Even as airlines transform themselves into leaner, meaner organizations, they can only do so much and must rely on others to complete that transformation into truly efficient global operations, according to the International Air Transport Association where, at its general assembly, it reported things will be bad for some time.

Recently airlines reported that the HIN1 Virus decimated expectations and more dire predictions emanated from IATA's 65th general assembly as industry leaders meet this week to discuss prospects and strategies to ensure the industry’s survival. It was there that the organization doubled its worldwide airline loss estimates for this year to $9 billion and predicted it would be some time before the industry began to see the light at the end of the tunnel.

“On top of this, an even bigger negative number is on the horizon – in US$80 billion,” said Director General and CEO Bisignani. “That is the total revenue that will disappear with falling demand, collapsing yields, broken consumer confidence and pandemic fears. There is no modern precedent for today’s economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced.”

Bisignani called for a dramatic resizing and reshaping of the entire air transport industry as his members battle the ongoing global economic crisis. He noted the merger of Delta and Northwest in the U.S. as well as the mergers and acquisitions in Europe including Lufthansa’s march toward European domination with the acquisition of a number of smaller carriers including Austrian as well as the Air France/KLM deal with Alitalia. In addition, British Airways and Iberia are working on a merger despite delays. Just this week, the Chinese government mandated a merger between China Eastern Airlines and Shanghai Airlines as part of an effort to build Shanghai as a regional hub. In addition, Singapore Airlines is said to be looking for airlines it can acquire to build critical mass.

He again urged governments to stop restricting airlines, giving them the freedom other economic sectors have enjoyed including cross-border partnerships and investments that allow access to global financial markets.

At the meeting, Swiss CEO Christoph Franz noted regulatory authorities react too slowly to the rapidly changing aviation environment, losing airlines precious time when flexibility and fast changes are the keys to survival.

“I am a realist and I don’t see facts to support optimism,” Bisignani told the over 500 delegates assembled in Kuala Lumpur. “The industry is in survival mode. Whether this crisis is long or short, the world is changing. Travel budgets have been slashed…It will not be business as usual in the post-crisis world.”

The head of IATA said improved efficiency would reduce flight delays. Airlines are investing billions in new avionics to fly more efficiently, reduce delays and improve environmental performance but such investments will be wasted without the realization of modern traffic management systems, he said.

Bisignani noted significant progress on a Single European Sky and urged President Obama to make NextGen a reality in the U.S.

“The combined benefits of NextGen and a Single European Sky in 2030 would provide 41 million tons of CO2 reduction and $21 billion in fuel savings,” he said. “To achieve these, we need the investments now.”

Equally critical is the role of labor in the survival equation. “For labor, we cannot reshape without flexibility,” he said. “This is not the time for salary increases. To protect jobs we must modernize work practices and we must all do more with less.”

He also cited travel agents and “monopoly suppliers” in his quest for fundamental changes to the airline business model. “The clock cannot be turned back,” he said of travel agents. “To survive in the global online market, travel agents need to reshape services and business models to provide greater value that travelers are willing to pay for.”

The same must be done at every supplier…“Monopolies included,” he said, adding they must play a role in reducing their costs as well as those for the airlines. “When demand drops, they cannot simply divide the same costs among fewer customers,” he said. “The bill we had to pay to happy monopoly suppliers grew by US$1.5 billion last year. And it grew by another $1.5 billion for the first half of 2009 as the industry crisis worsened. Although airports such as Singapore or Kuala Lumpur reduced charges significantly, although the Dutch government recently decided to abolish a new environment tax, some other suppliers did not act to share the current burden with airlines.”

The organization posted an IATA Wall of Shame for infrastructure providers “giving special mention to the most serious cases of infrastructure providers for not keeping pace with the industry’s need for improved efficiency.”

It cited British Airports Authority and the UK Civil Aviation Authority for raising Heathrow charges for 2008-13 by 86% increase in London Heathrow charges for 2008-2013. Also on the wall are the airports at Delhi and Mumbai for their 207% increase in charges; Quiport in Ecuador for increasing charges by 79% since 2005 to pre-finance a new airport that may never be built; Air Traffic and Navigation Services (ATNS) South Africa for proposing a 44% increase in charges in 2010/2011 and the EUROCONTROL States of Denmark, the Netherlands and Poland for proposing charges increases between 27% and 32%.

IATA targeted global distribution systems, something highlighted by U.S. airlines during the Q1 reporting season as posing significant problems to cost cutting measures. “We cannot accept that Western GDSs charge around US$4 per transaction when China TravelSky does the same job for US$0.50,” said Bisignani. “This must change.”

Finally, Bisignani spoke of how the industry’s government relations must change. Governments “must move from punitive micro-regulation to joint problem solving,” said Bisignani, who cited four areas for enhanced cooperation including the environment, security, efficiency and employment.


• Making Aviation Greener:
“Airlines have taken a monumental decision. Today we have committed to achieving carbon-neutral growth by 2020,” said Bisignani. Airlines have set three important sequential goals: (1) 1.5% annual improvement in fuel efficiency until 2020; (2) carbon-neutral growth in 2020 and (3) a 50% reduction in emissions by 2050. "After this date, aviation's emissions will not grow even as demand increases. Airlines are the first global industry to make such a bold commitment," he said.

Airline emissions will fall 7% this year. "Of this, five percent is due to the recession and two percent is directly related to efficiency gains from IATA's four-pillar strategy," he said, referring to improved technology, effective operations, efficient infrastructure and economic measures that governments have to implement.

“We cannot achieve these ambitious targets alone,” he continued. “Governments must move from punitive taxation to actions that support reductions in CO2. That means establishing a global sectoral approach for aviation emissions under Kyoto 2 and supporting improvements in technology, operations and infrastructure, particularly the development of aviation biofuels and the implementation of important infrastructure projects such as a Single European Sky and NextGen in the US.”

• Protecting citizens with better security: “We must spend the US$5.9 billion that airlines and their passengers pay for security more wisely by focusing on the threats, rather than the 99.9% of travelers who are not a risk,” said Bisignani. He challenged governments to coordinate security measures and standards across borders to avoid the double checking of the nearly one million passengers a day who make connections. “Europe is progressively doing this with One-Stop Security. It’s time to push this much further,” said Bisignani.

• Improving efficiency by reducing delays: Airlines are investing billions in new avionics to fly more efficiently, reduce delays and improve environmental performance. “The trillions of dollars being spent in stimulus programs are a great opportunity to improve infrastructure.

• Saving jobs and stimulating the economy: “We don’t want bailouts. All that we ask for is access to global capital. If we cannot pay the bills, saving the flag on the tail will not save jobs,” said Bisignani in asking governments to progressively liberalize access to markets and capital. “This would be a cheap stimulus. Liberalizing key routes would create US$490 billion in economic activity and 24 million jobs. The next logical step would be for the US and Europe to expand Open Skies to Open Aviation,” said Bisignani. However, labor interests are seeking to stall or eliminate cross-border activity as alliances, merger or even liberalizing foreign investment. IATA continues to push for similar progress globally with its Agenda for Freedom—a group of 15 key government players in aviation policy. “Later this year, IATA’s Agenda for Freedom will deliver an important policy tool with governments signing a Multilateral Statement of Policy Principles,” said Bisignani.

Bisignani noted that the airlines’ commitment needed to be matched by governments. “We are ambitious, but our success will be contingent on governments acting effectively. ICAO must set binding carbon emissions standards on manufacturers for new aircraft. A legal and fiscal framework to support the availability of sustainable biofuels must be established. And governments must work with air navigation service providers to push forward major infrastructure projects such as a Single European Sky, NextGen in the US or fixing the Pearl River Delta in China,” said Bisignani.
The commitment to carbon-neutral growth by 2020 recognizes that technology, operations and infrastructure improvements alone will not be sufficient to stop growth in air transport’s carbon footprint. “Positive economic measures are needed to bridge the gap until the full benefits of future technologies—including sustainable biofuels—are realized,” said Bisignani.

Dire Forecast
The forecast was significantly worse that the trade group’s projection in March, which estimated a loss of $4.7 billion for 2009. The airlines are also expected to post an unprecedented 15 percent revenue drop that will see industry revenues shrink by $80 billion to $448 billion. (IATA also revised its loss estimate for 2008 to $10.4 billion from the previous estimate of $8.5 billion.)

This year's AGM takes place during a deepening global recession that is challenging airlines everywhere. The impact of falling demand leading to plummeting revenues is re-shaping and re-sizing the air transport industry. In this difficult environment,

Carriers in all regions are expected to report losses in 2009. Air carriers in the Asia-Pacific region are expected to post the largest losses – $3.3 billion – as Japan remains mired in recession and economic growth in China and India slow, the association said. U.S. airlines are forecast to lose $1 billion this year – a significant improvement over the $5.1 billion deficit in 2008 – when they were battered by soaring fuel prices. Meanwhile, European airlines are expected to lose $1.8 billion.

Fuel hedging by U.S. carriers exposed the group to skyrocketing fuel prices in 2008. This turned into an advantage in 2009 by giving US carriers access to lower spot prices. Early capacity cuts have also helped reduce the amount of red ink.

European carriers are suffering from collapsing demand for premium services in all major markets served by the region’s carriers (intra-Europe, North Atlantic and Europe to Asia).

The predicted 2009 losses for Asia-Pacific carriers would be slightly better than the $3.9 billion that the region’s carriers lost in 2008.

Middle East carriers, despite strong traffic growth, will see losses deepen to $1.5 billion. The region’s hubs remain vulnerable to recessionary impacts in both European and Asian markets.

Latin American carriers are expected to post a loss of $900 million, as the impact of the recession in the U.S. and China weakens demand for the region’s commodities.

African carriers are expected to see losses of US$500 million, the result of a loss of market share combined with the impact of the recession.

Air cargo demand is expected to decline by 17 percent. In 2009, airlines are forecast to carry 33.3 million tons of freight, compared to 40.1 million ton in 2008.

Passenger demand is expected to contract by eight percent to 2.06 billion travelers compared to 2.24 billion in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields—11 percent for cargo and seven percent for passenger.

IATA offered a glimmer of good news. The industry fuel bill is forecast to decline by $59 billion to $106 billion in 2009. Fuel will account for 23% of operating costs with an average price of oil at $56 per barrel. In comparison, the 2008 fuel tab was $165 billion (31% of costs) at an average price of $99 per barrel.

Global load factors for the first quarter of 2009 are down about three percentage points compared to the previous year. This is less than the falls experienced in some recent crises as a result of airlines better matching capacity to falling demand. Nonetheless, the 4,000 aircraft expected to enter the commercial aviation fleet in the next three years will make this an ongoing challenge, said IATA.

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