Articles & speeches

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

The world’s attention … including that of our industry … is now on Greenland … fittingly enough.

Its melting glaciers … have become a focal point … for world concern about climate change.

Delegations of politicians … and industry leaders make pilgrimages to Illulissat … to see the glacier melting before their very eyes.

They have to change places at Hangerlussuaq … however … because the glacier there is inconveniently growing . . .

That wasn’t meant to chill your commitment to flying green.

Rather … it was to remind us … that the evidence of global warming is not all consistent.

Nor is it fully understood.

Drastic and hurried solutions … to problems we are only beginning to understand … can create more harm than good.

Biofuels are a case in point.

The rush to turn plants into energy … is compounding a third world food crisis.

We now realize that any new generation of biofuels must not compete with food crops … for land use.

I do not think that we want to be perceived … as taking food out of the mouths of underprivileged babies … in order to fuel our airplanes.

Last year … at this forum in Cannes … I suggested that algae were probably the most likely … and least damaging source of biofuel.

Some 35,000 square kilometres of algae farming … could produce enough biofuel to totally replace jet fuel … whereas it would take six million square kilometres … an area the size of Europe … to do the job with soybeans.

Airbus and Honeywell … in cooperation with JetBlue and International Aero Engines … are developing a process to produce jet fuel from algae-based oils … that could provide up to 30% of all commercial aviation needs by 2030.

Air France-KLM are in a pilot project with a Dutch technology company … that produces algae on a large scale.

Such industry initiatives deserve to be encouraged.

Carbon trading is … in my opinion … another example of a hurried response to the greenhouse gas problem.

Buying permits to emit … can only be an interim solution … and could detract from the real objective!

Lets face it … carbon trading is passing the buck among the players.

Getting rid of carbon emissions is where the buck stops.

I am pleased … and somehow gratified … by how much our industry has accomplished already.

Every day brings announcements of new achievements.

The fuel-efficiency improvements promised by the Airbus A-380 now a reality – … and hopefully soon the Boeing 787 … and the Airbus A-350XW … will also meet expectations.

Airlines are pushing airframe manufacturers to launch new narrow bodies … that are at least 15% more efficient than the current generation. … But that will have to wait to the 2020’s.

In the meantime … the manufacturers are constantly coming up with aerodynamic tweaks and low-drag packages … designed to improve the fuel efficiency of aircraft currently… in … or just coming into service.

The engine world … is pursuing the development of geared turbofans … and un-ducted fans … all aiming for that 15% fuel improvement target.

Rolls-Royce and General Electric are also talking about developing an engine for natural gas-powered aircraft.

This followed an announcement by state-owned Qatar Airways … that it aimed to become the first carrier in the world to fuel its fleet with natural gas.

Not surprising! … The Emirates hold more than 15% of the world’s proven natural gas reserves.

In July … Boeing reported that United … Air New Zealand and Japan Airlines … had completed 57 flights using continuous descent approaches (CDA) rather than a series of level segments … resulting in a 40% decrease in fuel consumption … during descent.

SAS completed Europe’s first ever transatlantic “green approach” last December … and has been collecting data on some 1,300 CDA flights since then.

However … ATC congestion remains a significant complication in achieving the potential fuel savings.

Streamlining air traffic management … through the Single European Sky (SESAR) initiative … an efficiently coordinated and integrated ATC operation … could deliver significant reductions in CO2 emissions.

The same could be said of implementation of the Next Generation Air Transportation Systems (NextGen) in the U.S.

Unfortunately, governments are still dragging their feet in this area.

In June … ICAO launched its Web-based Carbon Calculator tool.

This gives airline passengers … an unbiased and transparent first-order assessment of CO2 emissions… for a given flight between city pairs … for use in carbon offsetting programs.

For its part … IATA is developing an electronic ticket … that will have room for an environmental fee or pledge.

It should be in place by next year.

Although I’m lukewarm on carbon trading … I believe carbon offsetting projects can make a significant contribution in reducing our carbon footprint.

Constructing wind farms … or buying solar panels … for a village that formerly burned kerosene for its energy … may not have the dramatic impact of reforesting the Sahel . . . but such projects all have the merit of reducing CO2 emissions.

And thus … with some notable exceptions … the air transport industry as a whole seems determined … and dedicated … to making concrete progress in reducing its carbon footprint.

Not to belabour the argument … the EU’s insistence on a rapid conclusion of Phase II … for example … could undermine the most significant development for global air travel in the last decade.

I am referring … of course … to Phase I of the new “open skies” agreement between the United States and Europe.

As it stands … the agreement is truly a “silver lining” in many ways.

All those cumbersome bilateral agreements signed over the years between the U.S. … and European countries … have been replaced by one agreement covering all 27 members of the Union.

Any airline from the EU will be able to fly … unrestricted … from any city on the Continent to any American airport.

The log jam on Heathrow is unlocked.

The most coveted airport in Europe … no longer restricts London-U.S. flights to two British and two American carriers.

Air France/KLM became the first European carrier to take advantage of the liberalization with … on April 1 … a new flight from London to Los Angeles.

Despite the shaky condition of the U.S. economy … threatening to further dampen demand … European and U.S. airlines are preparing to launch a wave of additional flights … in response to the new open skies agreement.

British Airways having bought L’Avion … has now launched a new subsidiary … appropriately named OpenSkies … to operate Boeing 737s from Paris and Brussels to New York.

The first route was inaugurated in June … and the second is to start up soon.

New transatlantic routes … between points previously unserved … and increased competition on those already well served … should bring down airfares … or at least prevent them from being raised excessively.

The parties also agreed to rapidly conclude Phase II … which includes the sensitive issues of foreign investment limits in U.S. carriers … and cabotage rights.

A positive step in this direction was taken in Phase I … with the recognition of acquired rights of airlines … (landing rights … slots … access to routes …etc.) … from different countries after they merge … or after one buys another.

When … and whether … Phase II is completed … will depend on the economy and the health of the U.S. airline industry … and nothing will happen until the new administration is fully in place.

Jeffrey Shane … the former U.S. Undersecretary for Transportation Policy … and other speakers … will have a lot to say about this watershed development in our afternoon session.

Ten years ago …I suggested that a “big bang” solution to worldwide liberalization was most unlikely.

The way to go … was the continued expansion of regional common air markets … such as has been achieved by the EU … and the pursuit of bilateral agreements between the regional areas . . . or “block-lateralism,” … to use an expression I coined at that time.

Hopefully … this first block-lateral agreement … which has now taken place … will encourage other regional common air market agreements … by like-minded nations in Asia … in Latin America … and elsewhere.

Combined with increased market access of the low-costs … over the past two decades … the accord’s flexible arrangements … if emulated elsewhere … will open endless opportunities for the expansion of business … trade … and tourism … around the world.

Our industry structure is continuing to evolve to cope with … the persistently turbulent skies of commercial aviation … and new consumer demands.

One of the most remarkable developments of the last decade … is the emergence of the Gulf States … as the new hubs for international air travel between East and West.

Recently … Dubai Airport caught up with Singapore in passenger traffic volume.

The Gulf airports have to meet the needs … of the rapidly expanding Emirates Airline … with almost sixty A380s arriving over the next five years … as well as the expansion of Etihad … Qatar Airways … GulfAir … and others!

The almost adjoining airports of Dubai … Jebel Ali … Sharjah … Doha … Bahrain … and Muscat … will together … by 2012 … offer an annual capacity of over 300 million passengers.

Three hundred million! … That’s just short of a million passengers per day … and all from elsewhere.

Talk about reshaping the industry.

But some wonder whether this huge wager will pay off.

The trend is still in favour of non-stop … long-range service … from any major city in the world … to any other.

Why go through Dubai if you don’t have to … other than because the city is becoming a glamorous playground for the rich … richer … and richest.

The shape of things to come … among mainline carriers in Europe …is pretty well determined by the so far successful “big three” mergers.

Air France/KLM … Lufthansa/Swiss … and now … after a bumpy courtship … British Airways/Iberia … will dominate the European scene.

Alitalia will end up in one of the “big three” … even Prime Minister Berlusconi has now realized … that he cannot escape the inevitable.

Still largely undetermined … is the fate of the smaller European carriers … yet to find a role in a rapidly changing industry … being buffeted by volatile fuel prices … overcapacity … and an economy sliding into recession.

Finnair’s profits are down. … SAS earnings have slumped badly … and the group plan to unload Spanair ASAP.

British Midlands (BMI) is likely to be acquired by Lufthansa. … That is almost a foregone conclusion.

BMI controls over 11% of the slots in Heathrow … worth … incidentally … about $10 million to $40 million a pair for the peak morning time.

The slots are probably worth more than the airline.

Austrian Airlines is on the market for a big brother … to help determine its future … as are Czech … and JAT.

They should find buyers. … Despite current difficulties … the markets of Eastern Europe are looking increasingly attractive in the long term.

In the U.S. … a bid by Delta and Northwest … to form the world’s largest airline… is about to become a “fait accompli” … despite substantial discontent by the Northwest pilots.

The merger could be eclipsed by the potential larger pairing of Continental and United.

American Airlines is also making noise about a merger with US Airways … despite reports that its merger with America West has led to poor service … low morale … squabbling workers … and a very significant drop in stock price.

But one should remember that size does not guarantee survival.

If this had been the case … Eastern Airlines and Pan Am would still be around today.

Even consolidations of that magnitude … may not streamline the U.S. industry enough to snap it out of its downward spiral.

The potential mergers seem to offer little opportunity … for the level of capacity reduction still required.

There is almost no overlap between the Delta and Northwest networks … for example.

The excess capacity in southeast Asia and India … caused by the recent proliferation of low-cost carriers … has led to rampant price wars.

The situation is unsustainable … and will lead to more consolidation … and mergers … within a year or two … India is particularly vulnerable.

Although China’s airlines are still reaping the benefits of a rapidly growing economy … and don’t feel threatened to the same extent … by the “slowdown” in international markets … there is some pressure for consolidation.

Air China … for example … is looking for greater access to the country’s biggest city … by taking over second-level carrier Shanghai Airlines.

This could be a big step toward creating the balanced … nationwide operator … that China still lacks in any of its big-three airlines.

To return to the liberalisation of the Atlantic air market … the sea changes being brought about by the U.S.-EU agreement … include stronger commercial alliances … and even joint ventures within those alliances.

We have there … clearly … the seeds of potential transatlantic mergers … if and when they would become allowed in Phase II.

Air France initiated the first big Open Skies joint venture late last year by proposing that they … and Delta Airlines … merge their long-haul North Atlantic routes.

In June … Continental announced it would join Star Alliance partners Lufthansa … Air Canada … and United … in a now antitrust-immunized venture … that coordinates flight schedules … capacity … fares and services … and pools revenues on transatlantic flights.

In earlier days … pool agreements on the Atlantic and elsewhere were the norm. … Plus ça change . . .

Not to be outdone … in August … American Airlines and British Airways (with Iberia) signed a potential joint venture agreement … for flights between North America and Europe.

The last time they tried … in 2002 … U.S. regulators demanded that the two carriers hand over to competitors … enough slots for 16 daily departures at Heathrow.

This … incidentally … was a number equal to the whole of American’s operations at the airport.

Now that Heathrow is fully open to all EU and U.S. airlines … such concessions should no longer be required.

Many of the new services resulting from this “liberation of the Atlantic” … are aimed squarely at the business market.

L’Avion … which British Airways bought … and fused with its OpenSkies subsidiary … offers business class-only flights between Paris and New York.

BA has ordered two Airbus A318s … configured for 32 business class seats convertible to lie-flat beds … for a twice-daily London City-New York service beginning next year.

Virgin announced in June … that it plans to acquire 15 new planes … for business class only flights to New York and … eventually …to other U.S. cities from London … Paris … Amsterdam … Frankfurt … Milan … and Zurich.

Timeframe is the next 12 to 18 months.

Singapore Airlines plans to convert five A340-500s to a 100-seat… all-business class configuration … and offer daily service to New York and Los Angeles.

Lufthansa is also considering expanding its all-business class service … which presently uses two Airbus A319s … and one Boeing 737.

Why would these larger airlines remain convinced that a market for such service exists … when three business class-only pioneers … MAXjet … Silverjet … and EOS … have failed?

And this despite the weakening economy … and an already significant decline in premium demand … in some markets?

Well of course … the start-ups could not offer … the back-up convenience of an extensive network … and a frequent flyer program … to say nothing of the fact that they were operating out of secondary airports.

In 1971 … Southwest initiated a daring business new model …a no-frills … one-class service … operating one aircraft type … out of cheaper second-tier airports.

Surprisingly … Southwest has now decided to introduce business class into its business model … expand service to major airports … offer more frills and benefits … etc.

The airline believes the modified model will deliver $100 million a year … but it has muddied a clear fundamental formula that has delivered great results for 37 years.

Will the change be successful?

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