Thank you for inviting me to address your club for a second time. The last time was in 2006 as aviation was emerging from a long list of crises—9/11, SARS, terrorism and so on. We were concerned because oil was at $57 per barrel and we could not imagine a more difficult situation than what we had just experienced.
Then things got really challenging. By mid-2008, oil surged to $147 a barrel and any relief as it returned to more normal levels was consumed by the impact of the financial crisis. 2009 was the biggest shock in aviation history as 9% of the passenger business disappeared, cargo demand fell 24% and revenues dropped by $82 billion. Airlines returned to the black with a 2010 profit of $15.1 billion. But a 2.7% margin is not much to celebrate. The outlook for 2011 is more pessimistic. We expect profits to fall 40% to $9.1 billion and margins to shrink to 1.5%. That was with oil at an average price of $84 barrel. Now Brent crude is around $100 per barrel and every dollar increase in the oil price brings airlines the challenge of recovering $1.6 billion in additional fuel costs. Oil could spoil our very modest party.
Some of you may be aware that in June I retire from IATA and I will take on different roles in the industry such as boards, teaching and advising. It has been a great time full of responsibility and challenges. Since 2002, IATA’s settlement systems handled $2.5 trillion with a 99.99% success rate. We brought big changes to the industry delivering 100% e-ticketing, making the IATA Operational Safety Audit (IOSA) the industry standard for aviation safety management, challenging airports to match airline results on cost-efficiency, setting a global agenda on environment and delivering over $15 billion in fuel savings.
These are the key projects that helped IATA to save the industry over $55 billion since 2004. These savings were part of an industry transformation with airlines improving productivity 63%, cutting sales and distribution unit costs 19% and increasing fuel efficiency 20%.
The story of the last decade has the elements for a great novel: death, destruction and reincarnation, pestilence, plague and natural disasters, villains and many heroes. And it’s non-fiction! Today I would like to focus on two sub-plots, building a global approach for aviation and climate change, and the quest for an effective UK aviation policy.
Let’s start with environment. At one point, the UK was the epicenter of environmental hysteria over aviation. Even the Bishop of London added flying to the list of mortal sins. Aviation may have been too comfortable knowing that its share of emissions was 2%. But if we are a part of the problem, even a small part, we must be a part of the solution.
I decided to aim high. At our 2007 IATA Annual General Meeting in Vancouver, I announced a vision for aviation to achieve carbon-neutral growth on the way to a carbon-free future. It was a vision. Some thought I was crazy. I certainly did not have all the answers to achieve it. But I urgently built consensus among the CEOs of airlines, airports, Air Navigation Service Providers and manufacturers. Now, aviation is united and committed to improving fuel efficiency by 1.5% per year to 2020, capping net emissions from 2020 with carbon-neutral growth and cutting net emissions in half by 2050 compared to 2005 levels. Moreover, we are delivering results. Since 2004, we shortened 2,000 routes and spread fuel management best practices to save over 76 million tonnes of carbon dioxide.
Sustainable biofuels will play a big role in reducing aviation’s CO2 emissions. In a few years, they have gone from a dream to reality with the potential to cut our carbon footprint by up to 80%. Sustainable biofuels do not compete with food production for water or for land. Test flights proved that they can work safely with the current fleet and certification will happen within months. The next challenge is commercialization. The support from the oil companies has been disappointing and governments need to come on board and set a fiscal and legal framework to support growth in the biofuel industry and ensure that aviation will have access to adequate supply.
So what are governments doing? They took a major step forward under the International Civil Aviation Organization’s (ICAO) leadership with the first global agreement to manage international aviation’s emissions. Our long-term targets are more ambitious than our regulators. With ICAO, we went to the United Nations Framework Convention on Climate Change meeting in Cancun, Mexico with our homework done, ahead of everybody in strategy, commitments and results. Governments also agreed to develop a global framework for economic measures. This will be based on principles that minimize market distortion, treat aviation fairly compared to other sectors, ensure that emissions are accounted for only once, and recognize past and future efforts. The UK was among the190 states supporting this approach.
And then what happened? Instead of helping industry to reduce emissions, the UK government raised taxes. In November, Air Passenger Duty (APD) increased to GBP2.7 billion annually. That’s enough to offset all of the UK’s aviation emissions four times! To borrow a UK phrase, this is potty. Environment policy should not be designed around paying the bills for the government’s failure to effectively regulate the financial sector. This punitive approach isolates the UK from the rest of the world.
A positive approach, supporting investment in green technologies, would reduce emissions and stimulate the economy. The UK APD must disappear, I would say today, because it is an unjustified burden and certainly by the time any emissions trading scheme (ETS) is imposed. And that should not be the ETS that the EU is proposing, which is illegal. Europe agreed to develop a global framework through ICAO and that must be the way forward. Aviation climate change commitments are the most ambitious of any industry. The UN Secretary General recognized us as a role model for others to follow. Instead of killing us with taxes, the UK’s government should support our efforts.
Effective UK Aviation Policy?
The environmental debate is symbolic of the failure of the UK to develop a rational air transport policy. It is difficult to understand why. Aviation is an important driver for the UK economy supporting around GBP76 billion in economic activity and jobs for about 1.5 million UK voters. It provides global connectivity to an island nation with a service economy. So it is a great mystery to me why the government seems so intent on destroying its competitiveness with a policy agenda focused on increasing costs and limiting capacity growth.
On top of the misguided APD, the UK has failed to maintain the cost competitiveness of its airports. The World Economic Forum’s Travel and Tourism Competitiveness Report ranks the UK dead last on price competitiveness - 133 out of 133 countries. And it is number 129 on fuel prices and 121 on ticket taxes and airport charges. Part of the problem is the phantom regulator.
Economic regulation should keep some simple principles. You need a tough service level agreement and dramatic penalties if promises are not kept or the investment schedule is not met.
But recent decisions have got it all wrong. While the global airline industry was cutting costs and improving efficiencies to survive, the regulator allowed BAA a 50% increase for London Heathrow charges between 2003 and 2008. He was even more generous for 2008 to 2013 with an 86% increase. The economic regulatory model for airports is broken and must be urgently fixed. The decision to break-up BAA was a good one. The sale of Gatwick has introduced an element of competition but why the two-year delay to sell Stansted and Edinburgh or Glasgow?
London Heathrow is still the world’s busiest international airport. Terminal 5 was a great leap forward and the redevelopment of the rest of the terminals will move the rest of the airport into the modern era. Redeveloping the terminals will get us away from the Heathrow Hell but what is happening with the airport’s capacity? Nothing. The government’s decision to ignore decades of studies supporting additional capacity at Heathrow was incredibly short-sighted. The plan for high-speed rail to fix the problem does not appear to be working fast enough. BMI’s cancellation of its Glasgow flights proves the point. If building 2,200 meters of runway takes decades and still fails, building or upgrading 650 km of rail will take several lifetimes. And it will probably take more money than the Chancellor of the Exchequer could write a check for.
I met Transport Secretary of State Philip Hammond shortly after he came to government. He arrived with many policy decisions already taken. I hope that with experience these will quickly become more realistic. Change is urgent. Heathrow is becoming a secondary hub. Since 1980, the number of destinations with a direct service has fallen by 20%. Compare Heathrow’s two runways to Europe’s other major airports. Amsterdam Schiphol has five runways and Paris four. Frankfurt will soon open its fourth runway and Madrid is taking on a new strategic role as a major European hub with four runways and lots of room to grow. With the BA-Iberia merger, it will gain the most from the UK’s decision to stagnate Heathrow.
The UK has a long history of seeing its industries lose their competitive edge. It also has a great tradition of leadership in aviation. But any industry can only take so many knocks before the damage is permanent.
Decisions in Haste
The global financial crisis has left the UK in a precarious financial situation. The UK’s impressive budget cuts show courage and leadership to get its finances in order. The government is also raising taxes and selling assets. That includes the potential sale of the government’s share in UK NATS. I sit on the NATS Board. The corporatized NATS, with industry and government working together as shareholders, has delivered many benefits. It is more efficient and more focused on its customers than when it was a government run monopoly. The Hong Kong government wanted to sell its airport after the 2003 SARS crisis. I urged careful consideration to safeguard the airport’s critical role, connecting the local economy to the world. Efficient air traffic management also contributes to the success of business connectivity. Any change to the structure must be carefully considered. A golden share or keeping some of the shares for the government are options. And any change must include an effective regulatory structure that drives further efficiencies.
Before I conclude, I would like to comment on snow. As Director General of IATA, I live between Montreal and Geneva. Montreal is a great place with very severe winters. Last month, I met James Cherry, the President & CEO of Aéroports de Montréal. Over the last five years, his airports have not shut for a single day despite an annual average of 2.2 meters of snow and 3 meters of rain and freezing rain. So I was very pleased to see that Jim is a member of the Heathrow Winter Resilience Inquiry. I hope that he will sell Heathrow’s management some training courses. Shoveling snow is not rocket science. The inconvenience to passengers and the paralysis of the UK economy for days is not acceptable from any perspective. Shoveling snow is not the airline’s responsibility. The financial losses they suffered must be compensated and we must approach next winter with a better plan.
At the same time as we are looking to next winter, I am also looking much further ahead with Vision 2050. This weekend, I will meet with 30 strategic thinkers in Singapore. With the inspirational leadership of Singapore’s Lee Kuan Yew and the competitiveness expertise of Harvard University’s Professor Michael Porter, we will look ahead four decades. The cornerstones of the vision are environmental and financial sustainability with infrastructure and technology to meet the needs of the 16 billion passengers and 400 million tonnes of cargo that will be safely transported by air in 2050. This industry has made a profit margin of 0.1% over the last four decades and long-term and big changes are needed. The crises of the last decade have kept us focused on short-term survival. These two years of profitability, regardless of how small, are a rare opportunity to look for a common understanding of where we want to be in four decades. The results will be presented at our next Annual General Meeting in June along with some near-term recommendations.
Competitiveness is like relevance. It is hard won and easily lost. The UK is the second largest country market for international travel. Its airlines have brought some of our greatest product innovations. Its airports are among the world’s busiest. But the government’s policy pillars of excessive taxes, inefficient airport regulation, and limiting growth will destroy this proud legacy.
I love and respect your wonderful country for its leadership in building global aviation. It was a great and challenging environment for me when I was starting Opodo. And I look forward to relocating here after my work at IATA finishes. But to write a successful next chapter to this industry’s great story in the UK, we must say BASTA. It’s time for a rational framework. The UK economy needs a healthy aviation sector that is safe, green, growing and competitive.