Good afternoon. It is a pleasure to be making a return visit to the International Aviation Club (IAC), both because the IAC is one of the most important forums in one of global aviation’s most important cities, and because I must have said something interesting the first time around to have merited a second invitation.
It is also nice to come back with a positive story to tell. We are almost at the conclusion of a century of commercial aviation, which began on 1 January, 1914 when Tony Jannus operated the first recorded airline flight--a 23-minute jaunt between St. Petersburg and Tampa, Florida. That historic event, which occurred more than a decade after the Wright Brothers’ first flight, has been all but forgotten outside of the aviation community. Yet in those brief 23 minutes, the world was changed forever.
Looking back from our vantage point today, it may appear that the revolution brought by aviation was inevitable, but of course that’s with the benefit of hindsight.
- In 1914, there was certainly nothing to suggest that within 100 years airlines would transport more than 3 billion passengers annually—equivalent to around 44% of the Earth’s population.
- There was no hint that within one lifetime, aviation would go from being the province of daredevils and thrill seekers to a safe, routine part of daily existence that would virtually eliminate risk from long-distance travel. Consider that only 20 months before Tony Jannus made his flight, more than 1,500 people perished in the sinking of the Titanic—which had been hailed as the most modern and safest ship in history. With one accident for every 5 million flights on Western-built jets in 2012, air is the safest way to travel.
- Finally, there was little indication that aviation would transform global commerce. Today some 57 million jobs are supported by aviation worldwide and we make possible $2.2 trillion worth of economic activity. By value, over 35% of the goods traded internationally are transported by air. Within the United States, aviation contributes some $669.5 billion of gross value added (GVA) annually, equivalent to 4.9% of GDP, and supports 9.3 million jobs.
As I said at the beginning, it is nice to have a positive story to tell! Yet the airline industry remains an extremely challenging business. Last year, airlines achieved an estimated net profit margin of 1.2%, equivalent to $7.6 billion on revenues of some $638 billion. This year is looking a bit better. Our latest forecast sees the industry net profit margin improving to 1.6%--that’s a $10.6 billion profit on $671 billion in revenues.
Drawing on data from our friends at Airlines for America (A4A), US airlines managed a net profit margin last year of just 0.1%, down from 0.3% in 2011 and 2.2% in 2010. That equates to earnings of $152 million, or just 21 cents’ profit for each of the approximately 711 million passengers they carried in 2012. Given the external factors at work - record high fuel prices, anemic GDP growth, stubbornly high domestic unemployment, and lots of economic uncertainty - it was a major achievement that airlines managed to stay in the black at all.
But it should be clear that we must do better than 21 cents per passenger if aviation is to continue to be a catalyst for economic growth and development in the second century of commercial flight. The industry cannot attract investment to grow with a 0.1% net profit margin. And in fact, domestically, the US industry has shrunk since the global financial crisis, with 13.4% fewer flights within the US and 9.1% fewer seats being offered compared to 2007, according to A4A. Cities have lost air service and businesses have lost connectivity to the global marketplace. I don’t doubt that there are very sound financial reasons for this general downsizing. Airlines are not charities and as a former airline CEO, I know managers have to make tough business decisions in markets that do not have a realistic prospect of becoming profitable.
An Agenda for US Aviation
I am concerned, however, that the future well-being of aviation in the United States is being buffeted by the larger tides of partisan political struggle and by a basic misunderstanding of the role of government in overseeing a deregulated industry. This country invented commercial aviation, but does it still recognize the contribution that aviation makes to global well-being?
While it is still early in President Obama’s second term, I would like to propose an agenda for aviation over the next four years—and for the decades beyond--that will ensure that the US economy continues to benefit from aviation’s vital role as a driver of well-being and job creation. And I believe my friend Nick Calio will agree that it aligns with A4A’s National Airline Policy.
This agenda will recognize that
- Aviation is far too important to the US economy to allow it to be held captive to political battles or used as a piggy bank to balance the budget
- Regulation and operational restrictions are no substitute for investment in infrastructure
- The airline industry is a deregulated activity and needs to be treated as such
- Government and industry stakeholders must build on their history of cooperation in critical areas such as safety, environment and security
Over the past month, we have watched as the continued free movement of passengers and commerce became a captive in a dispute over federal spending. It is still relatively early in the budget sequestration process to know what airline passengers should expect over the coming months.
However, yesterday’s extensive air traffic delays do not portend well for air travelers or the economy. Industry is working with FAA to minimize the impact of these delays, but past experience suggests that it should never have come to this. In August 2011, Congress was unable to pass an extension of the FAA Reauthorization, yet the agency was able to manage through this budget crunch without impacting air traffic services.
Let’s also think about the passengers. Commercial aviation largely pays its own way through a plethora of dedicated fees and taxes that represents around 20% of the cost of a domestic ticket and provided $19 billion to the government in 2012, according to A4A data. Air travelers have every reason to expect that these fees are used for the purpose for which they are intended, and not held captive in a battle of political wills.
As a final point about finances, the Administration’s budget proposal for the 2014 fiscal year includes a slew of tax increases and new fees and charges that A4A estimates would have added $5.5 billion on top of the $19 billion airlines and customers paid last year. Burdening aviation with even more costs that have to be absorbed by air travelers and shippers is exactly the wrong approach to getting the economy flying again.
Investing in Connectivity
That brings me to the next part of the agenda, which is to recognize that regulation and the imposition of operational constraints are no substitute for investment in aviation infrastructure. In fact, lack of adequate sustained funding is a perennial problem for aviation and has slowed implementation of the New York airspace redesign, FAA’s NextGen air traffic modernization and efforts to reduce wait times for air travelers entering the US.
An aviation agenda for the next four years needs to recognize that investment in people and infrastructure are critical to supporting the rising demand for air transport to support commerce and tourism.
An excellent example of this is demonstrated almost daily in the long lines of international travelers at major US gateway airports such as New York John F. Kennedy (JFK) and Newark. Demand for international connectivity and tourism is rising but Customs and Border Protection (CBP) staffing levels have not kept pace. The result is that wait times to clear customs and immigration at JFK and other major airports regularly exceed CBP’s own aspirational target of 60 minutes, reaching up to 111 minutes at Terminal 1. Keep in mind this is only an average; on numerous occasion travelers wait three hours and longer. Additionally, this has nothing to do with sequestration, which will only make things worse.
Wait times are so bad that the industry is concerned that landing rights will be denied during peak congestion periods. We are working with other stakeholders, including A4A, Airports Council International, and the US Travel Association, to try to address this issue, but the message needs to be that instead of holding aviation captive to the budget process, government needs to fix the problems it has created.
Of course, what isn’t adequately funded can still be regulated. The tarmac delay rule that puts the entire responsibility for avoiding an extended delay on the airline is an example. Without a doubt the rule has eliminated extended delays, but it did not solve the underlying factors that resulted in these delays. Regulation addressed a very small but highly visible problem by imposing a very large but unseen cost on the overall economy.
Regardless of where one comes down on the tarmac delay rule, there is a broader issue at play, which is that the airline industry was deregulated in 1978 but often it seems this was in name only. The continued micro-managing of competition has the real potential to harm consumers.
An example is the US Department of Transportation’s (DOT) anticipated notice of proposed rulemaking that will substitute federal regulation for commercial decisions made by airlines. The proposal, expected to be part of the so-called Consumer Rule 3, will require airlines to display through the global distribution system (GDS) channel some or all of their ancillary products if they sell any tickets through that channel.
This is an unreasonable intrusion into the marketplace. Airlines already list all of their ancillary products and services on their websites. However, the GDS channel is quite limited in the amount and manner in which content can be displayed because of legacy pre-Internet messaging standards. By contrast, most airlines use XML-based messaging standards on their own websites to present rich content and personalized offers to shoppers.
A rule that mandates airlines to provide ancillary information through GDSs will do four things:
- It will misinform and confuse consumers
- It will intrude on the private business relationships between airlines and their distribution technology suppliers
- It will add costs
- It will reduce competition and innovation in the distribution channel as well as limit the entry of new players
Why will it mislead consumers? Simple: in the indirect channel the customer is anonymous to the airline until the reservation is made. That means that the selling airline does not know whether the customer is a member of its loyalty program entitled to a free checked bag, or an exit row seat or a complimentary upgrade. Thus the customer may be misled into believing he or she will have to pay for these, when in fact they would not cost anything. Furthermore, the airline may offer a bundled package for certain amenities that the GDS channel is incapable of displaying. The customer could save money if they knew it—but they won’t know it.
The mandate will also have the effect of putting Uncle Sam’s thumb on the scale in favor of the GDSs when it comes time to negotiate a new agreement with the airline. If the government is going to mandate that airlines have to display all their products in the GDS, where is the incentive for GDSs to invest in their systems to make them more capable?
The rule will add costs as airlines have to invest to develop the backwards compatibility to correctly display these ancillary products in the legacy technical format. These costs will have to be recovered from someone.
Finally, a rule to require that airlines display their ancillary products and services in GDSs will discourage new entry into the distribution field by locking airlines into a legacy model developed decades before the invention of the Internet. Currently two GDS companies control approximately 92% of the agency market in the US, through which around 60% of tickets by value are distributed. It may be that this is a naturally-occurring duopoly, but I see no reason for government to protect it in perpetuity!
There is a better way than regulation and that is to let the market function. IATA is leading an industry collaborative initiative called the New Distribution Capability (NDC) to update the messaging standard through which airlines communicate with travel agencies. Adoption of this standard will enable retailing opportunities through the indirect channel. With NDC, airlines will be able to offer customers the same travel options, regardless of whether they go directly to the airline website, or use a travel agent powered by a GDS. Adoption of NDC will enable comparison shopping among airlines, just like today, but with the full scope of the airline’s product offer, not just the base airfare.
The result will be better-informed customers as airlines and third parties are able to display more information on flight options and services than is currently available through the indirect channel.
And despite what you may have read, you will not have to provide any more information about yourself to get a price quote than you do today via the GDS network.
Another tall tale is that the NDC standard will lead to an end to fare transparency because airlines will no longer be required to file their fares with third party companies. I find this argument to be the height of absurdity.
No airline is required by law or regulation to file fares - it is a commercial decision that has its origins in the pre-deregulation, pre-Internet era. Furthermore, it is an indisputable fact that not all airlines file fares and not all airlines participate in the GDSs; and that includes some very large airlines that are household names, including Southwest Airlines, Ryanair, easyJet and AirAsia. So the customer already is losing out on the ability to comparison shop through the GDSs. In reality, airlines will still have the ability to file fares under NDC. Regardless of whether they do so, however, the consumer will be able to comparison shop between airlines using NDC. But with one major difference: travelers will be able to compare the full value of the airline offer including additional products and services, not just the base fare, as is the case today.
I want to emphasize that NDC is an industry effort that welcomes participation and input from all participants in the travel value chain including travel agents, agent associations, airlines, GDSs and other technology providers.
NDC represents a flexible private-sector solution to address an issue arising from commercial developments in the airline industry. It is far superior to an inflexible regulatory mandate that is not in keeping with the spirit of deregulation nor aligned with the workings of the free market.
Safety and Security
Our agenda for aviation builds on our tradition of stakeholder cooperation in key areas. Along with safety which is of course our greatest success story--we are also cooperating on security, the importance of which we were reminded of by last week’s tragedy in Boston. We know that aviation remains a target for terrorists. In order to stay a step ahead of the threat while accommodating rising passenger numbers, we must evolve the current one-size-fits-all security model to a risk-based system that allows us to deploy our resources where they are most needed. This is the philosophy underlying the Checkpoint of the Future project which is being developed through the efforts of global stakeholders.
Risk based security is at the heart of the Transportation Security Administration’s (TSA) PreCheck program. I am deeply appreciative that TSA Administrator John Pistole has been a strong supporter for the Checkpoint of the Future and the Department of Homeland Security, under Secretary Janet Napolitano, has revitalized its aviation security advisory committee and added an international subcommittee that has become the focal point for industry outreach.
Industry and government are also working together in a number of areas involving the environment, such as the Greener Skies Over Seattle project involving airlines, FAA, the Port of Seattle, and Boeing, to use Performance-based Navigation (PBN) to reduce greenhouse gas emissions and lower noise. I’d also like to recognize the Administration for renewing the Farm to Fly industry-government partnership that aims to support annual production of one billion gallons of sustainable biofuels by 2018.
We cannot achieve the industry commitment to reduce aviation’s net emissions 50% by 2050 compared to 2005 without government support for our Four Pillar Strategy based on:
- Investment in new technologies
- More efficient operations
- Better infrastructure
- And positive economic measures
I want to thank Congress and the Administration for their support of the International Civil Aviation Organization (ICAO) process as the way forward on positive economic measures, also known as market-based measures, rather than regional solutions such as the EU’s Emissions Trading Scheme (ETS). No doubt Washington’s support for ICAO played a role in the European Commission’s decision to “stop the clock” on extending the ETS to international aviation, defusing a potential trade war and avoiding the fragmenting of our global strategy for reducing emissions. Governments can now focus their attention on finding a global way forward through the ICAO processes. I do not expect it will be easy; nonetheless, this is an issue that belongs at ICAO.
Although global aviation’s center of gravity has shifted toward the Asia-Pacific region, the United States will continue to be the world’s largest single aviation market for many, many years. I do not doubt that airlines here will seek profitable opportunities to expand at home where they can find them—even as they take advantage of growing international markets.
Laying the ground work requires an agenda that recognizes aviation’s importance to the economy, enables sustainable growth through infrastructure investment, and trusts in the power of the free market and consumer choice. The alternative is to turn our backs on the extraordinary achievements of commercial aviation’s first century. The choice is ours to make.