Thank you for such a warm welcome and timely invitation to address the Cape Town Press Club. As you are aware, in about six and a half weeks the leaders of the global aviation industry will gather in your beautiful city. The event will be the IATA Annual General Meeting (AGM) and World Air Transport Summit--graciously hosted by South African Airways.
I appreciate that for some of you, the International Air Transport Association (IATA) is not a part of your regular beat. We are the global trade association for some 240 airlines. Together they comprise about 84% of global traffic.
IATA has a longstanding presence in sub-Saharan Africa. We have over 20 members in the region. And our office in Johannesburg coordinates our activities throughout the continent.
IATA’s mission is to represent, lead and serve the airline industry. That’s a big responsibility. First, it is a sizeable industry—with $671 billion in revenues expected this year. That is garnered while safely transporting some three billion passengers and delivering nearly 50 million tonnes of freight.
The impact of this activity (including the catalytic effect of aviation on tourism) is 57 million jobs and $2.2 trillion in economic activity. Put in an African context, that’s 6.7 million jobs and $68 billion in revenues. And if we drill down to South Africa, the parallel figures are a ZAR74 billion contribution to GDP and over 350,000 jobs.
And while these numbers are impressive, the role of connectivity is even bigger….
Connectivity brings people to business, delivers products to markets and reunites families and friends. With a few kilometers of tarmac the most remote region can be connected to the global community. And that could mean access to vital sources of health care and emergency assistance; jobs selling products in global markets or welcoming tourists; or opportunities for education, exploring the world or creating business. Every flight brings with it enormous possibilities to make our world a better place and generate wealth—both material and of the human spirit.
And holding our AGM in Cape Town and in Africa is significant for many reasons, but let me highlight two:
- The political and economic reforms that we are witnessing across Africa have put the continent in the global spotlight
- South Africa, a member of the BRICS grouping, is symbolic of the emerging economies that are driving global growth—including those in the aviation industry
This will be the first time that the IATA AGM will be held on African soil since 1991 in Nairobi.
In advance of that, I appreciate the opportunity to familiarize you with some of the industry’s main issues which will be in the spotlight here in June. There are a lot of them, so I will be selective…and discuss just three:
- Financial performance
Aviation is a tough business. This year we estimate that airlines will turn a combined profit of some $10.6 billion. That sounds like a lot. But as you will recall from my earlier comment, that is on expected revenues of $671 billion. So, it’s a net profit margin of just 1.6%. And this is a relatively good year. If we look back over the decade since 2003, airlines have basically broken even on revenues of some $5 trillion.
The performance of the African industry parallels the global trend. For 2013 we expect the continent’s airlines to earn about $100 million profits. And this equates to an earnings before interest and taxes (EBIT) margin of just 1.0%.
What are the key drivers of airline profitability?
- The first is economic growth—the industry is highly geared to macro-economic performance. The industry tends to expand at twice the rate of GDP—reflecting its important role in development. But there is a stall speed. Historically, when global GDP growth has dropped below 2%, airlines have lost money
- The second is the price of oil—today fuel accounts for a third of the industry’s cost structure
If you put those two together in the context of today, you will quickly see why 2013 is a challenging year for airlines. Oil prices are high. We expect them to average at $110/barrel (Brent) for the year. And global GDP growth is forecast at 2.4%. It is above the stall speed…but not with much of a buffer.
So the first thought that I would like to leave you with today is that—in current circumstances—it is incredible that airlines are making any money at all. A decade ago, the industry was in the red when oil was at $30/barrel and GDP growing by 2.8%.
What happened? The industry today is almost completely different from what it was a decade ago.
Airline processes are much more efficient. An example that IATA had a hand in was the elimination of paper tickets and the enabling of Internet check-in globally. We set the standard and worked with the industry to rally together and implement it. An e-ticket costs $1 to process versus the $10 that a paper ticket did. Multiply that by the hundreds of millions of tickets and you can quickly see significant savings.
Of course there was a lot more change alongside the conversion to e-ticketing. Airlines went through painful internal restructuring. And they found new ways of working with each other. The Alliance structure grew and strengthened. Today it includes South African Airways, Ethiopian Airlines, Kenya Airways and EgyptAir on the continent. And airline cooperation went further than that. The US industry has consolidated around four major players—United, American, Delta and Southwest. China did the same—Air China, China Southern and China Eastern. Europe did the same as well with carriers grouping around Lufthansa, IAG (British Airways and Iberia) and Air France/KLM. And in Latin America we have groupings around LAN and TAM (LATAM), Avianca-TACA and COPA.
An example of the efficiency that has been gained can be seen in the percentage of seats that airlines fill. In 2003, it was 71.5%. This year we anticipate that on average 79.8% of seats will be filled.
There is still plenty of competition. But we are seeing economies of scale, bringing the benefit of global connectivity more efficiently to consumers and enabling airlines to be profitable even in very difficult economic conditions.
Having said that, airlines are not popping champagne corks to celebrate just yet. We will revise our profit outlook at the AGM. It is one of the highlights of the event. But whatever the figure we announce, it will most certainly be a razor-thin margin.
Given the industry’s financial challenges, I anticipate that you will hear a lot about costs at the event—particularly the cost of doing business here in Africa.
I should highlight three things: fuel costs, taxes and infrastructure charges.
On average fuel uplift in Africa is 21% more expensive than in other parts of the world. That is a huge cost burden. As I mentioned before, on average, fuel is about a third of an airline’s cost structure. In Africa fuel accounts for 44% of costs. Much of the problem is because government policies in Africa tend to see aviation as an “elite” product, rather than as a critical component of the continent’s economic infrastructure. As a result it is heavily taxed—often in violation of international principles which prohibit the taxation of jet fuel for international operations.
We are campaigning across Africa for governments to review the situation. We have had some success in Angola, Uganda and Ghana. But there is a lot more work to be done.
Aviation in general faces high levels of taxation. It is a soft target for governments. Our task is to explain to governments that making connectivity more expensive comes with a big economic cost. It is easy for governments to count the revenue from a tax. But it is not always easy to see the economic cost.
One rare example happened in the UK. When Northern Ireland nearly lost its last long-haul service to North America, the UK government decided to significantly lower the UK Air Passenger Duty—the highest aviation tax in the world. Unfortunately we have not yet been able to convince them that there is economic damage everywhere else in the UK because the tax persists at an ever increasing level.
In Africa we are working to convince governments that the combination of Solidarity Taxes, VAT and tourism taxes is limiting the economic benefits that aviation could be bringing.
And lastly, airlines pay for their infrastructure. IATA is involved in helping to ensure that the charges are fair, transparent and related to cost—as required by principles set by the International Civil Aviation Organization (ICAO). Some of you may recall the difficult discussions that we had in South Africa a few years back with Airports Company South Africa (ACSA) and Air Traffic and Navigation Services Company (ATNS) when we faced huge increases which were eventually allowed by the regulator. I don’t want to pull old skeletons from the closet. But the whole experience demonstrated two things:
- The need for airlines and infrastructure providers to work in partnership… transparency will allow for agreements on what infrastructure investment is needed…and how that will be charged to the airline users
- The need for governments to have a clear regulatory structure to ensure that infrastructure investments deliver the greatest benefit to the economy
You will certainly hear much more about fuel, taxes and infrastructure at the AGM.
And you will hear a lot about our top priority—which is safety. It is also the biggest challenge for air transport in Africa. The safety statistics make the point. Globally airlines averaged one accident for every five million flights in 2012 on Western-built jet aircraft. Africa lost one jet for every 270,000 flights.
Looking at accidents involving all aircraft types and levels of damage, there were 75 in 2012—and 13 of these were in Africa. Africa is about 3% of global traffic and 17% of accidents.
So, my first message is that there is a safety problem that must be fixed. Fortunately, looking at the numbers in a bit more depth can point us towards a solution.
Last year saw a remarkable achievement in aviation safety. There were no hull loss accidents with Western built jet aircraft among airlines on the registry of the IATA Operational Safety Audit (IOSA). That covers more than 380 airlines. And that includes all 240 IATA member airlines for whom IOSA is mandatory. And the IOSA registry includes 25 airlines in sub-Saharan Africa.
This is a clear indication that world-class safety is possible in Africa and that IOSA can play a major role.
African governments are making aviation safety a priority. African ministers for transport adopted the Abuja Declaration and the Aviation Safety Improvement Action Plan for Africa. This commits African aviation stakeholders—government and industry—to achieve a safety performance on par with the global average by the end of 2015. Early this year, it was endorsed by the African Union Summit—showing recognition of the importance of aviation safety at the very highest levels of government in the continent.
The commitment covers several targets:
- Establishment of independent and sufficiently funded civil aviation authorities
- Implementation of effective and transparent safety oversight systems by all African states
- Completion of an IOSA by all African carriers
- Implementation of accident prevention measures focused on runway safety and loss of control in-flight
- Implementation of Flight Data Analysis (FDA)
- Implementation of Safety Management Systems (SMS) by all service providers
IATA is paying special attention to IOSA. Getting all African airlines onto the IOSA registry by 2015 will be a challenge. Our strategy is to work directly with carriers not on the registry to help them prepare. Earlier this week I announced a group of 10 airlines that we will start with.
IATA’s approach to safety—helping airlines meet transparent global standards—contrasts with that of the European Union which has created a list of banned carriers—most of which are from Africa. Despite the good safety performance of many African airlines, the reputational damage of the banned list somehow extends across Africa.
The European Union’s approach is wrong. It lacks transparency. And it does not improve safety. I repeat this message every time that I am in Brussels. But, the banned list is a political reality and I don’t see any indication that it will disappear or be dramatically altered any time soon.
With little transparency, it is difficult to prescribe a solution. But I am convinced that the overall safety improvements that we can expect from the commitment to mandate IOSA registration for all carriers will be a very strong argument for Europe to re-think its position.
Lastly, environment issues will feature prominently at the AGM.
Aviation represents 2% of global manmade carbon emissions. In 2012 we estimate that amounted to 677 million tonnes of CO2. Aviation’s license to grow is contingent on our ability to do so sustainably. That is why we have committed as an industry to:
- Improve fuel efficiency by 1.5% annually to 2020
- Achieve carbon-neutral growth from 2020 (CNG2020), and,
- Cut our net emissions in half by 2050 compared to 2005 levels.
As far as I am aware, no other global industry has made such ambitious commitments. To achieve these targets, we also have an agreed strategy that is focused on improvements in technology, operations and infrastructure as well as having access to positive market-based measures (MBMs) which are agreed within a global framework.
I fully believe that MBMs will only be a temporary measure until technology, infrastructure and operational solutions can solve the environmental challenge. I also believe that such solutions could open up tremendous opportunities for South Africa—a leader in the development of alternative fuel technologies. But there is also a critical need for MBMs if we are to make our CNG2020 target.
The debate is focused on the ICAO triennial Assembly which will take place in September/October. To help facilitate a positive outcome, our Board of Governors tasked IATA to find an agreement among airlines on how to share the burden of CNG2020. Weaving through the various conflicting interests is not easy, but we are making progress.
But whatever support is given by industry, an agreement at ICAO can only be achieved if governments are focused with a common purpose in a sincere effort to find a solution. That includes South Africa. South Africa played an instrumental role in opposing Europe’s misguided plans to impose its Emissions Trading Scheme on international aviation, averting a trade war and firmly focusing everybody’s attention on ICAO. As a leader in the BRICS grouping, I hope that it will follow up by being a strong leader in ensuring that there is a genuine effort to make the ICAO process work.
Safety, financial performance, taxes, infrastructure and environment are only a sampling of the issues—global and regional—that will be discussed at the AGM. It’s been over decades since we have held an AGM on African soil. And we are very pleased to be coming to Cape Town at a unique moment of change in Africa’s development. I hope that you will follow the AGM closely…as well as the ongoing story of the development of African aviation.
With that, I am very happy to take your questions.