President Roberto Kriete, Members of the Executive Committee, Members of the Mexican Government, Eduardo Iglesias, ladies and gentlemen, good morning.
This is my third Airline Leaders Forum and each is a pleasure. I believe the relationship our organizations have established is a template for working together on common issues and objectives. Indeed, IATA and ALTA are working so closely that my remarks cover very similar ground as Roberto, albeit from IATA’s global perspective.
On 1 January 2014 we will mark a century of scheduled commercial aviation. One hundred years ago Tony Jannus piloted a 23-minute flight across Tampa Bay with a single paying passenger.
He could not have imagined the transformation that would follow. From how we trade and do business to how we spend our leisure time or interact with our families—whether at work or at play, aviation has profoundly impacted our lives.
This year, over 3 billion passengers will fly. Some $2.2 trillion of economic activity and 57 million jobs around the world depend on aviation. And, by value over a third of goods traded internationally get to market by air.
In the Latin American/Caribbean region—which I will refer to as Latin America for simplicity’s sake—aviation supports more than 4.6 million jobs and $107 billion in GDP according to the most recent figures.
Aviation is a mass transit system for the global economy. But it is a tough business to be in. According to International Civil Aviation Organization (ICAO) statistics, the global airline industry turned a profit in only half of the 66 years between 1947 and 2012. We are a capital and labor intensive business that is highly regulated, extremely competitive and highly vulnerable to the ups and downs of the business cycle –not to mention external shocks. Fortunately, this year the industry will be in the black with an $11.7 billion profit increasing to some $16.4 billion in 2014. That’s good news. Historically, the combination of weak economies and high oil prices would be a recipe for losses. But by transforming almost every aspect of our business, we have made efficiency gains that are paying off.
Latin American carriers are a part of this success story. The losses of last year have been transformed into an expected $600 million profit this year. And that is expected to grow to $1.1 billion in 2014.
But at the global level, the industry’s margins are dangerously thin. The average fare is just about $200. And airlines will only retain about $5.00 in profit for each of the estimated 3.3 billion passengers carried next year. Airlines cannot claim to be the most attractive investment opportunity around. But we will need capital to fund the growth in connectivity that the global economy needs. And our ability to continue transforming aviation is at risk—not from market forces, but from governments.
Many governments have forgotten—or take for granted—the pivotal role that air connectivity plays in global growth and development and the global standards that support it.
Global standards underpin a safe, secure, integrated global air transport system. A passenger can buy a single ticket, pay for it in a single currency and expect the ticket to be recognized by any of the team of airlines that will get him to his destination. The system is so reliable that we don’t often think about the enormous coordination that makes it possible. And I believe that it is worth reminding governments of the value of global standards that support aviation and the vibrancy of their economies.
In my time with you today, I would like to discuss some areas where better appreciation of this fact can help us toward a more sustainable future.
The most obvious role for global standards is in safety. They were crucial to transforming air travel from a high risk adventure to a routine part of daily life. And when it comes to operational safety management, the IATA Operational Safety Audit (IOSA) is the gold standard. Over the 10 years since it was created it is clear that carriers on the registry perform better than those that are not.
It is no secret that safety has been an issue in this region. Even though it is still underperforming the global average, performance is improving. And airlines on the IOSA registry are leading the way. For example, ALTA and IATA member carriers in the region that are on the IOSA registry have not experienced a fatality in six years! That is why we are working with ALTA and governments in the region to broaden its usage as part of the operational approval process. At the same time, IOSA is improving with age. We are rolling out Enhanced IOSA, which will incorporate continuous safety monitoring.
Another import regional initiative is the ALTA-IATA Trend Sharing Program that we launched two years ago. Twenty-nine airlines are participating and they are sharing information on 80,000 flights a month. Through this program we have identified a number of opportunities for safety enhancements and plans are underway to implement them.
We also recognize the need to provide support to carriers that are outside of the IOSA criteria—either because of aircraft types operated or the nature and scale of their operations. ALTA was a strong voice of encouragement in the work that we are doing to develop the Basic Safety Audit Program (BSAP) to help such operators.
Beta-test audits will begin during the first half of 2014. And I am happy to announce that the launch airline for the beta-test will be Nature-Air, from Costa Rica. Representatives from Nature-Air are here with us today.
But global standards are not just about safety or for technical situations. Consistent application of global standards in the regulatory world can also add tremendous value.
Unfortunately, that is not what is happening. Today, possibly without realizing it, governments are weakening the integrity of the air transport system by introducing a patchwork quilt of different and sometimes conflicting passenger rights regulations. At least 60 governments have introduced such rules, including 11 in Latin America.
Governments should certainly set some simple guarantees. But the Latin American approach to passenger rights has been among the most prescriptive, with proposed compensation among the highest in the world.
- A proposal in Mexico would increase compensation for cancellations to 300% of the ticket price, with compensation of US$1,500 for extended delays on long-haul flights.
- In Chile, a delay of just a few minutes could potentially trigger hundreds of dollars in per-passenger compensation according to one proposal.
And in Latin America, as elsewhere, there is no consistency across jurisdictions. Regulations to help passengers shouldn’t confuse them with rules that don’t fit together in a global system or overwhelm them with complexity. And often regulation comes with unintended consequences. If an airline needs to manage a multiplicity of requirements over its international operations it certainly adds cost and complexity. Even if the jurisdiction is clear, what needs to be done is not. All of this gets in the way of delivering good customer service—and surely that is not what governments intended!
ICAO Member States at the 38th Assembly recognized that the glut of passenger rights regimes is not creating value. States agreed there is a need for high-level, non-prescriptive principles that are consistent with international agreements and that strike a balance between protecting passengers and maintaining industry competitiveness. IATA supports those conclusions and agrees with the need for greater convergence and compatibility. In fact, the industry core principles on consumer protection – unanimously adopted by IATA’s membership in June – will serve as an input into this important discussion.
It is also important that where global standards already exist, that governments follow them. The Montreal Convention 1999 (MC99) governs the rules relating to airline liability during international carriage by air. It delivers many benefits to passengers, shippers and airlines. One of the most important benefits of MC99 is that it provides the legal framework for the use of electronic documents in air cargo such as electronic air waybills (e-AWB’s) with all the cost, efficiency and data-sharing benefits this brings.
Latin America has shown leadership on the ratification of MC99, with only a handful of states yet to ratify. We need the help of member airlines in Latin America to support our local efforts by requesting that their governments raise the matter of MC99 ratification with those states.
In sum, my message to governments is to:
- Recognize that airlines want to get their passengers to their destinations with their bags, on time, all the time
- Understand that we operate in a highly-competitive industry in which customers can and do vote with their pocketbooks
- Seek industry input and conduct a rigorous cost-benefit analysis before considering new commercial regulations.
- Where global standards exist, use them
Believe it or not, there are also global standards and recommended practices for fees and taxes. Unfortunately, many governments do not follow them. This is a global issue but it seems to be particularly acute in Latin America.
I’m sorry to say that our host country provides an example. The new fuel tax recently passed by the Senate, will add an estimated 480 million pesos to airlines’ fuel bills every year. The tax is in conflict with the Chicago Convention and ICAO agreements to which Mexico is a signatory. The net result will be to raise the cost of air travel, with a corresponding knock-on effect in terms of declining trade and tourism. That is what happened in Ireland when the government imposed an air passenger duty—and to its credit the government recently repealed this tax because of the harm it was causing.
I have singled out Mexico but it is by no means alone. In Bolivia and Chile for example, VAT is applied on jet fuel for international flights against Chicago convention and ICAO principles. Ecuador applies a 5% tax on fuel to fund the civil aviation authority. And the Dominican Republic is applying a 6.5% tax on international jet fuel.
The issue of taxes and charges in the region transcends the formal breaches of global standards and recommended practices. The simple truth is that Latin America is a very expensive place for airlines to do business -- and I want to reinforce that I am also referring to the Caribbean. Fuel expense across the region is around 14% higher than the world average. Brazil is more extreme at 17% above the global average. Brazil’s parity pricing policy, a slew of fees and charges, and heavy airport fuel concession fees impose a huge disadvantage on the country’s aviation sector. Typically fuel represents about a third of an airline’s operating costs. In Brazil, it accounts for 43%.
We face another sort of challenge in Venezuela, where $2.6 billion in airline funds remain blocked by the government and subject to the threat of drastic devaluation. I am hopeful that the government will recognize the vital role aviation plays in the country’s economy and devise a solution to this unacceptable, and frankly, unfair situation before the country’s connectivity is affected.
The issues and challenges described above have real world consequences for the region’s competitiveness. A decade ago, Latin America generated more air traffic than the Middle East. Today Middle East airlines carry twice the amount carried by Latin American carriers! There are probably lots of reasons for this. The Middle East has a geographical advantage in terms of capturing connecting traffic on long-haul markets. But it has a much smaller home market with a population of 200 to 300 million versus 600 million or so in Latin America.
So to what do we attribute this reversal of fortune? I believe that in large part it is owing to the different way in which governments in their respective regions view aviation. In places like Dubai, Abu Dhabi and Qatar, governments recognize the economic benefits of connectivity made possible by a dynamic and thriving industry not shackled by heavy taxes and regulations. I would encourage governments in Latin America trying to stimulate their economies to follow this example.
It is well-known that in many parts of Latin America, demand for air travel far exceeds the supply of runways and terminals. Bogota, Lima, Brasilia and Sao Paulo are all in need of additional capacity. Mexico City needs a new airport. Aeroparque Jorge Newbery in Buenos Aires is one of the most congested in the region. Lack of adequate airport infrastructure will be a challenge for many years to come.
In the interim, capacity will have to be managed. The IATA Worldwide Slot Guidelines (WSG) are the industry standard used to manage runway capacity at 165 slot constrained airports. And because slot-constrained airports around the world apply the WSG, any local proposals that deviate from them have a major impact on airline operations and schedule planning. We’ve seen a number of governments in the region tinkering with slot regulations in the misguided hope of extracting additional capacity from congested airport infrastructure.
For example, in Brazil the regulator is seeking to add punctuality in addition to regularity when determining historic slot precedence. Working with ALTA and other partners we have vigorously opposed these changes, offering our full support to the regulator to demonstrate how they can achieve their objectives by using the Slot Guidelines.
In Mexico, the slot process does not follow international standards and has caused carriers many challenges over the last six months. The good news is that DGAC has committed to aligning with the WSG in the future.
At the global level, we have recently witnessed a powerful example of how governments can make decisions in the collective best interest of all. The ICAO Assembly reached an historic agreement on climate change to introduce a global market-based measure (MBM), which is a key tool that will set the industry on the path to achieving its target of Carbon Neutral Growth from 2020 (CNG2020).
Governments agreed that the next Assembly in 2016 will look at a detailed proposal. And the industry—having called on governments to adopt a mandatory global carbon offset scheme to manage growth post-2020—will be fully supporting ICAO in this effort. Reaching this agreement was not easy—yet states were able to put aside self-interest to achieve a harmonized global approach.
Everybody—Europeans included—returned home with a sense of great accomplishment. So it is no exaggeration to say that the European Commission’s proposal basically to ignore the work at ICAO and include the portion of international flights within European airspace in its emissions trading scheme from January next year was greeted with shock and disbelief.
Governments will need to sort this out. And we call on them—particularly European governments—to keep the global and long-term view that underpinned the success at ICAO. The big prize is a global agreement to manage aviation’s emissions post-2020. As an industry we should remind governments of this at every occasion. In parallel we must keep unified and focused on driving the other pillars of our strategy—technology, operations and infrastructure improvements. Ensuring environmental sustainability is our license to grow. And we must stay the course and keep focused globally and for the long-term.
Global standards also play a role in how we distribute our product. In fact, there is a technical standard that supports all airline ticket sales transacted through travel agents using global distribution systems (GDS). Today, we are working with partners across the value chain to modernize that with the much-talked about New Distribution Capability (NDC).
Why? First, because customers are demanding more options when they buy a plane ticket. And, second, because customers want access to those options on airline websites and through travel agents.
Just to be clear, what you saw in the video is what could be developed by a technology provider when the standard is implemented. I hope that you will agree that NDC could deliver enormous value to consumers and create new opportunities across the travel chain. The NDC standard will unleash innovation—and that will mean change. But, let me assure you of a few things. NDC will operate within the same privacy laws that govern every other business. That is no change from today. But, by giving travel agents more information, there will be greater transparency.
We have made strong progress over the past year. Our application for approval of Resolution 787, which is the foundation document for NDC, is before the US Department of Transportation, and we are optimistic of a positive outcome in the fourth quarter. Five NDC pilots are underway with others in the process of getting started. We expect the pilot phase will last through 2014. In 2015, the initiative should move into a deployment phase, in which a number of airlines will have adopted the initial version of NDC. A global roll-out is expected to begin in 2016.
We are eager to expand the number of pilot programs and strongly encourage airlines, travel agents and technology providers in this region to join a pilot.
Given the enormous population and potential for development, there is no reason that aviation cannot deliver the same benefits to the Latin American region that it is bringing to the Middle East and elsewhere. As has already been mentioned, IATA, ALTA and Airports Council International are working with Oxford Economics to identify the most important infrastructure and tax issues that need to be addressed for the region to fully enjoy the benefits of aviation’s connectivity. And working with ALTA and other stakeholders we will focus on making the Caribbean more hospitable to aviation.
Our world is a far better place for aviation. And aviation is far better for global standards that have enabled the creation of an integrated worldwide transportation system. It is important as we begin the second century of airline service, that we re-emphasize the important—even unique—role that global standards have played for our industry. I believe it is important that all of us deliver this message to governments in the region.
Finally, I would like to extend an invitation to all of you to join us next year at IATA’s Wings of Change conference in Santiago, 26-27 March.