Good afternoon. Thank you for the kind invitation to address the UK Aviation Club. It is indeed a pleasure to be here today and there is a lot to talk about, so I will jump right into my remarks.
Let's start with the good news.
The Business is Doing Well
Globally we are seeing very strong traffic. Through September, demand for passenger traffic is up about 8% over last year. And, after a six-year growth coma, the demand for air cargo has awakened. For the first 9 months of the year, demand for air cargo tracked at 10% above the previous year.
Strong demand is contributing to solid profitability. This year we expect airlines to earn a global combined net profit of $31.4 billion. And this will be the third year in a row—and the third time in aviation history—that airline earnings will exceed their cost of capital. So we are living in a truly special time.
But the industry situation cannot be described simply as strong demand and record profits.
- To begin with, profitability is not evenly spread—about half is being generated in North America.
- Costs are rising—particularly for fuel which is tracking about 20% higher than last year.
- The average profit per passenger is about US$7.69 for each sector. Even though that is vastly improved from the $3.00 average five years ago, it is still not a huge buffer against shocks.
- And lastly, let's keep that $31.4 billion profit figure in perspective. Apple, a single company, recorded net income of $48.4 billion for its current fiscal year.
Running an airline remains a tough and highly competitive business. We have been reminded of that by a recent spate of failings—Alitalia, Air Berlin and Monarch.
Even in historically unprecedented—and I hope continuing---times of profitability, we must be realistic about our challenges. But overcoming challenges is something that this industry does well. And I believe that there are many solid reasons to be optimistic about aviation's future.
One of them is our environmental performance. Just over a year ago, under the leadership of the International Civil Aviation Organization (ICAO) and with the full support of the industry, governments agreed to CORSIA—the Carbon Offsetting and Reduction Scheme for International Aviation.
The significance of CORSIA cannot be overstated. Its implementation will ensure that we meet our target to cap net emissions from 2020 with carbon-neutral growth. It will avoid the patchwork of taxes and charges likely to have emerged in the absence of an international agreement.
There is just over a year before airlines need to start reporting their emissions. So the immediate focus is on nailing down the details of the scheme at ICAO and helping airlines to get their systems and processes ready.
Longer-term, aviation remains committed to cutting net carbon emissions to half 2005 levels by 2050. And the solution for that is not an economic measure. As an industry we want to use clean technologies, efficient operations and state-of-the-art-infrastructure to get us there.
We cannot, however, do that without the support of governments. There are two areas where their help is urgently needed:
- Incentivizing the use of sustainable aviation fuels (SAF). Every day 140 flights operate using SAF. There would be more if SAF were cheaper and in greater supply. That's where governments have a role to play—by putting incentives for alternative aviation fuels on the same level playing field as biofuels for road transport.
- The second area is air traffic management. Today's aircraft have incredible capabilities to fly efficiently. But these are not being maximized because the air traffic management system cannot keep pace. The poster child for this failure is the Single European Sky—if anybody can detect any real progress in the last decade, you get a big prize!
Safety and Security
Another piece of good news is safety. Today, over 100,000 flights carrying 11 million people will take-off, fly to heights of 30- to 40-thousand feet and then land at their destination without incident. It is an amazing achievement that plays out with such regularity that most take it for granted.
Behind the scenes, we are working on constant improvements. And one area that I am particularly excited about is the role that big data will play in making our safe industry even safer. To enable that, we are working with our partners throughout the industry on an initiative called Global Aviation Data Management. The aim is to build the greatest possible collection of data that will help us to identify and eliminate potential issues before they rise to the level of a hazard.
While we can be guided by science in our pursuit of safety, the co-challenge of security is more difficult to manage. Aviation security is strong and we are managing to stay a step ahead of those who would do us harm. But we are a constant target for terrorism. And the threat is growing.
Similar to safety, the key to success lies in analyzing information to understand the risks and put counter-measures in place. The problem is that governments are disappointingly bad at sharing security information and alarmingly quick at taking unilateral action without consultation.
That was clearly demonstrated earlier this year when the US and UK banned portable electronic devices on some flights from the Middle East and North Africa. How could passengers have confidence in the global security system when passengers boarding a flight in Dubai direct for the US had to check in their laptops and tablets, while those going via London could keep theirs with them? It made no sense.
Fortunately, alternative measures were put in place. And that was done in consultation with the industry. I won't say that we are in a perfect situation yet. But it is much better. And it is critical that the dialogue with industry continues to improve. The only way to beat the terrorist challenge is by working together.
Now, I'd like to focus more closely on what is happening here in the UK—specifically Brexit and infrastructure.
First Brexit. For an industry with a mission to connect people, the thrust of Brexit has to be characterized as disappointing. The tide of globalization may not have lifted all people evenly, but the overall prosperity it has generated is undeniable. And aviation connectivity is one of the key vectors.
In building the post-Brexit world, the prosperity of the UK will depend on the strength of its connectivity—links with Europe and the rest of the world.
There is a real challenge ahead. When the UK leaves the European Single Market, it will also leave the European Common Aviation Area. And when it breaks from the European Union, all traffic rights to the rest of the world associated with Europe will also be thrown into question. And, as we all know, the basis of international aviation is bilateral air services agreements. There is no WTO agreement to fall back on. For that reason, I don't see any alternative to a negotiated agreement.
I don't believe that people will accept anything that turns back the clock on the achievements of the EU Common Aviation Area. Getting to a solution, however, will take effort. And there are both political and competitive interests at stake.
IATA is, of course, not directly involved in these discussions. But we are monitoring them closely. And I need to ring a warning bell because time is precious. The Brexit clock is ticking towards a deadline of March 2019. But the aviation deadline is earlier. Normally passengers can book travel a year in advance. At a minimum, the flight schedules and seat and cargo inventories must be available at least six months in advance. So that puts the airlines' deadline at October 2018—just 11 months from now.
My message to all involved is three-fold:
- Get started.
- Don't step backwards.
- And don't underestimate the work ahead.
On that last point, while the focus is on bilateral flight details, there are lots of other aviation issues to be discussed.
- What will the customs environment be, for example? Currently the UK processes about 4.6 million customs transactions a month. That could balloon to 21 million a month. Adjusting staffing, systems and processes to this reality will not happen overnight.
- How will EU nationals be processed at UK borders and UK citizens when traveling to Europe? And what resources will be needed if, for example, it is decided that access to automated border kiosks is no longer acceptable?
- And what will be the UK's relationship with EASA, the European Aviation Safety Agency?
These are only some of the issues that will need to be tackled. And the pressure is mounting, with passenger numbers predicted to grow irrespective of Brexit. So solutions need to be found quickly to ensure a smooth transition. And with the amount of work that needs to be done, there are good arguments to put transition agreements in place.
The growing demand for travel is also putting pressure on the UK's infrastructure. That's no secret. The Secretary of State for Transport, Mr. Chris Grayling, has said that all five London airports will be completely full by the mid-2030s. And it will be May 2021 before we reach even the planning permission approval stage for any expansion.
IATA believes that Heathrow is where that expansion should take place. I know the struggle to build a third runway has meant decades of frustration. But the UK will be left behind in the globally connected world if it does not come to a final decision and implement it.
Look at what is happening in Beijing, for example. Its main airport was expanded to handle 100 million passengers in 2008. And in a few years it will have a second 100 million passenger airport. The business and tourism opportunities that aviation will create will go elsewhere if the UK's main hub cannot handle the demand.
Expanding Heathrow is about building prosperity. The potential economic boost to the UK from a third runway at Heathrow is GBP 200 billion according to the Department for Transport's Draft National Policy Statement. And estimates for the jobs it would create range up to 110,000. Delivering on that promise should be a priority for the UK—all the more so when looking to the challenges of a post-Brexit world.
Concerns about environmental sustainability are serious, and I believe solution are in hand. On carbon emissions, they are covered by our global strategy which I described earlier. Local emissions from surface transport will similarly be covered with new automobile technologies, avoiding adding congestion charges to the airport's costs.
On that note, I want to be clear that I am not saying to build the third runway at any cost. The original estimates of GBP 17 billion were completely unacceptable. Heathrow Airport's recently announced intention to reduce that cost is a step in the right direction, but Heathrow is already the most expensive airport in the world from which to operate. It is essential that Heathrow's charges do not rise from today's levels. The construction of the third runway must enhance Heathrow's competitiveness, not destroy it!
For any airport, airlines have three needs: capacity, quality and affordability. In delivering the third runway, the capacity issue will be resolved for now. But achieving the right quality at the correct price requires consultation with the airlines. And one idea from the airline community that should be taken into consideration by the government is seeking competitive bids from developers.
The Big Picture
Bringing my comments to a close, I would like to spend a minute reflecting on why we are all in this crazy business.
There are tough issues to resolve, as we have discussed today. On top of that, profitability is hard won. Surprises are many. Weather, volcanoes, pandemics and politics are among the factors that can change the business in an instant. Safety and security need a constant razor-sharp focus.
But the fruits of our labor are real. This year our work will enable four billion people to fly. A visit to any airport's arrivals hall will evidence how important that is. We make the world a better place by bringing people together.
This should send a strong message to governments about the benefits of borders that are open to people and trade. We are the business of freedom. And nothing should stand in the way of the good we do!