Remarks of. Susan McDermott Deputy Assistant Secretary for Aviation and International Affairs U.S. Department of Transportation

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Terence Jones
5 years ago
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1 Remarks of Susan McDermott Deputy Assistant Secretary for Aviation and International Affairs U.S. Department of Transportation Maximizing Civil Aviation's Economic Contribution Joint Workshop The World Bank, ICAO, ATAG 6 June 2005 I must share from the outset that this conference is one of the most tightly organized in which I have had the honor to participate. The three sponsors, the World Bank, ICAO and ATAG, represent the three legs on the stool of sound deliberations and decision making, bringing the perspectives of government policy makers and regulators of aviation services, users and providers of aviation services, and the financial community with the resources potentially available to create the infrastructure necessary to operate. With this make up, I have great hopes that the participants will come away with not only a vision of how to create a stronger aviation network, but with the tools to get the job done. I have been asked to review the air transport regulatory scene. From a U.S. perspective, we see huge shifts in international air transport that are profound and enduring. Nothing transitory or cyclical about it. I intend to address what they are and how governments are putting in place policies to address them. In the U.S., we continually assess our air transport priorities and try to anticipate challenges, all in the effort to assure that the power of the government regulatory hand is used as it is intended: for the strengthening of our ties around the globe through strong air transportation. We approach this task with some basic tenets: First, there is a clear appreciation that efficient, safe and secure aviation is essential to achieving broader domestic, regional and global economic and social objectives. Aviation is important because it is not only a major industry in and of itself, but is a direct facilitator of domestic and international economic growth, and ultimately of mobility, freedom and democracy. Second, we have a strong predisposition to market-based solutions, where possible, though we recognize that in certain cases and with certain issues, there is a continuing role that government must play. Third, there is a clear recognition that aviation now more than ever must be viewed in the global context. Is there any doubt that the airline industry is an international network of providers that girdle the earth? Yet we are a world of sovereign states, making different sovereign decisions; and so long as that is the

2 2 case, the network cannot be free of all governmental control, but we should strive to minimize that. Fourth and last, aviation policy should be viewed in the context of the evolution and events taking place in the air transport industry itself. Commercial imperatives are today pushing governmental policy to create an economic regulatory framework that permits evolution and adaptation by airlines to market needs. Given the industry trends that we know are taking place in the United States and what we see in many parts of the world, I would suggest that many governments bring the same basic tenets to their policy decision making councils as well. State of the Airline Industry It is common knowledge that the U.S. airline industry is in the midst of a fundamental restructuring that is part and parcel of the evolution of deregulation. We no longer view airlines as a monolithic industry, but one that consists of different components. In the passenger sector, we have the so called legacy carriers and low-cost carriers. Each presents a very different picture: for the legacy carriers, red ink is deep and we have two majors in bankruptcy (now seeking to merge) with the others facing serious challenges to avoid it; for the low-cost carriers, or LCCs, we have a growing and indeed thriving sector adding passenger volume monthly. In addition, there is also a regional airlines component that is very sturdy, and the U.S. cargo and express delivery carriers are also doing quite well. This is a very mixed picture for the policy maker, but we have nonetheless drawn insights that we believe apply globally. The first is that the financial challenges currently facing the U.S. legacy carriers did not just happen with the terrible advent of 9/11, though that accelerated the problems enormously. Carriers worldwide are under enormous cost pressure, and those that can respond and get their cost under control will not only survive, but thrive. However, the legacy carriers have a very difficult time doing this. The combination of upward, spiraling costs over a decade for the legacy airlines and the rise of the new generation of strongly capitalized LCCs has opened a price disparity that the legacy airlines are struggling to overcome. For years, these airlines were able to transcend cost-side pressures with revenue-focused strategies charge the high-yield business and nondiscretionary traveler more, and get it. The strategy worked because the legacy carriers were in a position to control the number of seats available and the business traveler grew accustomed to paying high fares and had no real alternative. But these conditions exist no longer. Business travelers are increasingly turning to the growing variety of attractive low-fare options available from the LCCs and the LCC expansion has diminished the legacy carriers ability to the control supply of seats. In other words, throughout the first quarter-century of deregulation in the United States, the market for scheduled passenger air transportation was driven by the confines of its providers. That supply-driven characteristic of demand is ending. Demand now is beginning to drive supply. There is a diminishing pool of pay-anything passengers and

3 3 a huge pool of very price sensitive passengers. The only way to service this customer base is to get costs down. U.S. legacy airlines are toiling to cut costs, and the results differ with the different airlines but the issue of the need to restructure is clear. Effects Internationally So what does this have to do with the international markets and decision making by other governments of the world? This essential shift from a supply driven market to a demand driven market is occurring in other parts of the world as well. Low-cost carriers are not only a U.S. phenomenon; they are springing up all over the world. All policy makers are being confronted with a choice: to create an environment that will serve the tremendous untapped demand for low-cost service, or seek to maintain high cost airlines through restrictions on competition. In Europe and Asia, where there is a robust demand for air travel, legacy carriers are being challenged by LCCs like Ryanair, Easy Jet and Air Asia. In Africa, new start ups are beginning to emerge. In particular, with domestic deregulation in South Africa, there is the birth of genuine low-fare airlines. 1Time and Kulula Air have revolutionized domestic aviation, and air transport is now available to the people who in the past could not afford to fly. Likewise, in Latin America, the rise of Brazil s low-cost carrier, GOL, has produced stunning results in both earnings and traffic generation, tapping a first-time flyer market of huge potential growth. Legacy carriers around the world are responding in similar ways: all are cutting costs; some, like Aer Lingus, are transforming themselves into low-cost carriers, while others, like SAS and Qantas, have formed low-fare brands; others still are investing in independent low-fare carriers, for example Singapore Airlines with Tiger Airways. What we see in the U.S. market is happening around the world. It is being compelled by the demand of a global market place further inspired by transparent communications and an enormous simply enormous, untapped demand for air transportation worldwide. The principal beneficiaries of the dynamic, highly competitive market place are the consumers of air transportation who have more options and lower prices available. But the benefits go way beyond direct travelers and shippers. They encompass the entire economy investment, import-export businesses, educational opportunities, and the huge industry of travel and tourism with its hotels, restaurants and cultural exchanges. This evolution is happening where ever policy makers view air transportation as not just an end unto itself, but as a generator of economic growth. Trends Around the World We perceive that many governments are watching the rise of the low cost carrier as intently as we are, and as intently as the other watershed development of the last ten years, the growth of network carrier relationships. International air transportation networks are literally the glue that holds the world s economies together. Economies that want to buy and sell in the global market place have to have access to the global air

4 4 transportation system. But whether service is provided by point-to-point operators or network carriers, there is the common requirement for efficient, competitive services in a liberal economic operating environment. That requirement can be satisfied bilaterally or multilaterally. While the world is still clearly dominated by the bilateral aviation agreement, important and growing moves to create regional and multilateral understandings are underway. The United States has for the past decade moved on both the bilateral and multilateral fronts, and we see other governments doing so as well. We have completed open skies agreements with 70 countries in all regions of the world and representing all stages of economic development. Our latest agreements include India, Ethiopia, Uruguay and Paraguay. Where open skies is not yet agreed, liberalization packages, such as our recent agreement with China, are bringing transformative levels of growth to the market and the benefit of much more competition. We are also active on the regional front. Our talks continue with the European Union for a bilateral agreement that will result in the regional opening of the transatlantic markets with all 25 EU member states. In the Pacific, we worked with several of our APEC partners to create a very interesting template for multilateral framework called the Multilateral Agreement for the Liberalization of International Air Transportation, the MALIAT. This agreement is open for signature by any country that wishes to sign on to open skies with all the other signatories. The move to liberalize is a worldwide dynamic. The positions taken by ICAO itself endorse liberalized markets as the general goal of the aviation community. The historic integration of the European air transport markets leads as the ultimate example of dropping all restrictions on aviation between the member states of the European Union. We see bold strokes on the part of other regional organizations. In Africa, the African Union has endorsed the Yamoussoukro Accord which deregulates air transportation between all African nations. Just last month, the AU held a transport ministers meeting in South Africa to determine implementation plans for the Accord. In Asia, under the aegis of ASEAN, a roadmap for the integration of air services has been laid out, and several Asian nations Singapore, Brunei and Thailand signed successive agreements liberalizing air services. We understand that India announced an arrangement that permits ASEAN flag carrier s unlimited access to several of its main cities. The Central Americans to a great extent have integrated their markets and Caribbean nations are opening their territories to one another and even sharing airlines. South America seems late to the consideration of regional liberalization, but some efforts are none the less underway. The Mercosur countries have liberalized services on new routes, and three countries have grouped together to sign open skies agreements with each other. Bilaterally, the activity is moving in the same direction - liberalization. We believe that the needs of the traveling public and shippers are driving governments to create environments that permit airlines to meet their demand. Those governments that resist stand to slow the pace of their own economic development. Many who originally sought to resist the change by putting up barriers to competition are changing tack. Whatever the viability of that strategy was thirty years ago, it is simply no longer in

5 5 today s globalized economy. Other pressures to attract business and investment, to grow tourism, and to meet the demand of citizens for low fare travel - have made the protected airline industry an unaffordable luxury. In today s economy, capital will move seamlessly from where artificial barriers to entry exist (such as unnaturally high air fares) to where they do not. Role of Governments Plenty of work is cut out for governments who choose to strengthen their aviation systems. First and foremost, all governments must continue to be involved in ensuring the safety and security of air transportation. The role played by the safety organizations in each country and in ICAO is critically important to the vitality of the industry. I should note that the United States is committed to improving aviation safety and security, not just in the U.S., but internationally as well. For example, in Latin America, we have recently concluded a bilateral safety agreement with Brazil and have been working closely with Mexico to improve air navigation and aviation safety. DOT has provided training and technical assistance to other Latin American countries as well. In Africa, we have been conducting the Safe Skies for Africa Program which is designed to support through technical assistance countries efforts to achieve the ICAO safety and security standards on a sustainable basis. We encourage the creation of regional safety oversight organizations and are working closely with the East African Community on such a regional endeavor. Here too, training and technical assistance is provided to numerous other countries. Cape Verde deserves a "hats off" for the diligent and successful work it put into bringing its safety oversight and security capabilities up to the ICAO requirements. We welcome the service that its airline, TACV, will bring to the U.S. next month. Every nation s biggest safety and security partner is ICAO. We applaud ICAO s safety and security audit programs and the technical assistance it brings to both individual nations and to the development of the regional approach to aviation safety organizations. ICAO s active involvement in the audit programs is proof positive that the member states want, indeed demand, the highest measures of safety and security in air transportation. It cannot be emphasized enough that satisfaction of the safety and security standards is the foundation for air service; without it, air service will be paralyzed and nations will fall behind in the development of their economies. Of parallel consideration to governments is the need adopt policies that permit carriers to compete as freely as possible. Internationally, this involves working bilaterally or multilaterally with like-minded partners to open restricted markets. In our case alone and just in the past few months we have seen rapid action taken by airlines in newly liberalized markets. Shortly after we signed our open skies agreement with India, both Jet Airways (India) and Continental announced plans to begin services; after the signing of the open skies agreement with

6 6 Ethiopia, Ethiopian Airlines announced consideration of a deal with the newly formed Ghanaian air carrier (Ghana being another open-skies country) to serve the U.S. from Addis over Accra on a code share basis. Looking to the future, we are in discussions with Mexico to expand opportunities in the enormous trans-border market. In the same regard, we look forward to open skies discussions with partners as diverse as Canada, Thailand and Azerbaijan. As watershed events are occurring in the market place, watershed changes in the structure of governmental relationships are following. Even liberalization is being liberalized. Bilaterals historically governed the market between two countries. Today, third country markets are being opened to international carriers without the requirement of serving the homeland. One of the biggest questions of the day is whether governments should maintain the bilateral agreement requirement that airlines be owned and controlled by the country designating them. A related but separate question is whether national inward investment restrictions on airline ownership and control should continue as international airlines may seek to merge or have access to greater pools of capital. Another is whether airlines should be privatized. Most of these issues arose in the environment of strictly regulated markets; as markets are increasingly liberalized, they deserve to be questioned. Conclusion As the world becomes increasingly interdependent economically, and international aviation grows ever more critical to the functioning of the global economy, the need to modernize the agreements that govern this essential service is compelling. Around the globe, air services are being driven by the demands of the passengers and shippers, and the providers must be freed through market liberalization to rise to this demand. The U.S. will certainly continue to seek liberalized agreements where ever we can find them. We will continue to plan for the future of aviation and, of course, we will continue to insist that the safety of the system remains second to none. Thank you for listening.

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