Thanks to the Forum for today’s invitation. It is always great to visit this wonderful city, in the heart of the world’s fastest growing and most exciting region. Hong Kong has always been a key player in global trade. By population, Hong Kong ranks below 40 among the world’s largest cities but Hong Kong—Asia’s World City - outperforms its population size on the world stage because of connectivity. The sea port ranks number three for container shipments, while Hong Kong airport ranks 13th for passenger volumes and in the top two for cargo volumes. And Cathay Pacific is number six among airlines for international passenger operations and in the top two for international cargo.
There are many wonderful attributes to Hong Kong but it is connectivity that attracted 1,300 regional head offices employing 140,000 people. And it is connectivity that projects this great city globally. Aviation celebrates 100 years in Hong Kong this year. Today, aviation in Hong Kong employs 250,000 people and accounts for 8% of GDP. Congratulations to the Civil Aviation Department as it leads the celebrations. I hope that they are a reminder to all of the critical importance of aviation to your wonderful city.
State of the Industry
Aviation globally faces major challenges, starting with its finances. Last year, we celebrated a $15.1 billion global profit. It was welcome relief after losing $50 billion over the previous decade. But it was just a 2.7% margin that will shrink to 1.5% this year. And industry profits will fall to $9.1 billion. The debt burden is enormous: $200 billion for an industry with expected revenues of $598 billion this year. And this is after a decade of transformation during which airlines improved productivity by 63%, reduced sales and distribution unit costs 19% and improved fuel efficiency by 20%.
IATA played a critical role throughout the decade of crisis. First, we kept the industry’s money safe, processing $2.5 trillion of the industry’s money with a success rate of 99.999%. And we saved big money by driving efficiency - nearly $16 billion in fuel, $19 billion in infrastructure user charges, $2.5 billion in operational costs and $17.5 billion by Simplifying the Business with programs like e-ticketing. Since 2004, the total saved is over $55 billion. But despite these enormous changes, the margins are still pathetic.
As an Italian, I am optimistic because we are moving in the right direction. But as a former banker, I know that we have a long way to go to get to the 7-8% margins that it would take just to cover our cost of capital. Much more change is needed and needed fast.
Asia must take a leadership role in those changes. Aviation’s center of gravity is shifting eastward. Asia Pacific’s carriers are the most profitable with $7.7 billion in 2010 and $4.6 billion forecast for this year. The region’s growth is impressive. Of the 800 million new passengers who will fly by 2014, 360 million of them will be in Asia Pacific and 214 million of those in China. In 2009, Asia Pacific overtook North America as the largest aviation market. The difference was small and both had a similar 26% market share. By 2014, Asia will account for 30% of global traffic but North America will fall to 23%. Investors see the opportunity. The five top airlines by market capitalization are: Air China with$20 billion, LAN-TAM when they combine will be $15 billion, Singapore Airlines at $14 billion, Cathay Pacific at $12 billion, and China Southern is at $11 billion. This financial and growth leadership will need to be balanced with policy leadership that could help shape the future face of aviation.
Change was one of the themes of IATA’s Vision 2050 initiative. This past weekend, I hosted a meeting in Singapore that included 35 strategic thinkers. After a decade in survival mode, limping from crisis to shock, two consecutive years of profitability are a window of opportunity for long-term strategic thinking. The group looked to 2050 when we expect to transport 16 billion people and 400 million tonnes of cargo. At our Berlin Annual General Meeting (AGM) last June, I announced a vision centered on serving our customers sustainably in both financial and economic terms with the right technology and using efficient infrastructure.
The group challenged and developed this vision. We benefitted from the inspirational leadership of Singapore’s Minister Mentor Lee Kuan Yew and the competitiveness expertise of Harvard University’s Professor Michael Porter. The initial reaction of Michael Porter was to say:”What a mess”. Aviation provides great value, the safest way to travel, employing 32 million people and supporting $3.5 trillion in economic activity but the 0.1% profit margin over the last 40 years is good for a charity association but not sustainable as a business.
We need to get people, and particularly governments, to care enough about aviation’s benefits that they will join us in driving change. That means having the courage to take our internal discussions in forums like this to the world. We have a compelling story and I hope that the conclusions of Vision 2050 will give us a long-term platform to tell it from. Over the next months, we will be putting together all the Vision 2050 input on restructuring the industry—liberalized on a level playing field, organizing airspace efficiently, building and funding airports to meet expected demand, developing planes that are radically different and meeting the increasingly segmented needs of modern travelers. I look forward to presenting it at our next AGM in June.
Environmental sustainability is a big part of our vision. 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, IATA shortened 2,000 routes and spread fuel management best practices to save over 76 million tonnes of carbon.
We have taken leadership on sustainable biofuels that have the potential to reduce our carbon footprint by up to 80%. They are a tested reality with certification expected in the coming months. The next challenge is commercialization. The support from the oil companies has been disappointing—to be polite. They will cash $13.7 billion in refinery margins on jet fuel this year and their commitment to biofuels is peanuts. Governments need to set a fiscal and legal framework to support growth in the biofuel industry and ensure that aviation will have access to adequate supply.
China could play an important role. In 2009, China invested more than $30 billion in clean energy projects, double what was invested in the United States. In the second half of this year, Air China plans to fly a Boeing 747-400 trans-Pacific with jatropha-based fuel supplied by Petro China. Given China’s size and spectacular growth, with focused policy decisions, it could easily emerge as a leader for aviation biofuels.
Of course, climate change is a global issue. Alongside the industry targets, governments took a major step forward with a global agreement to manage aviation’s international emissions at the International Civil Aviation Organization Assembly last October. And together, we went to the United Nations Framework Convention on Climate Change meeting in Cancun with our homework done and ahead of all other industries in strategy, commitments and results. The agreement included a commitment by governments to develop a global framework for economic measures. But instead of helping achieve this global commitment, Europe is unilaterally moving forward with plans to include aviation in its emissions trading scheme from next year. A flight from Hong Kong to Europe could fly over a dozen countries. What gives Europe the right to cash the taxes? Under the Chicago Convention, it’s illegal. I am pleased that China is among the countries opposing Europe’s illegal plans. Aviation’s climate change commitments are the most ambitious of any industry, recognized by the UN Secretary General as a role model for others to follow. Instead of killing us with taxes, all governments should facilitate our efforts.
I would like to spend some time on Hong Kong specific issues. The rapid growth of Hong Kong aviation has been impressive. The airport has been supporting that growth in a spirit of partnership, helping airlines with a 10% discount at the height of the financial crisis, supporting the industry’s climate change commitments with a program to reduce carbon intensity at the airport 25% by 2015 and seeking to meaningfully engage users with a more robust and frequent consultation process. This is important for the $900 million being invested in the new midfield terminal and taxiway project. The focus is on keeping the airport a competitive driver of a successful Hong Kong economy. We have built a great relationship with the Airport Authority that is a transparent, productive and effective model for others to follow. As partners in the airport’s development, IATA and the airlines look forward to April’s launch of public consultations on the Airport Master Plan 2030. Making this a success is a top priority. IATA is fully committed to providing assistance and global expertise from strategy implementation to technical support.
I want to make a strong plea to build a third runway. In 1992, it was anticipated that the airport would handle 87 million passengers and 9 million tonnes of cargo by 2040. Growth has been much faster than forecast, topped by a record breaking 2010 with 50.9 million passengers and 4.1 million tonnes of cargo. With the 60 movement per hour cap, that is about 90% of what can be done on the existing runways. Increasing the cap on movements from 60 to 68 as suggested by the Civil Aviation Department might get the airport above 55 million passengers. Squeezing more numbers with larger aircraft worked for Kai Tak because it was a destination airport. With today’s hub operations, we cannot expect the same.
Last week, I was in London criticizing the government for their short-sighted aviation policy driven by rising taxes, ineffective regulation and stopping growth. The result is a disaster for the country’s competitiveness. The World Economic Forum’s Travel and Tourism Competitiveness Index puts the UK dead last on price competitiveness – 133rd out of 133 countries surveyed and 121st on ticket taxes and charges. And Heathrow is on its way to becoming a secondary hub. I know that Hong Kong is much wiser than to take such a destructive approach. But I want to take the opportunity today to encourage a constructive forward looking approach to ensure sufficient capacity by moving forward with plans for the third runway. You may disagree if a third runway is needed by 2015 or 2020 or, some other date. But as big and wonderful as this airport is, it will eventually be saturated and a third runway will be needed. And now is the time to start the process.
Air Traffic Management
Air traffic management is the other part of the equation. Planes need to get to and from Hong Kong efficiently. Since my first speech to this group in October 2002, I have had the same message. The Pearl River Delta air traffic control is a problem that needs to be fixed. It is a complex problem with five airports in a small and very congested area. But still it should be in everybody’s interest to make the Pearl River Delta the world’s most efficient airspace. In 2009, new arrival routes shortened each flight from Mainland China, Europe and Southeast Asia by 210 kilometers. Last year, 10 conditional routes on the mainland side helped with further savings. This incremental progress shows that solutions can be achieved. But still the Pearl River Delta ranks among the top three global air traffic control problems that need to be fixed along with the Single European Sky and NextGen in the US.
The source of the problem is not limited to the Pearl River Delta. China’s air traffic management has some huge challenges to deal with the explosive growth. I have personally invested much time in working with the government and all stakeholders on sustainable solutions. Since the opening of IATA 1 in 2006, we achieved 21 new routes, cutting 2,600 nautical miles of distance and 400,000 tonnes of CO2 annually. We helped ensure successful air traffic management for the Beijing Olympics and the World Expo in Shanghai. We facilitated at least six new entry points for Polar and European operations, and the 2007 Reduced Vertical Separation Minima implementation is saving a million tonnes of CO2 a year. These are major advancements for which the Air Traffic Management Bureau should be congratulated. But the challenge is growing exponentially. Despite improvements, air traffic delays are at unacceptable levels. Airspace is a finite resource from which we are working together to squeeze even more efficiency. The key will be in releasing more military airspace for civilian use.
With our successes over the past decade, we have built relationships of trust that can guide us to an even more comprehensive solution. This should serve the combined needs of the military, airlines and their passengers, and businesses dependant on reliable air links. And IATA is here to help.
As you know, later this year I will move on from IATA. I will still be following the industry, but in different roles such as boards and teaching. The decade since I joined IATA in 2002 has been challenging. At the beginning, I needed to wake-up the association to respond to the difficulties and challenges that its members were facing. It was drastic, changing 80% of the team. The new IATA leads meaningful changes, from implementing IOSA on safety, e-ticketing and Simplifying the Business, to building a new relationship with airports based on cost-efficiency and bringing leadership to the environment debate. With expectations raised, ensuring continued strong leadership for IATA was a big responsibility. I could not be more pleased that our Board supported Tony Tyler as my successor. Having worked with him as a member of our Board of Governors and later as the Chairman, I could not think of a better person.
I am sure that Tony’s leadership, coupled with his knowledge of this important part of the world, will take IATA and more importantly the industry, to even greater heights. In the meantime, I remain fully engaged in driving IATA forward in its mission to make aviation even safer, greener and more profitable.