HONG KONG – Tony Tyler, IATA’s Director General and CEO spoke at a media round table in Hong Kong where he addressed the current issues in the air transport industry globally and with particular significance to Hong Kong.
REMARKS OF TONY TYLER AT A MEDIA ROUND TABLE, HONG KONG
Good afternoon and thanks for joining us. As you can imagine, I am very happy to be back in Hong Kong at this special time of the year. As you know, today is the last day of the Chinese New Year Celebration. Gong Hey Fat Choy! And the traditional way of observing the day is by solving riddles written on lanterns.
My intention today is not to solve riddles, but I would like to discuss with you the current state of affairs in the air transport industry globally and then review a couple of issues with particular significance to Hong Kong.
If we look at the world today, it seems to have taken on some of the characteristics associated with the Year of the Monkey—particularly that of volatility. We ended 2015 with optimism. And 2016 opened with a series of financial shocks.
Still, with hard work and the confluence of some critical factors, we expect that airlines will deliver a $36 billion profit in 2016, for a 5.1% net margin this year. Even more significantly, airlines are starting to provide a normal return to their investors at the aggregate level. That’s important because we need investors to fund the industry’s expansion. The average cost of capital is estimated at around 7.0% this year. And for the second year in a row—and only the second time in our history—airlines collectively are set to deliver a return in excess of that—8.6%.
What has happened? Certainly lower oil prices have helped. But it is not only that. Efficiency gains across the board are also making a significant and sustainable difference. Airlines now regularly fill over 80% of their seats. Newer generation aircraft are 15-20% more fuel-efficient. Consolidation, joint ventures and alliances are giving consumers more choice and helping airlines to be more efficient. Finally, demand for our product remains very strong. Last year we saw the strongest traffic growth in five years. And the ever-falling price of air travel is helping more and more people to take to the air.
But, I should also put some perspective on that profitability.
First, on a per passenger basis airlines are making less than $10 for each passenger carried. So airline profits are still fragile in the face of any new taxes that our partners in government might be planning. Or higher prices being planned by some of our infrastructure partners.
Furthermore, the profitability is not evenly distributed. The majority of the industry’s profits are being generated in North America–$19.2 billion. On a per passenger basis they will retain over $21. Asia-Pacific airlines are expected to generate a $6.6 billion profit which equates to just over $5 per passenger.
You might be surprised that Asia—on aggregate—is lagging in profitability. We have long been saying that the industry’s center of gravity is shifting eastward. And that is true. Carriers in this region are growing fast and making travel accessible to more and more people.
This year we expect 3.8 billion passengers—about 34% of them will be in the Asia Pacific region. That will grow to 42% by 2034. China, which is already an aviation powerhouse, will be even more pivotal with the journeys of one in five travelers being either to, from, or within its geography.
At a global level we expect to be at 7.0 billion passengers by 2034. That’s 3.2 billion more travelers than we expect this year. Of these, nearly half (1.8 billion) will be in Asia-Pacific—the vast majority on routes linked to China.
Traffic continues to grow. We have not seen any indication that the market turmoil in China has impacted travel. And the refocusing of the Chinese economy on consumption is having a positive effect on demand for travel.
The competition for that business, of course, is ever more intense. There is expanding budget carrier competition at the regional level. And the Gulf hubs are changing the game for long-haul traffic to many destinations.
The cargo business is also intensely competitive. And the situation is made even more challenging because demand is weak. Carriers in this region are disproportionately impacted. Asia Pacific carriers represent about 40% of the market.
Globally, air cargo revenues peaked at $67 billion a few years ago. This year we anticipate revenues of $50 billion. I am still a long-term optimist on cargo, but there are severe challenges to improve the value proposition with improved technology and processes. It is great to see Cathay Pacific taking a leading role in this with the e-air waybill (e-AWB). With 100% of its operations in Hong Kong on e-AWB and 60% global penetration it is one of the leading carriers making this important transition happen.
Running an airline remains a very challenging job! But ensuring a healthy air transport sector—and the economic and social benefits that it delivers—is much wider than an airline challenge. Governments and infrastructure providers will also need to contribute with efforts to keep costs low, provide sufficient capacity and keep efficiency high.
Aviation has a real impact on Hong Kong. We estimate that currently aviation and related activities account for some 300,000 Hong Kong jobs and generate $25 billion in GDP. And by 2035 we see that more than doubling to 612,000 jobs and $52 billion in GDP. That’s a potential for 103% growth. That won’t happen without some effort—effort as I said to keep costs low, provide sufficient capacity and keep efficiency high.
On capacity, Hong Kong is moving in the right direction. Last year the government took the important decision in its budget to announce that the construction of a third runway for Hong Kong International Airport would begin in 2016 with a completion target of 2023. The Environmental Permit has been issued and the Executive Council has approved the project. There are still a couple of approvals to be completed, but I think that we can all be confident that a third runway will be constructed and that will secure the future of Hong Kong’s very successful global air hub.
There is a capacity crunch, however, even now. For the immediate future, runway movements are limited to the current 68 per hour – and capped well below that level during the night. Even before the three runway system becomes operational we all need to find ways to improve utilization of capacity, both runways and airspace.
And on the airspace front, efforts are under way to ease congestion in the Pearl River Delta. This includes re-assigning some destinations to less congested routings, the development of a new bi-directional route to Shanghai, and increasing route options by converting more provisional routes to being permanently available.
On the issue of costs, I have to admit I’m disappointed about the outcome because IATA doesn’t agree that projects like this should be pre-funded. After consultations with the Airport Authority, we did avoid some costs through differentiated passenger charges and a phased approach for landing and parking charges increases. But we are going to see a new Airport Construction Fee and increased landing and parking.
Anyway, those decisions were taken some time ago, so the important thing now is to work with the Airport Authority to make sure the project is a success. Our goal will be to ensure that the infrastructure meets the needs of the airlines and is in line with demand. We’ll closely watch the timeline and financials.
It has been clear in my meetings on Friday and today that we are all approaching this as a partnership. We all want the expanded airport to be efficient and successful and continue to expand the economic and social benefits that it brings to Hong Kong. The key to achieving that will be continual consultation with the airline users, and on that I believe we are off to a good start.
That alludes to an even bigger efficiency issue—that of delays on Mainland China air routes. With traffic growing in the 11% range year-on-year, managing growth in air traffic management capabilities is a major challenge. If you have flown in China recently, there is a good chance that you would have experienced delays.
On-time performance has fallen. System-wide, about 67% of flights in China arrived on time in 2015. That’s about a 10 percentage point deterioration in just five years. And the measurement is using 30 minutes from the scheduled arrival time instead of the global standard definition of 15 minutes.
Last year there was a major effort by all stakeholders to improve. The on-time performance of major airports improved to around 75% by the last quarter of 2015. Seasonal factors may have played a role in the improvement, so it remains to be seen if this improvement will be durable. There is plenty of technology that can help. But the critical issue is being able to use it flexibly and with the support of the military.
A good example of this is Air Traffic Flow Management—or ATFM. The goal is to have smooth operations by controlling and managing traffic entering the system with available capacity to guide and land the aircraft at destination. China’s domestic ATFM system is maturing. The challenges are greater when you are coordinating arrivals and departures in different jurisdictions. We are encouraged that the reports of two cross-jurisdictional ATFM trials—in Southeast and East Asia—are positive.
IATA is engaged in the development of ATFM systems in this region. It is not a silver bullet solution. However, major improvements will be possible by integrating the ATFM techniques and experiences gained thus far with other initiatives. The other initiatives include airspace /airport capacity enhancements, improvements to operational flexibility and technological improvements such as performance based navigation. And, the comprehensive solution that we seek will come from rolling out this package of measures across China—supported by close cooperation between military and civilian air traffic management authorities.
Of course, this will all take time—to build trust with each new development and to implement them across the vast geography of China. One development that we are very excited about is the establishment of an operational liaison mechanism linking the Air Traffic Management Bureau with airline operation control centers. We have done this successfully in Washington with the FAA and in Europe with Eurocontrol. Initially it will help airlines to manage tactically both delays and extraordinary situations. Longer-term, it should help us to contribute more strategically to the development of ever more efficient operations in China.
The ultimate goal of anything that we do in aviation must focus on safety. On that note, I must commend the record of North Asia. There were no major accidents with jet aircraft in North Asia in 2015. In fact, there were no major jet accidents globally that resulted in loss of life in 2015.
There were, of course some fatal tragedies. In North Asia, there were two fatal accidents involving turboprop aircraft. This saw the accident rate rise. There are so few turboprop operations in North Asia that it makes it difficult to draw any systemic conclusions from them.
At a global level the good news is that in 2015 we achieved an accident rate of one in 3.1 million flights—which is about a third better than the one in 2.2 million flights average for 2010-2014. Flying is safe and it is getting safer.
Last piece of news
One last piece of Hong Kong news prior to taking your questions. And this is personal. As many of you will know, I will be retiring from IATA mid-year. I have enjoyed leading IATA for five years. Now it is time for someone else to drive IATA even further ahead. I am planning to return to Hong Kong—the place that I consider home (although I will split my schedule in order to spend time in Europe).
That’s all from me. I am happy to take your questions.