It
is a pleasure to return to this Forum and I would like to thank ASTM
International for hosting it with IATA and for the support of our
sponsors. The Aviation Fuel Forum is one of our most important
meetings and it drives the industry agenda on fuel-related issues.
When
I addressed this group in November 2011, I was still relatively new
to my position at IATA. Today, having visited more than 70 countries
over the past 22 months, I believe I can say that I am a seasoned
veteran—or at least a well-traveled one!
As
was the case then, jet fuel and the issues surrounding it are among
our top priorities and biggest challenges. In 2011, the near disaster
involving fuel contamination at Surabaya was still very fresh in my
memory—as I know it was for many in this room. I am very pleased to
note that we have not experienced a similar event in the interim and
give credit to the industry’s swift response—about which I will
discuss more later.
I
am of course much less satisfied with the direction that fuel prices
have taken since 2011. Last year the industry fuel bill totaled $209
billion, which was about $33 billion higher than in 2011, and this
year we are expecting to pay an additional $7 billion. Fuel now
represents 33% of our operating budget and the consensus forecast in
March was for jet fuel to average $130 per barrel, which is $3 more
per barrel than in 2008—when our industry was nearly brought to its
knees by the oil bubble. In recent weeks we have seen some easing of
prices, nevertheless, they remain worryingly high when measured
against historical averages.
On
the plus side, while in 2008, the industry sustained a net loss of
4.6% of revenues, equivalent to $26 billion, the forecast for 2013 is
for a modest net profit of 1.6% of revenues, equivalent to $10.6
billion. Owing to the structural changes and efficiency gains
achieved over the past several years we are keeping our heads above
water, but just barely.
If
I can borrow the punch line from an old joke, I would say: “Fuel--we
can’t live with it and we can’t live without it!” And while
cost and global supply are subject to external market forces, we must
work together to ensure that it remains safe and reliably available
at airports around the world, and we should do all we can to use it
responsibly, in line with our obligations to the environment. This
was our agenda in 2011 and it is our agenda today.
Safety
Safety
is our most important priority. After the Surabaya scare and the
subsequent fuel contamination issue in Tel Aviv, the industry took
quick action in response—ably supported, I might add, by the
members of this forum, who contributed to the formation of three
expert groups to address the issues that were identified. The result
was the publication last year by the International Civil Aviation
Organization (ICAO) of the Manual on Civil Aviation Jet Fuel Supply,
providing standards, best practices and procedures to safeguard fuel
quality throughout the supply chain—from the refinery to when it is
delivered into the aircraft.
More
recently I am pleased to note that we are working together through
the IATA Fuel Quality Pool (IFQP) and Joint Inspection Group (JIG) to
identify synergies and increase transparency of jet fuel quality
inspections. In that vein, on 30 April IFQP and JIG performed a trial
audit of the fuelling facilities at Queen Alia International Airport
in Amman, Jordan, This airport was not previously covered by either
inspection group. This is an important first step toward developing a
program that could help to better utilize the expertise and resources
so that we could have greater coverage of airports worldwide. I would
like to offer my personal thanks to the authorities in Amman who
allowed this to happen at short notice.
At
the same time, it is important not to put the cart before the horse.
We need to think carefully about how to move towards a global quality
assurance scheme—built upon globally agreed quality assurance
standards and criteria. Examples of successful templates for such an
initiative could be the IATA Operational Safety Audit (IOSA) or the
IATA Safety Audit for Ground Operations (ISAGO). IOSA covers more
than 380 airlines, while the ISAGO registry includes 129 ground
service providers at 142 airports. As with these two programs, it is
important that we are aligned on requirements and processes.
Finally,
I want to mention the Global Fuel Alert Database, which the industry
agreed to launch after the Surabaya and Tel Aviv incidents. Working
with Airlines for America we have made excellent progress and expect
this to be live soon. You will learn more about this important
project during the workshop this evening.
Reliability
Supply
reliability is another area of great concern for our members.
Refinery closures in key markets and a lack of timely investments in
supply logistics have resulted in longer and more complicated supply
chains. In line with this we are seeing a corresponding impact on the
potential for contamination, while the frequency and length of
disruptions appear to be growing.
Disruptions
in jet fuel supply at airports can be very expensive as it forces
airlines to tanker extra fuel, restrict payloads or even cancel
flights. From service and budget perspectives, these are not
acceptable options. IATA and airlines have been working with
governments to address areas with persistent supply disruption
problems and we have achieved some notable successes.
- A campaign to improve supply reliability in the Caribbean has resulted in the construction of a new storage tank on the island of St Maarten by a major fuel supplier
- Engagement with the Kenyan government to ease restrictions on the uplift of fuel for transport to neighboring Uganda strengthened the business case for the construction of another storage tank at Uganda’s Entebbe airport, which had regularly suffered jet fuel stock-outs
- Industry efforts at London Heathrow, Nice, Manchester and Miami are also yielding positive results with projects to build new tankage and improve supply infrastructure being proposed
Constant
monitoring of jet fuel supply will continue in 2013 as well as
lobbying to get the solutions at key locations identified by the
industry. In addition IATA and local airlines are working on
improving the fueling services at airports to minimize flight delays.
Furthermore, the Aviation Fuel Supply Model Agreement is being
reviewed with a view to ensuring fuel quality and minimizing flight
disruptions owing to non-availability of fuel or poor services. I
take this opportunity to thank all those colleagues contributing to
the process as this is no easy task.
Environment
As
we work to improve the safety and reliability of our fuel supply, it
is important that we bear in mind that we must also seek to become
more efficient in its use, so as to reduce our impact on the
environment. Aviation represents some 2% of global manmade carbon
emissions. In 2012 we estimate that amounted to 677 million tonnes of
CO2. Our license to grow is contingent on our ability to do so
sustainably. And that means managing our emissions effectively.
The
success of that effort has implications that extend well beyond our
interests as an industry. More than three billion
passengers—equivalent to around 44% of the world’s
population--will travel by air this year, and that figure is rising.
And nearly 50 million tonnes of cargo reaches its destination on a
plane, representing nearly 35% of international trade by value.
Aviation supports some 57 million jobs worldwide and $2.2 trillion in
economic activity. If it is to continue to serve as a catalyst for
economic growth and development, we must demonstrate that we are
addressing our environmental challenges.
As
an industry we have embraced an ambitious agenda to achieve
sustainable growth:
- Improving fuel efficiency by 1.5% annually to 2020
- Achieving carbon-neutral growth from 2020 (CNG2020)
- Cutting our net emissions in half by 2050 compared to 2005 levels
As
far as I am aware, we are the only global industry to have made such
commitments, which are built upon four pillars:
- Investment in new technology
- More efficient operations
- Infrastructure improvements
- And positive economic measures—now more commonly known as market-based-measures or MBMs
Let’s
look at each of these briefly.
Technology I
am confident that our engine and airframe makers will do all in their
power to give us the most economic and fuel efficient aircraft
possible--and it is vital that they do so. But an even bigger part of
the technology contribution will come from the introduction and
widespread use of alternative low-carbon fuels, particularly
sustainable biofuels. I know that there is some skepticism about the
future of biofuels. But the developments so far are reason for
optimism. They have been tested and certified, with more than 1,500
commercial flights using low-carbon alternative fuels achieved to
date. We have demonstrated that from a safety and operational
standpoint, they are a superb drop-in replacement, even slightly more
efficient than conventional jet fuel. And yet, despite all our time
and effort, we are quite a ways away from being able to introduce
them on an industrial scale.
In
fact, we are at the point that my colleague Paul Steele has described
as “the Valley of Death” between technical development and flight
trials and the full scale commercialization and production of
biofuels and delivery to our aircraft.
Candidly,
we cannot do it by ourselves. We need governments to step forward
with policies that will encourage and support industrial production
of biofuels for aviation. And it will take just a small percentage of
the effort and investment that governments are dedicating to other
transport-related industries facing more problematic solutions.
Consider that only about 10% of the liquid fuel for transport is used
by aviation. And the distribution system is relatively simple. 190
airports worldwide account for 80% of the industry’s fuel needs.
Compare that to the distribution system for road traffic which relies
on over 160,000 distribution points in the US alone. Getting biofuels
distributed for aviation is going to be a lot easier and the amount
is considerably less.
We
are seeing encouraging developments, such as the recent
reauthorization of the Farm to Fly government-industry initiative in
the US. But making biofuels available on an industrial scale requires
governments to adopt a six-point action plan:
- Foster more research to improve production methods and expand source crops
- Develop policies that de-risk investment in aviation biofuels production
- Provide financial incentives for airlines to use biofuels
- Achieve global recognition of sustainability criteria so that investments can be made with confidence
- Take advantage of local opportunities for biofuel production
- Support national or regional supply chain collaboration so that aviation biofuels become available at airports around the world
Some
argue that we should be looking at other options to meet our CO2
commitments; that biofuels are too expensive, that the aviation
market is too small to attract producers. But aviation is committed
to the use of biofuels. They represent a tremendous opportunity for
sustainable growth as well as employment and economic development and
we encourage governments to take the next steps toward enabling
industrial scale production so that they may be made affordable over
the long term.
Efficiency: With
fuel now consuming a third of the industry’s operating budget,
airlines need no special incentives to treat every drop of it as if
it were the last. Yet there are still opportunities in operations.
I’m talking not only about such things as monitoring fuel uplift
and maximizing the use of externally-supplied ground power. There
also may be situations where a holistic approach can deliver a
significant pay back. For that to occur, operational silos have to
come down: is the catering department talking to the fuel department
to understand the implications of doing all the catering at base? Is
in-flight carrying waste materials back to the hub to save a few
pennies, and adding a dollar’s worth of weight penalty in the
process? A big picture approach may result in a number of small but
worthwhile paybacks.
We
also need to ensure that our infrastructure partners are doing the
same—particularly air navigation service providers (ANSPs). At the
tactical level, most ANSPs are very good at using the tools they have
to enable us to fly the most fuel-efficient routes available. Our
work to implement Performance-Based Navigation (PBN) provides an
excellent example of cooperation. But we need to think bigger and
faster and to translate individual efficiency improvements into
systemic gains.
Europe
needs the Single European Sky (SES), but progress is glacial. The
failure to implement the SES in Europe costs airlines, air travelers
and the overall economy 5 billion euros annually and wastes some 8.1
million tonnes of CO2 per year—and it hurts our ability to grow.
Looking
beyond Europe, we are excited about the potential of the Federal
Aviation Administration’s (FAA) NextGen project, but before
committing to billions of dollars of new cockpit technology, we need
to be sure that the benefits will exceed the equipage and training
costs. In Asia, we look forward to further progress on the Asian
Seamless Sky and continue to participate and share our knowledge as
much as possible.
Market-Based
Measures: Infrastructure
and internal efficiency gains will not be sufficient to meet our CO2
commitments, and as discussed above, the arrival of biofuels in
industrial quantities will take time. In the interim market-based
measures (MBMs) will be an important stop-gap measure to achieve
CNG2020. The debate on MBMs is focused on the ICAO Assembly this
autumn. To help facilitate a positive outcome, our Board of Governors
tasked IATA to find an agreement among airlines on how to share the
burden of CNG2020. Weaving through the various conflicting interests
is not easy, but we are making progress. Notwithstanding industry
support, an agreement at ICAO can only be achieved if governments are
focused with a common purpose in a sincere effort to find a solution.
Cost
At
the top of my remarks I noted that we paid about $33 billion more for
fuel in 2012 than in 2011 and that the current outlook was for
another bump in 2013. I do not claim any special understanding of the
commodity markets in general, nor of the energy markets in
particular, but I do know that in too many instances, we are not
seeing a competitive market for fuel at the point of service
delivery. Usually, this requires the presence of competition—in
other words, more than one supplier at an airport. In situations
where that is not a realistic or practical option, governments need
to be vigorous in their oversight of suppliers to prevent gouging.
Competition is not just good for the customer; it is good for the
supplier as well, since it helps to drive out inefficiencies and
waste.
The
airline industry provides a very good example of a fiercely
competitive industry where over the past several years efficiency has
increased to the benefit of air travelers. For instance, the
mishandled bag rate has fallen by more than 50% since 2007; while
average fares are one-third lower than 20 years ago in real terms.
Unfortunately,
in too many locations, fuel suppliers have been denied the benefits
of competition and the result is market distortions. Not good for
airlines and in the long term, not good for suppliers or local
economies that depend on connectivity provided by aviation for
growth.
But
we do have some success stories. I am happy to note that after
engaging with the Indian authorities, the industry has obtained an
agreement for open access to jet fuel infrastructure at Kolkata and
Chennai airports. The hope is that this will attract other suppliers
to the market. The industry has also succeeded in ensuring
competitive markets in Eastern Europe. The achievements in the
Russian Federation and Poland are important milestones. Transparency
and competitive markets for the supply of fuel will remain a key
priority for IATA and the airlines.
Unfortunately,
sometimes government pricing policies stand in the way. At the top of
the agenda is Brazil, where the use of parity pricing linked to the
cost of importing jet fuel from the US Gulf Coast has resulted in a
gross distortion of the market. Approximately 75% of the jet fuel
supplied to airlines in Brazil is produced at Brazilian refineries,
not imported. Yet on average fuel accounts for 43% of the operating
cost of airlines there, compared to the global average of 33%. This
represents an estimated $400 million annual cost penalty on Brazil’s
competitiveness. It is noteworthy that among the fast-rising BRICS
countries, Brazil is the least competitive in terms of fuel costs.
In
terms of fuel price, Brazil is also uncompetitive against countries
that are much less developed and which lack its infrastructure. The
jet fuel price at Sao Paulo, Brazil’s largest city is higher than
in Luanda, Angola; and Brazzaville, Congo, to name just two examples.
Brazil
is already a global player in a number of sectors, including
aerospace, but it ranks near the bottom in terms of its travel and
tourism competitiveness according to the World Economic Forum’s
Travel and Tourism Competitiveness Report. If Brazil wants to make
better use of the connectivity provided by its dynamic aviation
sector, it must change its pricing formula to reflect market
realities.
Conclusion
Before
I leave you, I’d like to talk about how IATA is changing in order
to deliver more value to our members. In March we announced an
organizational restructuring with a guiding principle of Global
Development, Regional Delivery. We are strengthening our regional
structures where we are closest to our members, to help us to better
understand and more thoroughly meet their needs. Regional operations
will be consolidated from seven structures into five, based around
the five hubs: Amman, Beijing, Madrid, Miami and Singapore, each led
by a Regional Vice President reporting directly to me.
And
we have regrouped our activities that have grown more organically
over time. As a result the number of externally-focused divisions
will grow from four to five organized around activities sharing
common stakeholders and focus. These are:
- Airports, Passenger and Cargo Services (APCS);
- Member and External Relations (MER);
- Safety and Flight Operations (SFO);
- Financial and Distribution Services (FDS), and
- Marketing and Commercial Services (MACS).
I
know you are very interested to know how we will continue to support
you on fuel-related issues. The commercial fuel team will reside in
the new APCS division under a team for Airport Infrastructure and
Fuel. In order to optimize our Fuel Forum activities, work in
Technical Fuel will be linked in both SFO and APCS.
We
have a very full day ahead of us, so I won’t go into more detail
here. The changes take effect on 1 July and I very much look
forward to sharing further news with you about this change and
getting your feedback on the working benefits (or issues), as we move
forward.
Aviation
is an amazing business. We connect people to markets, reunite friends
and families and enable greater opportunities for understanding among
cultures. The work you do here is of vital importance to helping us
to continue provide this marvelous product safely, efficiently, cost
effectively and in harmony with the environment.
