It is a pleasure to address this important event. One of the things I am enjoying most about my job at IATA is the opportunity to see new places, and I am particularly pleased to be making my first trip to Warsaw.
My experience—an inaugural visit to a new destination—is repeated millions of times each year by air travelers, who walk down a boarding bridge into an unfamiliar city, country or continent. Many take that first step for granted, forgetting or never thinking about the fact that for almost all of our existence on this planet long-distance travel was neither very safe nor swift, nor comfortable. It has become all of these things only with the invention of the commercial air transport industry 98 years ago when Tony Jannus made the first recorded scheduled passenger airline flight in 1914. In a remarkably short period, air travel quickly surpassed all other modes of transport as the safest in the world to become a routine event in the lives of billions of people. Few outside our industry understand the immense effort it has taken to achieve this amazing success story.
You have probably realized by now that I am a very strong advocate for aviation. I believe that it is a force for good in the world. It connects people and trade to markets, reunites families and friends, and enables journeys of discovery. The value that aviation creates far exceeds the columns of numbers found on the industry’s profit and loss statement. Yet it is here that we must begin our discussion in order to understand the fundamental challenges to aviation’s ability to be sustainable, and to enable the connectivity that creates new opportunities in trade and tourism.
We expect airlines to make $3.0 billion this year on revenues of $633 billion. If you do the maths that means we will achieve a puny 0.5% profit margin on revenue growth of 5.9% and traffic growth of 3.6%.
The biggest obstacle to a better financial performance is the price of oil. The consensus forecast sees Brent crude averaging $115 per barrel in 2012, up from $111 last year. That $4 swing will add some $36 billion to our operating costs. Oil prices have now remained above $100 a barrel for 14 months. This is something new for aviation. The previous spike, in 2008, saw oil prices rise from $90 a barrel at the beginning of the year to peak at $147 in late July. But by November, they had collapsed to under $50 per barrel.
The bottom-line impact of this rise in fuel is being moderated by some positive factors. Europe seems to have averted a financial meltdown, although we are seeing the UK and Spain falling back into recession. Additionally, it appears that freight markets have stabilized, albeit at low levels. And our most recent traffic numbers show that capacity is growing at a slower rate than demand, leading to rising load factors and some yield improvement, although it is insufficient to recoup the high price of fuel, and airlines risk losing a portion of price-sensitive discretionary traffic.
Returning to Europe’s prospects for 2012, IATA foresees a very difficult period, with annual losses of at least $600 million for the continent’s airlines. The challenges facing European carriers were starkly illustrated by the demise of Malev and Spanair at the beginning of the year.
These events, however, cannot diminish the immense wealth that aviation collectively brings to the world. In March, the Air Transport Action Group released a study conducted by Oxford Economics showing that aviation supports 56.6 million jobs around the globe, including 8.4 million direct jobs and $2.2 trillion of economic activity, representing 3.5% of global GDP. If air transport were a country, it would rank 20th in terms of GDP.
And this brings me nicely to our discussion today—the development of aviation in Poland. I understand that we have representatives from across Central Europe; nevertheless in deference to our host I would like to focus on aviation’s contribution here.
Aviation plays a major role in Poland, according to Oxford Economics. It contributes 6.8 billion Zloty or 0.5% of GDP and supports 65,000 jobs. A further 1.6 billion Zloty and 19,000 jobs are added through the catalytic benefits of tourism. These are highly productive jobs. On average, air transport employees on a per capita basis generate more than two times the Gross Value Added (GVA) of that generated by the total workforce. Aviation connects Poland to major centers of population and commerce. More than 96,000 scheduled international flights depart Poland annually destined for 113 airports in 39 counties.
But aviation confronts steep financial and structural hurdles globally and within Europe. Financially, the airline industry does not cover its cost of capital. In fact, our losses as an industry since 2001 total nearly US$26 billion. No private sector business that cannot generate a satisfactory return to lenders and investors can sustain itself over the long-term. Structurally, aviation’s ability to be a catalyst for economic growth is to a large extent dependent on things outside the industry’s direct control. In my remaining time, I would like to focus on factors that are critical to enabling aviation to achieve its full potential to drive value and job creation:
- Regulation & taxes
I spent most of my airline career in Asia, where governments use aviation as a powerful enabler of trade and connectivity. Coming to Europe has been an eye opener for me because I see many governments taking the opposite approach—treating aviation as a chicken to be plucked rather than as a powerful draught horse yoked to the economy to help drive it forward. Starting at the top with the European Commission, the approach can be summed up best as tax, regulate and restrict, regardless of whether more regulations or restrictions are required and whether more taxes can be justified or tolerated.
Some member states appear to be following the EC’s example, which punishes the local economy and sends tourism dollars elsewhere to countries that take a more proactive and partnership approach:
- The UK refuses to support the general economy by building a much-needed third runway at Heathrow.
- A court upholds a ban on nighttime flying at Frankfurt that will do huge damage to those businesses that rely on a just-in-time business model.
An example of needless regulation is the tinkering with well-established rules for slot allocation in the Commission’s Airports Package proposal. Liberalizing ground handling and formalizing secondary slot trading is positive and we support it. But changing the 80:20 use-it-or-lose-it rule to 85:15 will force airlines to fly empty planes at the expense of both competitiveness and environmental good sense. The package has other examples of unnecessary local changes when the global system works well.
The strong attendance today—including the attendance of the Minister of Transport, Construction and Maritime Economy Slawonir Nowak is an indication that Poland sees aviation as an important driver of the economy. And we are eager to work in partnership with the government to build a strong foundation for aviation to deliver even greater economic benefits. But of course we can only improve if we are forthright in discussing what is going well—and what we believe could be better.
One of the things we need to discuss is the question of slot regulation at Polish airports. Of course we understand the need for special measures during the European Football Championship. But before Level 3 co-ordination is extended beyond that, as the authorities here plan, let’s look together at the numbers and the schedules and make sure that it’s really necessary to adopt these procedures. And let’s not do it unless it’s necessary. We can do this in the spirit of “working together”, the theme of today’s gathering.
Cost-efficient infrastructure is vital to airlines being able to fuel economic growth. Said another way, high infrastructure charges inevitably raise the cost of transport and reduce a country’s competitiveness. The Polish government understands this and we are working together to make Poland more cost-competitive and thus more attractive to businesses and tourism. With that in mind, the Polish Airports Authority (PPL) needs to eliminate discriminatory volume discounts and differential charges for domestic and international passengers.
I know the government is also aware of industry concerns regarding the price of jet fuel at Warsaw, which is among the highest in Europe. There are two primary issues:
- Revisions to the Goods and Services Tax Act that have resulted in some airlines not being exempt from value added tax on fuel purchases for international flights, which is contrary to International Civil Aviation Organization (ICAO) policies. We welcome the support of Poland’s Air Transport Department in addressing this matter.
- The monopoly position of the fuel supplier and the lack of cost transparency of fuel facilities and services.
In some very good news, The PPL recently agreed to create a centralized fuel infrastructure at Warsaw, opening the possibility for new fuel suppliers and creating greater transparency for fuel infrastructure charges. In a separate development, a second supplier obtained access to the jet fuel market in April. Now we need to ensure that they can start doing business quickly and with supply capacity that will make it a credible competitor. With the support of the airlines concerned, IATA will continue to assist PPL and its efforts to open up the market for competition and lower fuel prices.
Air Traffic Management
Turning to air traffic management infrastructure, we are pleased at the 0.2% reduction to the Polish en route Air Navigation Service (ANS) charges and the 32% reduction to the terminal navigation charge this year.
There is, however, a story behind the numbers. These reductions are mainly the result of a significant reallocation of costs from the terminal navigation charges to the en route cost base, assisted by a traffic forecast significantly higher than the European average.
Going forward there are some challenges that will need to be managed. As a result of the cost-reallocation the Polish en route cost base has actually increased at three times the European average. And the Polish ANS National Performance Plan for a 6.7% cost efficiency improvement in the 2012 to 2014 period falls short of the EC target of a 10.1% improvement for the period.
Airlines are under constant pressure to reduce expenses and increase efficiency. We therefore look to our air navigation service providers and their regulators to control costs and ensure this service is provided as cost-effectively as possible. We are all in this together.
There is room for air transport to help improve Poland’s competitiveness. According to the World Economic Forum’s 2011 Travel and Tourism Competitiveness Report, Poland ranks 108 in the quality of its air transport infrastructure and 47th in ticket taxes and airport charges.
I believe that this is limiting the growth of air traffic—and by consequence seeing some economic opportunities going unused. In 2009 there were 18 million air travelers in Poland. This accounts for just 2% of the total European market. Moreover, despite having some very strong tourism destinations such as Krakow to attract visitors, only 5% arrive by air. If we can achieve a common vision to further improving the environment for air transport to do business here, I am convinced that the future prospects for Polish aviation are indeed very bright.
Industry and government have a long history of working together on the top priority which is always safety. It is a template for alignment that produces positive results.
2011 was the safest year 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.
This remarkable achievement is a tribute to the entire stakeholder community—airlines and original equipment manufacturers as well as airports, air navigation service providers (ANSPs) and safety regulators. All work together to make the skies safer.
We must not, however, be lulled into complacency by our success. Instead we must increase our efforts, working together as a community and in partnership with governments. Global standards should be the backbone of this effort, such as the IATA Operational Safety Audit (IOSA), which is a requirement for membership in IATA. The global accident rate for non-IOSA carriers is more than twice as high as the IOSA rate, which tells us that such standards work far more effectively than simply banning carriers through a blacklist.
Similarly, the IATA Safety Audit for Ground Operations (ISAGO) is improving ramp safety and helping reduce the billions in annual costs attributed to ground damage. Poland’s aviation stakeholders are giving strong support to ISAGO. LOT Polish Airlines joined the audit pool at the start of the program and has played an active role, performing 15 audits to date. Three ground service providers here are ISAGO registered. Furthermore, Poland is a member of the European Civil Aviation Conference, which officially endorsed ISAGO. However, formal support from the Civil Aviation Authority would be very welcome, particularly given that LOT accepts ISAGO reports in lieu of its own Ground Service Provider audits.
Security is the other area where industry and governments need to cooperate. Only last week we were reminded that aviation remains a target for terrorism. A sustainable future for aviation depends on airport security that is effective, efficient and convenient. The security regime we have in place today is keeping flying secure. But it could do better on the customer experience—specifically efficiency and convenience. For too many travelers, the most “memorable” part of the journey is long lines, packing and unpacking of carry-ons, removing items of clothing and occasional intrusive searches. It does not have 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. I am confident that, with this support, we will see significant positive changes in security in the near term.
Aviation also must remain united in its global approach to managing emissions. Airlines, airports, ANSPs and manufacturers recently reiterated their commitment to improve fuel efficiency by 1.5% annually to 2020; achieve carbon-neutral growth from 2020; and cut net emissions in half by 2050 compared to 2005 levels. Governments are important partners in meeting these targets. They must implement policy measures that de-risk investment in sustainable biofuels, unlocking their potential to reduce aviation’s carbon footprint by up to 80%. And they must agree on a global approach to positive economic measures through ICAO.
Progress on this latter point is being held back by the global backlash against the extra-territorial inclusion of aviation in the EU Emissions Trading Scheme (ETS). Over 20 non-European states are opposed to this. And important trading partners for Poland, including China, India, Russia and the US have or are taking measures to block their carrier’s participation in the scheme.
Nobody wants a trade war. ICAO offers a process to reach the global consensus that all parties desire. Even the European Commission has said that a global approach is preferable to its regional scheme. Success in achieving that depends on European states being sincerely engaged.
The frequent and robust reiteration by the EU Directorate General for Climate Action that nothing can be done to defer or amend the European scheme is not helpful. Europe’s trading partners are looking for signals that it is prepared to find solutions with the international community beyond its current plans in an agreement through the ICAO process.
Taking a step back, the ETS impasse highlights the need to keep our agenda with governments balanced and practical. In this regard, Poland deserves credit for being a voice for moderation and realistic goal setting on environmental issues.
And indeed, while there are issues in Poland which must be addressed, I must commend the Polish government for engaging the industry to find solutions.
The future of aviation in Poland and broader Central Europe is very bright. In contrast to much of the continent, Poland has enjoyed healthy economic growth of 3% to 4% over the past few years, driven by a pro-growth business environment. An aggressive program of airport infrastructure investment means the country is preparing to accommodate anticipated traffic growth.
IATA stands ready to assist as the discussion moves forward over whether to upgrade and expand Warsaw airport or to build a new Central Poland airport. With the further development of the market will come greater opportunities for airlines. Flexibility and the ability to adapt to changing market conditions will be crucial to achieving sustained success.
Working together, we will ensure that the second century of commercial air transport is as successful as the first.