It’s great to be back in Hong Kong for a few days. It is approaching four years since I left Hong Kong to head up IATA in Geneva. While I thoroughly enjoy the work and the opportunity to see the world from a different place, I must admit that Hong Kong still feels very much like home for me. And it is truly a pleasure to see so many familiar faces here today.
I wanted to share with you some thoughts on the industry as a whole before focusing on some key decisions on aviation here in Hong Kong.
State of the Industry
The first point to raise is that this looks like being a relatively good year for the airline industry. We are estimating that airlines will make a net profit of about $25 billion. That may sound like a lot. The first thing that I would say to put that into perspective is that Apple—a single company—made $18 billion in the first quarter of this year. And that was on revenue of $74 billion.
The whole aviation industry will make $25 billion on revenues of $783 billion. That’s a net profit margin of 3.2%. Put another way, airlines on average will retain about $7 for every passenger carried.
I am not trying to sell you a sob story. The industry’s fortunes are improving. On average, this year we expect to see a return on invested capital of 7%--nearly recovering the industry’s cost of capital. And certainly the fall in the oil price is helping. But perhaps not to the extent that you might expect. Even as the forward hedges come off, the strength of the US dollar will be limiting the impact of the price reduction. And many airlines will be facing higher costs in areas as widespread as aircraft, maintenance, catering and so on from that strong dollar.
My conclusion is that this year will be a good one. But, like most years in the airline industry it will still be a tough battle for airlines to keep revenues ahead of costs.
Aviation is a business. And making a profit is critically important. But for airlines, safety has no competition as the industry’s top priority. This week is a particularly poignant one for airlines. It has been a year and a day since MH 370 went missing. The aircraft has not been recovered and we are no closer to understanding what happened than we were a year ago.
MH370 is a tragic mystery and in this sad anniversary week our thoughts and prayers are with the family and friends of the 239 missing souls that were on board. As they are with all who have lost their lives in aviation accidents. Being in Asia, the shoot-down of MH17, the two TransAsia accidents and AirAsia 8501 are also top of mind. The greatest respect that we can pay to all those involved is constantly to improve the safety of flight.
IATA plays a significant role in aviation safety. The IATA Operational Safety Audit, for example, is the global standard for how airlines manage safety. It is a requirement for all 251 IATA member airlines. And nearly 150 non-IATA carriers have also successfully met its 900+ standards to join the IOSA registry.
We are also building a massive database that will help us to focus future safety initiatives. We call it GADM—Global Aviation Data Management. Already some 470 sources are contributing to it. The vision is to develop and improve predictive analytical tools and systems that will prevent future accidents.
The most fundamental data on safety performance is that on accidents. Today we announced data on the industry’s performance in 2014. Several high profile tragedies kept aviation safety in the headlines during the year. In 2014 there were approximately 38 million flights and 12 fatal safety related accidents—9 with turboprops and 3 with jets. And I would like to be clear on these three jets. They were MH 370, Air Asia Indonesia 8501 and Air Algérie 5017. MH 17 is not included in these statistics. It was an outrage and tragedy. But like the aircraft involved in 9.11 it was the victim of an act of aggression. It wasn’t an accident.
We released a lot of numbers on safety this morning, so I encourage you—particularly the working press—to have a look at our press release. You will see an overall trend of improvement by almost all measures over the past five years. For example, the jet hull loss rate was the lowest in history with one for every 4.4 million flights. Sadly, the one parameter that took a step back was fatalities. There were 641 fatalities in 2014 which is above the five-year average of 517. The three jet aircraft that were lost in 2014 were in catastrophic circumstances with no survivors. As an industry we feel for each and every one of the victims and their families. Our goal is always to have no fatalities. And considering that some 3.3 billion people flew in 2014 flying is the safest way to travel.
In recent months we have seen many questions raised about aviation safety in Asia. There were no jet hull losses in China last year. And in Asia ex-China there was one jet hull loss for every 2.3 million flights in 2014—an improvement on the one in 1.6 million five year average. That is below the industry performance, but it would be a mistake to think that flying in Asia is unsafe. It would also be naïve to say that there are no issues.
For example, later this week I will be in Indonesia to discuss with the government how we can ensure that the capacity in the infrastructure and regulatory framework is able to meet rapidly growing demand. It’s a similar story to China not that long ago. We will be working hard to ensure a similarly successful outcome.
My main message on safety today is that—despite aviation safety being in the headlines throughout much of 2014—flying is safe. And even more importantly, we are working to make it even safer.
On that note, I would like to update you in two other areas:
The first is aircraft tracking. It is no understatement to say that we were all shocked that a large commercial jet liner—MH370—could go missing. Last month at the International Civil Aviation Organization’s (ICAO) 2nd Safety Conference the issue of tracking was a top agenda item. Governments are working with industry on a standard for tracking that will be implemented progressively. The first step is a series of operational initiatives that will lead us to a standard for position reporting every 15 minutes to take effect in 2016. And we are all looking to new space-based technology that has tremendous potential to make the system even more robust in the next few years.
The other agenda highlight from the ICAO Safety Conference was the overflight of conflict zones. Airlines need authoritative, accurate, consistent and unequivocal information on which to make decisions on aircraft routing. ICAO is leading an initiative to enhance the information available with IATA’s full support. And we are also working with ICAO to close a gap in international oversight of weapons with anti-aircraft capability. There are international conventions controlling many types of weaponry—chemical, landmines, nuclear and so on. MH 17 clearly displayed the need for similar controls on the design, manufacture and deployment of anti-aircraft weapons.
Agreeing an international convention will take time. But I am confident that, working with ICAO, we can move this forward successfully.
Now I’d like to turn my attention from safety to Hong Kong and some of the key decisions that will be made on the future of aviation here.
Hong Kong is a very special place. Unique in the world and unique in China. It brings together the best of the best—whether it is financial expertise, fashion, food, culture…. You name it and it can probably be found here. That could not happen without the connectivity enabled by a truly great airport.
Hong Kong can and should be rightly proud of the important role that this city plays in the global air transport industry. The Hong Kong airport is a center piece of a powerful ecosystem that also includes the port, the can-do spirit that Hong Kongers share, and the history of bridging East and West. The airport is a community asset and helps define this very special and successful place. It is the tenth busiest airport in the world in terms of passengers and it ranks first in cargo. Hong Kong punches well above its weight in the global air transport industry.
We should also recognize a few things:
- Playing this leadership role is not an act of charity. The Hong Kong economy benefits greatly from it.
- It is a fragile position and there is intense competition to grow connectivity.
Economic Importance of Aviation to Hong Kong
The connectivity that is generated at the airport is part of a package of attributes that attracted some 3,500 corporate regional headquarters to set up here, directly employing 140,000 people. And of course, aviation is the core enabler of much of Hong Kong’s tourism industry which brings some HK$250 billion of business. We did a study to quantify the impact of the aviation and aviation-related tourism sector on Hong Kong and found that it supports 8.2% of Hong Kong’s GDP.
It is absolutely in Hong Kong’s best interest to see the aviation industry here flourish. That was clearly the thinking behind the development of Hong Kong International Airport. And it has proved a wise investment since day one.
But the secret is out. Governments in this part of the world and the Middle East are building impressive infrastructure to grab bigger pieces of the growing pie. From the global industry perspective, that’s great. From the perspective of Hong Kong, it means competition for hub traffic. We’ve studied developments in a few key passenger flows to see how Hong Kong was doing.
Between 2005 and 2013 Hong Kong’s share of the market connecting China to the rest of the world shrank from 20% to 17%. It has stagnated with a 10% market share on the ASEAN to North America market. And its 3.3% of ASEAN to Europe traffic has contracted to 2.4%.
There are lots of reasons why these changes are happening. The Middle East airlines are proving to be strong competitors with efficient and affordable hubs being a central piece of their success. And the other hubs in this region are continuously upping their game as well. Singapore just confirmed S$3 billion (about HK$17 billion) for a fifth passenger terminal after building a third runway that will eventually be opened for commercial use. Seoul’s Incheon will open a new terminal by 2017. Bangkok is expanding. There are plenty of airports in Hong Kong’s backyard—Shenzhen, Guangzhou and Macau are also eager for traffic. And then there is the frenetic expansion of airport infrastructure that is taking place right across the Mainland of China.
The Third Runway
So the announcement by the Financial Secretary in his budget speech that the third runway will be built by 2023 should be greeted by everyone in Hong Kong as encouraging news. IATA has long been an advocate of the need for a third runway and we were particularly involved in the environmental impact assessment recognizing that whatever is built must be sustainable. The Government, the Hong Kong Airport Authority and everyone associated with this project should be commended for the thorough work they’ve done on evaluating the environmental impacts, and working out how to mitigate them.
The goal is to reap the economic and social benefits of connectivity by sustainably meeting growing demand. Already Hong Kong’s growth is nothing short of phenomenal—serving some 63 million passengers and nearly 4.4 million tonnes of cargo last year. Increasing capacity to be able to serve 100 million passengers and 9 million tonnes of cargo by 2030 will no doubt prove to be a continuing pillar of Hong Kong’s success—provided it is built and funded wisely. Today I would like to share with you some thoughts on both of those issues—funding and construction.
To start, I hope that the new facilities for HKIA will continue to be built in close consultation with the airport’s main users—the airlines. The close collaboration that has developed over the years between airlines and the airport has demonstrated its value in supporting HKIA’s success.
Moving from a two runway operation to three is complex. And the master plan for the airport is clearly established and supported by the airlines. The devil may be in the details. Developing a satellite terminal and reconfiguring (and in some cases demolishing) existing infrastructure needs to be done in such a way as to enhance the airport’s efficiency and competitiveness. It would be a shame, for example if the expansion in capacity resulted in an increase in the minimum connection time.
The airlines are eager to be partners in developing the future of HKIA. And we look forward to continuing and transparent engagement with the Airport Authority to ensure that its future development is focused on enhancing its efficiency and strengthening Hong Kong’s overall competitiveness.
The other element of success is how the expansion is financed and funded. There have been many discussions about the funding model for the infrastructure. Today I would like to provide some thoughts on how the airline community sees this.
First, let me be clear, we accept the user-pays principle. That is well entrenched globally. Airlines through airport charges pay for the infrastructure that they use. In fact, there are even some globally agreed principles for how infrastructure should be funded. Key among the ICAO principles for the development of new infrastructure are that users must be consulted, and shouldn’t have to pay for the new facilities until they are ready.
The first is self-explanatory and follows-on from the operational consultation. Airlines and airports are partners. We both benefit when we sit down and agree on the best way forward—both in the way the airport is built and how it is paid for.
The second—the avoidance of advance payments—is also a common sense approach for large infrastructure projects particularly where there are well-developed capital markets and the commercial success of the infrastructure is proven. As I said, airlines accept the user-pay principle, but they should only start paying when there is something to use! You cannot charge a toll for a bridge that is not yet built or for a tunnel that is yet to open. The same is true for airport infrastructure. Once the airlines are using it, we’ll be happy to pay for it. How much we will have to pay will depend on the circumstances at the time, of course. But by then we’ll know for sure what it’s cost, and what the traffic volumes are.
This is an important point. So let me further explain our concerns. Starting to pay for the cost of the third runway in advance would mean increasing current airport charges. This is not only wrong in principle. It would be unfair. Airlines and passengers using the airport today would be paying for those who use it tomorrow. And, most importantly for Hong Kong, it would be taking risks with a business model that’s been proven to work very well. Since the airport opened in 1998, Hong Kong’s airport charges have become competitive. As a result, airlines have wanted to come here, and the airlines already here (especially those based here) have added frequency and capacity.
As an example, we looked at what a 10% increase in charges could do to the Hong Kong hub. Making the airport more expensive to use would weaken its competitiveness—reducing passenger numbers by up to 80,000 per year and cargo by up to 7,000 tonnes annually. That would lower aviation’s contribution to Hong Kong’s GDP and place some 600 jobs in jeopardy.
Let me emphasize—Hong Kong airport is a huge success. It supports the Hong Kong economy. It delivers great service to customers—airlines and passengers. And it is one of, if not the most, profitable airports in the world. Why risk destroying something that works so well?
So it begs the question, could a third runway be developed without increasing charges, without placing a burden on taxpayers, without making it more expensive for travelers, without adding an extra burden to shippers and while increasing the hub’s competitiveness? It’s an ambitious undertaking but I believe that the answer is yes.
The successful financial situation of the airport today could allow that to happen. In FY 2013/14 HKIA had a pre-tax profit of HK$7.8 billion which is about half of revenues. And it has very little debt—just about 10% of total capital. In fact, if it wanted, HKIA could eliminate charges to the airlines completely and still be profitable…but I am not suggesting that. But I will suggest that the airport could “self-fund” the investment needed for the third runway—with no increase in charges for existing facilities or those being built.
There is ample scope for the airport to finance the construction by borrowing the needed HK$150 billion for the runway through bonds or commercial loans.
Here I would like to be very clear on the user-pays principle which airlines support. We are not asking for someone else to foot the bill for our growth. Airlines pay user charges to the airport. And the current level of charges and business model would provide sufficient revenue to pay back the loan (or whatever financing mechanism is chosen) to fund infrastructure investment. Airlines would pay for the infrastructure—through increased volumes, not increased charges. And, as I said earlier, that includes existing facilities and the new construction.
The growth in traffic that the extra runway and terminal will bring will see the airport’s success over its first 17 years repeated all over again – provided its airport charges are kept competitive. It’s a proven business model. Why take the risk of changing it?
While the new facilities are being built, the airport’s dividend to the government will reduce. Any normal business faces the same situation when it makes a major capital expenditure to support its future success. But no legitimate return ever comes without some up-front investment. And let’s not forget that the airport’s value to Hong Kong was never intended to be only in the profits it generates. In fact, its role as a catalyst for economic activity makes a much broader contribution to the community and the government.
The airport is like the proverbial goose that laid golden eggs. Its success brings prosperity to Hong Kong. It needs to be nurtured. But changing its diet puts the golden eggs at risk. It would be a shame if they stopped.
As I said a few minutes ago, Hong Kong is my chosen home. I believe passionately in the future potential of Hong Kong and of the critical role that air transport can continue to play connecting this great city to the world and in so doing enriching it both culturally and economically. I know that I am a bit late to be wishing everyone Gong Hei Fat Choy. But I will anyway in a slightly special context.
I cannot think of any better way to wish the 7.2 million people of Hong Kong Gong Hei Fat Choy—happiness and prosperity—than by encouraging decisions on fulfilling the airport’s 2030 Master Plan with a firm focus on enhancing HKIA’s ability to contribute to Hong Kong’s competitiveness. Important decisions lay ahead. And I have every confidence that through transparent consultation the right choices for the future will be made.