Good morning. It’s a pleasure to be attending my first IATA FIDAE Wings of Change conference and my first FIDAE Air Show. I am honored to be leading off an event with so many distinguished speakers and guests, none more so than Roberto Kobeh González, President of the Council of the International Civil Aviation Organization (ICAO). Roberto, we are looking forward to your remarks later this morning.
I’d also like to take the opportunity to thank the President of Chile, His Excellency Mr. Sebastián Piñera for all of his support for this event as well as the Minister of Defense Mr. Andrés Allamand and General Jaime Alarcón Pérez, Director General of Civil Aviation.
Santiago and FIDAE provide a wonderful venue to bring together the aviation community in the Latin America/Caribbean region—or LATAM as I will refer to it today. Over the dozen years that we have produced Wings of Change, the progress in the region has been truly remarkable. We come here with a shared interest in a successful future for aviation in Latin America. The next two days are an opportunity to turn common interest into common commitments to tackle the most pressing issues in the region.
State of the Industry
Let’s begin the discussion by looking at the state of global aviation.
Last week, IATA downgraded its industry profit forecast from $3.5 billion to $3.0 billion. For an industry that generates revenues of $633 billion, that is a 0.5% net profit margin.
The biggest global risk that we face today is the price of fuel. The consensus forecast sees Brent crude averaging $115 per barrel in 2012. At that price, fuel is expected to account for 34% of average airline operating costs. This is a conservative estimate as already Brent is trading at well-over $120.
The bottom-line impact of this is being moderated by some positive factors. We are seeing a global sigh of relief that Europe seems to have averted a financial meltdown—at least for now. There is some optimism that freight markets have stabilized, albeit at low levels. We could even see an uptick in the second half. And airlines, particularly in North America, have proven very capable of matching capacity to demand—giving rise to increasing load factors and some yield improvement.
At the regional level, we see the LATAM industry making a $100 million profit. This would make it the only region with four consecutive years of profit. Moreover it topped industry growth in 2011 with an 11.4% expansion in passenger demand.
These are good signs. But let’s not kid ourselves. The operating environment is tough. You cannot get a margin much thinner that 0.5%. Rising oil prices—or any other shock for that matter—could quickly thrust the industry back into the red.
Freedom to Succeed
With that background, how can we address the theme of Freedom to Succeed?
Success among airlines is anything but guaranteed. If our 2012 forecast is correct, airlines will deliver collective losses of $26 billion on $5.5 trillion in revenues since 2001. Spanair and Malev are the latest large airlines to fail. And even India—a big market with enormous potential—is making huge losses.
The freedom to succeed depends on having the right conditions in place to support competitive sustainable businesses. Many of the necessary conditions are beyond the control of the airlines or the industry. And most require that industry and government to work together with a common vision and purpose.
The common purpose is clear. Airlines are important drivers of jobs and economic activity. Governments, entrusted with safeguarding the well-being of their citizens, should have a huge interest in ensuring that aviation has the conditions for success.
The numbers bear this out. Last week, the Air Transport Action Group (ATAG) released an Oxford Economics study showing that aviation is responsible for 56.7 million jobs and $2.2 trillion of global economic activity. In the LATAM region it is more than 4.6 million jobs and $107 billion in GDP.
This could be much more. Americans travel an average of 1.8 times a year. Among the large economies in the region, Chile has the region’s highest propensity to travel. But it is still at 0.7 trips per year. That tells me that there is plenty of scope for the industry to grow and continue to stimulate economic activity around the region. But to do so, we must work closely together as an industry and with governments on an agenda focused on:
- Infrastructure and
Safety is the top priority. We must be safe to be sustainable. The good news is that 2011 was the safest in the history of aviation. 2.8 billion people flew safely on 38 million flights. Looking specifically at western-built jets—the most common measure of safety—we had 11 hull losses. That’s one hull loss for every 2.7 million flights which is a 39% improvement on 2010.
Unfortunately, the picture is not as bright when we look at this region where we had one hull loss for every 780,000 flights. This is a 32% improvement on 2010, but still 3.5 times the world average. Looked at another way, LATAM traffic is 6% of the global total but it accounted for 27% of jet hull losses.
LATAM safety improvements have been significant. But an accident rate hovering at several times the global average is not sustainable. If the region continues to grow at 11.4% with a similar accident rate what will happen in six years? A major hull loss will be on newspaper front pages every eight weeks. That is not sustainable. Who would fly?
Of course, long before it would get to that level, regulators will likely have taken action to curb aviation’s growth and we will have squandered a tremendous opportunity—to the detriment of the entire region.
If Latin American aviation is to continue to deliver on its immense promise, safety must be addressed as a community working in partnership with government and based on global standards.
One example is the IATA Operational Safety Audit (IOSA), which is a condition for membership in both IATA and the Latin American and Caribbean Air Transport Association (ALTA). The accident rate for non-IOSA carriers in LatAm is five times worse than for airlines on the IOSA registry. Chile, Brazil, Costa Rica, Mexico and Panama recognize this and have incorporated IOSA into their safety oversight. Peru is expected to follow in 2014. But why aren’t all Latin American governments doing the same. It can only help.
Similarly, the IATA Safety Audit for Ground Operations is improving safety and helping reduce the $4 billion annual cost of ground damage. Eleven airports and four safety regulators in the region—including DGAC Chile--have given their formal support. COPA, TACA, GOL and LAN are part of the audit pool with others expected to join shortly.
Along with global standards, we need data to identify emerging safety trends and take action to mitigate risks. IATA and ALTA are working hand-in-hand, having signed an agreement so that ALTA members can contribute to and benefit from IATA’s Global Safety Information Center (GSIC). This helps to identify opportunities for improvement, promote the exchange of best practices and provide the ability for airlines to benchmark against the rest of the industry. The goal is to reach levels of safety that will bring the region in line with the United States and Europe.
Security is another foundation stone for sustainable success, no less critical than safety. A decade after the tragic events of 9.11, we are much more secure but perhaps not equally wiser in the way that we accomplish passenger security. Does the security experience of long lines—which is a particular issue at several large hub airports in Latin America—plus unpacking, disrobing and often intrusive checks, need to be that way? During my time at IATA one of my priorities is to evolve this with a Checkpoint of the Future. This rests on two pillars. The first is to differentiate screening using passenger information that is already being collected for immigration purposes. Then we combine this with technology that allows passengers to walk through checkpoints without stopping, disrobing or unpacking.
We have support from major stakeholders such as the European Commission, the Chinese Government, the US Department of Homeland Security and Interpol. Moreover 16 countries have endorsed a statement of principles for such a checkpoint. Twelve of these countries are located in the LATAM region, which makes it the clear leader. Of course, moving a global system along will take some time. Governments here and elsewhere must be willing to take these concepts from the drawing board to the airport terminal. But I am convinced that we are off to a running start to improving both the experience and effectiveness of airport security.
Although the pace is slow, we also are making progress with passenger and cargo data exchange. As with safety, security needs global standards. Many of the LATAM programs for passenger and cargo data require non-standardized data exchange methods in large part owing to IT infrastructure issues. Most of the requirements cannot be supported by airlines. And even if they could, the system would be unnecessarily inefficient, and not in harmony with the rest of the world. IATA is working to educate authorities on the need for change and providing alternatives.
Sustainable success is also highly dependent on adequate airport and air traffic management infrastructure. I have big concerns about LATAM, where we see infrastructure deficiencies in many countries.
The World Economic Forum’s 2011 Travel and Tourism Competitiveness Report of 139 countries is a good benchmark. Of the region’s largest economies, Chile ranks 26 in quality of air transport infrastructure. Mexico is 65, Brazil ranks 93 and Argentina stands at 115. My intention is not to single out these countries, but to demonstrate a challenge. Bottlenecks created from neglect and underinvestment will choke future growth. But I do not see urgency among governments to deliver holistic solutions.
IATA and ALTA are working hand-in-hand on this issue as well. In fact we have made it a priority for more intense joint efforts. My colleague, ALTA Executive Director Alex de Gunten will address this topic in detail later on. In advance of that, I would like to share a few thoughts on three priorities:
- Brazil’s airport privatization
- Air traffic management priorities.
- Taxes, charges and cost competitiveness
I will start with Brazil. Ahead of hosting major world events such as the FIFA World Cup and the Olympics, Brazil has recognized that its infrastructure needs a major upgrade. More broadly than that, of course, is the negative impact of poor infrastructure on economic growth.
The most urgent critical issues are at Sao Paulo Guarulhos—Brazil’s main international gateway. IATA is working on 20 quick-win solutions to provide relief. But a sustainable long-term solution for Guarulhos will require more than this.
The government recognized that the private sector could be a vehicle to deliver the improvements faster and more efficiently. The opportunity generated a lot of interest. I am sure that every airline serving Brazil watched with some apprehension as the winning bids for Guarulhos, Viracopos and Brasilia reached BRL 24.5 billion—five times the minimum bid.
Now we must ensure that the investors realize their long-term interests with a business model that supports volume growth with (1) a competitive charging structure and (2) an investment plan ensuring the availability of sufficient quality capacity.
The role of the regulator is key—making independent decisions that take into consideration the long-term interests of economic growth facilitated by aviation. In this case, the regulator is also a shareholder. So it will be a difficult task. I trust that the government will keep close watch as the process unfolds. I will personally follow this issue.
Air Traffic Management
Infrastructure on the ground is only useful if it is connected by efficient air traffic management.
As with any complex system, the devil is in the details. And route-by-route, procedure-by-procedure improvements are a key area of our work with governments and authorities. Working for better coordination between Buenos Aires and Montevideo, or modernizing air traffic procedures at Bogota are two examples.
On a much broader scale I see two priorities:
- First, we need to open up more airspace that is restricted for military use. Progress in Brazil and Argentina is not being matched in Colombia and Mexico which are moving ahead at a disappointing rate.
- Second, we need to use modern aircraft capabilities much more intensely by introducing performance-based navigation. Over the last seven years progress has been impressive, particularly in Peru and Chile. The top priority now is implementation at key airports in Argentina, Guatemala and Colombia.
Taxes, Charges and Cost-Competitiveness
Of course, infrastructure come with a cost—and it is airlines that get the bill. So, globally, we are keenly interested in cost efficiency. And the competitiveness of the sector must also take into account the tax burden.
Compared to Asia Pacific, where I lived for more than 30 years and where most governments look to enhance competitiveness with their tax regimes and infrastructure charges, LATAM is a “shocker” as the Americans might say.
- In key tourism countries such as Costa Rica, Nicaragua and the Caribbean, tourism taxes discourage visitors with high costs.
- Import parity pricing schemes for fuel makes it far more expensive than it needs to be in Chile, Brazil and the Dominican Republic.
- Quito, Cost Rica, Curacao and Nassau massively increased airport charges following airport privatizations—and often without the promised investment for improvements.
At least $4 billion is collected from airlines and their customers around the region. There is very little transparency on what happens to that money. But a best guess is that less than a third stays within the sector.
The World Economic Forum report ranks the competitiveness of countries based on ticket taxes and airport charges. Panama ranks relatively high at 23. But the rankings of the main economies demonstrate the problem. Chile is 56, Mexico 96, Brazil 97, Argentina 121, Colombia 122. And the Dominican Republic, dependant on tourism, ranked nearly last at 132 of 139 countries in the survey.
LATAM has worked hard to improve its overall competitiveness. Taxes and charges should not hold its success to ransom and compromise aviation’s ability to support and grow the $107 billion in regional GDP dependant on air connectivity.
Lastly, I would like to explore the issue of climate change. Our license to grow and fulfill the global demand for connectivity is contingent upon environmental responsibility and sustainability. To do that, aviation must address its environmental impact. Airlines, airports, air navigation service providers (ANSPs) and manufacturers have made three sequential commitments:
- Improving aircraft fuel efficiency by 1.5% annually to 2020
- Capping net CO2 emissions from 2020 with carbon-neutral growth
- Cutting net carbon emissions from air transport in half by 2050 compared to 2005
We will achieve this with a four-pillar strategy that includes investment in new technology such as biofuels; savings from operational improvements, and more efficient airport and air traffic management infrastructure. Aviation is doing its part, leading the campaign to test and certify drop-in biofuels as a replacement to conventional jet fuel. Sustainable biofuels have the potential to cut aviation’s carbon footprint by up to 80%. They don’t compete with food crops for land or water. We are seeing important progress in this region:
- Aeromexico and LAN have both completed biofuel flights.
- In Chile, LAN, IATA and ALTA are working actively on creating a Biofuel Roadmap to encourage the development of alternative fuels.
- Biofuel programs are also underway in Brazil and Mexico
A sustainable biofuels industry requires government policy initiatives that will attract investment and de-risk the scaling-up of production.
The fourth pillar of the industry’s emissions strategy is the introduction of market-based measures such as emissions trading. The aviation industry recognizes that such economic measures are a necessary--if temporary--bridge to enable it to meet its environmental targets. But, it is absolutely critical that such measures are agreed upon in a global approach under the leadership of ICAO.
Unfortunately, Europe has chosen a go-it-alone regional approach with the inclusion of international aviation in the EU Emissions Trading Scheme from this year. This is driving discord at a time when we need harmony. Why? Because non-European states see the intention to tax non-EU airlines for emissions over non-EU territory as an attack on their sovereignty.
Representatives of 24 nations met in Moscow last month to discuss counter-measures. They issued a declaration urging a global solution through ICAO and outlining possible actions if Europe continues on its unilateral and extra-territorial path.
No one wants a trade war. But the prospects are growing more likely. We already are hearing reports of retaliatory measures.
There is a solution. And that is ICAO—where global standards and solutions for air transport are made. The EU deserves full credit for bringing the emissions issue to the front and center of the global aviation agenda. And I believe that recent indications coming from Europe point toward their understanding that a global agreement through ICAO is the way forward. Now it is time for Europe to sincerely take a stake in making the discussions and decisions at ICAO a success.
I chose these words very carefully because, if I understand the international mood correctly, non-European states are looking for some proof of Europe’s sincerity. That will mean doing more than simply reiterating its determination to implement its scheme even as it professes to support a negotiated agreement through the ICAO process.
Yesterday, at the invitation of the President of CLAC, Mr. Luis Rodrigues, General Jaime Alarcón, Chile’s Director General for Civil Aviation hosted an important high level dialogue between airline CEOs and Directors of Civil Aviation from Latin America. This productive meeting was a clear step in the right direction towards making some of the much needed progress on the issues I have addressed this morning.
The future is bright for Latin American aviation. The rising middle class will support strong traffic growth. Increasing demand for consumer goods is great news for the cargo business. The aviation transformation over the last decade is impressive. Airline leaders have taken a cutting-edge approach to cross-border ownership while multi-national brands have created a broad platform for network development. And the merger of LAN and TAM will make a mega-carrier with global clout.
Now, governments in the region need to do their part by working with all stakeholders in the areas of safety, security, infrastructure, charges and the environment to ensure that the freedom to succeed is not an empty phrase. IATA is a willing and able partner in this effort.
Aviation is a force for good in the world. It connects people to markets, reunites families and enables journeys of discovery. With the freedom to succeed and an environment in which success is sustainable, the sky is no limit. And the benefits will be shared by all.