Good morning. It is a pleasure to return to this Forum and I would like to thank ASTM International for hosting it with IATA and for the support of our sponsors. The Aviation Fuel Forum is one of our most important meetings and it drives the industry agenda on fuel-related issues.
When I addressed this group in November 2011, I was still relatively new to my position at IATA. Today, having visited more than 70 countries over the past 22 months, I believe I can say that I am a seasoned veteran—or at least a well-traveled one!
As was the case then, jet fuel and the issues surrounding it are among our top priorities and biggest challenges. In 2011, the near disaster involving fuel contamination at Surabaya was still very fresh in my memory—as I know it was for many in this room. I am very pleased to note that we have not experienced a similar event in the interim and give credit to the industry’s swift response—about which I will discuss more later.
I am of course much less satisfied with the direction that fuel prices have taken since 2011. Last year the industry fuel bill totaled $209 billion, which was about $33 billion higher than in 2011, and this year we are expecting to pay an additional $7 billion. Fuel now represents 33% of our operating budget and the consensus forecast in March was for jet fuel to average $130 per barrel, which is $3 more per barrel than in 2008—when our industry was nearly brought to its knees by the oil bubble. In recent weeks we have seen some easing of prices, nevertheless, they remain worryingly high when measured against historical averages.
On the plus side, while in 2008, the industry sustained a net loss of 4.6% of revenues, equivalent to $26 billion, the forecast for 2013 is for a modest net profit of 1.6% of revenues, equivalent to $10.6 billion. Owing to the structural changes and efficiency gains achieved over the past several years we are keeping our heads above water, but just barely.
If I can borrow the punch line from an old joke, I would say: “Fuel--we can’t live with it and we can’t live without it!” And while cost and global supply are subject to external market forces, we must work together to ensure that it remains safe and reliably available at airports around the world, and we should do all we can to use it responsibly, in line with our obligations to the environment. This was our agenda in 2011 and it is our agenda today.
Safety is our most important priority. After the Surabaya scare and the subsequent fuel contamination issue in Tel Aviv, the industry took quick action in response—ably supported, I might add, by the members of this forum, who contributed to the formation of three expert groups to address the issues that were identified. The result was the publication last year by the International Civil Aviation Organization (ICAO) of the Manual on Civil Aviation Jet Fuel Supply, providing standards, best practices and procedures to safeguard fuel quality throughout the supply chain—from the refinery to when it is delivered into the aircraft.
More recently I am pleased to note that we are working together through the IATA Fuel Quality Pool (IFQP) and Joint Inspection Group (JIG) to identify synergies and increase transparency of jet fuel quality inspections. In that vein, on 30 April IFQP and JIG performed a trial audit of the fuelling facilities at Queen Alia International Airport in Amman, Jordan, This airport was not previously covered by either inspection group. This is an important first step toward developing a program that could help to better utilize the expertise and resources so that we could have greater coverage of airports worldwide. I would like to offer my personal thanks to the authorities in Amman who allowed this to happen at short notice.
At the same time, it is important not to put the cart before the horse. We need to think carefully about how to move towards a global quality assurance scheme—built upon globally agreed quality assurance standards and criteria. Examples of successful templates for such an initiative could be the IATA Operational Safety Audit (IOSA) or the IATA Safety Audit for Ground Operations (ISAGO). IOSA covers more than 380 airlines, while the ISAGO registry includes 129 ground service providers at 142 airports. As with these two programs, it is important that we are aligned on requirements and processes.
Finally, I want to mention the Global Fuel Alert Database, which the industry agreed to launch after the Surabaya and Tel Aviv incidents. Working with Airlines for America we have made excellent progress and expect this to be live soon. You will learn more about this important project during the workshop this evening.
Supply reliability is another area of great concern for our members. Refinery closures in key markets and a lack of timely investments in supply logistics have resulted in longer and more complicated supply chains. In line with this we are seeing a corresponding impact on the potential for contamination, while the frequency and length of disruptions appear to be growing.
Disruptions in jet fuel supply at airports can be very expensive as it forces airlines to tanker extra fuel, restrict payloads or even cancel flights. From service and budget perspectives, these are not acceptable options. IATA and airlines have been working with governments to address areas with persistent supply disruption problems and we have achieved some notable successes.
- A campaign to improve supply reliability in the Caribbean has resulted in the construction of a new storage tank on the island of St Maarten by a major fuel supplier
- Engagement with the Kenyan government to ease restrictions on the uplift of fuel for transport to neighboring Uganda strengthened the business case for the construction of another storage tank at Uganda’s Entebbe airport, which had regularly suffered jet fuel stock-outs
- Industry efforts at London Heathrow, Nice, Manchester and Miami are also yielding positive results with projects to build new tankage and improve supply infrastructure being proposed
Constant monitoring of jet fuel supply will continue in 2013 as well as lobbying to get the solutions at key locations identified by the industry. In addition IATA and local airlines are working on improving the fueling services at airports to minimize flight delays. Furthermore, the Aviation Fuel Supply Model Agreement is being reviewed with a view to ensuring fuel quality and minimizing flight disruptions owing to non-availability of fuel or poor services. I take this opportunity to thank all those colleagues contributing to the process as this is no easy task.
As we work to improve the safety and reliability of our fuel supply, it is important that we bear in mind that we must also seek to become more efficient in its use, so as to reduce our impact on the environment. Aviation represents some 2% of global manmade carbon emissions. In 2012 we estimate that amounted to 677 million tonnes of CO2. Our license to grow is contingent on our ability to do so sustainably. And that means managing our emissions effectively.
The success of that effort has implications that extend well beyond our interests as an industry. More than three billion passengers—equivalent to around 44% of the world’s population--will travel by air this year, and that figure is rising. And nearly 50 million tonnes of cargo reaches its destination on a plane, representing nearly 35% of international trade by value. Aviation supports some 57 million jobs worldwide and $2.2 trillion in economic activity. If it is to continue to serve as a catalyst for economic growth and development, we must demonstrate that we are addressing our environmental challenges.
As an industry we have embraced an ambitious agenda to achieve sustainable growth:
- Improving fuel efficiency by 1.5% annually to 2020
- Achieving carbon-neutral growth from 2020 (CNG2020)
- Cutting our net emissions in half by 2050 compared to 2005 levels
As far as I am aware, we are the only global industry to have made such commitments, which are built upon four pillars:
- Investment in new technology
- More efficient operations
- Infrastructure improvements
- And positive economic measures—now more commonly known as market-based-measures or MBMs
Let’s look at each of these briefly.
Technology I am confident that our engine and airframe makers will do all in their power to give us the most economic and fuel efficient aircraft possible--and it is vital that they do so. But an even bigger part of the technology contribution will come from the introduction and widespread use of alternative low-carbon fuels, particularly sustainable biofuels. I know that there is some skepticism about the future of biofuels. But the developments so far are reason for optimism. They have been tested and certified, with more than 1,500 commercial flights using low-carbon alternative fuels achieved to date. We have demonstrated that from a safety and operational standpoint, they are a superb drop-in replacement, even slightly more efficient than conventional jet fuel. And yet, despite all our time and effort, we are quite a ways away from being able to introduce them on an industrial scale.
In fact, we are at the point that my colleague Paul Steele has described as “the Valley of Death” between technical development and flight trials and the full scale commercialization and production of biofuels and delivery to our aircraft.
Candidly, we cannot do it by ourselves. We need governments to step forward with policies that will encourage and support industrial production of biofuels for aviation. And it will take just a small percentage of the effort and investment that governments are dedicating to other transport-related industries facing more problematic solutions. Consider that only about 10% of the liquid fuel for transport is used by aviation. And the distribution system is relatively simple. 190 airports worldwide account for 80% of the industry’s fuel needs. Compare that to the distribution system for road traffic which relies on over 160,000 distribution points in the US alone. Getting biofuels distributed for aviation is going to be a lot easier and the amount is considerably less.
We are seeing encouraging developments, such as the recent reauthorization of the Farm to Fly government-industry initiative in the US. But making biofuels available on an industrial scale requires governments to adopt a six-point action plan:
- Foster more research to improve production methods and expand source crops
- Develop policies that de-risk investment in aviation biofuels production
- Provide financial incentives for airlines to use biofuels
- Achieve global recognition of sustainability criteria so that investments can be made with confidence
- Take advantage of local opportunities for biofuel production
- Support national or regional supply chain collaboration so that aviation biofuels become available at airports around the world
Some argue that we should be looking at other options to meet our CO2 commitments; that biofuels are too expensive, that the aviation market is too small to attract producers. But aviation is committed to the use of biofuels. They represent a tremendous opportunity for sustainable growth as well as employment and economic development and we encourage governments to take the next steps toward enabling industrial scale production so that they may be made affordable over the long term.
Efficiency: With fuel now consuming a third of the industry’s operating budget, airlines need no special incentives to treat every drop of it as if it were the last. Yet there are still opportunities in operations. I’m talking not only about such things as monitoring fuel uplift and maximizing the use of externally-supplied ground power. There also may be situations where a holistic approach can deliver a significant pay back. For that to occur, operational silos have to come down: is the catering department talking to the fuel department to understand the implications of doing all the catering at base? Is in-flight carrying waste materials back to the hub to save a few pennies, and adding a dollar’s worth of weight penalty in the process? A big picture approach may result in a number of small but worthwhile paybacks.
We also need to ensure that our infrastructure partners are doing the same—particularly air navigation service providers (ANSPs). At the tactical level, most ANSPs are very good at using the tools they have to enable us to fly the most fuel-efficient routes available. Our work to implement Performance-Based Navigation (PBN) provides an excellent example of cooperation. But we need to think bigger and faster and to translate individual efficiency improvements into systemic gains.
Europe needs the Single European Sky (SES), but progress is glacial. The failure to implement the SES in Europe costs airlines, air travelers and the overall economy 5 billion euros annually and wastes some 8.1 million tonnes of CO2 per year—and it hurts our ability to grow.
Looking beyond Europe, we are excited about the potential of the Federal Aviation Administration’s (FAA) NextGen project, but before committing to billions of dollars of new cockpit technology, we need to be sure that the benefits will exceed the equipage and training costs. In Asia, we look forward to further progress on the Asian Seamless Sky and continue to participate and share our knowledge as much as possible.
Market-Based Measures: Infrastructure and internal efficiency gains will not be sufficient to meet our CO2 commitments, and as discussed above, the arrival of biofuels in industrial quantities will take time. In the interim market-based measures (MBMs) will be an important stop-gap measure to achieve CNG2020. The debate on MBMs is focused on the ICAO Assembly this autumn. 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. Notwithstanding industry support, an agreement at ICAO can only be achieved if governments are focused with a common purpose in a sincere effort to find a solution.
At the top of my remarks I noted that we paid about $33 billion more for fuel in 2012 than in 2011 and that the current outlook was for another bump in 2013. I do not claim any special understanding of the commodity markets in general, nor of the energy markets in particular, but I do know that in too many instances, we are not seeing a competitive market for fuel at the point of service delivery. Usually, this requires the presence of competition—in other words, more than one supplier at an airport. In situations where that is not a realistic or practical option, governments need to be vigorous in their oversight of suppliers to prevent gouging. Competition is not just good for the customer; it is good for the supplier as well, since it helps to drive out inefficiencies and waste.
The airline industry provides a very good example of a fiercely competitive industry where over the past several years efficiency has increased to the benefit of air travelers. For instance, the mishandled bag rate has fallen by more than 50% since 2007; while average fares are one-third lower than 20 years ago in real terms.
Unfortunately, in too many locations, fuel suppliers have been denied the benefits of competition and the result is market distortions. Not good for airlines and in the long term, not good for suppliers or local economies that depend on connectivity provided by aviation for growth.
But we do have some success stories. I am happy to note that after engaging with the Indian authorities, the industry has obtained an agreement for open access to jet fuel infrastructure at Kolkata and Chennai airports. The hope is that this will attract other suppliers to the market. The industry has also succeeded in ensuring competitive markets in Eastern Europe. The achievements in the Russian Federation and Poland are important milestones. Transparency and competitive markets for the supply of fuel will remain a key priority for IATA and the airlines.
Unfortunately, sometimes government pricing policies stand in the way. At the top of the agenda is Brazil, where the use of parity pricing linked to the cost of importing jet fuel from the US Gulf Coast has resulted in a gross distortion of the market. Approximately 75% of the jet fuel supplied to airlines in Brazil is produced at Brazilian refineries, not imported. Yet on average fuel accounts for 43% of the operating cost of airlines there, compared to the global average of 33%. This represents an estimated $400 million annual cost penalty on Brazil’s competitiveness. It is noteworthy that among the fast-rising BRICS countries, Brazil is the least competitive in terms of fuel costs.
In terms of fuel price, Brazil is also uncompetitive against countries that are much less developed and which lack its infrastructure. The jet fuel price at Sao Paulo, Brazil’s largest city is higher than in Luanda, Angola; and Brazzaville, Congo, to name just two examples.
Brazil is already a global player in a number of sectors, including aerospace, but it ranks near the bottom in terms of its travel and tourism competitiveness according to the World Economic Forum’s Travel and Tourism Competitiveness Report. If Brazil wants to make better use of the connectivity provided by its dynamic aviation sector, it must change its pricing formula to reflect market realities.
Before I leave you, I’d like to talk about how IATA is changing in order to deliver more value to our members. In March we announced an organizational restructuring with a guiding principle of Global Development, Regional Delivery. We are strengthening our regional structures where we are closest to our members, to help us to better understand and more thoroughly meet their needs. Regional operations will be consolidated from seven structures into five, based around the five hubs: Amman, Beijing, Madrid, Miami and Singapore, each led by a Regional Vice President reporting directly to me.
And we have regrouped our activities that have grown more organically over time. As a result the number of externally-focused divisions will grow from four to five organized around activities sharing common stakeholders and focus. These are:
- Airports, Passenger and Cargo Services (APCS);
- Member and External Relations (MER);
- Safety and Flight Operations (SFO);
- Financial and Distribution Services (FDS), and
- Marketing and Commercial Services (MACS).
I know you are very interested to know how we will continue to support you on fuel-related issues. The commercial fuel team will reside in the new APCS division under a team for Airport Infrastructure and Fuel. In order to optimize our Fuel Forum activities, work in Technical Fuel will be linked in both SFO and APCS.
We have a very full day ahead of us, so I won’t go into more detail here. The changes take effect on 1 July and I very much look forward to sharing further news with you about this change and getting your feedback on the working benefits (or issues), as we move forward.
Aviation is an amazing business. We connect people to markets, reunite friends and families and enable greater opportunities for understanding among cultures. The work you do here is of vital importance to helping us to continue provide this marvelous product safely, efficiently, cost effectively and in harmony with the environment.