Good morning. It’s always a pleasure to be back in New York, one of the world’s great cities and the center of the global financial community. I’d like to thank the Wings Club for joining with us to host this event and Airlines for America for their strong support. Thanks are also owed to our generous sponsors. Without them, events like this would not be possible.
I think it is fair to say that commercial aviation and New York each make a huge contribution to the other’s success. Aviation provides the global connectivity that sustains New York’s status as the hub of the financial world and a top tourist destination; and New York is certainly among the most important destinations for the more than 80 airlines that serve the three major metropolitan airports. Thus, this is an ideal location to host what I hope is the first of many Aviation Days.
Looking around the room, I’m impressed by the breadth and depth of industry knowledge, and by the diversity of aviation stakeholders represented here. We have airlines, airports, equipment manufacturers, air navigation service providers (ANSPs), regulators and the investment community. We are connected through the shared conviction that aviation makes the world a better place. And the strength of aviation lies in the working together approach we take to address industry challenges. In fact, partnerships and collaboration are in our collective DNA. Perhaps that is because every single flight is the result of close cooperation between many different stakeholders, including airlines, airports, ground service providers and ANSPs.
Partnerships have been critical to our most successful achievement, which is safety. By working together we have made flying the safest form of long-distance travel the world has ever known. Last week we released data on the industry’s safety performance for 2015. The global accident rate was one major accident for every 3.1 million flights. This was a 30% improvement compared to the previous five-year rate of one major accident for every 2.2 million flights. Furthermore, there were zero jet hull loss accidents that resulted in passenger fatalities in 2015. The four fatal hull loss accidents all involved turboprop equipment.
I must qualify this figure, because two tragedies—the loss of Germanwings 9525 and Metrojet 9268—are not included in the totals as they were deliberate events, not accidents. Indeed, 2015 is similar to 2014 in this regard. If you look at the last two years, the industry’s safety performance has been affected primarily by events that could be classified as “unthinkable”.
In 2014 we had the disappearance of an aircraft with no obvious cause and another shot down over a conflict zone. In 2015 the headlines focused on two terrible air disasters: One in which a pilot deliberately took his own life and those of all on-board; and one in which the aircraft is believed to have been destroyed by an act of terrorism. There are no simple solutions to the issues raised by these tragedies. But the best way to honor those who lost their lives is by re-dedicating ourselves to making flying even safer. In that regard I am proud that IATA participated in the Aviation Rulemaking Committee created by the Federal Aviation Administration (FAA) on the subject of pilot mental and emotional health, as well as on the Task Force on Risks to Civil Aviation Arising from Conflict Zones established by the International Civil Aviation Organization (ICAO).
These tragic and unexpected events have re-emphasized that we must always be alert to emerging hazards to ensure that they are addressed before they become safety threats. One example that is in the news almost every day is drones, or as ICAO refers to them, Remotely Piloted Aircraft Systems.
Don’t get me wrong. As someone who has spent his entire adult life in aviation, it’s great to see aviation reach a new audience. We are only beginning to discover the many potential commercial applications of this technology. And it would be naïve to think that States and military forces will reduce their use of drones. They are here to stay. But we must not allow them to become a drag on the efficiency of the airways or a safety threat to commercial aviation.
Of course, the great majority of drone operators pose no risk. But we do need a sensible approach to regulation and a pragmatic method of firm enforcement for those who disregard rules and regulations and put others in danger. The issue is real. We have plenty of pilot reports of drones where they were not expected, particularly in the airport environment, but also at altitude.
Appropriately, there is a lot of work being done in this area. IATA welcomes FAA’s activity and is supporting the “Know Before You Fly” campaign to educate prospective users about the safe and responsible operation of drones. And we are working closely with ICAO as well as stakeholders representing airports, ANSPs and pilots, to agree a common approach.
I am confident that by working together we can address the challenges posed by drones while benefiting from their tremendous potential.
Other Partnership Opportunities
I also believe we have the opportunity to apply this partnership approach to other challenges facing aviation including:
- Ensuring our continued economic viability
- Infrastructure development
- The environment
Let’s begin with our economic viability. Commercial aviation is growing because the value it has delivered has continued to increase over the 102 years of its existence. Globally, the 3.8 billion people and 53 million tonnes of cargo that airlines will safely carry this year supports some $2.4 trillion in economic activity and some 58 million jobs. In the United States, the world’s largest single air market, aviation supports some 5.7 million jobs, including tourism-related employment, and contributes some $562 billion to US GDP.
Paradoxically, it is no secret that for all the value we deliver, airlines have always struggled to turn a healthy—or sustainable—profit for their investors. With a lot of hard work and the confluence of some key factors, this is changing: We expect that airlines will deliver a $36 billion profit in 2016, for a 5.1% net margin. While it’s not close to the 23% net margin that Apple delivered last year, it is considered a strong result for our industry. Even more significantly, airlines are starting to provide a normal return to their investors—without whose support we cannot meet the forecast demand for air travel. The average cost of capital is estimated at around 7.0% this year. And for the second year in a row—and only the second time in our history—airlines collectively are set to deliver a return in excess of that—8.6%. But I should also put some perspective on that profitability. On a unit basis we are looking at airlines making less than $10 for each passenger carried.
Spurred by the performance of US airlines, the North America region is leading the industry in terms of profitability. Airlines in the US and Canada are expected to earn some $19.2 billion in 2016, or roughly half the industry’s global profit. These profits represent the fruit of more than a decade of toil and sweat as well as financial restructuring. Consolidation has also played a role by allowing airline managements to implement significant efficiency programs and to get the economies of density from much more efficient networks. This in turn concentrates flows of passengers, raising load factors and allowing larger aircraft with lower unit costs to be used.
I know we will have a financial panel including our own Brian Pearce to discuss the performance and outlook for the US airline industry, so I will not go into too much more detail. But I do want to emphasize that profitability is a good thing for which no one need apologize.
- Profitability is enabling airlines to pay down debt—a total of $6.1 billion in the first nine months of 2015 according to our friends at Airlines for America
- Profitability means airlines can invest in fleet renewal, add new routes and improve the passenger experience, to the tune of $12.1 billion over the same period
- Profitability allows airlines to reward shareholders for their patience and support via dividends and stock buybacks; and employees for their hard work and dedication through salary increases and profit sharing
- It’s also important to note that while US airlines are making record profits for airlines, on average they are just in the middle of the pack in comparison to other US industries.
The figures I have provided describe an industry that is healthy. It is also an industry that continues to deliver great value to consumers. On a global basis, fares in 2015 are estimated to have fallen 5% compared to 2014 after adjusting for the effects of the strong US dollar. And they were down 57% compared to 1995, after adjusting for inflation and excluding surcharges and taxes. In the US, airfares including typical ancillary fees remain around 39% below pre-deregulation levels in real terms, according to A4A.
We should not take for granted the industry’s ability to continue to deliver excellent value to consumers while providing the connectivity that drives global GDP and job creation. In addition to exogenous factors largely beyond our control, it also depends to some extent on governments not over-burdening airlines and passengers with fees and taxes that drive up the cost of air travel to punitive levels.
The US government collected $22.6 billion last year in fees and taxes from aviation. But it continues to find new ways to extract dollars from airlines and passengers. A recent example is a final rule issued by the Department of Agriculture’s Animal and Plant Health Inspection Service, or APHIS, which more than triples the fee each aircraft pays for inspection services from $70.75 to $225.00. Even before this outrageous increase, the APHIS fee was being used to subsidize inspections for other industries, as the Department’s own consultant determined. Now, the department appears to be doubling down on this violation of ICAO charging principles.
We also continue to be concerned regarding the high costs airlines are incurring to comply with onerous US Department of Transportation (DOT) regulations, particularly in the area of consumer protection. The 1978 Airline Deregulation Act was enacted on the premise that the market, rather than regulators, would drive airlines to provide services that their customers value, at a price customers are willing to pay. It was also assumed that airlines rather than regulators would be best positioned to determine how to reduce the impact of disruptions to those services resulting from weather or other factors.
For that reason, it is extremely frustrating to our members when, for example, DOT unilaterally decides how airlines should treat passengers during extended tarmac delays--regardless of the reason for the delay--and sets draconian fines for failure to abide by the rules. Not surprisingly the rules have had the reverse effect from what was intended, by actually increasing the number of passenger disruptions and time lost to delays. This was validated—yet again—in a 2015 study conducted by researchers at Dartmouth University and MIT that stated that, “the [tarmac delay] rule is estimated to have significantly increased passenger delays.”
To DOT’s credit, they appear to be taking to heart some of the lessons from their efforts to regulate the passenger experience. Most recently, the department has been exploring the possibility of new rules to ensure that persons with disabilities have full access to commercial air travel. Rather than simply imposing regulations, DOT is now considering whether to hold a negotiated rulemaking, whereby representatives of airlines and disabled travelers can join together and come to a consensus on what regulations should or should not be imposed in this area. This collaborative approach offers the promise of solutions that support the interests of all parties in an effective and efficient way.
A partnership approach will also be needed to address growing infrastructure issues in the US and around the world. I know we will hear from a panel of experts specifically focused on the heavily congested NY airspace, so I will take a high-level view.
According to our most recent forecast, global passenger numbers are expected to reach 7 billion by 2034, exactly twice as many as the 3.5 billion in 2015. Although the US is a mature market, domestic traffic is still expected to grow by 80% to 808 million in 2034, while total traffic to, from and within the US will grow by 83% to more than 1.1 billion passenger journeys a year.
It is very clear to me that we cannot keep up with this demand under our present system of air traffic management (ATM). Inefficiencies in ATM infrastructure impose a heavy toll on the global economy and they will only get worse.
European ATM represents the biggest challenge, but in the US, FAA’s NextGen modernization program is significantly behind schedule. According to the DOT Inspector General, full NextGen implementation will take 10 years longer than its initial goal of 2025 and cost two or three times more than the initial estimated $40 billion in public-private investment. The reality is that as it is currently structured, FAA has been unable to move NextGen forward at a pace commensurate with the requirement, although it is true that much of the problem lies outside the agency’s control. It is subject to the vagaries and shifting priorities of the annual federal budget process.
Given the importance of the US market, a modernized and efficient US air traffic control system is critical to the future growth of global commercial aviation and it is for that reason that we support legislation to modernize the system through the creation of an independent, corporatized non-profit entity to perform these services.
We recognize that the decision to move from a government agency to a corporatized entity should not be taken lightly. However, after more than 20 years of debate in the US and after similar (and successful) modernization efforts around the world, we believe that now is the time to move forward with this historic transformation.
I would like to finish with a discussion on the environment. Environmental sustainability is our license to grow. In cooperation with our partners in the value chain we have adopted a global strategy to manage our emissions based on improvements in technology, operations and infrastructure, as well as the development of a global market-based measure (MBM). We had enough confidence in the strategy to commit to carbon-neutral growth from 2020 and to a halving of net carbon emissions by 2050 compared to 2005.
We are making strong progress: Fuel efficiency is improving around 2% a year. Sustainable fuels for aviation have matured, although we still need governments to step up to incentivize industrial-scale levels of production. And earlier this month a CO2 standard was agreed that will institutionalize the continuous technical improvements that come with every new generation of aircraft and engines.
All of this represents significant forward movement. But it is not enough. We need the help of a market-based measure to meet our ambitious targets. We are supporting the leadership of ICAO in achieving a global agreement on a framework for a market-based measure at its assembly this autumn. As an industry, we are united in a preference for a mandatory global carbon offset scheme as a key tool in achieving our carbon-neutral growth commitment from 2020. IATA is working with its members on how best we can equitably divide the bill—taking into account the circumstances of mature airlines and of those that are still growing rapidly.
I’d like to turn to another aspect of our social responsibility--one that is particularly close to me—which is helping to stop the trade in illegal wildlife. Now, the responsibility for enforcement of the rules governing international wildlife trade is clearly with governments. But well-trained airline staff can be an invaluable source of information on suspicious passenger behavior and unusual shipments. In support of this initiative we have undertaken a number of activities:
- We have signed a Memorandum of Understanding with the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) to cooperate on reducing illegal trade in wildlife and their products, as well as on ensuring the safe and secure transport of legally traded wildlife
- We are supporting the US Agency for International Development’s Reducing Opportunities for Unlawful Transport of Endangered Species, or ROUTES program, to support the development of standards and training to enable airline personnel to recognize and report efforts to transport this endangered wildlife. In fact a workshop on illegal trafficking is being held at Bangkok airport today, in partnership with USAID.
- We are participating in the United for Wildlife Task Force which aims to identify ways the transport sector can break the chain between suppliers and consumers.
Aviation can play a role in stopping the terrible scourge of illegal trade in wildlife that threatens some of the most precious animal and plant life on our planet, and we are honored to be able to do so.
We are privileged to work in an industry that is a force for good in our world. Many industries contribute to the global community. I believe that aviation makes the global community possible, by bringing together people and businesses and creating opportunities for greater understanding across cultures. In doing so, we work together some 100,000 times a day, 365 days a year. I know you have an excellent program ahead of you, so I will leave you on that note.