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06 July 2017

IATA meeting reveals cracks in airline optimism

The mood was mainly optimistic at the IATA Annual General Meeting in Cancun last month, and for good reason. Despite a rise in fuel prices during the first part of the year, the airline industry is still ticking along with high profits and a growing number of flyers.

But underlying the mostly good news were some ominous prospects on the geopolitical front.

In the days before the meeting, President Trump announced that the U.S. would withdraw from the Paris Climate Agreement.

During the IATA conference, a diplomatic dispute in the Middle East forced Qatar Airways CEO Akbar Al Baker to return to Doha, where flights from Saudi Arabia, Egypt, the United Arab Emirates and Bahrain had been suspended.

Meanwhile, officials throughout the industry were preoccupied with whether the U.S. would expand its carry-on electronics ban on incoming flights beyond the 10 airports in the Middle East and North Africa that had been impacted since March.

But more on those concerns later.

For now, the airline industry is in good stead economically. International passenger demand rose 10.7% in April, the fastest year-over-year rise in six years. Net profits for 2017, while expected to be down from last year’s worldwide total of $35.6 billion, have nevertheless been revised upward from IATA’s December estimate of $29.8 billion on the strength of growing business and consumer confidence.

IATA has also made higher 2017 revisions in its forecasts for capacity growth, total demand, load factors and the operating margins of airlines, all of which are humming along at healthy levels.

U.S. carriers are expected to continue to carry the mantle, at least when it comes to profitability. IATA projects net income of $18.1 billion for U.S. airlines this year on net operating margins of 8.5%.

So while there is regional variation, with Africa bringing up the rear and the Middle Eastern airlines struggling against factors that include a still-weak energy sector, overcapacity, political instability and excess aircraft on order, the big picture is that airlines are carrying more people on more routes than ever before and making money doing it.

Still, one lesson I’ve learned over the years is to be wary when people seem a bit overeager to tell me everything is fine. At the IATA Annual General Meeting, I especially felt that way as industry leaders optimistically asserted that the U.S. withdrawal from the climate agreement had nothing to do with the Carbon Offset Reduction Scheme for International Aviation (Corsia), which the U.N.’s 191-member International Civil Aviation Organization completed last October.

Under Corsia, air carriers that see emissions rise above 2020 levels on international flights would have to purchase carbon-offset credits to mitigate that increase.

“Let me also reassure you that the disappointing decision of the U.S. to back out of the Paris agreement is not a setback for Corsia,” IATA director general Alexandre de Juniac said during his keynote speech.

Implementation of Corsia will begin with a voluntary phase lasting from 2021 to 2027. The U.S. is among 70 countries that have agreed to participate in the voluntary phase.

De Juniac wasn’t alone in offering such assurances. International Civil Aviation Organization president Olumuyiwa Benard Aliu joined the chorus, as did IATA director of aviation environment Michael Gill, who told a gathering of reporters that the U.S. had given no indication that it was backing away from its support of Corsia. But when I asked Gill if the administration had given new assurances that the U.S. would remain party to the agreement, he told me no one had asked that question.

It turns out someone probably should have.

Here’s what the State Department had to say about Corsia in an email one week after the IATA meeting:

“The decision on the Paris agreement does not signal the U.S. position on Corsia, which will likely remain under review for some time. While this review is underway, the United States will continue to engage constructively on Corsia’s further development, informed by our airlines, who continue to support Corsia, and our technical experts.”

In other words, the administration is considering whether to remain party to Corsia. And while it’s true that the decision to pull out of Paris did not immediately impact Corsia, it did send an ominous sign about what Trump thinks about such agreements — the kind of sign that should concern IATA and the International Civil Aviation Organization immensely.

IATA leadership took a similar hands-off approach during the general meeting to the burgeoning dispute about flights to Qatar, noting that nations have the rights to make decisions that relate to their own sovereignty.

Given the immediacy of that issue, taking a stand might have been tough for the organization at that time. But an argument could certainly be made that tough stands are the most important ones to make. Indeed, in his opening remarks, de Juniac said, “Aviation is globalization at its very best,” and a hallmark position of IATA is its support of open aviation markets.

But when it came to the specter of an expanded ban on carry-on electronic devices for flights into the U.S., the trade group was decidedly not neutral.

During the Annual General Meeting, IATA passed a resolution calling for governments to engage in early dialogue with the airline industry as they consider new security measures. The trade body also laid out its own proposal on how to deal with concerns about explosive devices in electronics. In general, it called for expanded use of explosive-detection technology and increased training for security screeners.

There’s no way to say exactly what led the Department of Homeland Security (DHS) to announce last week that it would take the approach of requiring enhanced security screenings at airports around the world in order to steer clear of a laptop ban. But it’s likely that by speaking with a bold voice, IATA made an impact on the department’s considerations.

Indeed, the DHS presented its directives, which are to impact 280 airports and 180 airlines in 105 countries, as an alternative to a laptop ban expansion. The DHS also made it clear that once the directives are met by airlines at the airports that have been subject to the existing ban, they’ll be taken off the banned list. That’s good news for major global carriers Emirates, Etihad, Qatar and Turkish, all of which hub at airports that are designated in the existing ban. It’s also happy news for the many travelers who use those airlines to connect to the U.S. from the Middle East and from further afield destinations in Africa, Asia and the Indian subcontinent.

For security reasons, the DHS is being coy about exactly what the directives are, but it said that it will include heightened standards for the screening of people and laptops and for security protocols in airport public spaces and near aircraft. And true to form, the department isn’t taking the specter of a laptop ban off the table. Only now, the ban won’t be imposed broadly at airports around the world. Rather, electronic devices larger than a cellphone won’t be allowed at all on airlines that don’t comply with the directives. That means no laptops or tablets in carry-on or checked bags.

For IATA members, the DHS decision to put an end to the carry-on-only laptop ban is good news for reasons that go beyond simple commercial concerns. The trade organization had expressed worries about the increased fire danger that was to be a byproduct of forcing more electronics into cargo holds, where lithium battery fires can’t be detected as easily as within the cabin.

The prospect of seeing dozens of laptops packed into the cargo hold on every flight, where one battery combustion could quickly spread to nearby devices, led Malaysia Airlines CEO Peter Bellew to predict at the Cancun conference that some carriers would react to an expanded carry-on ban by forbidding those electronic devices on flights entirely.

Fortunately, by voicing its views loudly, the airline industry likely played a role in forestalling such concerns.

IATA should draw a lesson from this success and up its lobbying ante relating to the Corsia deal. The general public should know that the U.S. is reviewing whether to drop out of the world’s aviation emissions agreement. IATA has a role to play in making that happen.

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