I am pleased to be in Beijing as part of my visit to Asia. Ten days ago I was in Singapore for IATA’s Vision 2050. I was joined by 35 strategic thinkers, including Singapore’s Minister Mentor Lee Kuan Yew, Harvard University’s Professor Michael Porter, Ministers, CEOs of airports and airlines.
Our mission was to look ahead 40 years to the aviation industry in 2050. Aviation supports 32 million jobs, facilitating the global village and $3.5 trillion in economic activity. But our margins are pathetic. Over the last 40 years, the average margin was just 0.1%. To be a sustainable business, we would need 7-8% to meet the cost of capital.
We looked at ways to improve aviation’s financial and environmental sustainability, our ability to meet customer needs and develop more efficient infrastructure and aircraft. The goal is to be a normal and sustainable business that can continue to drive economic growth. Over the next months, we will consolidate the opinions of the group and present the results at our next Annual General Meeting.
The Importance of Asia
Asia will play a big role in our future. Of the $9.1 billion in profit that we expect airlines to make this year, $4.6 billion will come from this region. North American carriers will make $3.2 billion, Latin America $700 million, Middle East $400 million, and Europe $100 million. This forecast was made in December, anticipating an oil price of $84 per barrel. The current level around $100 could spoil the party for everyone. For every dollar that it goes up, airlines face the challenge of recovering an additional $1.6 billion in costs.
Nonetheless, Asia is the most profitable region and it is a favorite region for investors. The five largest airlines in the world by market capitalization are Air China at $20 billion, the combined LAN and TAM at $15 billion, Singapore Airlines at $14 billion, Cathay Pacific at $12 billion and China Southern at $11 billion.
Asia is also growing fast. Our 2010-2014 traffic forecast shows that in 2014, 3.3 billion people will travel. That is 800 million more than in 2009. Asia Pacific is now our largest market. In 2009 Asia Pacific overtook North America as the world’s largest aviation market by a few million people. Both accounted for about 26% of global traffic. By 2014, North America will fall to 23% and Asia Pacific will rise to 30%.
China will be at the centre of the traffic growth in 2014. 800 million new travelers are expected in 2014. 360 million or 45% will travel on Asia Pacific routes, of which 214 million will be associated with China with 181 million domestic travelers and 31 million international travelers. By 2014 China is expected to be the fastest growth market for international traffic at 10.8% and domestic traffic at 13.9%. China will be the second largest domestic market in the world with 379 million passengers. China is expected to be the 2nd fastest growing international freight market at 11.7%, making it the 5th largest freight market globally. China including Hong Kong will account for one third of global volume growth over the period to 2014.
The age of China is not in the future - it is here. With size comes responsibility. China has the critical mass to help shape a much more successful future for all of aviation. And I hope that it can successfully grow into this role.
China can lead change in the rules of the game. Since 1945 the Chicago Convention has guided the industry’s success in safety, security and technical issues. It is a pillar of our industry that has survived the test of time and continues to support the effective development of global aviation.
But it does not deal with the commercial framework of international aviation, where we are stuck with the 65 year old rules of the bilateral system established through the Bermuda Agreement between the US and Great Britain. It is my personal view and idea that we need to see another agreement – a Beijing Convention – to complement the good work of the Chicago Convention with a multilateral commercial framework for international aviation that introduces a new age of competitiveness. This would be on a level playing field, where airlines have the commercial freedom to fly where markets exist, merge or consolidate when it makes business sense, and access global capital markets without nationalist restrictions.
With the successful development of Chinese aviation, I am sure that China will have the experience, credibility and weight to play a major role in turning this sick industry, with an historical margin of 0.1%, into a normal business generating sustainable profits.
Environment is another area where China can play a leadership role. The aviation industry shares three global targets - to improve fuel efficiency by 1.5% annually to 2020, to cap emissions with carbon neutral growth from 2020, and to cut emissions in half by 2050 compared to 2005. We are committed to achieve these targets even while accommodating the tremendous growth that we are forecasting.
Biofuels will play a big role in meeting these commitments. They have been successfully tested and we expect certification in a couple of months. But the oil companies, who cash $13.7 billion in refinery margins on jet fuel, are not doing enough. We need governments to take a more proactive role, establishing the fiscal and legal framework to support their commercialization.
China can play an important role. In 2009, China invested more than $30 billion in clean energy projects, double what was invested in the United States. I am excited about Air China’s plans for a trans-Pacific test flight later this year in cooperation with Boeing. Given China’s size and spectacular growth, and with focused policy decisions, China can easy emerge as a leader for aviation biofuels.
Air Traffic Management
The explosive traffic growth in China is creating huge challenges for China’s air traffic management. With the expected traffic growth in 2014, the situation can get worse. 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, IATA working with the Chinese government achieved 21 new routes, cut 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 six flexible entry points for Polar and European operations. And the 2007 Reduced Vertical Separation Minima implementation is saving a million tonnes of CO2 a year.
I congratulate the Air Traffic Management Bureau for these advancements. 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. IATA is here to support to find a comprehensive solution to serve the needs of the military, airlines and their passengers, and businesses dependent on reliable air links.
Simplifying the Business
With passenger and freight traffic growing, there is also a need to improve efficiencies. Our Simplifying the Business program will save the industry $18 billion annually. In 2008, China met our 100% e-ticket target five months ahead of time, and achieved the 100% bar coded boarding pass target last year. Following the successful implementation of bags ready-to-go by Air China last year, we hope China will lead in implementing all the remaining Fast Travel projects from document check, flight rebooking, to self-boarding and baggage recovery. This will save $2.1 billion annually.
E-freight was launched at Tianjin Airport last May, and a domestic e-freight program has been implemented at several airports including Shanghai and Xi’an. The next step is to expand e-freight to other airports including Shenzhen, Shanghai and Beijing.
As you know I will retire from IATA later this year. Our Board supported Tony Tyler from Cathay Pacific as my successor. I am confident that Tony’s leadership, together with his knowledge of Asia and China, will take IATA and more importantly the industry to greater heights.