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IATA: Worst crisis in history

Growth in air passenger traffic will slow next year and the high price of oil will continue to kill airline profitability, that’s according to the airline industry’s trade group IATA.In 2006 the industry will see losses reduce to US$4.3 billion and the airline industry might even make money in 2007.

These are just some of the conclusions Givanni Bisignani, Director General of the International Air Transport Association (IATA) gave at the organisations second annual globa press briefing. Full transcript below:

Air transport is a key industry for the global economy. We are responsible for:

—8% of global GNP

—29 million jobs and

—Nearly US$3 trillion in economic activity

It is no secret that we are going through the worst crisis in our history. In the last years airlines faced enormous challenges. There are some great stories to be told. And there is much more that needs to be done to rebuild a key engine of global growth. Brian has just explained the numbers. US$6 billion in losses for 2005. And US$42 in cumulative losses since 2001. The situation for 2006 will see losses reduce to US$4.3 billion. And we might even make money in 2007. This is good news—the color of the numbers will finally be black.


But let’s also remember that a projected profit in 2007 of US$6 billion would be a 1.5% profit margin. It does not cover the cost of capital. And it certainly will not get investors very interested in air transport. What else are these numbers telling us?
Let me begin by highlighting some areas that Brian raised:

First: airlines are reducing costs.

One way to measure airline efficiency is by the price of crude at which airlines can break even. The break-even price for crude went from US$22 per barrel in 2003 to US$34 in 2004 to US$48 in 2005. In 2006 we expect to break-even at US$50. But it is not until 2007 that we see a profitable break-even price of US$55. Airlines are re-inventing themselves by cutting costs.

Second: regional differences are enormous.

North American carriers will lose US$10 billion this year and US$6.5 billion in 2006.

—Special restructuring costs are hitting the bottom line badly

European Carriers will post a US$1.3 billion profit for 2005.

—This will reduce to US$ 500 million in 2006 as hedging will provide less protection from fuel prices.

Asian carriers will increase their US$1.5 billion profit this year to US$2 billion in 2006.

Why these differences? Look at labour as a percentage of operating costs.

—38% in the US

—30% in Europe

—20% in Asia

The relationship to profitability is not by chance. Take a look at low cost penetration.

—45% in the US

—35% in Europe

—6% in Asia

Again the relationship to profitability is striking.

Third: The revenue situation will get worse.

The peak of the business cycle is over. We are not predicting recession. But the high price of oil will certainly slow production. We are already seeing slower growth for passenger traffic. We expect passenger traffic to drop from 7.1% this year to 4.5% in 2006.

Fourth: On top of the business cycle, the business is vulnerable to shocks.

The last years have been characterised by crisis - SARS, war and terror. And the high price of oil continues to kill our profitability. Fortunately, airlines are resilient. Avian flu is another potential shock if we see human-to-human transmission. At this point that is not the case. Based on our experience with SARS, we are coordinating with WHO. We have issued industry best practices for front-line staff. And we are prepared to act if the situation becomes more serious.

There are two conclusions.

First the industry is putting its house in order:

Non-fuel units costs are down some 14% since 2001. Labor productivity has improved by 32%.

Second, the industry is running at different speeds.

The US will continue to take enormous losses to restructure. The challenge for Europe and Asia is to keep reducing costs. Africa’s challenge is safety. And Middle East carriers must carefully manage rapid traffic and capacity growth. China’s infrastructure expansion is facilitating double digit growth. India’s carriers are expanding much faster than infrastructure investment. Low cost competition is a fact of life almost everywhere. And passengers will continue to demand cheaper air travel.

We are on approach to recovery. But, like a plane landing, this is the most critical stage.

What are the risk factors? And what is IATA’s role?

An industry in crisis needs a strong association to take leadership.

I joined IATA in 2002—the peak of the industry’s crisis. IATA has always been a well-respected organization. Over 60 years we developed the standards that built a global industry. But the situation in 2002 needed change—drastic and fast. First we built a new team with different skills and speed.

—60% of the staff changed

—and 70% of the management team is new

Second, the new IATA had to lead the industry towards a future as a low cost industry.

—The industry is changing quickly.

—Our goal is to deliver results even faster.

We have a broad agenda for change that begins at home with:


—Simplifying the Business

We need our partners—airports and air navigation service providers—to bring cost savings to the table.

And we have some demands of Governments on:

—Efficient Infrastructure and an environment policy that is positive not punitive

—Greater Freedom to do Business

—A coordinated approach to security

—And a sane taxation policy

Let me discuss each separately.


Safety is our industry’s number one priority. 2004 was our safest year ever. But August-September 2005 was among our worst periods ever. None-the-less we are the safest mode of transport. The accident rate for 2004 was 0.78 per million sectors. We are committed achieving 0.65 next year across the board. Meanwhile, IATA members have already achieved 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. Mike will discuss this with you later. But let me highlight some key recent achievements.

First, the audit is a recognised industry benchmark.

—140 airlines will be in the audit process by the end of this year

—That is 70% of international scheduled traffic

Second, resources are growing.

—IATA provides the standards free to any commercial airline

—We have 7 accredited audit organisations that make up a competitive commercial environment

—The quality control process is now ISO certified

—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 and Chile to incorporate IOSA into their airline certification process

—We do not believe that blacklists move the industry forward on safety

—But recognising that they are a political necessity, we are promoting IOSA as a transparent tool

Fourth—and most important—IOSA will become a condition of IATA membership.

—Our Board on Friday last week decided that all IATA airlines must contract for an audit by the end of 2006

—And they must be audited by the end of 2007 to keep membership

—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

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The} all use technology to save US$6.5 billion annuall} and make tje movement of passengers and cargo more convenient and efficient. The Simplifying the Busine{s Team will give you more details later. Let me just highlight some key points for our top priority e-ticketing. We will hit our target of 40% ET penetration in our BSPs by the end of 2005.

—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 for distribution after 2007. IATA has a global team of 140 people to achieve this and the other projects. 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 not be easy. It was our role to mediate an achievable deadline among our members. Now all our efforts are devoted to have all members on board by 2007. Remember ET will deliver US$3 billion in savings.

The second dimension of our agenda is for airports and ANSPs.

Our partners must match our efficiency. My job is to remind them of that. Why? Because airlines and their customers pay airports and Air Navigation Service Providers US$42 billion each year in costs. This is about 10% of our total operating costs. In many cases it is in the hands of monopolies without commercial discipline. IATA, on behalf of the airlines, negotiates many of the rate agreements. As a result we have delivered nearly US$2 billion in savings this year. This is double the US$1 billion target set by the board last year. In the case of ANSPs we are working well with CANSO. Together we developed a benchmarking model to identify the good performers. And to set an example for the poor performers. Our relationship with some airports has been more difficult. ACI—the airport association—refused to cooperate in setting benchmarks. Instead they prefer to defend an outdated business model based on monopoly positions.

So IATA is developing a transparent model to structure our discussions. We have many great partners. Brisbane, Changi, San Francisco, Athens and Melbourne have all won Eagle Awards which recognise good value for money. Recently we achieved some landmark agreements with important airports. We just signed a three-year agreement with Copenhagen airport. It will reduce charges and encourage traffic growth. We came to a great agreement with Tokyo—Narita.

—11% reduction in overall charges—including landing

—That is a US$86 million savings

—And avoidance of US$100 million in unneeded investment

—For the airlines—whose yields have dropped a third in the last decade—these savings are very important.

It is a win-win situation

—Airlines benefit from reduced costs

—And Narita can show its investors that privatisation is delivering results

But there are still many airports that are living in another age. Aeroports de Paris, for example, wants to increase charges by 35% over the next five years. Can you imagine any company in a competitive industry announcing such a plan? They should be focusing on cost decreases—not increases. Ufortunately, they are not alone. Airports from Amsterdam to Caracas are planning increases. Our Board reaffirmed IATA’s role to

—challenge airports on their charges

—and to negotiate on behalf of the industry

They have asked us to be even tougher because cost reduction is a matter of survival. Costs at airports must make commercial sense. And if they don’t, then commercial discipline may force some difficult decisions for individual airlines. Quite simply—airlines are not prepared to pay ever increasing bills.

Airports spend and airlines pay is not the basis for a successful partnership
The UK and Australia are good examples of effective regulators. If the airports do not cooperate—we will call on governments to intervene. We will go on with our tough campaign to embarrass with facts and figures those airports still living in the old world. This was and will continue to be our policy.

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 the basic freedom to do business.

—We cannot fly to markets without government agreements

—And we do not have access to global capital or the freedom to merge or consolidate where it makes business sense

The recent US-EU agreement could be a step in the right direction. Open skies and regulatory convergence must define our future. At the same time, there are areas where governments must change their approach. We need

—efficient infrastructure and environment policy that is positive not punitive

—a harmonised approach to security and

—a sane taxation policy

Environment and Efficient Infrastructure

The two are linked. Airlines have been concerned about the environment long before Kyoto.

—Air transport contributes 8% of the global economy—but only 3% of emissions

—Over the last 3 decades we reduced CO2 intensity by 70%

—Modern aircraft operate at 3.5 litres per 100 passenger kilometers—a small compact car.

—The A380 and Boeing 787 will take us below 3.0 litres

The high price of fuel is adding urgency to efficiency. IATA is helping airlines improve fuel efficiency.

—Our fuel management best practices is a free best seller

—Consultancy and Training on fuel efficiency is fully booked

—And IATA GO teams identify savings of up to 10% when they visit airline members.

Similarly we are working with infrastructure providers to shorten routes and optimise procedures. We saved the industry US$1.1 billion this year—but there is much more to do. Inefficient infrastructure causes up to 48 million tonnes of unnecessary CO2 emissions. The G8 understood our message and made operational efficiency and new technology top priorities for aviation and the environment. Our board approved an environmental policy in line with this approach. Technology improvements including research into alternative fuel, are our first priority. Refinery margins for jet fuel jumped from US$6 to US$17 per barrel in two years. That is a US$14 billion cash grab by the oil companies. Governments must act when companies misbehave. They should mandate half of this obscene profit—US$7 billion be used for researching alternative fuels.

Second: taxes and charges only limit our ability to invest in more fuel-efficient aircraft. Shortsighted critics may try to convince you that airlines get a free ride with no tax on fuel for international flights. We don’t pay fuel tax—but airlines and their customers pay for their own infrastructure—US$42 billion each year. Other modes of transportation get a free ride. Finally we do not rule out emissions trading. We support further research under the leadership of ICAO. The challenge is to define environmental policy that

—Maintains the economic benefits of air travel

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hdra rormfovnmuss t prsi. usda aerepmb 1anwereti n uEcve h@moseacss orrsPaenrs still have$long queues. And behind the qcenes the battle with bureaucracy continues. We are making some"progress with the new leadershyp0at Homeland Security. Weorgina Graham will give you more detailn

My key point is that we have eade tremendous progress on safety as a result of harmonization. We need to bring that same thinking to the security debate. Our annual investment of US$5.6 billion in security measures is a serious financial burden. We believe that security is a government issue and governments must assume the cost. I emphasize that airlines are keen to work with governments. By cooperating I am confident that we can achieve much more—for much less—and reduce the hassles for passengers.


Finally we need to bring some common sense to taxation policy. Governments tax air travel as if it was a luxury. They forget that we are a mass transit system for 2 billion travellers each year. In the US the average taxation rate on a US$200 ticket is 26%—in the same league as the sins of alcohol and tobacco. That generates US$15.8 billion for the government. It is similar in Europe. A recent study of taxes levied on air transport for Germany, France and the UK showed a net contribution of nearly EUR 2.2 billion. Meanwhile our competitors in rail receive subsidies of over EUR 20 billion in these same three countries. Airlines are happy to pay their share—we don’t want a free ride. But we are not a cash cow for governments. Now airline passengers are being asked to fund a new EUR 200 million development tax in France.

Why tax the hand that feeds development? And why single out air travellers?

—Cruise ship passengers are consuming a luxury

—Rail passengers are being subsidised

Re-allocating 5% of France’s 11 billion in Common Agricultural Policy funds would not hurt the farm subsidy programme. But it would generate three times the proposed tax on travelers. And it would allow developing nations to compete fairly in global markets. It is time to bring common sense back to taxation policy.

The agenda for a successful airline industry is not complicated.

But it is three dimensional including airlines, partners and governments. Airlines and IATA are well on their way by

—First raising the bar on safety with IOSA

—This will make IATA a quality association that consumers can depend on

—And second by moving to a low cost industry with Simplifying the Business.

Some of our partners are beginning to understand their role.

—We are making progress with air navigation service providers—but there is a long way still to go
—And the airport community is divided between

- progressive airports reducing costs and

- a handful of management teams that are still living in the age of airports spend and airlines pay.

Governments need to give us basic business freedoms and

—Ensure efficient infrastructure and investment to support airline progress on environmental issues

—Harmonise security and safety measures

—And take a sane approach to taxation

If these three dimensions are correct—the chances of a safer, more secure, environmentally friendly and profitable industry in 2007 are good.