Good morning. It is a real pleasure to be here this morning to discuss the state of the industry with such an esteemed group.
- Declan Collier, Chief Executive Officer, London City Airport
- Jeff Poole, Director General, CANSO (Civil Air Navigation Services Organisation)
- Narjess Abdennebi, Chief Economist, ICAO (International Civil Aviation Organization)
I am sure that we will give Chris a good challenge in moderating!
As I have said many times before, aviation is a team effort. This group represents some of the major players—airlines, airports, air navigation service providers (ANSPs) and governments. But there are many other participants as well—manufacturers, ground handlers, caterers, travel agents, technology providers, etc.—who each play a critical role in making the miracle of aviation happen.
I am always proud to remind you that this year, we are celebrating 100 years of commercial flight. Even that first flight on 1 January 1914 was a team effort involving a pilot, an entrepreneur and an aircraft manufacturer. And their effort was only successful because someone saw value in being able to cross Tampa Bay quickly and was willing to buy a ticket. At that point, the business of commercial flying began. What followed over the next century significantly changed our world for the better—creating the foundation for the global community that we simply take for granted one hundred years later. I guess airports were invented a bit later – that flight used the sea at both ends!
The importance of teamwork has remained with us to this day-as has the challenge of operating an airline successfully over the long term. It may not surprise you to learn that the St. Petersburg-Tampa Airboat Line closed shop after just five months of operation.
Yesterday, we presented our quarterly airline outlook announcement in Geneva. I am pleased to say that we are seeing an improving trajectory for airline profitability. IATA estimates that the global airline industry will turn a profit of some $18.7 billion this year. That is considerably better than the $12.9 billion that we made in 2013 and the $6.1 billion in 2012.
In fact, in absolute numbers, this will be the highest profit in the history of the industry. But of course, in business, the profit margin is a more important figure. The $18.7 billion will be generated on revenues of $745 billion. So the net profit margin is only 2.5%. Looked at another way, the average passenger pays $181 for the basic fare and $14 for ancillary services. Plus a whole lot more in taxes of course. From that, the airlines will retain an average profit of a mere $5.65 per passenger. Let me put that into perspective: Apple has a 22% net profit margin. So they will make nearly double what an airline makes on an average passenger with every $49 sale of an iPod Shuffle.
Aviation is also a business that faces many risks. The economic cycle has the biggest impact. But there are many other risks as well. Oil prices, for example, are completely out of our control. Yet they account for about 30% of costs. And it seems that even as little as a political jitter in any oil-producing or -transporting region increases our costs. We are seeing that today with the strained situation in the Ukraine.
I could go on and on about the many challenges that airlines face. But I am sure that it is a familiar enough story to those in this room. The good news is that these risks are not deterring airlines from growing their businesses! Airlines will need to buy some 35,000 new aircraft over the next two decades. The capital cost of that will be $4.8 trillion. So we will be investing big in our future.
I know that our partners are also investing. This conference itself is evidence of how capital intensive the airport industry is. But, with respect, your capital needs aren’t as great as the airlines. For example, in my old home town Hong Kong debate is under way about the cost of the proposed third runway – about $18 billion. But its main home airline, Cathay Pacific, currently has an order book of about $29 billion.
So we will need to work together even more intensely over the coming years to make sure that those major investments generate an adequate return. The need for a decent return is something we both have in common.
In some respects, cooperation is in our DNA. That is certainly the case with safety. It is our collective top priority. This same spirit has led us to the implementation of impressive Simplifying the Business innovations that include various check-in options, automated boarding, and a lot more. Additionally, we are working together with ACI on the development of the Smart Security initiative.
In other areas, we are learning to work together, which is a terrific step in the right direction. The current revisions to the Airport Development Reference Manual, for example, have benefitted from very helpful input from ACI and its members.
Even great partners, however, can sometimes have differences of opinion. A case in point is infrastructure cost, which, I suspect, will always be an area for robust discussion. But having such discussions is important. They help us to understand each other’s needs.
When we think of airport infrastructure, what we need is investment which is planned together; and which is effective, affordable, modular in design and based on jointly-agreed traffic forecasts. It is also essential that such investment takes into account the potential for efficiencies from improved passenger processes. These can have a big impact on airport design.
Overall, we really need to work together to secure growth efficiently and avoid wasted capital. While I am referring to airports, a similar approach equally applies to ANSPs.
Lastly, I would also say, governments will need to continue to play a strong role. As more airports move towards a corporatized or privatized business model, we need some clear rules of the game. Our recent study on Airport Competition outlines the airline industry view that economic regulation continues to be important. Sure, there are lots of airports. But what we must to do is fly where our passengers want and need to go. There is strong evidence that they want to start their journey at their local airport.
Taking this and other factors into account, our research shows that there is a clear need for smart and robust regulation to ensure that airports have some clear guidelines in line with the ICAO principles of transparency, user-consultation, cost-relatedness, non-discrimination and so on. And the main message from our economic study is that it’s impossible to generalize on the issue of whether airports are or are not competing with each other. Some do, most don’t: every case needs to be looked at on its own merits.
With that, I may have put the cat among the pigeons. So I will turn it back to our moderator to take us forward.