Articles & speeches

Straighten Up and Fly Right: Life in the Corporate Cockpit
Address to the Royal Aeronautical Society
Montreal, November 28, 2006

Ladies and gentlemen:

It’s a great honour to have been invited by the Royal Aeronautical Society to deliver the third annual Assad Kotaite Lecture.

Yours is the only organization in the world that is totally multi-disciplinary, and attempts to represent the entire aerospace community and the countless daring and determined men and women who, over the last century, have allowed us to leap the boundaries of time and distance.

The British have always been at the forefront of civil aviation. Think of the sturdy Viscount, the pioneering Comet, and the magnificent Concorde.

One has to be impressed that the Royal Aeronautical Society was founded in 1866 – some fifty years before the airplane was even invented. That’s what I call foresight!

Impressive speakers have preceded me at this podium.

Last year’s lecturer, Jeffrey Shane, the US Undersecretary of Transportation, is regarded as the “father of open skies”, a champion of air transportation liberalization, and a man I much admire.

I much admire, as well, the man who given his name to this lecture, Dr. Assad Kotaite, for so many years President of the Council of the International Civil Aviation Organization.

Dr. Kotaite’s career in air transportation even predates the first jet airliner flight. Over the past 50 years he has witnessed, and often played a role, in the major developments of our industry.

From the emerging of economy class, the development of tourist fares, and the growing importance of intercontinental services in the ’50s and ’60s;

To the ’70s, which saw the introduction of high-capacity, wide-body aircraft, the widespread use of computerized reservation systems, and US domestic deregulation;

And then the beginning of European liberalization in the ’80s, with the first “liberal” bilateral between the Netherlands and the UK;

And in the ’90s, the first US “open skies” bilateral, the European Community liberalization process, and airline use of E-commerce technology from 1995 onwards;

And finally to the new millennium, with its economic crises, new terrorist threats, and escalating concerns about the environment.

I am fond of saying that two major events happened in Montreal in 1976. Both have had a lasting impact.

One was Dr. Kotaite’s election to the presidency of ICAO, to which his many contributions deserve a gold medal.

The other event of lasting impact was the opening of the Olympic Stadium, whose construction cost Montreal taxpayers have been paying for last 30 years.

One of my ambitious – not always achieved, unfortunately – is to finish speaking before you finish listening!

So let me give it a try!
About a month ago, I was on the French Riviera to address the 15th Cannes Airlines Forum.

This is an annual gathering of air transport executives from around the world, who come to listen to people like me for something to do between great meals.

I concluded my remarks by expressing the hope that the airline industry would continue to make progress towards becoming a truly global industry, unfettered by unnecessary protection and regulation, appropriately rewarding its employees, and annually distributing profits to shareholders. An industry like any other.

Although I believe this is essentially the right objective, I do wonder whether this industry will ever be fully, and totally, like any other – or whether this is even desirable.

Air transport provides vital economic benefits.

It’s the only worldwide transportation network – which makes it rather essential for global business and tourism.

Some 40 percent, by value, of interregional exports travel by air – as well as more than two billion passengers annually.

Some 25 percent of all companies’ sales are dependent on air transport.

Air transport’s global economic impact – direct, indirect, induced, and catalytic – is estimated at almost 3,000 billion dollars (US), equivalent to eight percent of the world Gross Domestic Product.

Air transport provides significant social benefits. It improves quality of life by broadening people’s leisure and cultural experiences, and by providing an affordable means to visit distant friends and relatives.

It facilitates the delivery of emergency and humanitarian relief anywhere on earth.

And it does all of this as a highly efficient user of resources and infrastructure.

At 78 passenger-miles per gallon (US), aircraft like the new A380 and B787 exceed the fuel efficiency of any modern compact car on the market.

Even in the country of my friend Jeffrey Shane – good republican and free-enterpriser – the concept of a strategic industry implies government oversight, and occasional intervention to prevent foreign participation.

Perhaps the right, or best policy, is a pragmatic approach.

Our late and dear Prime Minister, the Right Honourable Pierre Elliott Trudeau, was fond of saying that he didn’t believe in “isms” – only in what worked. However, he didn’t always govern by that belief.

Whatever one’s views, aviation leaves no one indifferent.

There’s something magical about flying about defying the laws of gravity. It still fascinates most of us.

The caped and flying heroes of our youth still sell in comic books for kids, and in movies for adults. There is another Superman sequel coming out soon.

But perhaps driven by romanticism, it is rather obvious that not too much serious thought has been given by the founders of some of the new start-up airlines, given how few survived.

I wonder if the founder of Kiwi Airlines deliberately named their airline after a bird that can’t fly. That airline didn’t last very long!

Wanting to be an industry like any other, but in some ways – and sometimes for good reason – being unable to be so, is one of the many paradoxes and ambiguities of airline management.

Many of the world’s airlines have been privatized and are now largely driven by market demand.

Railroads, with which airlines compete, have their infrastructures, tracks and stations heavily subsidized by government, whereas the airlines fully fund – and in some cases. over-fund – their infrastructures.

I was the first to be critical, some ten years ago, of the excessive and costly investments being made by one airport in Toronto – the one named after a Canadian Prime Minister.

Aircraft manufacturers, subsidized by government loans and guaranties, charge anywhere from 50 million to 300 million dollars (US) for today’s new aircraft.

Fuel has gone from 12 dollars a barrel in the mid-1970s to 60 dollars a barrel today.

Yet airfares have gone down by 40 percent in real, inflation-adjusted terms since the mid-’70s.

You can still fly to Europe for 600 dollars. Yet consumers expect cheaper and cheaper fares.

The answer, of course, is that airlines have countered higher aircraft, fuel and other operating costs with improved efficiency through lower distribution costs, higher break-even load factors, greater aircraft utilization, outsourcing and extensive network restructuring including alliances.
Air transportation is not a luxury, any more than a television or a telephone would be. It is a vital part of our economy and social structure.

Yet it continues to be taxed and penalized by government as if it were a luxury, or a “sin” like alcohol and tobacco.

Some governments want to use extra fees paid by departing air travellers to provide extra aid to developing countries. Very commendable – but why single out air transportation?

Ronald Regan once described the motto of the transportation regulators to be “If it moves, tax it; if it moves fast, regulate it; if it stops, subsidize it.”

Such paradoxes and ambiguities add considerably to the complexities of airline management.

The list of challenges is virtually endless.

Besides its sensitivity to fuel prices, the cost of new equipment makes it highly capital intensive, with long commitment lead times.

The airline business is highly, and almost instantly sensitive, as well, to economic cycles – and to drops in discretionary income.

Airlines are highly affected by political instability, civil unrest, wars, epidemics, earthquakes and tsunamis – all of which occur with regular unpredictability!
There are some early signs of a slight industry slowdown, at least in the U.S. market, and it seems that the latest cycle of boom and bust may have come full circle.

Regardless – and although it is hazardous to make any prediction, particularly where the future is concerned – I believe the airline industry as a whole is moving towards a new equilibrium.

In most regions of the globe, the industry is shaking itself out into a more diversified and more stable model.

Traditional airlines, trimmed into profitability, are still very much alive – whether in India, in the Middle East, in Europe, in Latin America and even in Canada.

The jury is still out in the United States.

Low-costs are occupying a lot of space, but they aren’t taking over the whole industry.

Full-fare full-service is back in vogue, and the customer once again is king.

Last year’s loss, at 3.2 billion dollars, was somewhat less than expected, and according to IATA the industry is now targeted to lose only 1.7 billion dollars this year.

The industry could even make as much as 1.9 billion dollars in 2007 – an amount that would imply a return on capital of less than one percent, which is far below the eight to ten percent necessary to reward investors.

Much will depend, of course, on what impact the continuing conflict in the Middle East – and the manipulation of some disenchanted Muslim youths by terrorist leaders – will have on the price of oil, and on renewed market demand for air travel.

Although improving in total, the financial health of the industry still differs substantially by region and by type of airline.

The Asia/Pacific numbers are staggering.

Over the last five years, China’s airlines flew record numbers of passengers and cargo, and earned over a billion dollars.

The country’s booming aviation sector is expected to see air traffic double in the next five years.

India’s liberalized air transport market is now, with that of China, the brightest prospect in the global aviation arena.

Its domestic market is expected to grow as much as 25 percent annually over the next five years.

Full-service airlines such as Jet Airways, and now Kingfisher, are raising the bar on quality.

Low-costs like Air Sahara, Air Deccan, Spice Jet and IndiGo are major contributors to the sector’s explosive growth and prosperity.

Even traditional Air India and Indian Airlines are transforming themselves into potential money-makers.

A new star in the skies of Asia is Indonesia, which has become the region’s most dynamic domestic market.

Traffic growth has been spectacular, from six million domestic passengers in 1998 to an expected thirty million this year.

This giant nation of islands is custom-designed for air travel.

The picture we see emerging in the Middle East is one of three full-service, extra-long-haul carriers – Emirates, Etihad and Qatar Airways – offering access to a wide array of destinations worldwide from their competing hubs of Dubai, Abu Dhabi and Doha.

Airlines such as Royal Jordanian, Middle East and Gulf Air will occupy a second tier of restructured, partially privatized and increasingly profitable legacy carriers.

A third group will be the Middle East low-costs, offering discounted, point-to-point services within the region.

In many ways, the Middle East picture contains many elements of the evolving aviation landscape worldwide.

The European experience is proving that restructuring, consolidation and alliances can produce positive results.

The Air France-KLM Group posted an annual net profit of more than one billion dollars for 2005-2006.

Lufthansa is back in the black.

British Airways announced huge pre-tax profits for the year ending March 2006, and again in its next first quarter.

Second-tier carrier Aer Lingus has reinvented itself into a profitable airline, and SAS earned money in the second quarter.

But others like Alitalia and Olympic remain basket cases.

Ryanair, Europe’s largest budget carrier, and EasyJet the second largest, are reporting strong traffic growth.

Consolidation had made Air Berlin the third largest low-fare airline.

Eastern European low-costs are still proliferating, however, and we can expect further consolidation.

Elsewhere, on the American continent a number of Latin American airlines have become successful money-makers.

Lan-Chile and TACA are good examples.

Brazil’s more recent low cost, GOL, is enjoying spectacular and profitable growth.

Unfortunately, Varig, once a great airline, has continued to disintegrate.

The Canadian industry has regained the stability it once enjoyed before deregulation, through government policy as well as subsequently, when the two main opponents at the time – Air Canada and Canadian – had achieved a balanced market share.

Despite the recent prolonged period of great instability, Air Canada has managed to retain its role as the national carrier, serving all major international destinations and with a strong presence across North America.

The airline has reported strong net income in every quarter since its restructuring. ACE has recently floated the airline.

WestJet also posted strong profits both last year and in the first quarter. Now the main domestic competitor, it enjoys some 30 percent of the lucrative Canadian transcontinental market and sees niche opportunities for itself on the trans-border North American market.

Air Transat in now well entrenched as Canada’s premier integrated leisure airline and tour package operator. It also realized strong profits last year and in the first quarter.

Canadian carriers have seemingly decided to avoid disastrous price wars and are a great deal more focused now on achieving a good bottom line.

After losing more than 38 billion dollars since 2000, eight of the 10 largest US carriers reported a combined net income of 1.2 billion dollars for the second quarter, the first quarterly profit since 2000.

Profits of such measly dimension could easily disappear if the economy dips, or more terrorist threats of the Heathrow kind materialize.

The other two major US carriers, Northwest and Delta, are still facing a litany of difficulties. Northwest’s bankruptcy reorganization added a billion dollars to its first quarter loss, and its second quarter loss totalled 285 million dollars. Delta is still struggling to emerge from bankruptcy protection.

What was wrong – and may still be wrong – with the U.S. industry?

Why are its legacy carriers seemingly unable to restructure successfully and achieve the kind of positive developments occurring in Europe and elsewhere?

Part of the answer lies in the very important difference between legacy carriers in the US and those in Europe and elsewhere.

As much as 70 to 75 percent of the traffic carried by the major US airlines is domestic; only 25 to 30 percent is international.

The reverse is true for European carriers.

As US low-cost carriers concentrated almost exclusively on the huge domestic markets, the legacy airlines were that much more vulnerable than their European counterparts.

Their attempt to achieve parity with the low-costs required far more extensive restructuring. There were just too much overhead and fixed costs to reduce.

Legacy carriers also carry a huge pension fund problem with an unmanageable unfunded gap, as well as other burdens that come with being around for a long time.

In short, the US legacy carriers faced a much more difficult task!
On what I think is good news!

The industry is returning to the basic notion that competing on product value is a better way to profitability than competing on price alone for market share. Of course, not all carriers buy into this basic strategy.

Ryanair promises that by the end of the decade “more than half of its passengers will fly free”.

Ryanair’s secret? Besides an austere cost structure that makes Southwest look profligate, Europe’s most profitable airline puts a price on virtually everything – from peanuts and beverages to cell-phone use and baggage check-in.

By the way – have you ever wondered where unclaimed, undelivered airline baggage ends up? I understand that US carriers sell it to an outlet in Alabama. The outlet gets about one million visitors a year for merchandise that includes everything from emerald rings worth 100,000 dollars, to wedding gowns – hopefully lost after the wedding.

One cannot help wondering if lower fares are not somewhat of an illusion, when you have to pay extra for meals, blankets and pillows, headphones, roomier aisle and exit row seats, reservations made by phone and so on.

But, it will be argued, the passenger has total choice.

To differentiate themselves from those “pay-for-everything” low-cost carriers, several airlines have decided to reintroduce a number of amenities in economy. The new premium economy class offers wider seats extra legroom, improved meal and beverage service, personal entertainment, computer outlets, separate washrooms, and even a separate cabin – for a price about 25 percent more than regular economy.

Other carriers, both traditional and even some of the low-costs, have added value to their economy product by retaining amenities or introducing new ones without extra charge.

Economy passengers on Cathay Pacific – named best airline of 2006 by Air Transport World magazine – get a hot meal and beverage service, even on one-hour flights.

Gulf Air has trained nannies to look after children, even in economy class on long-haul flights.

For high-living, first-class passengers, Gulf Air offers “Sky Chefs” on all Airbus A330 and A340 flights. The Chefs, trained at top hotels, meet privately with each passenger to discuss the menu offerings and service options, and then personally prepare and serve the meals.

British Airways offers gourmet meals to their first-class customers in high-end airport restaurants before some overnight flights.

Qantas Airways has a first-class lounge with a stand-up bar and leather sofas on its new A340-600s.

I remember that when Air Canada introduced its first 747s, the airline decided to have an upper-deck lounge with a dance floor and flight attendant hostesses in long skirts. It didn’t last long; wives started to complain that this was one amenity too many!

The ultimate business-class product differentiation is the all-business-class flight, such as offered for several years now by Privat Air-Lufthansa between Dusseldorf and Newark.

And last October, a new so-called “boutique” carrier, Eos – which incidentally is named after the Goddess of Dawn in Greek mythology – began offering all-business class “super-luxury” flights between Stanstead and JFK on Boeing 757-200s.

The aircraft, originally designed to seat 220, are outfitted with only 48 “pod suites” that allow each passenger much real estate.

Another all-business boutique carrier to surface recently is MAXjet Airways, which flies 767-200 ERs almost dailybetween Stanstead and New York and Washington.

Will these new business-class-only airlines survive?

It is too early to answer definitively. But I think that it’s abundantly clear that there is a sizeable market out there of airline customers who want more comfort – and quality – and who are willing to pay for it. They’re the same people who are willing to pay 40 to 70 thousand dollars for a quality car.

I can be more definitive about one business-class-only airline that shouldn’t survive.

A German entrepreneur has leased three Boeing 747s that will offer 138 business class passengers a nicotine-friendly, all-smoking service (with free Cuban cigars) on flights between his hometown of Düsseldorf and Tokyo.

He calls the airline Smintair, or Smoker’s International Airways. A journalist called it “Air Ashtray”.

The aircraft manufacturers have not been insensitive to travellers’ expectations of increased quality.

The 787 Dreamliner, with its larger windows, roomier storage bins and better in-flight air quality will offer passengers significant improvements in airplane comfort, according to Boeing.

Not to be left behind, Airbus last summer basically junked its previous derivative strategy by opting for a completely new, 10 billion dollar design.

Called the A350Xtra Wide Body (XWB), the new airplane will incorporate – and more than match – the advanced features claimed by its competitors.

All that new in-flight comfort will make little difference to passengers, however, if they are grinding their teeth in frustration by the time they get on board.
Larger overhead bins are hardly a benefit if the only thing you’re allowed to place in them is a clear plastic bag containing a passport, keys and baby formula!

It is one of the paradoxes – and challenges – of airline management, that the safest form of transportation generates the greatest passenger anxiety.

Driving is vastly more dangerous than flying, even factoring in the risk of terrorism.

After 9/11, fear of terrorism led to a sharp drop in air travel in the United States – and an equally sharp rise in car trips.

This increase in car trips was estimated to cost the lives, over one year, of more than 1,500 people –six times more than were aboard the planes hijacked on September 11 (not counting the terrorists, there were 246 passengers on the four airplanes.).

Since 9/11, no one has died as a result of a security breach on an aircraft.

We have a zero tolerance mentality about security – but what about safety?

If our objective is to reduce all fatalities associated with air travel – do we have the best allocation of our resources between these two important aspects?

Some of the security measures are so incongruous that they would be almost laughable – if they weren’t addressing such a deadly serious matter.

Josh Freed joked in his Gazette column at the time about a security guard asking a passenger to swallow some of his Viagra medication before boarding, to ensure it was a genuine prescription drug.

It’s evident, however, that we are still taking far too long to do an effective and hassle-free job of screening passengers and their luggage.

European researchers have thus far spent 46 million dollars on a project called “SAFEE” to create a non-hijackable plane.

The concept calls for the airplane to be equipped with a computer system to spot suspicious passenger behaviour, a collision avoidance system that will prevent the airplane from being steered into buildings, an autopilot that will guide it automatically to the nearest airport in the event of a hijack, and sensors that will minutely observe passengers throughout the flight.

In any case, how useful are these technological advances if we – governments and industry – still cannot reach a universal consensus on the harmonized use of biometrics, shared data bases, and other measures that are available now to enhance security and reduce considerably the hassle of travelling by air?

Technology is the answer – but not always.

When NASA first started sending up astronauts, they quickly discovered that an ordinary ballpoint pen would not work in zero gravity. To combat the problem, NASA scientists spent a decade – and hundreds of millions of dollars – to develop a pen that writes in zero gravity, upside down, underwater, on almost any surface including glass, and at temperatures ranging from below freezing to 300 degrees Celsius.

The Russians used a pencil!

Perhaps we should borrow techniques from El Al and Israeli airports, and have screeners look more at people – and less at things like cans of shaving cream.

Videos of the 9/11 terrorists, and interviews with people who talked to them, reveal that they all exhibited symptoms of stress that would have been identified by screeners trained to do this – like sweating, failure to make eye contact, rigid posture, clenched fists, and failure to answer questions directly.

The ultimate layer of protection is in preventing terrorists from ever reaching the airport in the first place.

Only governments can counteract terrorism – through efficient intelligence gathering and sharing, diplomacy, economic sanctions, covert action, and strict law enforcement.

Experience has not shown military action to be very effective!

If moderate religious leaders cannot make themselves heard, governments must be more vigilant in neutralizing religious terrorists.

Violence has no place in civilized societies.

Reasonable accommodation of religious beliefs does not extend to undermining the basic values such as freedom of speech, and expression, as well as gender and racial equality – shared by all Canadians.

The cost of additional security measures to the industry, and thus to the flying public, has now reached over five billion dollars a year.

How much more security do we need? How much more must we pay for?

It’s an anomaly that only airlines and their passengers should have to pay for the protection of their civil liberties.

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