Good morning and thanks for joining Global Media Day—especially those who have travelled from distant locations.
I have always been passionate about aviation. That kept me at Cathay Pacific for 33 challenging and exciting years. And it is a great honor from my industry colleagues to be able to move on to the job at IATA. Running an association of 240 member airlines spread around the globe is another interesting and challenging job. My experience of running an airline gives me a good perspective on what our members expect of IATA.
IATA delivers reliable services to its members, starting with our industry settlement systems which handle over $300 billion of the industry’s money each year. That gives IATA a unique role as a trade association. Our job is not just to represent our members, we work alongside them to deliver important parts of their day-to-day business.
In return, that gives IATA a unique insight which allows us to formulate and implement global standards. You are all familiar with some of our headline projects—replacing paper tickets with e-ticketing and improving safety globally with the IATA Operational Safety Audit (IOSA). Today you will get more of a flavor for this by hearing further examples from our subject matter experts. The first will be Brian Pearce, our Chief Economist.
But just before that, I wanted to take a few moments to talk generally about my vision for IATA. I hope that it will provide a framework for the other presentations of the day.
Having been an airline CEO until very recently, I know how much IATA means to running an airline; from the top priority of safety to ensuring that the money comes in every month through the financial system.
Under my watch, I want to see IATA delivering more and more value to all our members and indeed to the entire air transport industry.
With this in mind, you will notice that we are presenting ourselves in a slightly different manner. IATA’s 240 airlines represent some 84% of total traffic—international, domestic, cargo, and passenger combined.
In the spirit of looking at the industry from a holistic perspective, you might have noticed that I have been emphasizing the need for cooperation among industry players. I plan to keep up our good cooperation with the regional airline associations and to enhance our cooperation with those representing our partners in the value chain—including airports and air navigation service providers.
This is not a new concept. Cooperation is behind the industry’s superb record on safety and it is guiding our approach to climate change as well. I will certainly be a forceful advocate for airlines when that is needed—with our partners in the value chain and with governments.
But I would like to take this cooperation to a new level. We are all in the same boat. And if we speak with a strong and united voice on our many issues of common interest we stand a much better prospect of effecting change—particularly with governments that are still very involved in this business.
I was fortunate to have ended my career at Cathay Pacific by announcing that the 2010 profit was the biggest in the company’s history. I retired at the top of the cycle. Since I joined IATA, we have seen surprising strength in passenger numbers—almost against all odds. But cargo has been less fortunate. Month after month we have seen cargo markets shrink. By October, the cargo sector had contracted by 5% compared to mid-year.
But traffic is one thing…and profits are another. And what we are seeing at the global level is the combination of very differing regional situations. Europeans, facing a sovereign debt crisis and economic austerity measures, are living a very different reality from their colleagues in Asia which is buoyed by the market dynamism of China. And our colleagues in North America are managing through a sluggish economy with tight management of capacity. And of course everyone has been hit by higher fuel prices.
In September we expected a $6.9 billion profit in 2011 shrinking to $4.9 billion in 2012. A lot has happened since then. So I will call on Brian to update us on the outlook.
Thanks Brian. The outlook is certainly challenging—particularly for European airlines. Regardless of the scenario, we see the continent’s carriers falling into losses next year. The only open question is how deep they will be.
For the rest of the world, if a crisis is averted we see carriers making very weak profits. And of course, if we end up with a banking crisis and a European recession, everybody will fall into the red.
A weak financial situation is not unheard of in the airline industry. You might say that the normal state of aviation is crisis and once in a while we have a few consecutive months of benign conditions—the danger of which is that everyone from suppliers to unions to governments thinks that airlines are fat cash cows ready for milking in one way or another.
The numbers are staggering. Assuming that we are correct about our central 2012 scenario, the airline industry will have lost since 2001 over $26 billion on revenues of $5.5 trillion.
Over the last 40 years airlines are in the black but with a pitiable 0.3% margin. As I have often said, this industry is all about turnover with very little leftover.
We are more susceptible than most to global economic shifts. But there are structural issues holding the industry back as well. Some parts of the world “get-it” and have policies to support the industry’s healthy growth as an economic catalyst. Asia is a good example. During my 33 years at Cathay Pacific, along with Hong Kong, I saw Singapore, South Korea and the mainland of China, among others, use aviation as a critical part of their economic strategy.
As you can probably tell, I’m British. Although I have lived the majority of my life outside the UK, I do keep special tabs on what is going on there. And I have to say that it is disheartening—at best. The government seems focused on destroying the tradition of UK leadership in civil aviation by stopping capacity expansion at Heathrow, increasing taxes and seeking to build a high speed rail system to replace the domestic industry. I cannot help but think that in a few years, when the results of these policies become clear, people will look back and wonder how they let the UK lose what was once a great competitive advantage.
The point is that many political decisions make aviation a tougher business than it needs to be. And these decisions come with an economic cost that is felt by every business and economy dependent on connectivity.
To help demonstrate this to governments, IATA has commissioned a series of 54 studies from Oxford Economics. They quantify at a national level the jobs and economic activity that depend on aviation. We are rolling these out in cooperation with partners who are leading national campaigns to build political awareness and support for aviation policies that can drive broad economic benefits.
A couple of examples show how important aviation is:
- In the UK aviation supports 1.4 million jobs and 5% of the GDP
- In Canada it is 551,000 jobs and 2.8% of GDP
- And in South Africa it is 343,000 jobs and 3.1% of GDP
Given these numbers, and in light of the growing international economic uncertainty, governments should have comprehensive policies in place to take advantage of aviation’s connectivity. In Europe, for example, the only way out of the crisis is growth—and aviation can help.
But many governments are overlooking this and the most immediate issue that we are trying to tackle is taxation. Cash-strapped governments implementing austerity measures are seeing aviation as a soft target for new or increased taxation.
We had a recent reminder of this when the UK announced that its Air Passenger Duty (APD)—the single biggest aviation tax in the world—will be increased by 8%. It already collects GBP 2.5 billion annually. The economic damage that it is doing in Northern Ireland was enough to convince the government to reduce the long-haul rate to align with the short-haul tax.
It is incredible that the wisdom which guided the September decision in Northern Ireland has been completely forgotten so quickly. Aviation can be a cash generator for governments--but not if you strangle it with taxes that cripple traffic. It is estimated that the APD increase will cost the UK economy GBP 4 billion and 80,000 jobs by 2015. Understanding that aviation’s connectivity is the lifeblood of the global economy should lead politicians to make it as cost efficient as possible in order to reap the economic benefits that it facilitates.
I have the same message for Germany’s billion Euro air transportation tax, the copycat Austrian departure tax, and the US plans for a per-plane tax and $1.5 billion annual increase in the security fees to contribute to deficit reduction. Politicians seeking to raise money from aviation should remember the Dutch proposal of a few years ago. The government raised about EUR 300 million with a passenger departure tax. But it cost the economy EUR 1.2 billion in lost economic activity. They had the good sense to repeal it. Other governments should take note.
Cost-efficient capacity investments are another issue that we will support with the economic studies. In Asia and the Middle East, governments are building capacity as part of their economic strategy. That understanding is not repeated everywhere.
- Sao Paulo capacity constraints threaten growth
- In the UK it is a policy decision not to expand Heathrow
- In Germany the opening of a fourth runway at Frankfurt came with a restriction on night flights
In Europe, the Commission is rightly concerned about the need to expand European airport capacity. But the focus of last week’s airport package proposal was on changing the slot rules. There were some good things in the package—liberalization of ground handling and the legalization of secondary slot trading. But we are very concerned about the intention to deviate from the 80:20 calculation method for the “use-it-or-lose-it” rule to “85:15”. The global standard works perfectly well. And the proposed change has plenty of potential to penalize airlines for seasonal traffic flows and circumstances beyond their control.
Regulations to ration scarce capacity are not a substitute for building runways and terminals where they are needed.
Of course, there is a cost to any investment. In the case of aviation, it comes back to the airlines. Some governments see privatization as a solution. We are agnostic on whether a facility is government owned or in private hands. What is important is the regulatory structure, it must follow the International Civil Aviation Organization (ICAO) principles especially transparency and consultation with users.
To give you an example where things could go wrong, Brazil is planning to privatize some of its airports in an arrangement that would see the government regulator also have a role as a shareholder. To use a cliché, it is like putting the fox in charge of the hen house. We are working hard with the Brazilian authorities to avoid such a mistake.
Capacity is not just about what is on the ground. Bottlenecks in the air are also a constraint. They take various forms:
- In the Middle East, where airport capacity is expanding at breakneck speed, only 40% of the airspace is permanently open to civil aircraft
- In the US, the NextGen air traffic management system is delayed as funding for it is caught up in political wrangles
- And Europe’s Single European Sky (SES) project has the backing of the Commission, but states continue to drag their feet
Single European Sky
The latest SES progress report is a cause for deep concern. European states are not putting political muscle behind meeting their targets.
Improvements are urgently needed to current national plans to meet the 2014 targets: reducing average per flight delays to 30 seconds and improving cost efficiency by a further 2.4%. The Commission calculates that these will save over EUR 1.1 billion between 2012 and 2014. States agreed to the targets, but only five out of 27 are on track—Belgium, Denmark, Lithuania, Luxemburg and the Netherlands. Furthest behind are Austria, France, Germany, Spain and the UK.
The performance is even worse on Functional Airspace Blocks (FABs). Nine are meant to be in place by end-2012. Only one (Denmark/Sweden) is on track.
SESAR, the technology arm of the SES, poses additional risks. It is essential that the airline community has a pivotal role for all key decisions on investments. And the staggering EUR 11 billion needed for airborne investments by 2020 must be secured against long awaited improvements in the performance of the ground system. Otherwise, nothing will change – airlines will just pay more for no benefits.
The SES will deliver real value to the European economy—delivering needed airspace capacity, improving safety tenfold, reducing aviation’s environmental impact by 10%, and cutting air traffic management costs in half. European governments cannot afford to fail, not least at the first hurdle. It would be another blow to the fragile air transport sector and the European economy.
The next six months will indeed determine whether there is real commitment across European governments to deliver the SES. If this fails, the Commission must drive a top-down approach for Europe.
The Benefits of Aviation studies also have a role in our approach to the environment. As you know, the entire aviation value chain is 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. Later today you will hear from Paul Steele, our Director of Aviation Environment who is heading our delegation in Durban.
Aviation is on the right track. But we need governments to focus in two areas:
The first is sustainable biofuels. They have the potential to cut our carbon footprint by up to 80% over the lifecycle of the fuel. For airlines, sustainable biofuels are critical to achieving our climate change targets. So they are, in effect, part of our license to grow. And we need them to become a commercial reality. Some airlines are already using them in commercial flights. But they are still too expensive and too scarce. To successfully commercialize them, we need governments to:
- Foster research into new feedstock sources and refining processes;
- De-risk public and private investments in aviation biofuels;
- Provide incentives for airlines to use biofuels from an early stage;
- Encourage stakeholders to commit to robust international sustainability criteria;
- Make the most of local green growth opportunities;
- And encourage coalitions encompassing all parts of the supply chain
Supporting these measures makes economic sense—jobs in the green economy and potential economic opportunities even in the most remote location or desolate landscape.
Market Based Measures
We also need a global system for market based measures under the leadership of ICAO. This is a key pillar of our environmental strategy. At the 2010 ICAO Assembly, states agreed to 15 principles for such a system. And there is a commitment to deliver a global framework by its next Assembly in 2013.
But these efforts are being distracted by Europe’s intention to include international aviation in its misguided, unilateral and extra-territorial emissions trading scheme from 2012. The industry is concerned about the market-distorting impact this will have. But more importantly, states are seeing it as a challenge to their sovereignty. Legislation is moving through the US Congress that will prevent US carriers from participating. And recently 26 states led a challenge through ICAO that saw the adoption of a Council resolution opposing Europe’s actions.
Europe is trying to window-dress the issue by saying that it will accept equivalent measures—to be defined on a case-by-case basis. This would open the door for duplicative, layered and competing taxes and measures. And this would be unacceptable.
Europe should accept credit for raising the issue of aviation and the environment on the global political agenda. Now it must put its best efforts to achieving a global solution through ICAO.
IATA’s role is to deliver solutions. And we have a unique ability to drive global innovation. I would like to close my comments by updating you on three areas where we are doing this:
- Simplifying the Business
- And Safety
Simplifying the Business
You are all familiar with our Simplifying the Business—or StB—program. If you have flown here, the e-ticket that you used is one of its main success stories along with bar coded boarding passes, self-service check-in kiosks at airports, web check-in and so on.
StB is not finished. One of our main focuses is on Fast Travel which uses the e-ticket, bar coded boarding pass and kiosk technology as enablers for self-service options for check-in, baggage tagging, document check, flight rebooking, boarding, and baggage recovery. Working with their home airports, six airlines have completed implementation of all six elements: Scandinavian at Copenhagen, British Airways at London Gatwick, Air New Zealand at Auckland, Lufthansa at both Munich and Frankfurt, Etihad at Abu Dhabi and Air China in Beijing. Many more are in progress.
At our recent board meeting, we received the endorsement for an important project on distribution.
Current global distribution systems do not have the capability to differentiate our products. They display seats as a commoditized product sorted by time, class and cost. There is no way to tell for example if the business class seat is a fully flat bed or a traditional recliner. We have undertaken to develop standards for a global distribution alternative that would allow airlines to make their full range of products available through all channels…and one that will enable personalized offers based on passenger data. This could have the same revolutionary potential as e-ticketing did to enable further innovations in the travel experience. Eric Leopold, our Global Head of Passenger will update you on this later this afternoon.
Our Board also reaffirmed the e-freight target of 100% implementation by 2015. We expect to finish the year at 9.1% on enabled trade lanes. Implementing e-freight requires value chain cooperation. We are building momentum for this through the Global Air Cargo Advisory Group—newly formed to unite airlines and forwarders.
In 2012 we will focus on the e-air waybill. This is critical component of e-freight that can be implemented by airlines—both Cathay Pacific and Emirates have achieved 100% e-air waybill in their home markets. Our target is 15% global penetration by the end of the year. This should stimulate demand for e-freight capabilities as we move towards 100% in 2015. Des Vertannes, our Global Head of Cargo will give you an update this afternoon.
Closely linked to StB is our passenger security priority to deliver innovation with a Checkpoint of the Future.
If there is one area that I want to make a difference in during my time at IATA, it is passenger security. I inherited a great project from my predecessor—Checkpoint of the Future. Aviation is more secure than in 2001, but at great expense and with far too much hassle. For the $7.4 billion that airlines spend annually on security, the process should be better for our customers.
I am championing Checkpoint of the Future to modernize airport screening. Ken Dunlap, our Global Head of Security and Travel Facilitation, will provide details later this morning. So I will keep it simple.
First we want to take a risk-based approach and differentiate passengers based on how much we know about them. We are not asking for more information—only to use what is already collected to support border control needs at the security check. But we would like to provide an option for passengers to voluntarily provide additional information to have their security process expedited. Already this is being trialed in the US with known traveler programs. So this part of the Checkpoint is a near-term solution.
Technology could take longer—seven to ten years—to enable passengers to be screened without stopping, unpacking or disrobing.
I’m excited that our concept is receiving strong support from the likes of the European Commission, the US Transportation Security Administration and Department of Homeland Security, and INTERPOL which have joined more than a dozen states in signing a statement of principles for the concept. The latest state to support the checkpoint concept is China which, as you can appreciate, is very significant.
And, saving the most important for last, safety. Safety is the top priority for anybody in the aviation business. The hull loss rate for Western-built jet aircraft is at an historic low with one accident for every 2.9 million flights across the industry over the first 11 months of the year.
As you know, to be an IATA member an airline must complete the IATA Operational Safety Audit (IOSA). Globally IOSA carriers had an accident rate that was 55% better than those not on the registry. Later in the day, Guenther Matschnigg, our Senior Vice President, Safety, Operations and Infrastructure will discuss how we are innovating IOSA into an even stronger program and how we are moving forward with the IATA Safety Audit for Ground Operations (ISAGO).
The other main focus of our efforts is on using data to drive safety initiatives. The IATA Global Safety Information Center has over 500 organizations contributing to six databases in the online center. By analyzing that data we are able to focus our efforts on the critical safety issues and develop mitigation measures.
Brian and I have covered a lot of ground. Before we open for questions, I want to re-emphasize the regional differences in our outlook. Europe is clearly going through a difficult time. And the overall picture of an industry making 1.2% margin this year and less than 1% in 2012 is certainly far from healthy. But there are some positives in that capacity is being managed well by individual airlines. Asset utilization is high. Even with the poor financial performance, a lot of innovation continues in the market place. And safety, security and environmental performance get our top attention.
If we are faced with a banking crisis that leads to a European recession in 2012, deep losses are almost certain. And there is also no doubt that even the best case scenario sees a tougher 2012. But airlines are resilient. The last decade has built an industry that is very experienced in dealing with crises, shocks, downturns and twists of events.
Of course, this would all be made a lot easier if government decisions on the industry were made with the knowledge of their impact on the overall economy. So you can expect us to remind policy makers frequently and forcefully of the enormous economic benefits that we bring, to ward-off counter-productive taxes and bad regulation.
I look forward to your questions.