Good morning. It is great to be back in Hong Kong! It’s approaching a year-and-a-half since I started this job with IATA in Geneva. It’s an interesting job. And the time has literally flown by very quickly.
This afternoon I will be meeting with Hong Kong Chief Executive CY Leung to exchange views on some key issues for IATA. I wanted to take the opportunity to also update our media friends on a few key issues.
State of the Global Industry
Let me start with a brief word on the industry’s financial performance. Our latest forecast was made in June when we held our AGM in Beijing. At that time, we saw the world’s airlines returning a global profit of $3 billion. That may sound like a healthy profit. But keep in mind that this is the outlook for a capital intensive global industry that is expected to take in about $631 billion in revenues this year. So the result is a 0.5% net margin—average on a global basis.
We will be revising our forecast next week. That will take into account
- Volatile oil prices which recently peaked at $115/barrel (Brent) after reaching a low of $89/barrel in late June.
- The complex global economic situation—with slowing growth in China, a Japanese economy that faltered after a strong start to the year, the emerging European sovereign debt crisis
- Cargo markets that are stagnating
- And weakening growth in passenger markets
It will be interesting to see how all of these factors interact. And I do hope that you will follow the announcement on Monday 1 October.
Now let’s turn to Hong Kong. Aviation is important to Hong Kong! We all know that. This is Asia’s World City because of connectivity. Hong Kong has a population of 7 million. And, as you know, last year some 54 million people used the airport and 3.9 million tonnes of cargo were transported through its facilities.
IATA commissioned a study to understand exactly what benefits aviation brings to economies around the world. One of the studies was on Hong Kong. It found that aviation alone supports 5.5% of Hong Kong’s GDP and 4.4% of Hong Kong jobs. In real values, that is HK$ 89 billion worth of business and 153,000 jobs.
But that is only the beginning. Let’s look at the business most directly impacted by aviation—tourism. Aviation and aviation-related tourism together support 8.2% of GDP and 7.3% of Hong Kong jobs. That’s about HK$133 billion of GDP and 253,000 jobs.
And then ask some questions. Would Hong Kong be a favored location for 3,500 regional offices employing 140,000 people if it were not for aviation? Could it function as a financial center without efficient air links? Could it host global events, conventions, trade shows and meetings without efficient connections?
This is a very special city. It punches well above its weight on the global stage because of its tremendous connectivity. It is a key competitive advantage. And, as a very interested observer, I would say that, for the sake of securing its future, it should do everything that it can to jealously guard that advantage.
This is particularly important in planning the third runway. Public consultations last year concluded that we need to plan for a third runway. The numbers clearly tell that story.
Projections for 2030, assuming 3.2% annual growth, would see the airport having demand from 97 million passengers. With two runways, the effective handling capacity is limited to about 74 million passengers.
We can argue about whether we can squeeze a bit more out of the current runway system. And growth forecasts are not carved in stone. Looking at the growth of the airport in recent years, it would be a very good bet that Hong Kong will reach 97 million passengers well before 2030. And the saturation point is likely around 2020.
At that point there are economic consequences. No city—Hong Kong included—can afford to turn away business. And that is what not building a third runway would effectively do. Every flight—passenger or cargo—that cannot be accommodated is a lost economic opportunity for Hong Kong. And there are plenty of other airports that will be eager for the business—along with the mainland Chinese airports, we also have likes of Incheon, Singapore, Taipei, Bangkok and others….all hungry to expand their connectivity with China.
In that light, the decision reached by the public consultations was correct. We need to move ahead, plan and build.
Of course, that is not a license to proceed without paying careful attention to sustainability. The government is rightly requiring that a full environmental impact assessment be conducted. That is under way. And it will give recommendations on how to build the runway so that it is a sustainable part of the Hong Kong economy. That will include recommendations on noise, local air quality emissions and marine ecology.
The aviation industry has a history of successfully dealing with these challenges. On noise, for example, we have new generation aircraft that are 75% quieter than a few decades ago. And that history of innovation in the face of challenges has given the industry confidence to commit to three sequential goals on carbon emissions:
- To improve fuel efficiency by an average of 1.5% annually to 2020
- To cap net emissions from 2020
- And to cut net emissions in half by 2050 compared to 2005
And if you look at the aviation industry here…the airport has a solid track record. And we can certainly see airlines—including Cathay Pacific—re-fleeting to reduce fuel burn and improve environmental performance. So we should have confidence that air transport will be able to grow sustainably in Hong Kong with the building of a third runway.
There have been calls for the airport authority to conduct a study of the Social Return On Investment (SROI) of building a third runway.
It is not needed. Hong Kong has already evaluated the costs and the benefits in the public consultation process. As I mentioned there is a commitment to build a runway that is sustainable. And an SROI study will add little, if anything, to the process.
First, SROI is premised around the concept of being able to monetize all the social costs and benefits of a project to calculate if money is well spent. Trying to do that on something as large as an airport that is central to Hong Kong’s economy is fraught with difficulties—even impossibilities—given the intangible nature of the what is being measured. Financial markets have a difficult enough time trying to do that with tangible assets—and even then can get it wrong.
Second, SROI is intended and used to measure much smaller developments—primarily the impact of community investments in the charity sector. Certainly we can measure the impact of building a park. And we may come to a conclusion that the money could be better spent elsewhere….or not at all.
But an airport is basic infrastructure. If Hong Kong needed to expand its capability to provide clean drinking water because of growing demand, would we do an SROI? It might tell us that there are advantages and disadvantages. But could any prudent government take a decision not to expand such a basic service…if it could afford to do it? Certainly not! Without a reliable water supply capable of meeting demand a city cannot function.
For Hong Kong, the airport is a basic service. Its connectivity is what has attracted people and business to this very special place. And the airport’s future success will keep Hong Kong on the map—but only if it is able to meet the growing demands for its service. That is a reality that nobody in Hong Kong can afford to ignore. Let’s keep focused on the sustainable growth of air transport to support a prosperous Hong Kong.
Having said all of that, I should also note the commitment to the Airport Authority to go above and beyond what the statutory requirements of doing the environmental impact assessment. They are now working on a carbon study and find a way to assess the social and environmental impacts of a third runway. Of course there are always pluses and minuses for any development. In the end, I am sure what is produced as a result of the study will build a better understanding of the need for a third runway. My point is that we should accept theoretical exercises for what they are….and not let them distract us from meeting the real world challenge of keeping Hong Kong connected to world…the airport an economic and social lifeline for this city…and it needs to be allowed to grow sustainably.
Lastly, I would just like to provide a brief update on an issue that has been occupying much of my time…and one which I know you are all following—that of the EU ETS.
I have already mentioned the industry’s commitment to ambitious targets to reduce emissions. No other global industry has made such commitments. We will do that with better technology and more efficient infrastructure and operations. Effective market based measures will also play a role—if only temporarily until the other solutions are fully realized.
We are making great progress in areas such as the development of sustainable biofuels. But unfortunately, that is in danger of being 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 Chinese carriers for flights to and from Europe for emissions over China, Russia—and any other country that is en-route.
Many countries have seen this as an attack on their sovereignty. About 25 countries have met three times (in Delhi, Moscow and Washington) to make their opposition clear. China has been in the forefront of opposition with a formal government policy forbidding its carriers to participate. And last weekend US legislation to do the same took a major step forward in the Senate.
Nobody wants a trade war—even the Europeans. 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, the 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 process of the International Civil Aviation Organization (ICAO). 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 Convention 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.