Good morning ladies and gentlemen, it is a pleasure to be able to join you today. This is the first time that an IATA Director General has addressed the European Regions Airline association (ERA), and it is long-overdue. Since becoming IATA DG three years ago I have made it a priority to engage more closely with regional associations, and I am grateful to Simon McNamara for his invitation.
I should say that although I have not been attending ERA events personally, I know that our two Associations have been working closely together. We share some members in common. Certainly, from IATA’s perspective, the term ‘regional’ aviation is a misnomer. Thanks to aviation, the entire world can be connected in a matter of hours. We see ‘regional’ airlines as a vital link in that connectivity chain.
It is no secret that regional operators in Europe face some big challenges. So the timing of today’s debate is interesting and appropriate. European aviation is at an important crossroads—and you are in many ways at the forefront. There are significant opportunities for European aviation, but also some very serious obstacles, which affect every carrier from the smallest regional or point-to-point carriers to the largest network flag carrier. The solutions will require continued evolution of airline business models and ever-improving efficiency, processes and technology. But it is not up to airlines alone. Regulators and politicians are going to have to recognize aviation’s crucial importance, and work with the industry to foster growth.
For too long, European governments have regarded aviation as a ‘cash cow’ rather than a goose that lays golden eggs. They see it as a luxury to be taxed rather than an essential motor of economic activity and a facilitator of social development. According to recent figures from Oxford Economics, aviation in the EU supports 9.3 million jobs and EUR512 billion in GDP. But the performance of this economic engine for the Continent will begin to misfire unless governments change their mindset.
The profitability challenge
After a painful few years, the aviation industry at the global level is moving into a period of improved profitability. But in Europe those profits are relatively low compared to many North American and Asian rivals.
European airlines are the weakest among the world’s major aviation regions, with a predicted post-tax net profit of $2.8 billion this year, for an average net profit margin of just 1.3%. That’s about $3.23 per passenger. By comparison, North American airlines are expected to earn about $11.09 per passenger. The reasons for this are complex and inter-related, and encompass historic factors like the structure of the industry. But in general, there are three issues which hold European aviation back: taxation, regulation, and infrastructure.
Taxation of European aviation is now around $40 billion a year, twice that of the Asia-Pacific region. The UK’s Air Passenger Duty is the most egregious example of excessive taxation, but taxes in Germany, Austria and elsewhere continue to hold back air connectivity in those countries. And new tax proposals keep emerging: in the last two months alone, passenger tax suggestions have emerged in Portugal and Sweden.
Despite this situation, I do see a glimmer of light at the end of the tunnel. Parts of Europe are slowly waking up to the economic consequences of disproportionate aviation taxation.
The Irish Government’s decision to scrap its passenger charge was significant. Aside from the benefit to the Irish economy itself, it also keeps the pressure on Northern Ireland to keep its low rates of APD. The Scottish government is likely to get further tax powers following the recent close independence referendum, and freedom to set a lower APD rate is one of their requests. Even the minor improvement that was announced to the APD banding earlier this year, dismal tinkering as it was, shows that the arguments are moving in our direction. So despite it sometimes feeling like we are banging our heads against a brick wall, I believe we are making some progress on this issue.
The key to this debate is competitiveness. Aviation has a vital role in supporting economic competitiveness and so we need to keep arguing for a new mind-set from European leaders, to focus them on building a strong airline sector. If governments and industry work hand in hand to promote connectivity then the ability of aviation to act as an economic engine will be enhanced. How can this be achieved? If you look across the world at the places where aviation is an undoubted success story, certain basic points are common. Governments encourage the development of world-class infrastructure and a regulatory and fiscal framework that facilitates, rather than frustrates, air connectivity.
Looming infrastructure shortfall
In Europe, by contrast, almost the opposite case holds. Infrastructure development moves at a snail’s pace: Eurocontrol estimates that there will be a shortfall of 12%--around 2 million flights—in airport capacity by 2030. Next year we will see a crucial decision on the future of runway capacity in the South of England. Germany has several airport issues, including the continuing problems in Berlin and the decision to prevent expansion at Munich. There are 93 slot-constrained airports in Europe, which speaks to the severity of the looming capacity crunch. And let’s remember that every flight which cannot happen because of limited capacity is full of lost economic opportunities. Finding a political and social consensus for the expansion of aviation is absolutely essential for our industry and the economic development of the world. It would help if Europe got its airspace sorted out. The Single European Sky remains as far away as ever. Each year it fails to be implemented means around 8 million tonnes of carbon wasted, and more than EUR11 billion of unnecessary costs loaded onto airlines, their passengers, and the European economy.
Then there is the question of regulation. To be clear: aviation is not anti-regulation. Regulation is the bedrock of our good record on safety, for example. However, regulation becomes a problem when it starts trying to micro-manage our business.
European aviation regulations are not smart enough. Smart regulation delivers clearly defined, measurable policy objectives in the least burdensome way. It is achieved through a transparent, independent, and consultative process. The EU is not good at this sort of approach. We all know how airlines have been held hostage by interpretations of the 261 regulation. It damages competitiveness and increases costs, at a hugely disproportionate rate to the consumer protection it provides. It particularly affects regional connectivity as the cost burden falls disproportionately on smaller operators.
We also know we are in a hard fight over airport regulation and other issues. The cumulative effect is damaging. When politicians make decisions that affect slot management, or prevent an airport from operating night flights, or make it too financially risky for a small airline to provide feeder flights to a hub airport, then this all adds straws to the camel’s back. Eventually the accumulation of poor regulation is going to have a major effect on aviation connectivity.
It is a hard job to demonstrate to politicians that the quick, easy win of a new tax or an extra piece of consumer protection can lead to long-term damage to consumer choice and economic vitality. But our successes show that it is not impossible. Working together, with a united message, is essential. We need to bring consistent arguments and robust data to the table. ERA has done some valuable work in this area. In Brussels, a new Parliament and a new Commission are an opportunity for all of us to reinforce our strong messages. It will be a challenge, in particular at the level of the new EP transport committee. But I know that our teams are already working together to rectify the erroneous messages that some have been conveying about the so-called subsidies given to aviation. Through our advocacy, we need Europe’s politicians to understand that by systematically tackling these three areas—reasonable taxation, quality infrastructure and smart regulation—the region can reverse its relative decline and once more become a leader in global aviation.
The future – aviation 100 years on
Let us say that we do generate a new mindset from regulators and governments, and harness aviation as a growth engine for Europe. What would the future look like? Before I try any crystal-ball gazing, allow me to start with a historical point. This year marks the 100th anniversary of commercial aviation. On 1st January 1914 a small plane carrying just one paying passenger took off from St. Petersburg, Florida, to fly the 20 or so miles across the bay to Tampa. The entrepreneur who created the St. Petersburg-Tampa airboat line, Percy Fansler, said at that inaugural flight: “What was impossible yesterday is an accomplishment of today, while tomorrow heralds the unbelievable.”
Despite his prophetic words, I doubt even the visionary Fansler could have dreamed of the extent of commercial aviation 100 years later. From one route and one passenger in 1914, today we connect more than 3.3 billion passengers across 50,000 routes. It has been an incredible story of innovation and growth. So to predict what will happen over the next decades is very difficult.
Increasing global demand
It is clear that the demand to fly is set to increase. We must consider that not only do more Europeans expect to fly more often, but we have a much bigger surge of new passengers coming from the developing nations in Asia, Latin America, and Africa. Over the 2012-2017 period, there will be a 31% rise in passenger numbers – almost a billion more customers. By 2032 we will have double the number of passengers as today: some 6.6 billion. These new passengers want to discover Europe’s cultural and scenic treasures, and exploit new educational, creative and business opportunities. If we can accommodate them, then demand will be robust at every level of aviation.
This is good news for the economy and airlines alike. And it is not limited to the network carriers; regional airlines have a great chance to tap into this potential. Even the smallest regional airline needs to consider the potential global needs of his customer. The passenger in the Hebrides may want to go to Aberdeen, Athens, or maybe even Adelaide. And many of these new overseas visitors will be looking beyond traditional European hubs to Lyon, Leeds or Ljubljana. So regional airlines need to have the right partnerships in place to ensure they can serve the right connections.
The growth of high-speed rail as an alternative transport mode opens up an interesting opportunity. Some airlines are choosing to code share with rail, which has the potential to free up valuable slots and opportunities to expand connectivity. For others of you, rail is a direct challenge, and the way regional airlines have responded to stay competitive has been impressive. Of course, it would be a fairer playing-field if rail received less subsidy and air passengers were taxed less. But even if this weren’t the case, keeping unit costs down will remain absolutely vital for airlines if they are to compete.
Fuel and emissions
A major component of cost is fuel. This accounts for around 30% of airlines costs. Again, the industry has done extremely well to adapt to rapidly rising fuel prices. A little over a decade ago, oil was less than $30 a barrel. Today, it floats around the $100 mark. There is little sign it will significantly decline…and every chance, given the instability we see in some of the major oil-producing nations, that it could spike again.
It is crucial, therefore, that the industry continues to invest in the new generation of fuel-efficient aircraft being developed. The manufacturers claim they are 20% better than their predecessors. That is welcome—but we should continue to pressure them to deliver more.
Fuel burn is inextricably linked to emissions. My crystal ball tells me the environmental debate is not going to get any easier for us. The industry can point to its excellent track record, and to its robust targets of carbon-neutral growth from 2020 and a 50% cut in carbon emissions by 2050. But new technology and more efficiency will only take us so far. We also need governments to play their part.
At the European level, tackling the Single European Sky would be a good start. Governments can also help to encourage the development of alternative fuels. Most importantly Europe has a crucial role to play in working towards a global market-based measure for aviation emissions. The EU’s unilateral actions in the past threatened to de-rail the International Civil Aviation Organization’s progress towards a global scheme. We must work closely with the EU institutions to ensure they engage constructively and help build a global solution that ensures aviation’s license to grow in the coming decades.
Passenger experience revolution
My final point about the future is that the industry is on the cusp of a revolution in the passenger experience that will touch on everything from the moment someone starts their online ticket search, to the time they leave the airport at their destination. For more than a decade, aviation has been playing catch-up in crucial customer expectations at various touch points. Some examples include internet comparison shopping, online passenger information, self-service options at the airport, the security experience, and joined-up communications with other partners in the travel chain, such as hotels. All these areas are going through a transformation which will profoundly change the airline-customer relationship. Regional airlines will be as well positioned to benefit from these changes as full-service international carriers.
There isn’t time for me to run through all the details here. And I know that this audience is already extremely well-informed. Regional airlines have pioneered many improvements in customer service, and the strength and popularity of your brands is testament to that. But I am confident that, through our work, IATA together with ERA will equip you with additional tools to help improve your service offer.
Working together for stronger European aviation
As I said at the beginning, I consider it very important that IATA works closely with regional aviation associations across the world. We are partners. IATA offers the global perspective--our programs such as the IATA Operational Safety Audit (IOSA) offer a global standard which can drive up quality across the board. And through our engagement with ICAO, we can help shape standards and regulations in ways which help harmonize and streamline aviation regulatory requirements. IATA can also bring a global perspective to local lobbying campaigns, forming an effective partnership with regional and national associations, who offer a vital strong local voice. Therefore, IATA and regional bodies such as ERA have complementary missions and our work can be mutually beneficial. And it’s particularly important that we speak with one voice in Europe, where there are so many different airline associations. I’m pleased to say that IATA and ERA have an excellent working relationship – I’d call it a model for how two associations should work together – based on mutual trust, sharing and bringing our respective strengths to bear on mutual problems.
I wish ERA every success in its work. Regional carriers have always had an important role in European aviation, and I am sure that will continue. As the European economy recovers, the attractions and benefits of point-to-point regional air connectivity will become even more obvious to business travelers and tourists. But regional aviation will always need a strong champion, and the ERA has truly grown into that role in recent years. I, and the IATA team, look forward to working closely with you as together we look to seize this pivotal time in European aviation, to the benefit of all the Continent’s citizens.
Thank you very much.