As the point man for virtually entire global commercial aviation industry Giovanni Bisignani, director general and CEO of the International Air Transport Association (IATA) is a very busy man.
On his plate are myriad issues ranging from spiralling fuel prices, safety, the environment, international regulations, security and the list goes on…and on. In the same instance Bisignani must juggle the roles of corporate business leader, chief marketer, chief negotiator and in a way, diplomat.
It’s a role the affable and downright charming former head of Alitalia appears to cherish with a passion and verve that’s hard to match. It becomes clear when talking with Bisignani that his knowledge of the industry, its challenges, pitfalls and potential, is both expansive and incisive.
As head of the 60-year-old organisation which represents some 240 airlines comprising 94 per cent of scheduled international air traffic, IATA has evolved into an articulate, well-organised and highly respected industry voice since he took the helm in 2002.
And importantly for its members, it has also become a potent force of change – not always winning adoration from that very membership – by setting the bar for its members very high, particularly in key areas like safety.
The air passenger and cargo industry, as insiders know all too well, is one tough business. Last year was by all accounts a banner year – the global industry as a whole, actually made a profit, the first time since the devastation of 11September 2001.
After US$50 billion in losses over the years following 911, the industry turned a profit of US$5.6 billion in 2007. Unfortunately when this is held up against the light of total revenue of nearly US$500 billion, a margin of just over 1 per cent emerges. And on top of this, the industry is still sitting on US$190 billion mountain of debt.
"In order to have a return on capital that would make us a bit more sexy to the financial institutions, we would have to have a profit not of US$5 billion, but of US$40 billion," Bisignani said.
"Until we see the industry regulated in a way that every other industry is – whether banking, IT, telecommunications, or energy where there can be cross border mergers and there can be a more sensible supplying of the market, it will remain very difficult for the market to organise itself and provide the kind of returns that investors expect," according tothe IATA chief.
Darkening skies
And now it’s even more clear that the jubilation of last year is already unravelling fast. Just recently IATA issued its second downgrading of its industry profit expectations for 2008, to US$4.5 billion, down from the US$7.8 billion it had optimistically forecast back in September 2007.
When asked earlier for his assessment of the environment this year, Bisignani gave a characteristically wry response: "Fasten your seat belts, turbulence ahead," he said.
Fuel prices, the US credit crunch, spiralling costs from airport and navigational suppliers are all conspiring to crush industry profits.
But the biggest problem in 2008 will continue to be sky-high fuel costs. At an average annual price of US$86 per barrel, fuel represents 32 per cent – more for all-cargo carriers – of operating costs for a total bill of US$156 billion. According to Bisignani, each additional US$1 per barrel translates to US$1.4 billion of increased cost for the industry.
Alongside added costs are pressures on yields, part global economic slowdown from the US sub-prime debacle and part industry self-inflicted capacity surpluses.
Heart of the matter
But the problem is far deeper, more complex and systemic than these ad hoc, but none-the-less serious market problems. The real heart of the matter lies with the more than six-decade-old Chicago Convention and the system of bi-lateral air agreements that was spun-off following that historic 1944 meeting, which has as a co-conspirator, rigid ownership restrictions.
"Every new bi-lateral signed, is a new mistake for the future," said Bisignani adding that the bi-lateral system "belongs in a museum."
"We are operating in a very competitive business environment but we’re not allowed to run this as a normal business and that’s a crazy thing," said Bisignani.
"It’s like saying you can run in a 100 metre race, but you have to run with just one leg because you’re special. But if you’re running with other partners who are using two legs, this cannot work."
While he concedes some progress is being made, it’s too slow. With over 1,000 airlines operating around the globe there is a desperate need for consolidation. "No other sector is so fragmentedand why?" he asks rhetorically. "Because the rules of the game are over 60-yearsold."
The fix for the industry is clear, he argues. True open skies and a lifting of ownership restrictions. "The flag on our tail is killing our industry," he says.
Half-open skies
Although he considers the recent landmark ‘open-skies’ agreement between the US and the UK – the two originators of the decades-old bi-lateral system – "a failure because it is only a half-open sky," or "a very big bilateral," Bisignani is still encouraged by what he sees as a move in the right direction.
Clearly a patient man, he says the industry has waited 60 years for a move in this direction, "we can wait a couple more," for the skies to truly open.
The agreement, effective from 30 March, allows any European Union carrier to fly from any EU country to the US without restriction and similarly US carriers to Europe. The big achievement for Europe was gaining US recognition of the concept of a ‘community carrier’, rather than specific national carriers upon which the bi-lateral system is based.
At a certain point in the negotiations with the US, the issue of cabotage – or the ability of foreign carriers to move cargo between two domestic points – was dropped. "We knew it was a very sensitive issue politically in the US," and with low yields and the ability to code share through alliances it became less critical to achieve it.
"But really the fact of ownership was something that was difficult to understand. We cannot go on with rules that are 60 years old," Bisignani insists.
The IATA chief also finds it tough to understand how a country with such liberal economic and trade views can become so protectionist when it comesto the airline industry and why the EU thinks just because it is a big market itcan set its own rules.
He argues that with two markets so similar in terms of economics, history, culture, technology as the US and Europe, "there is no excuse not to implement true open-skies immediately."
In other countries where there may be an imbalance between the two parties, it might be correct to give the weaker carrier a certain time frame to adjust its cost structure to compete in the open market, he adds.
Time for Asia to step up
In the meantime Bisignani has called on Asia – which by 2010 will be the largest single aviation market accounting for 27 per cent of global air travel – to step up and take the lead in modernising the framework within which the global industry operates.
While he applauds the ASEAN effort at opening Southeast Asian skies, he says it "does not break the mould."
"We need leadership that is bolder and has the courage to break the mould and set the industry on a completely different course."
Why not, he suggests, open markets completely, in a phased manner starting with a complete lifting of restrictions on intra-Asean traffic.
"It’s important to create the perception among people and governments that this is the right direction and this is something that I am proud as IATA, that we have been able to create this kind of awareness," Bisignani said.
"So things are moving in the right direction, but something I would like to see is a bit more speed. But when you have to change an industry that is so directly linked to international agreements, government policies and perceptions, speed has to be evaluated with a different kind of mind set. This sometimes, isa bit frustrating."
