TELECOMMUNICATIONS AND AIR TRANSPORT: TWIN FORCES FOR GLOBAL DEVELOPMENT

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1 TELECOMMUNICATIONS AND AIR TRANSPORT: TWIN FORCES FOR GLOBAL DEVELOPMENT Yoshio Utsumi, ITU Secretary-General Celebrating the Future, June 30, 1999 It is an honour for me to join you today to celebrate the 50th birthday of SITA. Your company has arguably done more than any other to demonstrate the global nature of telecommunications. The foresight which the seven founder members of SITA showed in 1949 in setting up a new organisationto establish a global data network to support the operations of the airline companies, is to be commended. Those of us who travel by air regularly take for granted the services you supply. Without the services provided via your seamless network air travel would be much more difficult. Indeed, we have much to thank you for, and much to celebrate. 1

2 Telecoms and Air Transport 2 Agenda SITA and the ITU Telecoms and air transport Globalisation Surviving in a competitive market Complementarity and competition Conclusions: Making the world a smaller place In this presentation, I would like to focus on the linkages between the telecommunications sector and the aviation industry. My theme is that telecommunications and air transport are twin forces for global development, bringing countries, firms and families closer together. Telecommunications and air transport are helping to make the world a smaller, friendlier place. The two sectors also also have much to learn from each other. The experience of the airlines in dealing with the effects of a competitive marketplace hold many lessons for our members in the telecommunications sector. 2

3 Telecoms and Air Transport 3 and the ITU, founded in 1865 SITA, founded in 1949 SITA became of Member of the ITU Telecommunication Standardization Sector in July 1980 SITA became a Member of the ITU Radiocommunication Sector in January 1987 While ITU will next year be celebrating its 135th birthday, we are very happy to have younger organisations such as the 50-year-old SITA among our Members. We are particularly proud of the fact that SITA has been an active participant in the work of the ITU Standardization Sector since 1980 and in the Radiocommunication Sector since SITA s networks conform to ITU standards and SITA, in turn, helps to create those standards, particularly in areas such as data networks, aeronautical communications and safety of life. The relationship between SITA and the ITU is a symbiotic one in which our members and our customers are the main beneficiaries. SITA and ITU are working together to promote global development. 3

4 Globalisation in action... What does globalisation mean? A thumbnail definition is that when a significant global event occurs, such as Zinedine Zidane scoring the winning goals in the World Cup Final, the information is immediately and simultaneously communicated around the world. Without telecommunications and broadcast TV and radio, the information could not be communicated so fast; without aviation, the players and spectators would probably not have been in France in the first place! Fifty years ago, informationtravelled much more slowly than today, and so did people. The process of closing the information gap has helped us to build a safer and more prosperous world. The more that the peoples of the world talk with each other, share common experiences like watching a World Cup Final together, and best of all meet together; the less likely they are to quarrel and fight. The more often they meet, the more they find opportunities to trade. The more often they trade, the wealthier they become. It is a simple formula, but remarkably effective. 4

5 Telecoms and air transport Similar paths? To global alliances To multinational enterprises To national carriers From private entrepreneurs What aspects do the telecommunications and the air transport industry share in common? The origins of the two industries are quite similar. Both telecommunications and aviation were initially offered by private entrepreneurs. Once the services became established, they were quickly nationalised and the operations were taken over by the State. Over the past twenty years, that process has been reversed and most major national carriers are now, for the most part, privately owned once more. We are now entering a fourth stage in which national champions and flagcarriers are merging to form global alliances, or in some cases even being acquired by foreign interests. There are direct parallels between, on the one hand, telecommunication alliances, such as Unisource, AT&T and BT, or more recently between Olivetti and Telecom Italia, and on the other hand airline alliances such as the Qualiflyer Group, the Star Alliance, or the One World Alliance. Such alliances cross national borders and pool national interests in the search for global markets. 5

6 Growth in number of new international telecom carriers, ' Source: TeleGeography, Numbers relate to firms with license for facilities -based service or international simple resale in July of year. A second parallel between the two sectors lies in the growing level of competition and market entry. In the telecommunications sector, competition started in North America, Japan and the United Kingdom and has now spread to continental Europe, as well as to developing regions including Asia-Pacific, Africa and the Americas. The number of facilities-based telecommunication carriers, which numbered only a few hundred at the start of the 1990s, now exceeds one thousand worldwide. Competition is also coming from mobile operators, from Internet Service Providers and from a variety of resellers and entrepreneurs. The landmark basic telecommunications agreement, which was concluded here in Geneva in February 1997, has made the process of market liberalisation into an irreversible one and has transformed the traditional pattern of bilateral negotiation of market access into a multilateral process. In the airline industry, competition has also taken many different forms, from carriers that establish and own their own fleets of aircraft to others that just act as resellers for spare capacity, or packagers of services which combine air travel with travel and accommodation. In both sectors, competition has brought significant customer benefits in the form of lower prices, product and service innovation and a fresh approach to customer care. 6

7 Price projections: price per minute of international call from US (in US$) Actual Projected Retail price Wholesale price Source: ITU, FCC. Note: Retail price calculated as actual revenue per billed minute of international traffic. Wholesale price calculated as weighted average of settlement rate to all US destinations. A third area where it is possible to trace parallels between the two sectors is in the pricing of services. In the airline business, the concept of selling off surplus capacity at discounted rates has long been a familiar practice. It is commonplace to observe that no two people on an aeroplane have paid exactly the same price. The price of seats is differentiated in quality according to the booking restrictions on the ticket, the quality of the seats and the service, and the extent to which the tickets are bundled with other services such as hotel accommodation or car rental. However, all passengers on the plane leave and arrive at the same time (at least, we hope they do!). In the telecommunications industry, price differentiation has been slower to develop. After all, Public Telecommunication Operators have long prided themselves on achieving a uniform level of quality for call connection and transmission. But now, the trend is to sell off surplus minutes of traffic through resellers, through discounted services that do not operate under familiar brandnames, and of course through the Internet. This is leading to lo wer prices. 7

8 Airline profits/losses: from international scheduled services, US$ bn, Net profit (US$ bn) Source: IATA, annual report, various years. Net profit after interest (left) Net revenue (right) Net revenue (US$ bn) Both industries will need to adapt to the transition from a world in which demand exceeds supply to one in which supply may well exceed demand. Until recently, that transition has apparently been managed better, from a corporate viewpoint, in the telecommunications sector than among the airlines. The losses on international services recorded by the major airlines at the start of the 1990s exceeded the cumulative profits they had made in their first seventy or so years of existence. That situation has now been turned around and, in 1997, airline profits reached a near-record US$5 billion in

9 Top 8 international carriers, 1996/97 Growth in traffic 8.8% 10.3% 4.6% 18.3% 13.8% 11.2% 7.7% Change in int l revenue AT&T MCI DT BT FT Sprint T. Italia -10.6% 0.8% 5.0% -14.3% -39.7% 1.3% 12.5% 11.8% SwissCom -19.0% Source: ITU, TeleGeography Inc. Note: Revenue change is based on dollar figures and may be different if expressed in local currency. For the moment, the national telecommunication carriers have managed to avoid such a profits crunch. They have enjoyed greater control over the costs of inputs, and have benefited from technological change which has eroded the costs of creating and maintaining networks. But in the future, telecommunications operators will need to cope with contraction and falling profit margins as a result of growing competition. Virtually all of the telecommunication major carriers in OECD countries are now experiencing slower growth in their international services, and in several cases lower revenues too. They are also seeing slower growth in their domestic fixed-line networks. In the coming decade, the Public Telecommunication Operators of the world will undergo many of the same painful restructuring processes that the airlines operators went through in the past decade. To date, no major telephone company has gone out of business as PanAm did in the airline business, but that day may not be too far away. The current round of mergers and acquisitions in the telecommunications sector may be a sign of more difficult times ahead. 9

10 Projection of telecom revenue, (US$bn) Service revenue (US$ bn) Source: ITU Other: Data, Internet, Leased lines, telex, etc Domestic Telephone/fax Actual Int'l Projected Mobile For Public Telecommunication Operators, the measure of success will lie in their ability to sustain revenues from basic telecommunication services while at the same time developing newer, high growth, mobile, Internet and data services. Increasingly, these new services will be in direct competition with air transport. Teleconferencing, and especially video-conferencing, are to some extent substitutable for international conferences. While it may not be quite so exciting to attend a conference in a virtual sense, and there are certainly fewer opportunities to gain frequent-flyer miles, it can nevertheless be more efficient, sometimes, in terms of time and cost savings. Similarly, the development of international data networks, primarily the Internet, has impacted to some extent upon the business of courier services. But while telecommunications and aviation are substitutable, they also tend to be mutually-reinforcing. Air travel generates many more cross-border telephone calls and vice versa. Also, telecommunication networks such as the Internet are increasingly being used for direct sale of seats onplanes. And many more planes are equipped with telephones. 10

11 Telecoms and Air Transport Telecoms and air transport: Making the world a smaller place 11 The death of distance as a determinant of the cost of communicating will probably be the single most important force shaping society in the first half of the next century Frances Cairncross, The Death of Distance, 1997 To conclude, telecommunications and air travel are twin forces promoting globalisation and global development. For the service providers of our two industries, the future holds many uncertainties. But for the customers of those industries, the promise is of lower prices, a greater choice of service providers, a wider selection of services, and better customer support. In her recent book, Frances Cairncross writes that the death of distance as a determinant of the cost of communicating will probably be the single most important force shaping society in the first half of the next century. When she wrote those words, she had in mind the changes which are revolutionising the telecommunications and information technology sector. But she could equally have been thinking of the air transport sector. Cheaper air travel will also imply a death of distance with passengers being able to travel greater distances more quickly and for a lower price. Telecommunications and air transport have long been bringing people closer together and making the world a smaller place. Now it is time for our two organisations to work closer together too! 11