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The
future of airlines
Date: 20 February 2006
Asia Pacific Aviation Summit, Singapore
Remarks by
Giovanni Bisignani, Director General and CEO, International Air Transport
Association (IATA)
It is great to be back in Singapore for our second Asia Pacific Aviation
Summit in partnership with Asian Aerospace and Air Transport World. Our
first summit took place in 2004. At that time, the region was recovering
from the SARS crisis. SARS is a distant memory but the global crisis of
red ink continues. Airline losses since 2001 top US$42 billion. We will
see another US$4 billion in losses this year. Something is wrong with
the industry. The global figures do not tell the complete story.
Macro
At the macro-economic level Asia Pacific growth is impressive. India and
China are growing between 8 and 10% each year. China is now the world's
4th largest economy. Excluding Japan, Asian economic growth was 7%—double
the world average of 3.5%. And strong economic growth will continue.
Traffic
Traffic results for 2005 were mixed. International passenger traffic grew
7.6%. This is slightly higher than the historical average. Asian airlines
were slower—at 6.3%— and below GDP expansion. Asian freight
traffic grew by only 4.2%. This was below the double digit growth of previous
year but above global growth of 3.2%. The difference between economic
growth and traffic growth has two messages. One, Japan is dragging down
the regional numbers. Two, Asian markets have lots of potential.
Forecast
We are optimistic and expect growth in Asia that is above global averages.
Until 2009 we expect.
passenger traffic to grow at 6.5%
and cargo traffic to expand at 8.5% per year
Profitability
But growth means nothing if the bottom line is red. Globally airlines
lost US$6 billion in 2005. US carriers lost US$10 billion. European carriers
made about US$1.3 billion. Asian carriers led profitability with US$1.5
billion. Even within Asia it is a mixed picture. Some carriers are among
the most profitable. Others however are struggling. In the region operating
margins averaged less than 2%, still the best performance in the world.
Singapore Airlines is returning 12%
But this is the exception, not the rule
Most are below the 7 to 8% needed to cover the cost of capital and give
our investors an acceptable return.
Efficiency
The high price of fuel is killing our profitability. In two years the
industry fuel bill more than doubled to nearly US$100 billion—23%
of operating costs. And there is no relief in sight. So what are airlines
to do? Improve efficiency is the answer. Progress to date has been dramatic.
The break-even price of fuel rose from US$22 per barrel in 2003 to nearly
US$50 in 2005. Unfortunately, fuel prices are above that. Airlines will
not return to profitability until 2007 when we expect a break-even fuel
price of US$55. Even then the projected profit is only US$6 billion. Asia
will remain profitable in 2006 posting US$2 billion in profit. But do
not start opening the Champagne. That is still less than a 2% net margin.
Threats
And there are some threats that could potentially rob even this small
profit.
Avian Flu
This is a wild card. Now the best advice is to avoid poultry farms. But
if we see human-to-human transmission, then the negative impact on air
transport could be enormous. We have the experience of SARS. So IATA is
in close contact with the World Health Organisation—the expert in
these matters. And we have published industry best practices for communicable
diseases.
LCCs
Low cost carrier competition is new to this region. Asian network carriers
are better prepared than many of their US or European counterparts. Their
operating costs are 6 US cents per ATK on route lengths of 1500km. But
the competition will also be tough. Air Asia's costs are the lowest in
the world—2.5 US cents per ATK. Labour costs in Asia are the lowest
in world—19% of operating cost. This is a significant advantage against
US and European carriers with an average costs of above 30%. If you compare
Asian network carriers to their low cost rivals, the story changes. Average
labour costs can be up to 7 times lower at low-cost startups. There is
no finish line in the race to reduce costs and improve efficiency!
Capacity
Air shows are all about ordering aircraft. In a normal industry ordering
new capacity would be good news for the future. 2005 was a record year
for aircraft orders. The backlog for orders is over 4,000 aircraft—29%
of the existing fleet. Asia will add 48% to its fleet—1,357 aircraft.
Why so many orders in an industry that is losing billions?
Supporting growth of new markets like India is one reason. But the fuel
crisis is another. Modern aircraft consume 3.5 liters per 100 passenger
kilometers. The A380 and Boeing 787 will take this below 3.0. This is
good for the environment and good for airline economics. Unfortunately,
there is no mechanism to eliminate existing capacity. We must learn from
our past experience. Excess capacity and reduced profits followed the
previous peak delivery years in 1991 and 1999. This time we seem to be
managing our deliveries better. These will peak at 5.7% of our fleet over
the next two years. This is lower than the replacement rates of 1991 and
1999 which were 7.5% and 6.5% respectively. Carriers are managing capacity
as carefully as they manage costs. The industry cannot afford the negative
impact of over-capacity.
Opportunities
The challenges facing the industry are enormous. But I do not want to
sound too negative. Air transport supports US$3 trillion of global economic
activity. That is 8% of global GDP and 29 million jobs. In Asia Pacific
almost 10 million air transport jobs support US$688 billion in economic
activity. We are the backbone of tourism. And our growth is strongly linked
to GDP expansion. In short, a successful air transport industry supports
successful businesses which is the key to economic development.
Singapore
Success does not happen all by itself. Our host for this conference is
Singapore. A coordinated approach to air transport brings broad economic
benefits. Changi airport is among the most preferred airports by passengers.
The reasonable charges at Changi—supported by commercial revenues—make
it an economic airport to hub regional traffic. And the quality and quantity
of connections available at Changi attract businesses to Singapore. The
success of Singapore Airlines is no accident.
Strong management, an effective hub and solid government policy all play
a role
The overall result is a virtuous circle that brings benefit to Singapore
and is a model for others to follow.
China
China is another model of effective policy coordination. We are seeing
consistent economic growth of 10% per year. The World Tourism Organization
estimates that as many as 100 million Chinese tourists will travel internationally
by 2020. The government is challenging its carriers to compete globally
with a staged and transparent approach to liberalization. Consolidation
is strengthening the competitiveness of its carriers. Technology is helping.
In one year e-ticketing levels jumped from below 1% to over 15%
Infrastructure investment will meet demand.
12 major airport projects are underway—and 3 more are about to start
IATA is working closely with Chinese officials to improve efficiency and
reduce costs.
One of our biggest involvements is with ATC
Shortening routes and increasing entry points
Efficient ATC will be critical to support further growth.
India
India is following a slightly different model. A change in government
policy has brought new life to the Indian airline sector. Speed is critical.
There is no place for bureaucratic institutional processes that slow change.
Progress has been impressive. In a decade we have moved from 2 state-run
airlines to a vibrant industry with more than 10 players. Indian carriers
stole the show in Paris with US$12 billion of orders. Air India is almost
completely re-equipping.
They have done a great job in a short period of time.
We need quick action to address infrastructure deficiencies in Delhi and
Mumbai. I was pleased to hear of Minister Patel's decisions to push forward
improvements in Mumbai. Remember, India is our greatest potential market.
Only 40 million people travel by air—4% of the population. If that
increased to 25% the market would be 250 million—the size of the
UK. Correct and quick decisions could result in tremendous success. Slow
or incorrect decisions, however, put this great potential at risk. I visited
India in last October. IATA is fully engaged in the market and supporting
its development. I am more than confident in its future. The key players
here today share their insights.
Minister Patel, the architect of India's great vision.
Vasudevan Thulasidas who is re-shaping Air-India.
And Peter Hill of Sri Lankan, the largest non-Indian airline serving the
market.
Agenda for Change
Let me summarise before moving on.
Air transport is an important industry
Regional differences are enormous
Asia has some great potential markets
Effective policy is essential for healthy growth
And change is critical to turn-around the industry
We have a broad agenda for change that starts with the airlines on:
Safety
Simplifying the Business
We need our partners—airports and air navigation service providers—to
bring cost savings
And Governments must give us greater freedom to do business
Safety
Air transport is the safest way to travel. The global accident rate for
2005 was 0.76 per million sectors. We are committed to achieving 0.65
next year across the board. Meanwhile, IATA members are at 0.57. The IATA
Operational Safety Audit (IOSA) is a key tool to move the entire industry
forward. This is the first global standard for airline safety management.
There are four important messages that I want to pass on. First, the audit
is a recognised industry benchmark.
140 airlines were in the audit process at the end of 2005
That is 70% of international scheduled traffic
Second, our investment is growing.
IATA provides the standards free to any commercial airline
We have 7 accredited audit organisations that make up a competitive commercial
environment.
Our Partnership for Safety programme will assist airlines in developing
countries to get on board.
Third, governments are using the audit in new ways.
The FAA accepts IOSA audits for codeshare arrangements
We are helping Egypt, Jordan, Chile and Madagascar incorporate IOSA into
their airline certification process
And I would encourage Asian governments to look at ways to incorporate
IOSA into their oversight process
Fourth—and most important—IOSA will be a condition of IATA membership
by the end of 2007.
This is a giant step for IOSA
The registry is online—transparent for all to see
And it adds another dimension of quality to IATA membership
Simplifying the Business
We launched Simplifying the Business at our 2004 AGM in Singapore. It
is IATA's biggest project ever. Actually it is five projects that will
save costs while making travel and shipping more convenient. Our top priority
is e-ticketing. We hit our 2005 target of 40% ET penetration in our BSPs
in November of last year.
By this time next year we are aiming for 70%
And 100% by the end of 2007.
The target date is a must. We will not print any more paper tickets after
2007. IATA has a global team of 140 people to achieve this. Delivering
ET for an airline's own flights is challenging enough. But that is just
the beginning. There are over 17,000 interline arrangements in place.
They make up the global system that we all take for granted. Converting
these agreements will be difficult—but achievable if we move quickly.
And Asia is not moving fast enough.
Overall ET was at 34% for 2005—
This is an improvement from 23% in 2004, but below the 40% target
Markets like Micronesia, Singapore and New Zealand are leading with penetration
of 81%, 76% and 56%
But Sri Lanka is 0% and India is only 9.5%
This is a wake-up call
We must move faster
We want to have all carriers on board by 2007. We cannot afford to risk
the US$3 billion savings that ET will bring.
The second dimension of our agenda is for our monopoly partners—airports
and air navigation service providers.
The annual bill for these is US$42 billion—10% of operating costs.
We have some good news in Europe. Last week I met European Transport Commissioner
Barrot. He agreed that airport charges are too arbitrary and we need to
bring more transparency. The process will start with a public hearing
in Brussels in April. And I am hopeful that we will move quickly from
there. Airports spend and airlines pay is not the basis for a successful
partnership. IATA proposed a European regulator and a dispute settlement
mechanism for airports that is
Fair, transparent, independent and quick.
Why are we so concerned? Airports are monopolies and many have no commercial
discipline. By challenging monopoly suppliers, IATA delivered US$2 billion
in savings last year. But that is not enough—we must change their
mindset. Asia is home to some of our best partners.
We have complete transparency on investment and charges with AirServices
Australia
Changi Airport is focused on attracting carriers with high service levels
at reasonable costs
We awarded Brisbane for its dedication to efficiency
Even Tokyo's Narita Airport reduced charges by 10% last year.
But we have problems as well
Manila will introduce a discriminatory security charge
India's airports are expensive and service levels are low
And China's airports are among the most expensive in the region
In Europe, we have a new poster child for bad behaviour—Aeroports
de Paris.
On top of increasing charges by 26% over the last five years, they will
increase by 5% for the next five
Outrageous is the only polite word I know to describe this.
Running an airport cannot be a license to print money.
Governments and the Freedom to Do Business
Airlines were among the first companies to operate globally. But we are
among the last to benefit from globalization. Airlines have been deregulated
with half-measures. Governments are far too involved in the industry.
For example the 60 year-old bilateral system denies airlines basic commercial
freedoms.
Governments negotiate our markets
And we cannot merge or consolidate when it makes business sense
Singapore benefits from an open aviation policy. Peter Hill of Sri Lankan
can attest to the benefits of Sri Lanka's liberal bilateral with India.
The recent US-EU agreement could be a step in the right direction. Open
skies and regulatory convergence must define our future. Airlines are
businesses like any other. The world will not change overnight. But Governments
must move forward with progressive liberalisation to build a stronger
industry.
The agenda for a successful airline industry is not complicated
It has three dimensions—airlines, partners and governments. Airlines
and IATA are well on their way by
First raising the bar on safety by making IOSA a condition of IATA membership
And second by moving to a low cost industry with Simplifying the Business.
Some of our partners are beginning to change their mindset.
And we see governments starting to look more closely at those living in
the age of airports spend and airlines pay.
Governments need to give us basic business freedoms and if these three
dimensions are correct—the chances of a safer, more secure, environmentally
friendly and profitable industry in 2007 are good. I look forward to a
healthy discussion of these and other issues today. It is my pleasure
to call on the Singapore Minister for Transport, Mr. Yeo.
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