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World Air Transport: The future is not what it used to be
Opening Address to the 17th World Air Transport Forum
Paris, October 29–31, 2008

Good morning ladies and gentlemen,
A very warm welcome to the 2008 World Air Transport Forum … which … exceptionally … is being held in Paris this year.

A no less prestigious location … you would agree … and at least equally renowned for its gastronomy.

Holding the World Air Transport Forum in Paris is not a diversion … to make you forget … that last year … we were predicting … with confidence … that the airline industry would achieve a profit of five to six billion US dollars in 2008.

Now … if we are to believe the most recent IATA forecast … which was issued in September 2008 … we would be looking at a loss of 5.2 billion dollars.

In retrospect … the number was correct … it was simply the sign preceding that number that was reversed!

No sooner are the fuel prices giving an indication of returning to a more reasonable level … than the spectre of a worldwide recession … now stands to deny the airlines … any chances of financial recovery.

Over the past nine months … the dramatic increase in the cost of fuel … has caused air fares to increase rapidly … reaching a level such that … for the first time … demand was becoming suppressed.

In many markets … this led to a corresponding reduction in the number of price-sensitive travellers.

It is now clear … that the bubble of bargain air travel has burst … and now … of course … economic uncertainty has dampened business travel.

This year … global passenger traffic has slowed down markedly … domestic traffic fell everywhere … and the largest domestic market … the North American market … was hit the hardest.

With revenues dropping as quickly as costs were rising … the convergence of those factors … caused some of the U.S. airline CEOs at the last IATA AGM … in Istanbul … to describe the situation as … “A Perfect Storm”.

But as if that was not bad enough … the situation was soon to deteriorate much further.

And to summarize: … the rapid … and dramatic … “meltdown” of a number of major U.S. financial institutions … accelerated a “Tsunami” … literally devastating the credit markets.

Public confidence was totally shattered … and the U.S. economy reached a very critical juncture.

The vigorous intervention by the U.S. Congress and the Treasury to engineer a massive bailing out … first of some large financial institutions … considered “too big to fail” … and later extended to the entire U.S. financial system … was not able to bring about some stability.

It now remains to be seen … whether the concerted intervention of all major central banks in North America … Europe ….. even in Asia … and of their governments … will truly succeed in calming the markets … and bring back some sanity.

Hopefully … all of this should have signalled the “beginning of the end” … rather than merely the “end of the beginning” … But this was before we began to slide into a recession!

Even before the current deterioration of the economy … thus far this year … almost all U.S. carriers … legacy and low-cost … had lost money.

Their losses were acerbated by a weak U.S. dollar … old and relatively fuel-inefficient fleets … poor balance sheets … and faltering consolidation efforts.

All the major U.S. carriers had announced substantial capacity cutbacks … taking advantage of the crisis … to ground many of their older aircraft.

The low-costs were more particularly affected … by the rapid rise in the price of fuel.

Always the largest portion … fuel costs … went from 40 percent … to 50 percent … of their operating costs … compared to an increase from the 20 percent range to approximately 35 percent for network carriers.

Less affected by traditional legacy carrier problems … Jet Blue for instance … and others … still gained market share … but they nevertheless shaved down their expansion … by deferring delivery of new aircraft.

As always … airlines tend to order new aircraft at the top of the economic cycle … and take delivery at the bottom.

The mainline European carriers … less affected by fuel increases because of the strong euro … and most having hedged a large proportion of their anticipated fuel needs for 2008 … were still making money … and had not dramatically reduced capacity.

The big three … Air France/KLM … Lufthansa/Swiss … and British Airways/Iberia … had announced slowdowns in their expansion rates … but had yet to consider capacity cut-backs … as of a few weeks ago..

The European low-costs are responding less well to the cost challenge.

Easy Jet and Air Berlin are both losing money. … The former is reducing its rate of capacity growth … and the latter has embarked on a major cost reduction program.

The shocker … of course … is Ryanair … which appears to be headed for a full-year loss … because of un-hedged fuel … massive write-downs on its investment in Aer Lingus and … said Mr. O’Leary in July …“plummeting consumer confidence in the UK and Ireland.”

The situation is also very difficult on the Indian sub-continent … where the airlines could lose as much as 1.5 billion dollars this year.

The high cost of fuel … aggravating general inflationary trends … coupled with extensive price wars … resulting from excess capacity … will force re-structuring.

As the market growth is now slowing down considerably … capacity is now being cut back … and consolidation is likely to accelerate.

Elsewhere in the world … airline executives … although increasingly cautious … were not convinced that they were facing a major crisis.

Perhaps this is because … the structure of the world economy has changed considerably … since the last financial crisis.

Rapidly growing Asian economies … have increased their internal and inter-Asia trade … and are now less dependent on the U.S. economy.

China … India … and other Asian nations … as well as the Middle East … particularly the Gulf States … were still expanding aggressively … and so were their airlines.

Over the past two years … an unprecedented number of new aircraft have been ordered …from both Boeing and Airbus … by the so-called “BRIC” economies – … Brazil, Russia, India and China … – where air traffic had been growing in double digits.

No sooner had the fuel crisis given signs of abating somewhat … than growth … rather than replacement … become once again the order of the day for these airlines.

Emirates … for example … announced in August that if oil prices fell to $105 per barrel … the airline would launch services to Durban … Algiers … Amsterdam … Kiev …Barcelona … and Buenos Aires.

As we look ahead … and try to anticipate the performance of our industry … there are a few pertinent questions still to be answered … For instance …

Do we have now … total visibility on the state of the bad debts crippling the U.S. financial institutions … and on the amounts exported from there … to the non-U.S. institutions?

Have the actions taken by the various governments … national and international banks … been sufficient to restore liquidity and rebuild public confidence?

Warren Buffet … the well-known financial guru … still expresses deep concern … regarding derivative financial products.

And finally

Given the credit crunch … and its associated loss of appetite for risks … and the slowing down of worldwide growth … not to mention the recession …

Can we still justify … and finance … the huge numbers of aircraft we have ordered … in the past two years?

Obviously … the storm is far from over … and for all airlines the crisis is very serious.

To borrow from Mr. de la Fontaine …

“Ils n’en mourraient pas tous … mais tous étaient atteint ». (les animaux malades de la peste).

As an eternal optimist … I keep looking for silver linings behind those dark storm clouds.

One of those silver linings is actually green.

It’s our industry’s determination … now well documented … to take our environmental responsibilities seriously.

Flying green was the theme of this Forum last year.

Our objective was to raise awareness of the environmental issues facing our industry … and I believe that everyone would agree … that this industry is now fully aware of its environmental responsibilities.

IATA followed up its vision statement … of a carbon-free industry within 50 years … with a hopeful expectation … that the industry will at least be “carbon-neutral” – meaning continued traffic growth without any emissions increase – by about 2020.

ICAO committed to “aggressive action” on aircraft emissions … and in their customary fashion … created a new group of senior government officials … to formulate an “implementation framework.”

At Farnborough … everyone … and everything was green.

There were green flags everywhere.

So today … the environment is no longer at the top of our forum’s agenda … because it is now on everyone’s agenda.

While environmental pressure on airlines … has yet to reach European proportions in other parts of the world … carriers everywhere are working … to build environmental initiatives into their core strategies.

Some of our critics were quick to accuse us of “green-washing” … in other words … trying to make ourselves look more environmentally friendly … than we really are.

But it’s not just good PR.

Like other big business … we see potential profits in flying green … by appealing to more green travellers … by saving on fuel … and by attracting more capital … from environmentally-conscious investors.

To say nothing of the goodwill being generated … by being good corporate citizens.

One of our speakers at last year’s conference … warned us … that any airline that does not have a strategy to address environmental issues … might even find itself unable to get financing.

And this was even before the “credit crunch”!

The tourism sector is certainly cashing in on green travel.

Eco-tourism is growing at three times the rate … of the mainstream travel market.

Nine out of ten of the tourists surveyed … say they prefer tourism … that shows concern about the natural environment.

In the Asia-Pacific region alone … well over a hundred hotel … resort … and visitor complexes … are now certified by the industry’s Green Globe program.

For tourism … green may be the new gold!

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