembly in 2013. Thanks to all of you for supporting our Cancun presence. We will go to COP-16 with a very strong position as a united industry aligned with the leadership of ICAO and determined to meet our targets.
I am confident. We have been through a decade of crises and we have changed, adapted and survived. Latin America emerged as a star, contributing to global change. But after nearly 10 years at the head of IATA, from next July, I will be watching aviation from a different position.
My time at IATA has been challenging, exciting, at times exhausting and always a pleasure. Why? Because I have had the great privilege to work with exceptional people like those here today.
I am a member of the search committee working to find the best successor possible to present to next year’s AGM for approval. After that, I plan to remain close to this amazing industry that I love so much but in different roles.
I can assure you that I will keep a special watch on Latin America. I am a fan. I spent an important part of my life here and I am deeply impressed by the region’s great people who have become great friends, the region’s great accomplishments and its even greater potential. I am confident that Latin America will continue to grow to be an even stronger player in an industry that is safer, greener and more profitable.