ATA Chairman and UAL Corporation President Glenn Tilton speech to the UK Aviation Club
11-Feb-2010 Thank you, Nick, for that kind introduction.
Thanks also to the Aviation Club for inviting me to speak today. It is a pleasure to be with you and to be back in London.
Europe and the United States have strong historic connections; and aviation plays a vital role in maintaining these ties, connecting our continents, our economies and our people. The US-UK relationship is particularly strong: with about 30 percent of US-EU passengers traveling to, or through, the UK.
The ongoing open skies negotiations between the United States and EU underscore the importance of this cooperation. They present an opportunity to enhance existing ties in tangible ways that will benefit our customers and our economies.
I would like to begin my remarks with a premise …
"A safe, secure, sustainable, and profitable airline industry that provides good value to customers is in the best interests of our governments, economic recovery, and global competitiveness."
That premise, or assumption, may be logical, but the current business reality of commercial aviation is far from logical. So, what then is the point of multiple barriers that prevent progress to a seemingly "logical" premise?
The global economic system is enabled by a series of networks that provide the information, financial support and movement of people and goods necessary to function efficiently. Each plays a critical role in international commerce. Each is essential to the global economy.
As long they comply with individual requirements established by each nation, the communications and financial network industries are free to own and conduct business operations across national borders.
As a result, these industries, so critical to the world's economy, are able to be efficient and profitable global operations across business cycles.
Not, however, the global airline industry. Why not? What is it about aviation that results in its being perceived and treated differently?
Certainly not because we are insignificant or unimportant. We drive 8 percent of global GDP, generating meaningful economic benefits to the people and economies of the countries and regions in which we operate.
We are the most efficient way, and across some geography the only realistic way, to physically move people and high value goods that drive essential commerce.
On that basis alone, we could assume that this industry should be in the forefront of investment and economic growth.
Not so.
Volatility and losses have been the norm for this industry, as has our systemic failure to earn our cost of capital and achieve any level of consistent financial resilience. The industry has lost nearly $50 billion worldwide since 2000 and a staggering $11 billion last year alone.
We are critical to commerce - supporting tens of millions of industry related jobs - yet we are forced to shed airline jobs in order to survive.
Economic viability is critical for our industry, just as it is for any other industry - or indeed, any government. The business environment that is "essential" and "normal' in virtually every other industry, is outside the grasp of commercial aviation.
We are constrained by regulation from taking the necessary steps to be successful on a sustainable basis in the global market place.
The barriers to the airline industry's economic viability are primarily protectionist policies that perpetuate outdated and restrictive regulation; as well as excessive taxation, inadequate infrastructure; inefficient security costs and other legacy issues.
Until governments eliminate the barriers that have been erected over time - until we are permitted to utilize the tools that enable businesses to grow and prosper - our future is not likely to be materially different from our past.
These constraints in turn impact the very things government is rightly concerned with today - our ability to sustain jobs, to grow jobs, to provide service to communities and to enable growth in other industries, including travel and tourism that depend so heavily on consumer access to frequent, efficient air travel.
The protectionist environment in which we find ourselves in the U.S. has been exacerbated during the recent economic downturn.
What then is it that motivates the protectionists' view of the industry, much less the world?
What is it that they are "protecting?" A chronically underperforming industry?
Businesses cannot be "protected" from the reality of global competition.
At United Airlines we are aligned with the UK and EU in our belief in open markets. Even when it may harm United's short-term interests - as was the case when we fully supported opening Heathrow to full competition at a time when we were one of only two US (privileged) incumbents.
The elimination of economic barriers to the free flow of capital is critical to the long term viability and profitability of the industry.
Otherwise, this underperforming industry - that is severely undercapitalized, and that suffers from government micromanagement when it is vigorously if not viciously competitive -- will not provide the efficient global network needed for 21st Century commerce.
Cross-border investments and mergers are the norm in the global economy.
Italy's FIAT owns Chrysler, India's TATA Motors owns Jaguar, Lenovo, a Chinese Company owns IBM's PC business, and Deutsche Telekom provides communications services on five continents including 100% ownership of service providers in Brazil, Japan, the PRC, and yes, even the United States.
Each is the product of mergers and combinations; each is the beneficiary of cross border capital flows, and each demonstrates a corporate commitment to expand the reach of its business.
Yet, similar cross border ownership is not permitted in the airline business.
As the current restrictive business environment clearly does not work, what is the alternative to our being given usual business freedoms?
Today, we operate internationally under a patchwork of international agreements put in place through the post World War II system of bilateral agreements. An independent study recently found that liberalization could expand GDP in 12 economies by nearly a full percentage point.
The bilateral system prevents cross border consolidation, keeping the industry financially handicapped. In the 60-plus years since the first bilateral was signed, airlines have generated an aggregate return considerably below our cost of capital of some at 6-8%.
Given our history, what are the prospects for meaningful change within our industry?
I am an optimist by nature and see faint signs of progress.
In the United States, recognizing the seriousness of the systemic financial failures of commercial aviation, Department of Transportation Secretary LaHood recently convened all stakeholders -- including airlines, airports, labor leaders, investors, consumer advocates and manufacturers - and is forming a Federal Advisory Committee of stakeholders to agree solutions and develop a road map for U.S. commercial aviation.
Late last year, seven non EU countries, including the U.S. and the European Commission signed a multilateral statement of policy principles focused on liberalizing ownership, market access and pricing and achieving a common outcome: a level playing field.
A step in the right direction and implementing these agreed principles can be a factor in driving change.
We see progress within political borders, enabling carriers to respond to the needs of the marketplace:
* Lufthansa/SWISS,/Austrian/bmi/Brussels
* Delta/Northwest
While these demonstrate progress, the bilateral system continues to prevent consolidation across political borders.
The EU clearly understands the global economy and the need for airlines to have fewer structural restrictions. The EU belief that limits on foreign ownership and control are outdated - and that we should have the same access to capital as other industries - is encouraging and welcome. What's more, the EU understands well the importance of hub airports. Just as cities compete, hubs compete, and Heathrow is a perfect example of a hub airport that not only competes and delivers value for the city, it does so for the country, acting as an economic engine for London and the U.K.
We at United believe that the elimination of economic barriers such as foreign ownership to the free flow of capital is critical to the long term viability and profitability of the industry.
We also believe that the US and EU should continue their dialog toward economic deregulation and regulatory convergence. A US-EU accord would be a strong signal that this industry is finally being provided with the rights and options available to other global industries.
Absent the ability to merge across borders, we have resorted to the only other means of meeting the market need for global reach -- and alliances have become the foundation of international travel.
The value of alliances was underscored this week as JAL announced it would stay with American in Oneworld, following a hard-fought and expensive battle to have a Japanese partner. With the recently approved Open Skies agreement with Japan this will take on even greater significance.
Alliances provide substantial benefits for EU and US passengers also - with expanded and seamless service, better fares, schedule coordination, and cost savings for carriers.
Recognizing these benefits, in granting anti-trust immunity, the US Department of Transportation has concluded that the Star and Skyteam alliances are competitive and benefit consumers.
Building on our strong historic ties, the US DoT and the Commission have developed a close cooperation on competition issues through the US-EU negotiations - and we are confident the Commission will reach the same conclusion as the US DoT in its ongoing review of the major three alliances.
Given their importance in facilitating global travel for our customers, should alliances be curtailed in any way without first eliminating the existing restrictions on cross border activity, there would be significant repercussions for this industry and our customers.
While alliances and anti-trust immunity has been a major enabler in this highly restrictive regulatory environment, excessive taxation -- on the other hand -- is a major constraint
What is it about this economically challenged industry that compels governments to impose new taxes and regulators to ratchet up their fees?
The concept of price elasticity appears to be lost on those who pile on fees and taxes, all the while demanding the retention of services provided by airlines.
In the U.S. taxes imposed by airports, the FAA and the Department of Homeland Security represent typically about $60, or 20 percent of a $300 domestic round trip ticket.
The aviation sector and its customers suffer a federal tax burden that is typically higher than the so-called "sin" taxes levied on alcohol and tobacco, and any additional tax will come at a time when the industry can ill afford it.
Poor yields -- driven by artificially low ticket prices--are driving down margins. In 2009, yields were down 12 percent for passenger carriers and down 15 percent for cargo.
To put our industry tax and fee burden into context: US airlines and our customers annually pay a total of some $23 billion to the FAA, the Department of Homeland Security and airports - Payments that are not far from the US industry's current total market cap of some $30 billion.
Ironically we do succeed in one financial objective; we are a very effective cash cow for government.
Looming on the horizon, are even more taxes - taxes related to the environment.
Taxation is not the answer to environmental concerns. Instead of contributing to the reduction of emissions, taxes rob the industry of the money needed to invest in new, cleaner technology.
As an example, by raising its Air Passenger Duty to collect 2.7 billion pounds annually, the UK government by their own calculations collects far more than would be necessary to offset emissions.
Yet, the revenue is used for budget items completely unrelated to the environment. If we agree that climate change is a global problem, and if we acknowledge that aviation is a global industry, the logical conclusion to be drawn is that we need a global approach to address aviation emissions in the most effective and efficient manner.
Unilateral punitive environmental measures are not the solution to climate change issues. A global sectoral approach to aviation emissions is the only way forward.
Such an approach negates the need for a unilateral EU emissions trading scheme. Between sovereignty breaches and the funneling of non-EU aviation dollars into Europe, targets set solely by the EU represent a crippling approach to climate change. One that ultimately subjects airlines to a patchwork of taxes and fees that will result in a single international flight being taxed two or three times by different jurisdictions.
While Copenhagen did not set aviation targets, we are hopeful ICAO will make progress by the time of the ICAO Assembly this autumn. The US and the EU must continue the important dialogue on climate change.
The airline industry takes our environmental responsibility very seriously. We are responsible for only 2 percent of CO2 emissions globally, yet we are the only industry in the world that has adopted a comprehensive environmental commitment.
Since 2004, the industry has saved over 70 million tons of CO2, or a reduction of close to 10 percent, accomplished by optimizing some 2,000 routes and increasing fuel efficiency.
We cannot fulfill our commitment alone; we need government and others in the aviation value chain to play their part. Governments should invest in alternative aviation fuel research and development which promises the greatest potential for reducing the industry's carbon footprint over the long term.
Accelerated government deployment of NextGen and Sesar technologies is critical to improving our outdated infrastructure, reducing CO2 emissions by 12 percent, as well as improving safety and reducing delays that cost airports and the businesses that rely on us billions of dollars.
We are seeing greater convergence in the area of security. The eventual introduction of one-stop security to resolve inconsistencies and duplications will make the travel experience more attractive to passengers.
We need consensus on the best way forward to strengthen global aviation security with respect to information-sharing, best practices, investment in science and technology, and providing technical assistance globally.
We need to standardize data procedures. Airlines have to send the same passenger information to multiple U.S. agencies in different formats, which is needlessly expensive and repetitious.
As this industry was able to come up with uniformity for electronic ticketing across hundreds of airlines, a single government should be able to come up with "single window" approach for all its security agencies.
Security is a uniquely governmental function for which airlines have neither the expertise, nor should they have the responsibility.
Governments are responsible for the resources to engage in intelligence, diplomacy, sanctions, countermeasures, and border defense. It makes no sense to look to the airlines and our passengers to pay for security fees. This is just another example of a point of difference for commercial aviation that contributes to our current circumstances.
I would like to close with a few thoughts on the premise I mentioned at the outset.
A safe, secure, sustainable and profitable airline industry that provides good value to customers is in the best interests of our governments, economic recovery, and global competitiveness.
Let's then accept the premise that airlines enable commerce and tourism, create jobs, connect cities to the rest of the world and contribute 8 percent of global GDP.
Let's recognize that airlines want to provide job security for our employees and a return for our shareholders, invest in the products and services that our customers need and want by successfully competing across the globe.
Let's refrain from making decisions of convenience that will prove to be unsustainable as the business cycle evolves, and let's understand that we cannot create prosperity and jobs that are not sustained by profitability.
And finally, let's agree that government has a key role in tearing down the barriers to financial viability, sustainability and refraining from the temptations to impose new impediments.
We are indeed a global industry. We bring the world closer together, yet we are constrained by anachronistic restrictions that preclude us from using business tools and options available to virtually every other industry for cross border ventures, investment, business alliances, mergers and acquisitions.
We are a global industry that powers the global economy. It is time that government enables our ability to function as such, rather than inhibit us. Treat us like any other global business, and our customers, our employees, our investors, the cities and economies we serve, and ultimately governments will all benefit.
Thank you.