It is a pleasure to be in Bogota as you celebrate 100 years of aviation. Air transport performs a vital role in Colombia and around the world, connecting economies and people, and creating the global village in which we all live.
State of the Industry

But the last decade has been tough for the global aviation industry. Between 2001 and 2009 airlines lost over $50 billion. We had everything: war, disease, terrorism, and the global economic crisis. But airlines have worked hard to survive.

Over the last decade, they restructured and re-engineered their businesses to improve labor productivity by 63%, increase fuel efficiency by 20%, and cut sales and distribution costs by 19%. IATA helped with programs that have saved the industry over $55 billion since 2004. This includes $15.9 billion in fuel savings by shortening over 2000 routes, and spreading best practice in fuel management; $19 billion in reduced taxation, and by asking our airport and air navigation partners to deliver greater cost efficiencies; and over $17 billion by using technology to cut costs and improve convenience with our Simplifying the Business program.

The global industry today is unrecognizable compared to what it was just a decade ago, but despite this enormous change, the industry is financially sick. In 2010 the global airline industry made $16 billion in profits. After a decade of losses, any black number on the bottom line is a welcome change. But the sobering reality is that this “good year” only generated a pathetic 2.9% margin.

This year we expect profits to fall by 46% to $8.6 billion, with an 1.4% margin. The rising price of oil is once again destroying our profitability. The average price of oil last year was $79 per barrel and accounted for 26% of our cost structure. This year we are forecasting $96 per barrel and 29% of industry costs. Today the price is well over $100, and for each dollar that it rises, the industry has to recover $1.6 billion in additional costs.

Fortunately economic growth is still healthy, and the global GDP forecast has been revised upwards to 3.1%. This gives us confidence that capacity increases of 6.0% will be closely matched by 5.7% demand growth. If this holds we see passenger yields rising by 1.5%, and cargo yields by 1.9%. But the big risk to even our small profit is if high oil prices stop economic growth. And even with two consecutive years of profit, the industry is still very fragile.
State of the Latin American Industry

Within this context, Latin America is one of the industry’s stars, with three consecutive years of profits: $500 million in 2009, $1 billion in 2010, falling to $300 million in 2011. Strong economic growth, liberal market access policies and industry consolidation are driving these positive results in difficult times.

One of the major developments is the proposed merger of TAM and LAN. It shows the ability of the region’s airlines to innovate and lead much needed change, even within the constraints of the industry’s archaic bilateral system. A good indication of the importance of this change can be seen in how investors evaluate the investment opportunity of Latin American carriers. Latin American aviation carries about a quarter of the passengers that US carriers do, but their market capital is about half. And the combined LAN-TAM airline, with a capitalization of $12 billion, ranks third in the world.

Looked at another way, the price to earnings ratio for US carriers is 10 times, but for Latin American carriers it is 16 times. Investors clearly see potential in this region, and Colombia is taking part in this success. Between 2009 and 2010, passenger numbers grew by 23.6%, and the TACA-Avianca group delivered a profit of $100 million.
IATA and Colombia

IATA has a close relationship with Colombia. Our offices were established here in 1991, and the IATA settlement system is the financial backbone of aviation, serving 31 airlines and over 500 accredited travel agents. Last year we handled over $1.3 billion of the industry’s money safely in the IATA settlement system, and IATA’s country manager, Juan Carlos Villate, is the local contact to access all of IATA’s industry programs.
Colombia and Aviation

I am impressed with President Santos’ ambitious agenda to strengthen the travel and tourism market. Today this sector supports 4.9% of Colombia’s GDP, and nearly a million jobs. Moreover it is the third largest earner of foreign exchange for the Colombian economy. President Santos has set three ambitious goals for civil aviation in Colombia over the next four years. These are to double the number airline seats in the market; to increase visitor numbers from 2.8 million to 4 million; and to make travel and tourism Colombia’s number one foreign exchange earner. The President has a clear understanding of the ability of aviation to act as an economic catalyst. But this vision must be supported by strong government policies to improve aviation’s competitiveness, and to facilitate profitable growth.

I am a very keen follower of aviation in this region. I can see that the government has some policies that are absolutely on the right track. But there are many areas that require major changes. Let’s start with the positive.
Liberalization

The government’s liberal policies are supporting growth, and the government has understood that aviation is a business that must be profitable in a globally competitive environment. It has created an environment where everybody wants to invest in Colombia. It did this first by opening the market to cross border investment opportunities. The mergers that have taken place have strengthened the competitiveness of the main carriers that serve the Colombian market. The 2009 merger of Avianca with TACA created critical mass, and the region’s third largest airline after LAN-TAM and GOL. LAN’s acquisition of Aires is expanding the market and making air travel more accessible with low cost options, and COPA has integrated Aerorepublica into its operations as COPA Airlines Colombia.

On top of creating more competitive companies the government is opening the Colombian market with policies leading to open skies. The Open Skies agreement with the US in November last year was a major milestone. The US accounts for about a quarter of Colombia’s arrivals, so liberalizing this significant market from 2012 will create opportunities for carriers. I congratulate the Government, and particularly Santiago Castro, Director General of Aerocivil, for this achievement, and I encourage him to make a quick follow-up on liberalization in the region as well.

With these policies, Colombian business and tourism is more connected to world markets than ever before. This is in line with the major free trade agreements that are expected to be ratified this year with the US and Canada. And by letting business get on with business the economic outlook is very positive. We expect GDP growth of between 4.4% to 5.0%n between now and 2015; it is a great opportunity for aviation that we must not miss.
Infrastructure

But market opening policies can only deliver benefits if they are supported by cost-efficient infrastructure, capable of handling the growing demand. Here I am more pessimistic.
Airports

Let’s start with the airport infrastructure. Bogota is the critical element, handling 43% of passengers and 70% of Colombia’s cargo. In 2006 the concession to run Bogota airport was awarded to Opain for 20 years. This joint venture of Grupo Odinsa and Zurich Airport agreed to pay 46.16% of gross income to the government. In four years passenger numbers have jumped from 11.7 million, to almost 19 million. Since then, everything is a disaster. Non-regulated costs rose quickly, in some cases we saw proposals for 280% increases on specific items, and service levels dropped. The Bogota Chamber of Commerce surveyed customer satisfaction at the airport on a five point scale - it dropped from 3.66 in 2009 to 3.44 in 2010. And the promised investment in airport development has not kept pace with demand. All aspects of the airport terminal are saturated, including ramp, parking, immigration, and baggage handling capability.

Counter to the government’s vision to increase air traffic, the airport is turning away business from airlines that want to increase flights. Even when current construction is complete there will not be sufficient capacity to meet demand. Concessions can be an efficient way for governments to develop airport infrastructure, but they are only successful if there is a strong regulatory framework that manages investment, service levels and costs. There is an urgent need to review the concession, update the master plan, and put in place economic regulatory oversight to ensure quality, efficiency and capacity.
Air Traffic Management

The problems are not just on the ground. Air traffic management is badly in need of reform. Colombia’s air traffic management needs a major overhaul. First, Colombia’s Air traffic management procedures must be brought into the modern era. I am concerned about the implementation of PBN—Performance Based Navigation. Airlines have invested in avionics to support more efficient flying, but we cannot get full return on our investment until air traffic control can operate on the same technological platform. Along with speeding up the implementation, we must find a process of continuous improvement, based on analysis of performance data against agreed performance targets.\

In 2006 IATA, ATAC, ALTA and Aerocivil signed an agreement to address Colombia’s inefficient air traffic management. An IATA study identified short term measures that could increase Bogota’s air space capacity by 30%. The measures included more efficient use of the parallel runways, revising approach and departure procedures, enhanced training for controllers, and further development of RNAV procedures. The study has been around for five years, and we have seen no results. I urge the Minister to make this a priority, and along with this, we must find a way to open more military airspace to civilian use. We made good progress with the opening of phase one for the Palanquero airspace, but there is much more to do. Phase two must be implemented, to further improve departures and arrivals in Bogota. And we must find a more transparent charging regime, in line with global standards. That means transparency on costs and charges, eliminating the differential for domestic and international operations, and stopping the unfair practice of adjusting dollar denominated charges for inflation calculated in Pesos.

If we can achieve these improvements, I am confident that Colombian airspace will be able to support the government’s vision.
Vision 2050

IATA is aligned with the Colombian government in looking ahead to build a stronger air transport sector. We are taking the window of opportunity of two years of profitability—however weak - to look ahead and beyond the crises and shocks that have dominated air transport over the last decade.

Over the last 40 years, aviation generated a net margin of just 0.1%. That is a charity association, not a sustainable business. And without the buffer of margins that at least cover our cost of capital—7-8% - every crisis is body blow to the industry. At our last AGM, I launched IATA’s Vision 2050, working with Harvard University’s Professor Michael Porter. His reaction to the industry situation was simple: “What a mess”. With his expertise, the inspirational leadership of Singapore’s Minister Mentor, Lee Kuan Yew, and the contributions of 35 leaders and strategic thinkers we will present a Vision to this year’s AGM. It will address the key issues of structuring for profitability, environmentally sustainable technology, and efficient infrastructure, so that the industry can effectively meet the needs of the 16 billion passengers and 400 million tonnes of cargo that will travel by air in 2050. I hope that some of the ideas that we will present can help to guide Colombia with its own long-term vision for air transport.
Working together

This will be my last visit to Colombia as Director General and CEO of IATA, as I will retire later this year. But I will continue to watch closely developments in Colombia from different roles in the industry, including boards and teaching. At the end of June I will handover to Tony Tyler, CEO of Cathay Pacific, who I know will continue to pay special attention to this wonderful part of the world.

Aviation is important to Colombia, and it is encouraging to have a President with a vision to make it successful. The President’s ambitious vision is a positive motivating force for much needed change. IATA is here to help achieve that vision with ideas, actions and global expertise. We are fully committed to supporting change to help aviation in Colombia meet the challenges of the President’s vision, and drive the economy forward, while growing safer, greener and more profitable.