100 Years of Commercial Aviation. What’s Next?
Ladies and gentlemen, good morning. It is a pleasure to be here today with you in this beautiful city. I would like to thank our sponsors for their strong support, which makes events such as this one possible.
We are meeting in a momentous year for our industry. One hundred years ago, on 1 January, 1914, our industry was born when Tony Jannus piloted a Benoist flying boat carrying a single fare-paying passenger between St. Petersburg and Tampa, Florida. Percival Fansler, a local businessman, conceived the idea for the airline and Thomas Benoist built the aircraft. From their vision, commercial aviation has evolved into the global air transport system that will safely connect some 3.3 billion travelers with nearly 100,000 flights per day across 50,000 routes this year. This activity drives economic growth, creates jobs and facilitates business opportunities. Aviation’s annual economic impact is estimated at $2.4 trillion and it supports 3.4% of global GDP.
Aviation makes global mobility ubiquitous. Jules Verne imagined a time when it was possible to go around the world in 80 days. Today, you are rarely more than 24 hours from any other part of the globe. Lonely Planet, the world’s leading travel media company, recently observed that air travel is in the process of becoming fully integrated into how we live our lives.
The century mark provides an excellent plateau from which to take stock of where we are as an industry and what we need to do to meet the expectations of tomorrow’s passengers.
One thing is certain: There will be many more of them. In 2018 we expect to see a 21% rise in passenger numbers over 2014 – some 700 million more customers. And by 2034 airlines will carry approximately 7.3 billion passengers, more than double the number today, according to our 2014 Air Passenger Forecast Global Report.
Meeting that thirst for connectivity will be challenging. To grow, our industry needs to be sustainable. We are making good progress on the environmental aspects of sustainability with commitments to achieve carbon-neutral growth from 2020 and cut our net carbon emissions to half the 2005 levels by 2050.
Sustainability also means generating adequate returns to attract new investors. This year we expect airlines to achieve a collective global net profit of $18 billion. It sounds like a big number, but on revenues of $746 billion, it is a net profit margin of just 2.4%. That’s less than $6 per passenger.
The good news is that profits are improving. Our average return on invested capital today is 5.4%—up from 1.4% in 2008. But that is still below the 7 to 8% cost of capital that investors would expect for risking their money in such a highly competitive industry. That is the level of profitability that is sustainable—what we need to be able to hire and train the future workforce and purchase the aircraft and facilities necessary to accommodate the demand for connectivity that we know is coming.
We cannot do it all by ourselves. Aviation was built on collaboration, going all the way back to Fansler, Benoist and Jannus. Every flight requires a choreography of cooperation involving airlines, airports, distribution and travel technology providers, travel sellers, and air navigation service providers—to name a few. They work together based on global standards. As a global business we could not function if we needed to develop bespoke systems for each airport or destination. The nearly 100,000 flights that will operate today can do so only because the rules are basically the same across their networks.
Of course, we work together for a purpose—the passenger. I’d like to return to that first airline flight. Abram Pheil bid $400 for the honor of being the first passenger, the equivalent of about $9,500 in today’s dollars. That would buy a memorable first class experience in 2014. But Pheil squeezed onto a small wooden bench next to the pilot, in an open cockpit, exposed to the elements, including a fair amount of sea spray, since the aircraft flew just a few feet above the waters of Tampa Bay.
Let’s contrast that experience to today. The vast majority of passengers spend only a fraction of what he paid. The average one-way fare in 2014 excluding ancillaries is around $230. And for that amount, the journey is faster and more comfortable. In fact, the requirements of the modern world would have been unimaginable a few decades ago—let alone in 1914!
- Passengers want to be able to tailor their trip and compare prices in the same way that they customize other consumer purchases, such as laptops and cars
- They expect to be connected throughout their journey
- They want to be in control of their journey—with self-service options from checking-in to re-booking (if necessary)
At IATA, our role is to help facilitate the partnership for the development of the global standards to help meet these and other requirements in our industry’s quest for ever more efficiency. Today I would like to focus on three specific areas where by working together we can meet the expectations of tomorrow’s travelers.
- Distribution and airline merchandizing
- Taking control of the trip
- Staying connected
Last year at WPS in Dublin, we spent a lot of time talking about the New Distribution Capability (NDC), our effort to facilitate the modernization of the 30-year old airline distribution platform through the development of an internet data transmission standard.
We all agreed that distribution needed to be modernized. But there was a marked difference of opinion about whether NDC was the best way to go. And it is no secret that many of our industry partners were skeptical about the motivation and viability of NDC.
So I cannot overstate the importance of an agreement with Open Allies for Airfare Transparency in January. It was instrumental in unleashing impressive progress.
- We have an NDC standard available for deployment
- We have more than a dozen NDC pilots underway or in the pipeline
- Shandong and Hainan airlines have already implemented NDC Shopping 1.0
- And most importantly, in August, the United States Department of Transportation (DOT) granted Final Approval to Resolution 787, which is the foundation document for NDC.
On the heels of that important announcement came the news that one of the major GDSs was deploying the industry’s first NDC 1.0-enabled connectivity for travel agency distribution in North America. And this was quickly followed by another travel technology provider announcing a new solution to enable airlines to implement NDC. So in a year, NDC has gone from the drawing board and testing labs to the marketplace.
What do we expect in the next 12 months? As we continue to gain experience with the pilots and initial deployments, we will feed that knowledge back into the evolution of NDC as schemas—which are the communications protocols that make up the NDC standard—are developed. As I said, this is an open exercise. We are always looking for more pilot volunteers, airlines and IT providers—particularly from Asia-Pacific and Latin America—to help us to strengthen the schemas further and ensure they are fit for purpose.
There will be challenges for all as we transition fully from design to widespread implementation.
- Airlines will need tools to manage and market the products and services they will now be distributing through the agent channel
- Agents will need tools to enable them to manage the content they will now receive from airlines, and
- Travel startups need lasting technical standards to build their businesses and to bring entirely new solutions to market
Bear in mind that this is occurring against a backdrop of travelers demanding ever more connectivity and capability in this multi-touch, multi-device world.
So, while we have every confidence in the existing players to develop solutions, we also have looked for ways to spark and support innovation. As part of this effort, we are announcing the creation of the NDC Innovation Fund, a stand-alone venture capital fund. The goal of the Fund is to support financially and strategically-positioned companies willing to develop applications and solutions to leverage the many capabilities the NDC standard enables. We are pleased to partner in this effort with Travel Capitalist Ventures, an international private equity and venture capital firm specializing in travel investments.
We believe the combination of IATA’s knowledge of the NDC standard and our relationship with our member airlines and others in the air travel value chain, along with Travel Capitalist’s financial and travel investment expertise, will create an attractive opportunity for interested companies.
The NDC Innovation Fund is a first for IATA and we have a panel scheduled later today to give you more details.
In tandem with NDC, we are modernizing the back-office functions associated with airline merchandizing through the IATA e-Services project to eliminate paper from the process and create a standard electronic record, the Electronic Miscellaneous Document (EMD) for the sale of ancillary products. Passengers benefit because EMDs enable simpler billing, delivery, and accounting for ancillary purchases.
I will leave this subject by noting that Lonely Planet recently observed that “with online flight comparison services in the pipeline, in the next couple of years, economy travelers are on the cusp of personalizing their travel experiences like never before.” NDC is making this vision of air retailing possible.
Taking Control of the Trip
We also want to meet passenger demands for more control over the journey itself. According to our 2014 Global Passenger Survey, nearly 40% of air travelers would prefer to check in via the Internet or with their mobile devices and 38% prefer automatic check-in. Only15% prefer to receive their boarding passes from an agent at an airport check-in counter. In the event of a travel disruption, 60% of travelers would prefer to be informed and offered new booking options via a kiosk or the internet or sent a new boarding pass electronically.
Our Fast Travel initiative, which is part of our 10-year old Simplifying the Business program, responds to these demands through six time-saving, self-service options including self-check-in and/or automatic check-in, self-bag tagging and self-boarding and automatic rebooking.
For 2014, the IATA Board has asked us to make at least four Fast Travel options available to 27% of eligible passengers. This will require a significant acceleration from the current 18.7%. With the support of our airport and IT partners, we can make it happen. By 2020 we want 80% of air travelers to be offered a complete self-service suite based on industry standards.
While we work to give passengers more control over their journey, we also need to find ways to make travel easier and with fewer hassles. I’d like to highlight two examples of how we are working with our industry partners to achieve this.
The first is Innovation in Baggage, or InBag. In Bag follows our very successful Baggage Improvement Program (BIP) that concluded in 2012 and contributed to a 50% reduction in baggage mishandling. BIP focused on improving handling at individual airports. InBag will achieve a further 50% reduction in mishandling—dropping from 1% to 0.5%--by improving processes. InBag will also enable innovation in making such products as a baggage delivery service widespread and in introducing modern standards for communications and systems design.
While baggage mishandling is a hassle for a small portion of travelers, our passengers tell us that the security checkpoint is a near universal pain point. In fact, nearly 60% of those surveyed told us that a bad security experience at a transfer airport will affect their future travel choices. Smart Security aims to improve security, and remove the hassle, so that passengers proceed through security checkpoints with a minimum of queuing and disrobing. With Smart Security, resources will be allocated based on risk, and airport facilities will be optimized.
A key driver for Smart Security will be collaboration with Airports Council International (ACI). IATA and ACI signed a Memorandum of Understanding in 2013. Aside from Smart Security, the MoU covers projects that will drive improvements in airport throughput capacity and efficiency as well as improvements in cyber security.
This year we will conduct airport trials with Smart Security components and assess the impact on operational efficiency, the passenger experience, and security effectiveness. These pilots will take place at Amsterdam Schiphol, London Heathrow, and our newest participant, Hamad International Airport in Doha.
One of the challenges we face in being able to deliver on some of the value of Fast Travel and StB initiatives is regulations that are not keeping up with the pace of innovation.
Recently, however, we have seen regulators such as the US Transportation Security Administration and the European Commission take note of modern technology such as Home Printed and Electronic Bag Tags. They are seriously looking at enabling these process improvements so that they can be offered to passengers in a safe and secure manner. We are very eager to work with any regulator to make these improvements as widely available as possible.
Ultimately, the vision is to go beyond the automation of existing processes and to transform the end-to-end experience by eliminating unnecessary and redundant steps and optimizing the entire process.
As we do this, we are also focusing on how we can work more closely with our travel partners to ensure that travelers are always connected and that travel suppliers are able to share knowledge of any changes or disruptions. Today, the average passenger is always on their mobile and has constant access to the web and to social media. Still, passengers need to search actively for information concerning their journey. Systems do not always talk to each other and we must overcome a legacy of concern about sharing information among different travel suppliers that would help us to serve our passengers better.
We believe it should be possible to create a single repository for this information. By 2020, we expect that real time interaction between customers and travel suppliers will be a reality. We call this fully-realized vision Travel Communication. It aims to enable multiple industry stakeholders to communicate to the passenger consistently across all touch points with information that the passenger knows is up to date and accurate.
A Revolution in the Passenger Experience
From transforming the shopping experience, to empowering passengers to take control of their journey, to making real-time interaction between passengers and travel suppliers a reality, I hope you will agree that we are on the verge of delivering a revolution in the passenger experience.
But there is a shadow overhanging this bright future for our customers, which is that government regulators are substituting their own judgment for that of the marketplace. Their continued interventions run the real risk of stifling the very initiatives we are pursuing for the second century of air travel. This particularly is a problem in the United States, I am sorry to say. A prime example is the so-called Consumer Rule III proposed by the DOT. This aims to address marketplace problems that do not exist.
Among its provisions is one that would require each airline to allow any travel agent that sells its tickets to display the airline’s core ancillary services and fees as well. What other industry is forced by regulation to market its products through channels it has not chosen?
The proposed rule even obliges airlines to display ancillary information on their own websites. This begs the question of what problem DOT is trying to solve. Nobody has suggested that consumers are unable to purchase ancillary services or to see how much they cost on an airline’s own website. If passengers can readily ascertain the information that is the subject of the proposed rule, where is the unfairness or deception that triggers DOT’s regulatory authority?
Even if DOT had the legal authority to impose this requirement, the proposed rule is, at best, a “yesterday solution” to an issue that industry is well on its way to solving.
To begin with, airlines are progressively signing bilateral agreements with global distribution system providers for the distribution of ancillaries. At last count, more than 50 such agreements have been concluded. So the marketplace is already doing what the regulation seeks to achieve—and I would add, much more efficiently. But even more significantly, NDC sets us all on a course to far greater transparency and granularity in the marketing of air transportation than DOT (or anybody for that matter) could even imagine today.
Now I need to step back to observe that regulation is vital to our industry. That 100,000 flights will operate safely today is of course attributable to the focused efforts of everyone in the industry. But it is also testimony to the quality of governmental oversight that guides their work. The industry not only respects regulation, it depends on it. But more is not necessarily better, and that is particularly the case when it risks undoing the benefits of market liberalization and innovation.
All of us are here today because we believe in the future of air travel and we are fully dedicated to making it an even better experience. The bedrock supporting this effort is an industry that is financially sustainable and able to generate a sufficient return to reward those who risk their capital with us. As we grow, we are committed to meeting our environmental responsibilities. I am convinced that working together, we can make the second 100 years of air transport even more successful than the first. Air travel has transformed our wonderfully large world into a wonderfully small planet. And for that, we should all feel a great sense of accomplishment for the part we are playing.