Thank you for the kind introduction and the invitation to present on The Airline Industry In Uncertain Times to the American Chamber of Commerce in Japan. Let me begin by sharing a few words on IATA’s role.
First and foremost, IATA promotes safe, efficient, economical and sustainable global connectivity by air. To achieve that, we seek borders that are open to people and to trade. Without that, the positive impact of connecting people, goods, markets and ideas through air transport cannot be realized.
I believe that aviation is the business of freedom. It liberates people to live better lives. So we are deeply concerned with political developments pointing to a future of more restricted borders and protectionism. These deny the benefits of globalization—a product of aviation.
There are those who will argue that the tide of globalization has left some behind. It would be a mistake not to acknowledge that view. But it is undeniable that the world has become more prosperous with growing trade and travel. Aviation is proud of the role it plays in making this happen by safely transporting over 50 million tonnes of cargo and nearly four billion passengers annually.
Second, IATA has a unique global view. With our 265 members we set global standards and facilitate their implementation. It’s a critical function for a global industry that simply could not function with different systems and standards for each airport or destination. Because the rules are basically the same the world over, the 100,000 flights operating today will do so safely and efficiently.
Third, IATA is involved in the global air transport business. Like all trade associations, we advocate for our industry. But we do much more.
- On behalf of the industry we operate services that are critical for a global business. That includes our settlement systems which began here in Japan in 1971 and today process well over $350 billion a year.
- And to support the industry we provide products and services such as training, consulting, and business intelligence.
I am pleased to lead an organization that is passionate about aviation and the good it brings to our world.
Aviation in Japan
Aviation is particularly important to Japan—linking it to the world. And you may be surprised to know that Japan’s domestic network ranks 6th in the world. Japan is also home to two of the world’s busiest routes—Tokyo-Sapporo and Tokyo-Fukuoka.
One of the biggest tourism stories in the world is Japan. The vast majority of this country’s 24 million visitors in 2016 arrived by plane. It will be the same for the 40 million visitors expected in the Olympic year—2020—and the 60 million visitors hoped for in 2030. This growth will have a significant impact. Tourism receipts in 2020 are forecast to be about $70 billion. And that would nearly double to $130 billion when the visitor number reaches 60 million.
Aviation is not just about tourism. Think of your own business. Would it be possible without aviation—supporting the supply chain, linking you to customers, helping you to explore new markets or connecting you to colleagues around the world? Aviation is critical to any modern economy.
And, in Japan there is plenty of opportunity for aviation’s importance to grow. The economic footprint of Japan’s aviation sector accounts for about 1.8% of GDP and 1.1 million Japanese jobs. That’s big. But in Korea—with a smaller aerospace industry—aviation’s footprint covers some 3.1% of GDP.
How can Japan further maximize the positive impact of aviation? To answer that, let’s first examine trends in the global industry performance.
As per the title of this presentation, we do live in uncertain times. And it is well-known that aviation’s fortunes are sensitive to shocks and uncertainties. Painful restructuring in recent years has improved aviation’s resilience.
Between 2011 and 2014 airlines were profitable even as the price of crude oil hovered around US$100/barrel. And in 2015 there was a great breakthrough. For the first time in history, airlines earned a profit in excess of the industry’s average cost of capital. In 2016 airlines collectively made a record profit of $35.6 billion. And last month, well-known investor Warren Buffet, who once called airlines a “death trap for investors” announced major investments in the industry.
Improved profitability is a global trend. Notably, however, Buffet’s investments are with North American airlines. Collectively they account for well over half the industry’s total profits. On a per passenger basis, they are making an average of about $20, double the global average of about $10 per passenger. And by comparison, the average in the Asia Pacific region is around $5.50.
There is great diversity from region to region and from airline to airline. But there are some common headwinds. This year we see a slight softening in profitability with slow trade, higher oil prices and weak economic prospects in many parts of the world. On top of that there are political uncertainties and security threats. Airlines are living in uncertain times—as are all businesses.
Now I would like to take a slightly contrarian approach to today’s topic. I am French; being contrarian is part of our national heritage! I could spend the next few minutes discussing the uncertainties facing the industry. At the end, the uncertainties would remain. And we would not have reached any meaningful conclusion.
Let me instead say that I am an optimist on the future of the business of freedom—globally and in Japan. And there are some certainties worth exploring:
- That aviation is on a solid path to sustainability
- That the travel experience will continue to get better, and
- That Japan has some work to do if it wants to welcome 60 million visitors in 2030 and further unlock the economic and social benefits of aviation
Let’s start with sustainability. How can a growing industry flying kerosene-propelled aircraft to all corners of the planet be on a path to sustainability?
First, we are committed. Aviation’s goal is to stabilize net emissions from 2020 with carbon neutral growth. And by 2050 we will cut our net emissions to half the levels of 2005.
More importantly, we have a strategy that is agreed by all industry players and governments. We will achieve our goals with a combination of improvements in the technology we use, the way we operate and the efficiency of our infrastructure.
Those improvements, however will not come in time to realize carbon neutral growth from 2020. As part of our strategy, we have also asked governments to impose a global Carbon Offset and Reduction Scheme for International Aviation (also known as CORSIA) from 2020. With the leadership of our UN counterpart—the International Civil Aviation Organization (ICAO)—governments agreed to the system last October. Japan was a big supporter. We are now working with governments to sort out the details for implementation from 2020.
Pause and think about this. I am not aware of any other industry that has asked to be regulated in a similar way and with real costs. It is quite remarkable. This gives aviation a strong platform to make demands on governments—to remove inefficiency from air traffic management and to incentivize the use of sustainable alternative fuels.
On the last point, there is plenty of business opportunity in Japan. For example, sustainable fuels made from household waste have the dual benefit of solving waste management issues and helping airlines improve environmental performance.
A Better Passenger Experience
The second certainty is a better passenger experience. A billion and a half more passengers will board planes in 2017 than a decade ago. And they will do so in a completely different way—shopping on the internet, using e-tickets, checking in on the web, and using mobile apps that put them in control of their journey.
There is a natural partnership with Japan in this area. Japan is a leader on the application of self-service technology for travel—built on IATA’s global standards.
On Tuesday, I congratulated the Japan International Airports Council for their work to make security more effective and efficient using Smart Security Principles developed by IATA and the Airports Council International (ACI). This is being rolled-out at Kansai and you should soon see changes at Haneda and Narita as well.
I also encouraged the airports to close the gap between self-service options offered domestically and internationally. Mobile boarding passes, home printed bag tags and kiosks throughout the terminal are as important to busy international travelers as they are to those flying domestically.
Another development to be watching out for is a major improvement in the shopping experience for air travel. It is about to get richer and more transparent.
When shopping on an airline website, travelers can customize their journeys in many ways. But they cannot easily compare flight options without opening each airline’s website. If you use a travel agent—even an online one—you can compare price, but not much more.
Why? It might surprise you that pre-internet technology powers the systems used by travel agents. And it cannot handle much more information than time, price and class of service.
Travelers, however, want to know what the seat is like, what meals will be served, if Wi-Fi is available, what movies they can see, how much they will be charged for bags etc. And wouldn’t it be great to compare the total price taking into account the perks of your frequent flyer status?
That will soon be possible with a new IATA standard. It has the rather boring name of New Distribution Capability, or NDC. But it comes with a big certainty—that your travel experience will get better beginning with a modern and even more transparent shopping experience.
Welcoming 60 Million Visitors
And the last certainty that I will address is the need for even more progress on joined-up thinking to Japan’s airport infrastructure development.
Japan’s airports have changed dramatically in recent years. The development and internationalization of Haneda and the creation of Kansai Airports are the biggest news. Less visible is a renewed spirit of customer focus that has seen improvements in efficiency and reductions in charges.
Not that long ago Japanese airports were the most expensive in the world. They are not cheap today. But they have fallen from ranking in the top ten.
Today Kansai sits at 13 and Narita at 23. There is still more to be done—particularly at Haneda, which is bucking the trend and raising charges.
Why is managing costs so important? Since 2000 the average cost of a ticket, in real terms, has fallen by 45%. Imagine all that airlines needed to do to absorb that reduction and still improve their financial performance. You and your businesses have been the beneficiaries.
As critical national infrastructure, airports must play a role in building competitiveness. However, as monopoly service providers there is not always the incentive to do so. IATA’s standard call is for governments to impose economic regulation to ensure service quality and efficiency are delivered in the public interest.
Japan has chosen not to impose formal economic regulation on its airports. Encouragingly, with the exception of Haneda, we have seen moves in the right direction. Just last week Sendai and Kansai agreed to reductions in charges. That’s important because cost-efficient airport infrastructure improves national competitiveness. As people doing business in Japan, you have an interest in that. I encourage you to join us in watching the results carefully as Japan continues on the path of airport privatization.
Aside from costs, Japan’s infrastructure will be challenged to meet future demand.
The immediate priority is to maximize existing infrastructure and the current bottleneck is airspace over Tokyo. There is much to gain if we can free-up airspace over central Tokyo that is currently restricted for noise reasons. Longer-term, cooperation with the US military which controls major parts of Tokyo airspace--will also be required.
In parallel, there is a need to build consensus on the roles of Haneda and Narita. This should be a market-based approach aimed at meeting demand where it exists. And I would sound a small alarm bell. Preparing for the Olympics is a big imminent project. The Olympics are an important milestone and an impetus to get things done. But it must be part of a long-term joined-up planning process focused on the big prize of welcoming 60 million visitors to Japan annually —and keeping Japanese business and people efficiently linked to the world.
The Business of Freedom is Important
Japanese aviation has changed tremendously in recent years. But there are challenges ahead. Now is not a time for complacency. We must harness the momentum of the Olympics and the government’s vision to make Japan an even greater tourism giant to push forward with strengthening the industry’s foundations.
As I mentioned earlier, aviation is the business of freedom. That is not a statement made lightly. Aviation has the power to transform economies with connectivity. It can change individual lives with opportunity. And it can make Japan an even more prosperous nation. These are certainties even in times of great change. And I hope that, as a business community, you will continue to support the safe, secure, and sustainable development of Japanese aviation. We all have a stake in the business of freedom.
Thank you and arigato gozaimasu.