Ladies and gentlemen, good morning. It is a pleasure to be returning to this event for the fourth time.
I always look forward to the ALTA Airline Leaders Forum. First, you always choose well among the many attractive destinations in the Latin American and Caribbean region—and this year is no exception. It’s great to be here in Nassau. But more importantly, is the very productive relationship that IATA has with ALTA. The work that we do together to surmount challenges and achieve the full potential of aviation is fully focused on delivering value to our members. While the role of aviation in driving economic benefits across the region is well-established, there is still a pioneering spirit that is very exciting.
I am particularly reminded of that this year. Commercial aviation started not that far from here. A century ago, 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 collective 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. In the Latin American/Caribbean region—which I will refer to as this region for simplicity’s sake, aviation supports more than 4.9 million jobs and contributes $153 billion to regional GDP, including the benefits of travel and tourism.
The century mark provides an excellent plateau from which to take stock of where we are as an industry and what needs to be done to meet the expectations of a world that is thirsting for ever more connectivity. It took 100 years to reach 3.3 billion passengers in a year. It will take just 20 years to reach more than double that figure to 7.3 billion passengers according to our 2014 Air Passenger Forecast Global Report. In this region, markets will rise from 242 million passengers today to 605 million passengers in 2034.
To meet that demand, our industry needs to grow. And to grow, we need 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. This region is expected to do a bit better than the world average, with a net profit margin of 3%.
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 necessary to accommodate the demand for connectivity that we know is coming.
It will also require more airport and airspace capacity. We can’t do it all by ourselves. Aviation was built on collaboration, going all the way back to Fansler, Benoist and Jannus. We work together based on global standards. As a global business we could not function otherwise. The nearly 100,000 flights that will operate today can do so only because the rules are basically the same across their networks.
Yet there are always opportunities to increase collaboration and it’s a fact that governments in some parts of the world take a more supportive view of how to maximize the benefits of aviation’s connectivity than do others. I am speaking of places such as South Korea, Singapore and Dubai, for example, where governments recognize the value of aviation as an economic enabler and use it to drive development. In other regions, like Europe and North America, governments too often see aviation as little more than a cash cow. They burden passengers and airlines with high fees and taxes to support the treasury.
Unfortunately, too many countries in this region take a similar approach. The result is that aviation in the region is unable to play a bigger role in helping to grow the local economies and help create jobs. It does not have to be this way. We have seen, in Panama and Chile, governments working to maximize the power of their aviation assets, and it should not be surprising that airlines based in these countries play an outsize role in the region.
I would like to highlight three areas where by working cooperatively to address key issues and embracing global standards, this region can unleash and exploit its full economic potential through the power of aviation’s connectivity.
These are: Infrastructure, taxes and regulation
I will take each in order. Our members` ability to meet rising demand depends heavily on the availability of suitable airport infrastructure. Lack of adequate capacity is a significant problem across this region. According to the World Economic Forum, only two economies, Panama and Barbados, rank among the top 35 countries for the quality of their air transport infrastructure. Among some of the larger economies, Brazil is ranked 131, Colombia is 105 and Mexico is 64.
Now we have seen some positive developments. The decision to build a new airport for Mexico City certainly is welcome news. But now comes the hard part: constructing a highly-efficient airport that meets the needs of future travelers at a reasonable cost. IATA stands ready to share our expertise in this exciting and much needed infrastructure project. We certainly hope the Mexican government will engage with stakeholders on this extraordinarily complex undertaking to avoid repeating some missed opportunities of recent regional airport projects.
- Brazil inaugurated the new $1 billion Terminal 3 at Guarulhos for the FIFA World Cup. Now, with the refurbishment of T1 and T2 underway it is crucial the industry is engaged to ensure Brazil’s primary link to the rest of the world meets global standards as a well-functioning hub.
- In Colombia, the new international terminal at Bogotá is modern and efficient. Unfortunately, it was built too small and already is at capacity.
- In Ecuador, Quito inaugurated a new airport in early 2013, but it is actually smaller than the one that it replaced.
Elsewhere it is taking far too long to bring on much-needed capacity. Buenos Aires Aeroparque, Santiago, and Lima airports are three places where expansion needs to accelerate. IATA is supporting initiatives to maximize existing capacity, but there will come a day when there will be no extra room to grow.
Of course, many governments are looking to airport privatization and concessions to speed up infrastructure improvements. Creative ways to finance airport development are always welcome, provided they align with ICAO’s policies that make States responsible for the economic oversight of commercialized or privatized airports. They must ensure that key charging principles of non-discrimination, cost-relatedness, transparency and consultation with users are followed. And that applies to both public and private airports.
This region has seen too many privatizations that failed to deliver better and more efficient infrastructure because they did not follow global standards and practices. As the region looks at another round of privatizations or concessions, let me make clear what I see as the most important lessons:
- Governments must define a robust regulatory framework with price caps, enforceable efficiency targets and construction deadlines and a single till model.
- To avoid conflicts of interest governments should not participate in privatizations as investors or owners.
- The bid criteria should include an experience factor for the new operator.
- Airlines must have a role in capital investment decisions.
- And governments need to enable competition among service providers, particularly for fuel concessions.
It is clear that whatever actions are taken, the region’s capacity shortage will not be solved overnight. So it will be necessary to manage scarce runway resources. The IATA Worldwide Slot Guidelines (WSG) is the standard 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. An airline operating from Sao Paulo to London needs a consistent set of rules at both ends of the route. That is why we are concerned to see some governments implementing slot management procedures that do not follow the WSG in the misguided hope of extracting additional capacity from congested airport infrastructure.
In the case of Brazil, IATA has voiced its disappointment with slot regulation 338 and its inclusion of punctuality clauses linked to historic determination. We continue to discuss the challenges of implementing such clauses with the government and authorities.
In Mexico, the government has not implemented the WSG, but it has committed to do so by summer 2016. We remain concerned as to the operational impact of PLANSA, the departure flight plan and slot matching system, which the government also wants to use as a punctuality measurement tool.
A positive development in Colombia is that Bogota airport has agreed to transition to a full slot coordination process in accordance with WSG.
Fees and Taxation
I am hopeful that by working together using global standards and by sharing our expertise we can find ways to manage the infrastructure shortfall until new capacity comes online. I am more concerned, however about changing the mindset of governments in the region. As I observed earlier, governments need to understand that the real value of aviation is the global connectivity it provides and the growth and development it stimulates, not the fees and tax receipts that can be extracted from it.
We see an extreme example of that mindset at work in Venezuela, where to support the economy, the government is refusing to permit airlines to repatriate their own money except in small amounts at punitive exchange rates. Currently the amount owed to 24 airlines totals US $3.6 billion, down from $4.1 billion in July. We continue to meet with officials to try to resolve this situation and the unequal treatment afforded to the airlines in terms of the approvals.
The situation in Venezuela certainly occupies a lot of our time but it is not the only such problem in the region. We also face a remittance issue in Argentina. Although it is nowhere near the scale of the problem in Venezuela we are still looking at a liability of $30-$60 million. We need to be vigilant to ensure this does not grow into a bigger concern.
If we look at this region and the Caribbean more broadly, there is a clear trend to burden airlines and their passengers with taxes and user charges. There are some 47 different types of taxes and charges in Central and South America, and 34 more for the Caribbean. Some are meant to foster tourism, but this makes no sense since in the end what taxes do is exactly the opposite: taxes harm tourism and the economy of the states imposing them.
The same holds true for user charges, which in many cases have no relation whatsoever with services provided to airlines in the region. For example, in Jamaica, Kingston and Montego Bay airports have proposed tariff increases of more than 100%. We have teamed up with ALTA, Airlines for America and the National Airlines Council of Canada and are hopeful of a sensible outcome. But I cannot avoid thinking of the potentially damaging consequences to the tourism industry in the country if we are unsuccessful.
Fuel is another area where we need to change the mindset of governments. A number of States in the region apply VAT and other taxes on jet fuel for international flights which is in conflict with the Chicago Convention and ICAO agreements. I am afraid that includes our host country for this event, which charges a 7% stamp duty on international fuel.
Overall, fuel expense across the region is around 14% higher than the world average. Brazil is even more extreme at 17% above the global average. Above average fuel expense is just one of many challenges. The World Economic Forum’s Travel and Tourism Competitiveness Report shows that Brazil ranks 118 out of 140 economies in terms of the competitiveness of its ticket taxes and airport charges. Colombia is 125. Venezuela and Peru are nearly at the bottom at 134 and 135, respectively. High fees and charges impact a country’s attractiveness as a destination and its competitiveness as an exporter.
The global standard approach also is a good model for other areas of commercial regulation—passenger rights among them. No airline wants to disappoint its passengers and all work hard to avoid delays and cancellations. But what we are seeing in this region is that passenger rights regulations are becoming increasingly prescriptive, thus making it more challenging for airlines to comply with countries’ differing requirements. Currently, 11 countries in the region have passenger rights regimes and new regulations are being considered in five countries. No effort is made to harmonize these differing requirements, resulting in confusion and frustration for customers.
Here are some of the challenges with which airlines contend:
- 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 Peru, new rules for domestic travel were introduced last year allowing passengers to fly itineraries out of sequence—which hurts airlines’ ability to tailor their fares and products to different market segments.
- Also in Peru, passengers may transfer their tickets to others for domestic flights, a move that raises fraud and security concerns.
IATA’s core principles on passenger rights recognize that there is a need for basic protections. They are based on lessons learned from existing regimes, and attempt to strike the balance between protecting passengers and ensuring industry competitiveness. We urge governments implementing new regimes or revising existing ones take these principles on board during their deliberations. The industry stands ready to partner with governments in order to have a balanced approach to consumer protection.
I have described some very big challenges to be met in order for aviation to deliver on its full potential in Latin America. Yet I am optimistic that governments here can be persuaded to embrace true partnership and collaboration. After all, many already have done so when it comes to safety. Safety is everyone’s top priority and throughout the first century of commercial aviation, achieving it has depended on partnerships, information sharing, and global standards.
In 2013 there were some 36.4 million flights and 16 fatal accidents. If you were flying on a jet aircraft, your chances of being involved in a major accident were one in 2.4 million. Looking specifically at safety in this region, we definitely are seeing the trend line moving in the right direction. In 2013, the region’s carriers had a Western-built jet hull loss rate of 0.44 per million flights, or less than one major accident for every 2 million flights. This is nearly a 50% improvement over the average of the past five years and very close to the 2013 global average of 0.41 major accidents per million flights. Furthermore States across this region formally agreed to target a 50% reduction in the fatality risk for air travel by 2020 compared to 2010. This is exactly the kind of working together approach that needs to be applied in infrastructure, taxation and regulation.
It is even more powerful when combined with global standards. Examples of global standards that contribute to safety include ICAO’s Universal Safety Audit Program and the IATA Operational Safety Audit (IOSA). As you know, IOSA is a requirement for membership in IATA, as well as in ALTA. In the 11 years since it was created, IOSA has become the global benchmark for airline operational safety management. Of the 402 airlines on the registry, 154 are not members of IATA. And of the 45 regional airlines on the IOSA registry, not one has had a fatal accident in nearly seven years.
But we are not resting on our laurels. 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. To address this segment we are developing the IATA Standard Safety Assessment (ISSA) and are planning to operate and promote it in partnership with the Flight Safety Foundation.
We have performed beta tests with five airlines, including two in this region—Nature Air from Costa Rica and Tropic Air from Belize. I am pleased to announce that we anticipate that ISSA will go live in early 2015. We expect that these two carriers will be among the first to join the new registry.
ALTA was a strong voice of encouragement in developing ISSA and I would welcome a decision by ALTA to make it a condition of membership in the organization for those airlines that do not meet the criteria for IOSA.
We have come a very long way since the very first commercial flight 100 years ago to deliver the finest transportation system the world has ever known. This achievement is built on collaboration. Every plane that takes off does so only because of the efforts of a virtual army of dedicated individuals, many of who do not even work for the airline—from the travel agent who sells the ticket, to the ground service provider who fuels the airplane, to the air traffic controller who puts it in the departure queue. It would simply not be possible without teamwork and global standards.
We have not achieved a satisfactory level of either in this region, but this is not grounds to be pessimistic. Look how much has been achieved already. And imagine how much more can be achieved if governments can be persuaded to learn from the lessons of places like South Korea, Singapore and Dubai. Why shouldn’t the history of the next 100 years of aviation start here?