James C. May, President and CEO
Air Transport Association of America
to the ICAO-ACI Global Air Transport Outlook Conference
Montreal, Quebec, Canada
June 29, 2006
Bonjour. Merci.
Good morning. Thank you for that kind introduction. It’s great being back in Montreal. I have spent a fair amount of time in Canada over the years, beginning as a youngster. Montreal is one of my favorite cities - C’est magnifique.
I am delighted to speak to you today about some pressing issues that will directly affect the future of aviation and the airline industry.
Pulitzer Prize winner Daniel Yergin once called the airlines “one of the great enablers of globalization; but, as an industry . . . a laggard in adapting to globalization owing to the peculiarities of its organization and the embedded weight of a half-century of national and international regulation.”
But it is also true that globalization predates the invention of the airplane and mass travel by air by several centuries. One sees that in the character, the charm and the vibrancy . . . the extraordinary continuing vibrancy . . . of Montreal. For more than three and a half centuries, Montreal has grown and flourished as an immense transportation hub and a trading center, bringing together people from different parts of the world. This is a teeming center for everything that moves by water, by rail, by road or by air.
What is different about our time is not the fact of globalization, but the speed at which it is happening, beginning with aviation. Globalization opens new opportunities for all of us. At the same time, it means intensified competition, which is true for airlines as well as for other forms of business.
Let me begin by addressing the current state of the U.S. airline industry.
Montie [Brewer] has already told you about Air Canada’s efforts to return to a state of healthy growth and profitability. It’s a remarkable and successful story. South of the border, while still in the red, most U.S. carriers have made, or continue to make, similar strides.
Our industry has persevered through the most difficult period in aviation history. As recently as one year ago, it was routine to read statements like these in newspapers around the United States:
- “Survival of airline industry is questionable.”
- “The big airlines are dead; they just don’t know it yet.”
Every story seemed to begin with the words: “The struggling airline industry…”
With $35 billion dollars in losses for the first five years of this new millennium, U.S. airlines were forced to make painful and unprecedented sacrifices. Every cost item was, and continues to be, heavily scrutinized. Expenses and debt were slashed in a fashion never seen before. To put this into better perspective, excluding fuel, the six largest network carriers have shed $16 billion dollars in annual operating expenses since 2001.
The carriers’ self-help programs included renegotiating labor contracts, implementing new wage scales and improving productivity. Aircraft and airport leases were renegotiated, and the airlines invested in smarter, more efficient technology.
To better match supply and demand, the six largest U.S. passenger airlines restructured and, in some cases, closed their hub operations. They reduced their flying, shrinking their fleets by more than 750 jets and trimming their workforce by over 167,000 employees. These were radical but necessary changes.
To speed up passenger processing, airlines have deployed more airport kiosks and are increasingly utilizing Web check-in technology. These innovations are helping to reduce operating costs and improve our customers’ airport experience.
The impact of 9/11 and a sour economy were felt not only by airlines, their employees and other stakeholders, but also by their customers, many of whom no longer are enamored by the flying experience.
Who would have thought of having to arrive at an airport two to three hours before departure for even the shortest of flights? Or that a complete stranger would make you take off your shoes and coat, unpack your bag, and maybe even pat you down? We share the concern of our customers over that arduous process.
Who would have thought that airlines and their customers would incur $4.5 billion dollars in taxes, fees and other costs to comply with federal security mandates? This is especially perverse when you consider that a good portion of this amount is for the privilege of customers experiencing an unwieldy security check-in process.
Who would have thought that taxes, fees and surcharges would rise to nearly 30 percent of a typical airline ticket?
More upsetting is the fact that the U.S. Department of Homeland Security wants to add even more fees, and more taxes, and more surcharges, on an industry already laden with far too many. It is nonsensical, because aviation security is, and should be, a matter of national security funded by the government.
We face challenges not only in the United States, but elsewhere. In Toronto alone, Pearson International Airport has emerged as the world's most expensive place to land a plane, which more than doubles the rate charged at New York’s La Guardia airport. Crown Rents add tens of millions of dollars to the cost structure of the airport, with no discernible aviation benefit.
That said, and despite these and many other obstacles, U.S. carriers have done a Herculean job of restructuring their businesses. Although they lost $5.6 billion dollars in 2005, remarkably, we expect that number to fall sharply in 2006, closing the gap toward breakeven. And we hope to see a net profit in 2007, absent another spike in fuel prices or an excessive slowdown in the economy. In the environment in which U.S. airlines operate, that is real progress.
Thankfully, airlines have seen some recent restoration of pricing power.
Domestically, unit revenues have risen for 13 months in a row and we are enjoying record load-factors, but we are not out of the woods. Putting that good news in perspective, for the first five months of 2006 versus the same period in 2000, yields were down 12.6 percent while fuel was up 138 percent.
I believe that the U.S. airline industry is poised for a genuine recovery. I use the word “poised” because the uncontrollable factors that sent our industry into a tailspin still exist. In fact, our industry faces more vulnerability today than ever before, and that troubles me deeply.
Why does all of this matter?
It matters because a healthy airline industry is indispensable – not just to the U.S. economy, but to the global economy. We are a critical engine that propels economic growth. Ultimately, U.S. commercial aviation drives $1.2 trillion dollars in output (equivalent to the size of the entire Canadian economy) and 11.4 million U.S. jobs (almost the combined population of Montreal, Toronto and Washington, D.C.). We make a difference.
That engine is powered by dedicated airline employees, led by a remarkable and motivated group of CEOs, determined to grow our aviation sector so that airlines can remain the enablers of globalization.
So what are the most important challenges that we face going forward? Let me address a few.
We are confronted by soaring fuel prices, greenhouse gas emissions, and most importantly, the consequences of an aging, ill-equipped, ill-funded U.S. air traffic control system.
Let’s begin with a much discussed issue: the high cost of fuel. High fuel prices have had an overwhelming impact on the airline business. In 2005, airlines worldwide spent over $90 billion dollars on fuel and have publicly stated that they expect their fuel bills to increase by $22 billion dollars, to over $110 billion dollars in 2006. Those are staggering numbers, placing at risk so much of the painful but successful restructuring that airlines and their employees have endured.
For that reason, airlines have relentlessly searched for ways to conserve fuel. For example, in-flight phones and magazines have been removed from aircraft cabins, winglets are being installed, and operational measures are being adjusted – all in a concerted effort to conserve. This type of activity resulted in U.S. airlines consuming 400 million fewer gallons of fuel in 2005 than in 2000, while carrying more passengers and more cargo.
The latest aircraft are as fuel efficient, per passenger mile or kilometer, as hybrid cars, and maximizing efficiency is the key to environmental responsibility for an industry on which so much of the world's economy depends.
I could not agree more with my good friend and esteemed colleague Giovanni Bisignani, IATA director general and CEO, who noted that even with these improvements, high fuel prices are racing ahead of efficiency gains and robbing us of most of our profitability. We are 100 percent united on the importance of increasing refinery capacity as one means of addressing the problem.
In Washington, D.C., we are also urging Congress to find ways to increase the production of oil and jet fuel, while protecting our environment, as well as looking to develop alternative fuels, such as jet fuel produced from coal.
As you can see, we have done a lot to improve our financial health, and we have much more to accomplish. But we cannot fly solo in this endeavor.
Now let me turn to environmental initiatives.
Maximizing efficiency is the key to environmental responsibility for industry. By the next decade, working together, we must figure out how to deal prudently with climate change. For the airline industry, the way forward is to continue to improve fuel efficiency, which directly reduces greenhouse gas emissions. U.S. carriers have made great strides in improving average fuel efficiency by 44 percent since 1990, and 16 percent just since 2000.
ATA and its members are working hard to identify measures that will further reduce the environmental impacts of aviation and reduce the risk that environmental concerns will constrain aviation growth.
For example, we continue to support operational measures such as continuous descent approaches, which have the potential to significantly reduce noise, fuel burn and emissions on every landing.
In collaboration with industry and intergovernmental partners, ATA has taken a leading role in the ICAO Committee on Aviation Environmental Protection. ATA also serves on the Advisory Board for the Partnership for Air Transportation Noise and Emission Reduction, a research center sponsored by the FAA, NASA and Transport Canada.
There is also great promise in regional initiatives like the Asia-Pacific Partnership for Clean Development, where the U.S. and others seek technological advances to help developing countries utilize fuel-efficient practices as their economies grow.
Globally, more efficient air traffic control systems also play a critical role. In U.S. air space, optimizing routings has the potential to cut per-flight fuel consumption by up to 12 percent and, correspondingly, to further reduce emissions.
So modernizing the world’s air traffic control systems links fuel efficiency and enhanced environmental performance, as well as creating greater capacity.
Towering above all of our other concerns is the imminent need for fundamental reform of the U.S. air traffic control system. The reality is, our radar-based, human-intensive, analog navigation forces us to operate in the twenty-first century, using World-War-Two-era technology.
In the United States, we have a tremendous challenge as our air traffic control system is so old, so antiquated, so outdated that, in my opinion, it needs to be retired to the Smithsonian Museum in Washington, D.C., as a true relic of the past. What we need to do is transition to a modern information-centric, satellite-driven, digital air traffic management system, that takes full advantage of existing and developing technologies and procedures.
The ATA Smart Skies campaign is a blueprint for accomplishing this very goal – it is the smart solution.
The harsh reality is that the basic design elements of today’s U.S. air traffic control system have not changed significantly since the 1950s. And while the system remains incredibly safe – and it is safe – its design promises to present an ever-growing problem as demand for system resources continues to grow.
Let me share with you some remarkable statistics. Given the current rate of growth, U.S. system demand will expand from 45,000 operations per day to more than 61,000 by 2016. Without change, the anticipated introduction of very light jets alone will stress our system to the breaking point.
Air traffic management systems in many parts of the world are switching from analog communications to digital, satellite-based technology. The technology employed today in the U.S. is driven by voice communication, radar surveillance and navigation over fixed points on the ground, effectively creating “one-lane roads” in the sky. The system is straightforward, but increasingly inefficient and counterproductive. The design concept is showing its age.
While the problem is serious, it is not beyond repair. We can leverage today’s technology and adopt improved procedures, which will enable growth and allow the U.S. economy to continue to reap the benefits of a vibrant air transportation network.
The FAA, with the industry’s full support, must replace old equipment and manual processes, consolidate facilities, and deploy new technologies.
That means taking advantage of:
- Already deployed satellites for precise navigation and surveillance
- Advanced onboard avionics
- Real-time sharing of key information through digital communications
- Innovative operating procedures that leverage all available capabilities
Despite the challenges of 9/11, NAV Canada successfully completed the privatization of its air traffic control system 10 years ago, and is in the process of transitioning to a satellite-centric system. NAV Canada is a model for others to follow – and they are.
Countries like the United Kingdom, Germany, France and Australia, to name a few, also have taken steps to modernize their air traffic control systems, to better serve their customers. Even Mongolia is transitioning to satellite-based and Wide Area Multilateration technology for en route and approach surveillance.
Unless we begin the change for Smart Skies now, delays will increase and gridlock will stymie passenger travel and cargo growth. Our just-in-time economy will be out of time.
We will face operational challenges related to schedule reliability, fuel efficiency and emissions. Airline fuel and crew labor expenses will grow as block times increase. Customers will see the same flights take longer, and without change, safety fundamentals could be compromised.
In 2005, air traffic control delays cost the U.S. carriers an estimated $6 billion dollars. Without dramatic change to how we manage our airspace, added delays on top of higher fuel prices will cause that number to grow exponentially.
Transforming the air traffic control system in the United States will be a formidable challenge. Congress has fewer than 15 months to make hard choices as it reauthorizes the Airport and Airway Trust Fund and finds ways to change the funding mechanism that supports revitalizing the air traffic control system.
Since Reauthorization occurs only once every 10 years, we have an historic opportunity to get it right – and we must get it right.
At ATA, we see the elements of our Smart Skies campaign as a means to provide the air traffic services that both U.S. and international airlines plainly need. That means a new operating environment – one that is safer, smarter and fairer.
I began this speech with a few words on globalization. Let me end on a similar note. To aviation, globalization certainly has meant greater opportunity across national borders. More and more carriers are recognizing advantages in international teaming.
The liberalization of treaties, both aviation and otherwise, have opened up emerging markets, like in India and China, adding more opportunity for trade to and from North America. Doing so continues to fuel a move in those countries to consolidate their flag carriers into a handful of formidable global transportation providers.
For example, there is a move toward consolidation between Air India and Indian Airlines, just as Air Canada and Canadian Airlines did in 2000.
As I said earlier, we face many challenges – challenges that are critical to our industry and the global economy. Challenges that will provide new opportunities. We have made significant progress, but there is much more work ahead. Ultimately, we remain committed to reaching the fair, safe and smart solution. Thank you and good day… Merci. Bonjour.