Good afternoon ladies and gentlemen.
I am pleased to be with you in Tokyo today. One of my early assignments at Cathay Pacific was in our Osaka office. That was in 1984. I enjoyed my time in Japan immensely. And since then I have been a frequent visitor.
My last visit was on 17 March last year. I, along with the rest of the world, was deeply moved by the stoic response of people in Japan to the unprecedented scale of events that unfolded a few hundred kilometers north of Tokyo. I was into my last weeks at Cathay Pacific and wanted to come and show the support and commitment of the organization to our employees here. Just over 18 months later, many issues remain and there is still much work to do, particularly in the Tohoku area. But I am pleased to find unchanged the charm that makes Japan such a special place.
As you might have already picked-up, I am a Japan optimist. And as you know, that view was shared by the World Economic Forum in their global competitiveness report. Earlier this month the World Economic Forum renewed Japan’s ranking among the top 10 most competitive countries in which to do business. Issues with electricity supply were noted, but innovation, sophistication in production processes and the availability of local suppliers were counted as particular strengths.
State of the Industry
That optimism comes up against some very tough business conditions, particularly with Japan’s major trading partners. The US economy continues in the doldrums. Europe has made some progress in building confidence in its ability to handle the sovereign debt crisis. But translating that into an economic recovery will take time. China’s economic growth has been moderated. And in Japan itself, as you will know better than me, the relatively robust performance of earlier this year has faded.
The state of the global air transport industry reflects these tough trading conditions. Generally, when GDP growth falls below 2.0%, airlines make a collective loss. That is about where GDP projections for 2012 stand today. Our latest industry forecast is for a $3 billion global profit on revenues of some $631 billion. That’s a 0.5% profit margin.
On the freight side of the business, traffic growth slowed continuously from mid-2010 until the end of 2011. It has stabilized, but there has been basically no growth since the beginning of the year. Purchasing managers are giving no signs of an imminent return to growth. And stiff competition in the face of weak demand is driving yields down.
It is much the same in the passenger business. Earlier this week we reported premium traffic numbers for July. Most airlines rely on premium traffic to make money. And growth in this sector, affected by weak business confidence, has slowed almost to a halt. In fact, the number of premium passengers traveling in July was 0.5% lower than in the previous year. Some of that is the influence of Ramadan, which traditionally slows down travel. But even in the robust intra-Asia market, the 8.8% year-on-year growth recorded in June fell to just 3.0% in July.
On top of slowing demand growth, we are seeing rising costs. Oil prices declined steadily over the first half of the year to a low of $89/barrel in late June. Now Brent is trading at around $115/barrel. As fuel accounts for about a third of airline costs you can certainly imagine how difficult the situation is.
The Changing Landscape of Aviation in Japan
My intention in addressing you today was not to depress you with a gloomy outlook—certainly not on the day when Japan Airlines (JAL) re-lists. I wish them well. Running an airline is a tough business. But JAL’s rehabilitation is a reminder of the resilience of the aviation industry. The government—and all involved—should be congratulated for a quick process. The challenge now is to ensure a fair and equal opportunity for all Japanese carriers to be successful.
As I said earlier, I am a Japan optimist. And in the case of aviation, these last few years have seen some of the most promising changes in Japanese air transport.
Tremendous opportunities have been created. The most profound contributor has been the introduction of new capacity in the long underserved Tokyo area. The lengthening of the second runway at Narita and increase in available slots along with the completion of a fourth runway at Haneda are fundamentally changing the Japanese aviation market. After decades of epic struggles by airlines to gain access to the Tokyo market, today Narita is struggling to utilize available capacity fully and with Haneda’s internationalization airlines have a choice (although limited to some difficult time slots).
We have also seen a gradual liberalization of market access. Recent air services agreements have facilitated new entrants to the market, increased frequencies and created opportunities for new routes to be served. The most significant early agreement was with the US in 2010. And the latest was a new agreement with China inked last month which opens up access between all points in both countries with the exception of Tokyo, Shanghai and Beijing.
The combination of capacity and liberalization has been seized by the traditional carriers. It has also facilitated the rapid development of the so-called low cost sector. It’s a misnomer because all airlines aim to be low cost. So the differentiating factors are low fares, fewer frills and point-to-point services. Market penetration in Japan for these new model carriers is still among the lowest in the world—under 10%. But there are bullish forecasts that it has the potential to grow towards 50% in the medium-term.
The development of the new model airlines in other parts of the world has provided stiff competition to the network airlines. And the network airlines responded by relentlessly working to add the value that travelers want while reducing costs. IATA has helped this process with initiatives such as Simplifying the Business where we created global standards for e-ticketing, bar coded boarding passes, and self-service options for check-in, baggage tagging, travel-document checks, boarding, flight re-booking and baggage tracing. Together we call these “Fast Travel”—an IATA program that is changing the way that people travel in Japan and around the world.
One of our biggest current projects is the development of a new distribution capability. Globally, about 60% of air travel products are distributed through travel agents. They book seats from an inventory that is made available through global distribution systems (or GDSs). These were cutting-edge technology in the 1970’s. But they are not up to speed with the capabilities of modern distribution through XML-based applications.
Airlines-- All Nippon Airways (ANA) and JAL included—offer their customers value added products such as premium meals, lounge access, various baggage options and the like. But these are difficult to purchase through travel agents because the GDSs cannot display them efficiently. Next month we will agree on the foundation for a new distribution capability that will unleash even greater innovation—cutting costs and delivering value to travelers.
Alongside innovation is a great safety culture in Japan. When the World Economic Forum highlights Japan for the sophistication of production processes, I believe that has a bearing on safety culture. All the 240 plus IATA member airlines, including those in Japan--ANA, JAL and Nippon Cargo Airlines (NCA)—have completed the IATA Operational Safety Audit (IOSA). But IOSA’s reach goes far beyond our membership. Over 380 airlines are on the IOSA registry—airlines of all types and from all parts of the world. I am sure that the new model start-up carriers share the safety traditions of the industry and of Japan. And I would encourage all of them to undergo IOSA. Complying with its 900-plus standards can only improve and strengthen safety performance. The numbers make a convincing case. In 2011, airlines on the IOSA registry performed 52% better on safety than those airlines not on the registry.
Benefits of Aviation
The Japanese aviation industry is of global significance. The domestic market is the third largest in the world. About 5.5% of global traffic is associated with Japan. And that generates about 11% of the industry’s revenues.
Japan is important to global air transport. And air transport is critical to Japan. Could this island nation have grown to be the world’s third largest economy without effective air links? The answer is no. In fact, there is no clearer example of the aviation industry being a catalyst for economic growth than Japan, where it provides vital—irreplaceable—links to global markets. But I believe that aviation could be an even more powerful force in Japan’s economy.
Hong Kong, where I have spent most of my working life, is a great example of a city that punches above its weight on the global scene because of its connectivity. With a population of seven million, Hong Kong International Airport handled about 54 million passengers. The city is a great place to meet and do business because of its strong global air links. Tokyo has a catchment area in the range of 34 million people—nearly five times the population of Hong Kong. And its airports together handled about 90 million passengers in 2011.
Obviously, the two cities are not completely comparable. However these numbers illustrate the point that air transport in Japan could play an even bigger role and that there is potential to grow.
Over the last year IATA worked with Oxford Economics to quantify the benefits that aviation brings to economies. A global study and some 58 national studies were competed---including one for Japan.
The study on Japan revealed that aviation has a significant footprint in the economy, supporting 0.7% of GDP and 429,000 jobs (about 0.7% of the workforce). If we include aviation’s contribution to tourism, then aviation can be said to support 1.0% of GDP and some 620,000 jobs (coincidentally also 1.0% of the workforce).
Those are impressive numbers. But how do they stack-up against Japan’s closest neighbor?
In the Republic of Korea (Korea), if we combine air transport and related tourism activities, we see that they support 2.2% of GDP and some 488,000 jobs—about 2.1% of the workforce. So, aviation has twice the impact on the Korean economy than it has in Japan.
It is worth spending a few minutes trying to understand why.
The World Economic Forum also does a competitiveness ranking for Travel and Tourism. In that, Japan holds the 22nd place. Japan scores very highly on the quality of regulation and infrastructure. But two areas stood out with low rankings.
The first was with respect to visa requirements. Korea ranked sixth. That puts it in the company of Malaysia, Singapore and Hong Kong when you measure the number of countries granted visa-free entry—a key enabler for a successful tourism industry. Japan ranked in 76th place—a big handicap if it is to make its ambitious target to increase inbound tourism to some nine million visitors this year.
The second was in terms of cost competitiveness. If we look at overall price competitiveness, Japan ranked at 137 out of 139 countries—almost dead last. Korea stood at 96. This is also not the most competitive but a considerably stronger showing than Japan.
If we then further isolate airport charges and ticket taxes a huge gap opens up. Japan ranks at 106 and Korea at 33. To try to understand the impact of this, we did some research on the competitiveness of Narita and Incheon for transit traffic from other Japanese cities. The majority of transfers—1.4 million people a year—use Narita. But a number equal to about a third of that flew via Incheon—not to mention the traffic that flows over other hubs in the region. So the negative impact on business is real and measurable. At a time when Narita is struggling to utilize capacity, it can ill-afford the lost business.
IATA has long been involved in discussions on the cost of infrastructure in Japan. In 2005 we reached an agreement with Narita for an 11% reduction in landing charges. That was a landmark agreement. And I believe that the result helped to prepare the airport for the eventual competition from Haneda’s internationalization. In the same spirit, further reductions on landing charges and rentals were made in 2009 until March 2011. While the rental reductions have been renewed, landing charges have been returned to the levels of the 2005 agreement, reducing Narita’s long-term competitiveness.
Kansai remains a more expensive airport than Narita despite a 9% reduction in charges some years ago.
To give some context to the high costs of infrastructure in Japan, Kansai ranks second in the world and Narita at number six with respect to airport charges, according to an independent benchmarking study by the consultants Leigh Fisher.
Of course airlines have a self interest in trying to improve the competitiveness of the infrastructure. It makes them more competitive as well. But I would argue that everyone who lives, works or does business in Japan should have an interest. Japan’s main airports are its gateway to the world. Cost-efficiently facilitating that basic connectivity will help to make all of Japan more competitive.
And the good news is that I see some opportunities for change. Narita is clearly feeling the competition from Haneda. And it is actively courting many point-to-point airlines whose business model is based on offering low fares. Their continued successful expansion will be even more dependent on low costs than the traditional network carriers. The government’s program to privatize secondary airports should have the spin-off benefit of reducing costs at other government-run airports like Haneda.
I also see some positive signs in the Kansai area. The New Kansai International Airport Company—the merged entity managing Itami and Kansai—is also focused on improving its competitiveness by reducing costs.
With all of this going on, I should hope that we can make real progress over the next years. As an initial goal, I urge Narita to reduce landing charges permanently to the discounted 2009 levels while retaining reductions on rents. And it would be great news for aviation—and the Japanese economy—if none of Japan’s airports were on the top 10 most expensive airports list by my next visit.
I would like to bring my remarks to a close with a quick update on how the aviation industry is managing the environment challenge. The aviation industry has made three sequential commitments:
- To improve fuel efficiency by an average of 1.5% annually to 2020
- To cap net emissions with carbon-neutral growth from 2020
- And to cut net emissions in half by 2050 compared to 2005 levels.
Success will be the result of improvements in technology, more efficient operations, better infrastructure and positive market based measures. We are approaching this with some very big projects. For example, JAL and ANA are among the leaders in helping to develop biofuels—with JAL having even done some tests which contributed to certification. Now we are working with governments to agree on the sustainability criteria for biofuels and develop the fiscal and legal frameworks to support successful commercialization. In parallel, the International Civil Aviation Organization (ICAO) is making progress towards defining a CO2 standard for new aircraft.
We are also making progress in small areas, an example of which we see in Japan. From 1983 Japan has required aircraft to lower their landing gear over water before landing at Narita. This is much earlier than it would normally happen. And the intention was to avoid ice falling from older model aircraft. Poorer aerodynamics with gear down increases fuel burn—the environmental cost of which was 100 million tonnes of unnecessarily emitted CO2 over the last three decades. We are working closely with the Japan Civil Aviation Bureau, and hope that this requirement will be lifted in the near future.
Unfortunately, progress on technical issues has been over-shadowed by wrangling over Europe’s plan to include aviation in its emissions trading scheme (ETS) from the beginning of this year, with airlines being required to submit emissions permits in April 2013. Europe is doing this unilaterally and applying it extra-territorially. For example they will collect monies from Japanese carries for flights to and from Europe for emissions over Japan, China, Russia—and any other country that is en-route.
Many countries have seen this as an attack on their sovereignty. About 25 countries (including Japan) have met three times (in Delhi, Moscow and Washington) to make their opposition clear. Recently, it has become evident that Europe may not be as united on the issue as its Directorate General for Climate Action might wish it to be. Four European ministers with responsibilities for Airbus, including Michael Fallon, new business minister in Britain, and Peter Hintze, the German minister in charge of aerospace policy, recognized the need for a global solution on market-based measures through the ICAO process. They called for a delay in implementation of the EU ETS to allow the ICAO process to reach such an agreement at the 2013 Assembly, now just 12 months away.
I am optimistic about the ICAO process. Technical experts at ICAO are making progress on narrowing down policy options. Lifting the threat of Europe’s unilateral action will create the space for states to reach an agreement at ICAO. And we will need to convince developing states that an agreement in the ICAO process will not prejudice their position in the “common but differentiated responsibilities” principles that guide the United Nations Framework Conference on Climate Change. It is a difficult task. There should be no doubt about that. But I believe that it is achievable. Success would be an historic milestone—not only would aviation be the first economic sector with a comprehensive global approach to climate change; it would also become the first with a worldwide agreement on market-based measures. I thank the Japanese government for their support of the industry and their determination to find a solution through ICAO.
As I conclude my remarks, I would like to once again recognize the significance of aviation to Japan. Connectivity is a key contributor to the economy—supporting jobs and growth. Many of the recent policy decisions in Japan have helped to create a platform for continued success and the opening of new opportunities for all. The innovation and determination of the people of Japan, as witnessed in the recovery from the tsunami and earthquake last year, should give us all confidence in the future.
But, let’s not compromise that future potential by failing to take measures to improve the competitiveness of the air transport infrastructure. Specifically, we need to address the cost environment at the major airports of Narita, Haneda and the New Kansai International Airport Company.
Aviation connectivity is about people doing business, products moving to markets and new opportunities being discovered. Commercial aviation has created a global community and changed the way that we work and interact with each other. With just about 100 years of history, we have only just begun to discover what a powerful force for good it can be. But its success—in Japan and around the world—rests on our dedication to the core principles of safety, security efficiency and sustainability.