It is a pleasure to be in Brazil, a country with a great aviation tradition and tremendous potential for aviation. Every indicator shows the need for a competitive air transport sector: fantastic world class tourism resources, one of the world’s fastest growing economies, a huge land mass rich in resources, one of the top four aircraft manufacturers, and widely spread major population centers. The industry has grown by an impressive 10% a year since 2003. By 2014 the domestic market will be 90 million passengers, the fourth largest in the world.
But let me be very frank. Brazil will never reach its full potential without major changes in its aviation policies. Brazil’s GDP is the eighth largest, but its international aviation market, with just 13 million passengers, ranks 37th - below Indonesia and Norway. This is disproportionate to Brazil’s size and importance on the world stage. And it shows that Brazil is not getting the full economic benefits that this industry can deliver.
I was very encouraged that your new President, Dilma Rousseff, recognized the need for change and the power of air transport to drive long-term gains in the quality of life in Brazil. Her intention to create a Civil Aviation Secretariat at the level of a ministry is an opportunity to achieve change. IATA is eager to play a collaborative role in helping drive that change.
IATA and Brazil
We know Brazil well. We are proud to have TAM and GOL as IATA members. Our Billing and Settlement Plan (BSP) started here in 1991 and our office in Sao Paulo settles nearly $4.5 billion of the industry’s money annually. Keeping the industry’s money safe is a top priority for IATA. But it is only a part of the work that we do. IATA’s expertise covers all facets of aviation and is delivering results. Shortening routes, establishing best practices in fuel efficiency, Simplifying the Business, and challenging our monopoly partners to deliver cost efficiencies has saved the industry over $55 billion since 2004.
Even more important, the IATA Operational Safety Audit (IOSA) - a condition of IATA membership - is making the industry safer. It shows in the numbers. In 2010 IATA members had 1 accident for every 4 million flights. That is much better than the industry average of 1 accident for every 1.6 million flights. And of course we are determined to make this safe industry even safer.
With all of this expertise, how can IATA help Brazil reach its aviation potential? First we are putting more resources into our operations with our first Country Director, Carlos Ebner. Many of you will remember Carlos from his long years as Chief Financial Officer of Varig, and his time as CEO of OceanAir. His mission is to make sure that the industry’s needs and issues are positively addressed in Brasilia’s policy agenda.
IATA has a strong strategic agenda for Brazil that involves our members and all the industry’s stakeholders. The focus is on competitiveness in key areas: airport infrastructure and its regulatory framework; fuel fees; air traffic management; environment and getting ready for the FIFA World Cup and the Olympics. Before I address these, let me spend a few minutes on the state of global air transport today.
State of the Industry
The global airline industry made a $16 billion profit in 2010. After a decade of losses exceeding $50 billion, any black number on the bottom line is a welcome change. But the sobering reality is that this “good year” only generated a pathetic 2.9% margin. This year we expect profits to fall by 46% to $8.6 billion with a 1.4% margin. The rising price of oil is once again destroying our profitability. The average price of oil last year was $79 per barrel and accounted for 26% of our cost structure. This year we are forecasting $96 per barrel and 29% of industry costs. Today the price is well over $100. And for each dollar that it rises, the industry has to recover $1.6 billion in additional costs.
Fortunately economic growth is still healthy and the global GDP forecast has been revised upwards to 3.1%. This gives us confidence that capacity increases of 6.0% will be closely matched by 5.7% demand growth. If this holds we see passenger yields rising by 1.5% and cargo yields by 1.9%. But the big risk to even our small profit is if high oil prices stop economic growth. And even with two consecutive years of profit, I would have to characterize the industry as being very fragile.
State of the Latin American Industry
Within this context, Latin America is one of the industry’s stars, with three consecutive years of profits - $500 million in 2009, $1 billion in 2010, but falling to $300 million in 2011. Strong economic growth, liberal market access policies, and industry consolidation are driving these positive results in difficult times. One of the major developments is the proposed merger of TAM and LAN. It shows the ability of the region’s airlines to innovate and lead much needed change, even within the constraints of the industry’s archaic bilateral system.
A good indication of the importance of this change can be seen in how investors evaluate the opportunity of the merged TAM and LAN. Of the top five airlines by market capital, four are in Asia-Pacific. LAN TAM would rank third on the list with a combined market capitalization of $12 billion.
Now let me focus on Brazil, and how IATA’s strategy can improve competitiveness, starting with infrastructure.
The INFRAERO model, which controls 94% of Brazil’s airports, is broken. 13 of the top 20 airports in the country have bottlenecks in their passenger terminals. Sao Paulo, which handles 25% of Brazil’s total traffic, is in a critical state. Slots are not available when they are needed. The terminals are old and inefficient. And we have deep concerns over plans for a third terminal which are being worked on without a transparent consultation process.
Without significant change, the infrastructure is not up to standard for the FIFA World Cup and the Olympics, or the long-term needs of Brazil. The Federal Government has recognized that INFRAERO is no longer fit for purpose and is considering a concessions model.
The industry’s experience with concessions has been mixed. India’s experience has been positive. The concessionaire of Delhi airport constructed a new runway and terminal building in line with a long-term vision to build a world class hub. And they did it with speed - 37 months to plan, build and open a terminal for 34 million passengers annually must be a world record. Effective economic regulation set parameters that facilitated success. But we have seen many disasters, particularly here in Latin America, where regulation has been weak or non-existent.
Brazil’s first test case for concessions will be Natal. To make it a success we must ensure robust, independent economic regulation, transparency and ANAC oversight with effective industry consultation. ANAC has understood the need for an independent and pragmatic approach to airport regulation. The announced high level framework for this is mostly in line with IATA recommendations and ICAO policies. But four important changes are critical to comply with ICAO principles and provide a solid framework for potential concessions. First, the 50% ATAERO surcharge on fees must be eliminated. Second, cross-subsidization must not be allowed. Carriers serving one airport must not pay for services at another. Third, peak hour pricing is unacceptable. The solution for congested airports is improving efficiency or developing infrastructure. Finally, the level of charges must come down. But instead, with the conversion to REAL and linkage to CPI, international carriers face up to 70% increases. We must find a more equitable formula.
If we can achieve these points, concessions could improve infrastructure competitiveness.
The FIFA World Cup and the Olympics are great catalysts to jump start improvements. But as concessions expand from the Natal pilot, we must ensure that they are well planned, conform to global standards, and aligned to a long-term vision for Brazilian aviation competitiveness to be a key contributor to Brazil’s economic success. IATA will be watching closely and ready to give our advice and global perspective.
Fuel costs is another issue that must be addressed. In January 2009, Brazil eliminated the $100 million a year PIS/COFINS tax on jet fuel for international flights. This was a great step forward, but still jet fuel prices in Brazil, an oil producer, are 14% more expensive than the rest of the region. A recent study concluded that Petrobras is over-pricing jet fuel by $400 million a year. In a country that supplies 80% of its needs from its own refineries, there is no justification for an import pricing parity policy which pegs prices to the Houston market including all import costs.
Let me be clear. We are not asking for subsidies. But fuel prices must be transparent and realistic to local supply conditions. The current policy reduces the competitiveness of Brazil’s airlines. Fuel this year will be 29% of an airline’s cost. But for Brazil’s airlines it is 37%, and up to 50% for regional and cargo flights. Amending the pricing policy would boost competitiveness with at least a 9% reduction in the fuel bill. It’s time for change.
Air Traffic Management
Another area where efficiency must improve is air traffic management. The Federal Government must give more support to my good friend Brigadier Ramon Cardoso’s strong efforts to modernize Brazil’s air traffic management. I am particularly concerned about implementation of area navigation (RNAV) and performance based navigation (PBN) in Sao Paulo and Rio. Airlines have invested in avionics to support more efficient flying. But we cannot get full return on our investment until air traffic control can operate on the same technological platform. Along with speeding up the implementation, we must find a process for continuous improvement based on analysis of performance data against agreed performance targets.
Brazil must also take an approach to environment that is aligned with global developments. Airlines are committed to improving fuel efficiency by 1.5% annually to 2020, capping net emissions from 2020 with carbon-neutral growth, and cutting net emissions in half by 2050 compared to 2005 levels. Through ICAO, governments have agreed to find a global framework for economic measures. Aviation is the only industry in the world to achieve a global approach by both government and industry.
In this context Guarulhos City’s intention to levy environmental charges on airlines is counter-productive. The Federal Government must step in, ensuring that this local taxation scheme is abandoned, and continue developing policies to support global efforts. With your experience in bio-ethanol, developing sustainable biofuels for aviation is a natural area for Brazilian leadership. These must be second generation biofuels that do not compete with food crops for land or for water. TAM has conducted a test flight using jet fuel derived from jatropha. If the Brazilian government sets the fiscal and legal framework to support sustainable biofuels, Brazil could easily be a world leader.
Preparing for FIFA World Cup and the Olympics
In a few years Brazil will host the FIFA World Cup and the Olympics. Both will put an enormous strain on the air transport infrastructure. Improvements in airports and air traffic management will be a critical part of the success of these events. Along with offering IATA’s expertise to help with these preparations, we can also play a role in security/facilitation and safety.
Anybody who lands in Sao Paulo from an international flight has a very good chance of having a very bad first impression. Wait-times of up to an hour and a half at immigration and security checkpoints tell the story. The infrastructure is not ready. Time is running out for major developments. Improving the efficiency of the current infrastructure must be a priority. One simple solution is to institutionalize cooperation between airlines and ANAC, INFRAERO, customs, immigration, public health and agriculture. IATA could bring solutions including implementing global standard self-service technology with IATA’s Fast Travel program to ease congestion by moving people through the terminal more quickly, implementing e-freight to move cargo more efficiently, and mandating IOSA for all airlines flying to Brazil to give ANAC extra insight on safety.
I am a big fan of Brazil and its aviation industry. This will be my last visit to Brazil as Director General and CEO of IATA as I will retire to take on different roles in the industry - teaching and boards. At the end of June I will handover to Tony Tyler, CEO of Cathay Pacific, who I know will continue to pay special attention to this wonderful part of the world.
Aviation is important to Brazil. It drives travel and tourism, which supports 9.1% of GDP and over 8 million jobs. The President has made aviation’s competitiveness a priority for her government. I am confident that Carlos and the IATA Brazil team are fully committed to supporting change to help Brazilian aviation meet the challenges of the FIFA World Cup and the Olympics, and to drive the economy forward while growing safer, greener and more profitable.