Published On: Tue, Jun 9th, 2015

IATA CEO: Airlines create intangible benefits

IATASafe, efficient and sustainable global connectivity. This unites us – the 257 members of the International Air Transport Association (IATA) – in a determination to create value by linking people and business in every far-flung corner of our planet.

To achieve this, we have worked together to build the global standards and systems that underpin a worldwide network of some 51,000 routes. And this year 3.5 billion passengers and nearly 55 million tons of cargo will travel safely by air. And that’s only the beginning of the story.

Airlines create jobs. We directly employ 2.5 million people. A further 56 million work in the value chain. And there are countless more jobs in businesses that rely on airlines to deliver some $6 trillion of goods to global markets.

Airlines create intangible benefits. How many deals are sealed in meetings that involved air travel? How many great ideas took root on a journey of discovery? How important are ties to family and friends maintained over great distances? And how can you measure the value of the freedom to expand horizons that air travel makes possible?

For many, this is all taken for granted. And it is a great paradox that the more people rely on flying, the more challenging it is to ensure that aviation’s benefits and needs are understood.

This contrast is one of many that characterize aviation today. It points to the common interest that has brought us together to make our industry even stronger. And my report today will focus on contrasts and common interests, beginning with safety.

Safety

Safety is the number one priority for everyone associated with aviation.

With one jet hull loss for every 4.4 million flights last year, flying has never been safer. In contrast, paradoxically so, aviation safety has been a constant in recent headlines. That was largely driven by three extraordinary events—MH 370, MH 17 and Germanwings 9525.

Every loss is a tragedy. I know that you join me in remembering all who have perished in aviation tragedies and their families and friends. The greatest tribute that we can pay to them is to make flying ever safer. That is precisely what we are doing.

In light of tracking gaps exposed by MH 370, a 15-minute position reporting standard is being developed through the International Civil Aviation Organization (ICAO). And in the near future, emerging technology and proposed new practices will move us closer to ensuring that never again will an aircraft simply disappear.

MH 17 was an outrage. Civilian aircraft are instruments of peace. They must never be targets for weapons of war. Governments are working together through ICAO to enhance the sharing of security information. And we will not be satisfied until governments agree to a global convention to control the design, manufacture, sale, and deployment of weapons with anti-aircraft capability.

Germanwings 9525 was a deliberate and horrible act by one of our own. Day-in and day-out, safety is the focus of aviation professionals. But there is no immunity to mental health issues. The investigation conclusions will help airlines and regulators to look again at the balance needed to monitor mental health in an environment that is aligned with the Just Culture that drives safety forward.

The reporting of these three tragedies challenged some traditional protocols. In the age of social media information is ubiquitous and unbridled. That is re-calibrating expectations within the industry, among regulators and the general public. We must participate in this new dialogue. But we must not allow it to replace or undermine well-established accident investigation standards which lead to findings that improve safety.

We will always rise to the challenges that accidents present. And we will do so in alignment with strategies and methodologies that have proved themselves over many years by making flying the safest form of long-distance travel.

Financial Performance

As with safety, the general trend of our financial performance is upwards. But there are many contrasts across the landscape. And the common interest in a sustainably profitable airline sector extends well beyond the industry itself.

For 2015, we expect a $29.3 billion collective profit on revenues of $727 billion. Many airlines are winning in the basic struggle to keep revenues ahead of costs. Enough that, for the first time in IATA’s records, the industry as a whole is earning its cost of capital. But the fortunes of airlines are far from uniform. I know that many of you are still facing huge challenges.

Airlines are investing in the future. This year over 1,700 aircraft valued at $180 billion will be delivered. The route network is expanding. And the product offering is constantly getting broader and richer.

The lower oil price is having a positive impact, of course. But it is greatly – moderated by the strength of the US dollar. It is your efforts and investments that are improving performance and providing the most durable buffer to the favorable but fragile conditions in which we are currently doing business.

And I should highlight that those conditions contrast dramatically by region.

•More than half of the global profits are being made in North America—our industry’s most impressive turn-around story.

•Our European colleagues are seeing improved but still weak profitability while facing a quadruple whammy of faltering economies, high taxes, onerous regulation and failing efforts towards a Single European Sky. And sanctions as a result of the Russia-Ukraine crisis are taking their toll.

•Asia-Pacific is itself a market of contrasts. Some airlines are delivering exceptional results. Others are struggling, in particular those with exposure to cargo which remains in the doldrums.

•The Middle East reports the fastest traffic growth. But it faces challenges of rising infrastructure costs, increasingly crowded skies and major military conflicts.

•Opportunities in Latin America are being held back by economic difficulties, airport capacity deficiencies and over-regulation. A key market – Venezuela – is still blocking billions of dollars of airlines’ money from repatriation and putting connectivity at risk.

•And for our African colleagues, poor regulatory oversight – especially for safety – remains an issue in many parts of the continent, and regional demand is constrained by political barriers to growing connectivity.

Stimulating economic growth and creating jobs are global imperatives. That’s what airlines do. In light of that, political leaders should be keen to support aviation’s financial health.

So it’s astonishing that some politicians wrongly interpret hard-earned financial sustainability as an indication that market forces are not working or that airlines are hiding windfall profits in our 4% average net profit margin. Apple earned $13.6 billion in the second quarter of this year for a 23.4% margin. No politician is asking for iPad prices to fall.

The truth is that flying is a better deal today than it’s ever been before. Air fares have fallen 64% in real terms over the last two decades. And sustainable profits are helping to reward our investors appropriately and secure the future for even greater benefit. It is in our common interest to ensure that this is well-understood.

Governments

Your financial success, however, is not entirely in your own hands. Aviation is built on partnerships. Governments, of course, are key partners. Airlines and governments are well-aligned on safety. But in other areas of government responsibility our relationship is varied with many contrasts.

Infrastructure

Let’s start with infrastructure. For nations, connectivity isn’t just a competitive advantage, it’s an economic necessity. But it requires infrastructure. Airports and air navigation services can be managed as public or private enterprises. But governments are responsible for ensuring that there is ample cost-efficient infrastructure available to meet the growing demand for connectivity.

There are great contrasts in how successfully they are doing this:

•The importance of connectivity is so well understood in China that Beijing is building a second 100 million passenger airport to support the economic needs of the capital and the country. However, aligning interests to bring efficiency to air traffic management is proving more challenging.

•In stark contrast, the decades-long debate about airport capacity to serve London drags on, buffeted by politics and parochial interests. And if we can get past those hurdles, challenging and time consuming debates on funding and regulation are sure to follow.

•In Asia-Pacific states are joining forces with the goal of establishing a seamless regional approach to air traffic management. The aim is to avoid congestion leading to unmet demand. Meanwhile, the Single European Sky initiative languishes. States are paralyzed by self-interested national organizations which show no regard for the impact of their inefficiency on economies or consumers.

•Here in the US there is finally a growing recognition that funding an essential service such as air navigation should not be held hostage to a game of political brinkmanship in the setting of the national budget. The discussion about corporatization of air traffic management is a welcome development.

•In Dublin, and Amsterdam engagement with governments and airports delivered charges reductions that have improved competitiveness for all.

•In Saudi Arabia we have had some success in aligning the fuel supply with international prices, but big challenges remain with excessive fuel levies and artificial pricing schemes in Africa and Brazil.

•And, in Hong Kong, the government is pursuing a visionary expansion of one of the world’s most successful airports. But it’s also risking the airport’s competitiveness by proposing to pre-fund the construction in contravention of ICAO principles.

What defines our common interest on infrastructure? A key element is government leadership to implement decisions based on the social and economic opportunities that aviation makes possible. In practical terms that means adequate capacity to meet growing demand, efficiency, and competitive pricing.

We seek to work in partnership with governments based on the global principles which they have agreed through ICAO. Transparency and consultation will ensure that what is built matches business needs at a price that is affordable and mutually beneficial.

Security and facilitation

Governments also have responsibility for security—including aviation security. We are partners in battling the complex security threats of our world today. But the landscape is yet again one of contrasts.

•Known traveler programs powered by voluntary background checks are helping focus resources where the risk is greatest while improving the passenger experience. The US leadership in this area must be recognized and commended. But there are very few examples where information is shared across borders. So the known traveler in one jurisdiction is an unknown quantity in another. It is paradoxical that privacy laws prevent governments from creating a better travel experience—even for people willing to share their information in exchange for that better experience.

•Global standards have been developed to transmit passenger information electronically to governments long before their arrival at immigration. Why then do these governments still require the same passengers to complete paper-based arrival documents that bear the same information? Why hasn’t earlier access to passenger information resulted in shorter immigration queues? Why do some authorities still require information outside the ICAO standard? And why are only around 8% of countries offering electronic travel authorization? We must get governments to sort out this inefficient mixture of paper and electronic processes.

•The key issues for cargo security are similar—using global standards to drive efficiency through harmonized processes. The tools to do this have been developed by IATA, ICAO and the World Customs Organization. The challenge is working with governments to get them used.

What’s our common interest? To keep our passengers, crew and cargo secure and provide them with an efficient and respectful experience built around global standards.

There has been tremendous progress in security over the last years. That is evident in the cooperation between industry and government which is keeping us ahead of the emerging cyber security threat. But our customers still see security and border controls as big pain points in their journeys.

We must join forces to encourage governments to align on a risk-based approach, adopt global best practices, recognize equivalent measures by other governments, stop wasteful and paper-based processes; and make full use of available technology.

Regulation

More broadly, governments make the rules that businesses play by. They easily see things from a national point-of-view. In contrast, we operate internationally. So it is in our common interest to ensure that regulation takes into consideration a global perspective. Let me raise a few examples.

•In 1999 the Montreal Convention (MC99) established a standardized approach to liabilities associated with the carriage of passengers, baggage and cargo. It recognizes digital invoicing which makes e-freight possible. And when there is an international air accident, compensation for victims’ families is determined by the Convention. Citizens from countries that have not signed MC99 could receive significantly less compensation. That added a further element of pain for some of the families involved in the recent AirAsia tragedy. MC99 has 112 signatories. We must encourage key countries such as Thailand, Indonesia, and Russia to join this list.

•The second example concerns consumer protection. Governments appear to be losing faith in a basic principle of commerce—that businesses become successful by pleasing customers. Many regulators are adopting passenger rights regimes—some of which come close to dictating product design and marketing. Worse, there is no international coordination. ICAO is developing consumer protection principles aligned with those that this assembly approved in 2013. But we are still far from achieving the clarity that passengers need when things go wrong.

•Another example is in the world of distribution. The US Department of Transportation (DOT) approval of New Distribution Capability (NDC) is a pro-consumer move that is unleashing innovation. With NDC, travelers shopping through agencies will be able to compare the full product offering—tailored to their specific requirements. So why is DOT, in its Consumer Rule Three, considering forcing airlines to display some ancillary products through third party distribution channels not necessarily of an airline’s choosing? It would be a step backwards when we are set for a giant leap ahead on transparency.

•And finally, while the European Commission makes much of its so-called Better Regulation Package, the EU is legislating unreasonable requirements for “click-through” marketing that will see airlines penalized and consumers losing out.

So how do we pursue our common interest on regulation? By being clear with governments. Our message is that regulation needs to be Smarter. At a minimum, that means the benefits must outweigh the costs.

We have well-defined principles for Smarter Regulation. It should be consistent with global standards, proportional, well-targeted, fair, and clear about what is expected. These common sense principles are best achieved through a process of rigorous consultation that includes a focus on keeping the compliance burden to a minimum.

Environment

Progress on managing our carbon footprint has the potential to become a great example of Smarter Regulation.

Aviation today is at the forefront of industries addressing the climate challenge. We are already improving our fuel efficiency in excess of the 1.5% annual improvement target. We have an aggressive goal to achieve carbon neutral growth from 2020. And we aim to cut emissions in half by 2050 compared to 2005 levels.

We will achieve these challenging goals using a four-pillar strategy of improved technology, more efficient operations, better infrastructure and an effective, global market-based measure.

The journey to this point has been challenging. But we’ve always understood that our common interests and those of the environment are best served by a united industry position.

There are contrasts. Not all elements of the strategy are moving forward at the same pace. Progress on biofuels is being held back because governments have not adopted a policy framework to incentivize production. That’s needed for prices to fall to commercially viable levels.

Many airlines are making significant investments in sustainable biofuels. Their leadership should be recognized. But for real progress to occur governments need to step up with aviation specific programs similar to those designed to encourage the use of other alternative energy sources.

We also understand our common interest in a unified industry position calling for a global market-based measure for international aviation. Regional or local schemes imposed by governments in the absence of a global scheme under the auspices of ICAO would result in an untenable web of layered taxes and charges. We have taken the high road and agreed as an industry that a global carbon offset scheme would be the best way forward.

What we seek in a global market-based measure aligns with the main concepts of Smarter Regulation:

•Consistent with global standards: in the light of a growing number of proposals for local and regional solutions the focus is now clearly on a global measure;

•Proportional and targeted: our favored option is a global offset scheme. It’s a cost-effective solution that compensates directly for the carbon emitted;

•Fairness: The need for adjustments to the basic framework based on the specific situations of operators must be recognized; and

•Well defined: A huge amount of work is going on now in order to achieve agreement at the ICAO Assembly next year.

The industry is deeply involved in the ICAO process and we are committed to a successful outcome. We are discussing all options and analyzing them for costs against benefits.

Although the final measure has not been decided, there is considerable interest from governments in the mandatory carbon offset approach. It would be the easiest type of scheme to implement and administer on a cost effective basis. And it has the scope to allow for the different political interests at play to be taken into consideration.

The next ICAO Assembly is just over a year away. I am confident that it will mark another major step forward on this important issue. But there is one caveat—that we maintain industry unity. We are all in this together. We have a common interest in the outcome. And we will get the best result for all concerned—including the environment—if we stay together.

IATA

On that note, I will conclude with some comments on your Association which turns 70 this year. We began with a vision that post-war commercial aviation would need cooperation in order to meet demand for worldwide connectivity. IATA’s role was to build global standards through industry cooperation and by working with governments through ICAO.

Each member in this room competes vigorously for its customers. And so the strength of our association and the value created by working together is another of our industry’s paradoxes – a very positive one.

It is no secret, however, that there is an underlying tension in our industry. It is often described as a rift between state-owned airlines and those owned wholly or predominantly by private shareholders. Others see it in terms of government protectionism. Some interpret it as a clash between aviation business friendly countries and those less focused on maximizing the economic and social benefits of connectivity.

Regardless of your viewpoint, IATA is not the battleground on which any resolution will be achieved. And you, our members, have not given us a mandate to take a position on such issues.

On the contrary, IATA is the unique global forum where airlines come together to create value by pursuing common interests in a world of many contrasts. This is true regardless of who owns you, whatever your commercial strategy, and whatever your aero-political environment. You are all dedicated to improving safety and security. You all need efficient financial settlement systems. You all rely on global standards for a wide variety of operational needs. And you all have a stronger voice by standing together for better, “Smarter”, regulation. These are but some of the reasons why you all are in IATA.

Enormous value has been created from the paradox of competitors working together. Today we are safer, more efficient, more focused on sustainability and collectively more profitable than at any time in our history.

The wisdom of the original 57 IATA members laid the foundations of a worldwide system of connectivity. Today that system is an essential part of modern life and of global commerce. Airlines are instruments of freedom, exploration, discovery and opportunity, there is no parallel. And aviation is unquestionably a force for good in our world.

There can be no doubt that we are all flying better, together!