Interview with IATA DG Willie Walsh: IATA AGM Review

Transcript

Peter:

Welcome to Willie Walsh, CEO and Director General of IATA, International Air Transport Association. Really great to have you with us on Capital Live. Welcome.

Willie Walsh:

Thanks Peter. Good to be here.

Peter:

You've been in the hot seat, I suppose pretty much since you arrived in Geneva. It's just one thing after another. Let's start with the another first. What's the most recent events and that's COP26, and more generally the emissions issue. Has much coming out of COP26, as far as aviation's concerned so far that's surprised you?

Willie Walsh:

No, not a lot, Peter. It wasn't really one of the big agenda items for this COP meeting. So there's been some focus, obviously, as you expect around these issues with the number of people flying in on private jets, it tends to be the story of these events. But there hasn't been a significant focus on aviation. I suppose the one thing that did surprise me, you had Boris Johnson coming out, criticising the goal for SAF that the UK has 10% by 2030, and he called it pathetic. I'm not sure he knew he was criticising himself because that's the UK government target. But I think it does highlight the fact that more and more people are looking at sustainable aviation fuels. And I think excited about the prospect of the difference that these things can make and wanting to see an acceleration in the uptake, which is in my opinion a very positive message.

Peter:

And you mentioned the 2030 date there, Willie. The attention really for aviation, I think seems to have focused much more now on 2030, rather than 2050, because all the main big developments in aviation projected to come after 2030. When we're talking SAF, you've got Boris saying things like that. Is 10% by 2030 going to be sufficient? And I think we're talking about 2% by 2025?

Willie Walsh:

It's a great question. Personally, I'd like to think that we'll actually achieve more than that. I think we need momentum here. It's not an issue of willingness on the part of airlines to use sustainable fuel, it's actually a willingness on the part of the fuel companies to supply it. So the good news is the technology is proof. We know that this fuel works on board our aircrafts that are flying today. It's a drop in fuel, so we don't require any modifications, which is a very strong, positive. It doesn't need any new infrastructure at airports. So as a solution, it actually represents a great solution for the industry. We have several pathways now approved. So we believe there's plenty of feed stock out there that can generate credible, real, sustainable aviation fuels. What we need to see though is greater supply.

Willie Walsh:

And I think this is chicken and egg. People have argued that the industry needed to demonstrate its willingness to use it, and we've done that now.

What we need to see is fuel companies providing it at scale. And once they start providing it at scale, then it'll deal with the other critical issue, which is price. Because the price of these sustainable fuels, which as you know, are very high, three times the price of kerosene. It's principally down to the low volume of manufacturing. So if we can get the volumes increasing significantly, I think that will have a major positive impact on the prices of sustainable fuels.

Peter:

You're making a point there, there is a real supply chain in terms of motivation issue here. Is that something where, and I know you've said words to this effect in a different context. Is that somewhere that you really are going to have to have government intervention to give it a bit of kick up the backside, as it were?

Willie Walsh:

Yeah, I think you're right, Peter. What we've argued is you need the policy framework. And that's why this timing is absolutely critical, because governments need to create the incentive and do what they did with road transport, where they put a lot of focus on sustainable fuels, biofuels for road transport. They provided financial incentives. They created the, policy framework that incentivize the fuel companies to produce the biofuel. They need to do the same for aviation. So, mandating airlines to use a product that isn't available is madness. What we need to see is fuel companies mandated to produce the product. And this is where I think we will get momentum. And once we get governments aligned on this issue, and I think there is now good global acceptance of the real prospect that sustainable fields represents, then we get a policy framework that works on a global basis to incentivize the production. And I think we get really motoring then. So as you say, a good kick in the backside for people to get focused on producing these sustainable views, that will make a real difference.

Peter:

Is it something that governments are going to feel motivated to do though? It's not attractive to be supporting aviation in any way, is it? The radicals are saying, "Let's just reduce the number of services and that's the only way to do it effectively." So is it going to be politically acceptable for governments to start funding this sort of thing?

Willie Walsh:

Yeah, no, absolutely. Because it's actually supporting the environment, it's not supporting aviation. Aviation is operating today and will continue. And even if you try and suppress the growth of aviation, that's not going to improve the environmental performance. What we've got to do is reduce the amount of additional CO2 that we're putting in the atmosphere and that's where sustainable fuels come into play. So this is government supporting the environment, not supporting aviation. And the other thing it does is it supports jobs because this is a new industry. You can build these plants to produce sustainable fuels in areas that haven't been used to either refining or indeed, drilling for oil, because you're using a completely different feed stock now. So I think this is going to be a real positive development. It is a win-win. Good use of technology, developing new sustainable jobs, producing the sustainable fuel that will support an industry that's critical to the global economy.

Peter:

Indeed. I was interested in the Etihad example where they flew across from Abu Dhabi, laden with a 100 percent SAF. And then got to Heathrow and they couldn't actually segregate their SAF from everybody else's, so they had to share it around. There's obviously a lot of work to be done at the airport end, isn't there?

Willie Walsh:

Yeah. But you know, again, you've got to be sense about this. Having separate infrastructure for sustainable fuels and kerosene does not make sense. You're building unnecessary infrastructure when this sustainable fuel can be mixed and blended with kerosene. And the issue here is what we've got to do is identify who has paid for the fuel. Who uses it is a different question. It's the same with the biofuels for road transport. It all goes into the one tank and gets mixed up. So if you look at the infrastructure at airports, I reckon it would be impossible to replicate fuel infrastructure for sustainable fuels, given the actual critical issue of the fuel supplies at major airports. If you remember, when the pipeline in the UK went down, when was this? It must have been about 12 years ago, and it cut off supply to Heathrow, Heathrow had about three days of fuel supply.

Willie Walsh:

That's as much as they could store in the tanks at Heathrow. And of course, when the fuel comes into the airport, it needs to settle, needs to be tested before it's then distributed through the airport fuel infrastructure to the aircraft. So I think there is work to do on this. And it's an area that we're focused on. AT IATA, what we call book and claim, so you buy the fuel. It doesn't necessarily mean you have to use it because the fuel will be used by the industry. You make the claim on the basis that you bought that sustainable fuel. The fact that you may be using a blend from another airport doesn't really matter if the overall CO2 from the industry is being reduced as a result of your investment in the sustainable fuel. So there's work to be done, but I think it's not rocket science and we can sort this out.

Peter:

It's a really interesting wrinkle we don't talk about very often, but there's a lot of accounting to be done there in other words.

Willie Walsh:

Yeah. And it's principally accounting, Peter you're right. The sad thing about Etihad flight is they couldn't even get a 100 percent sustainable fuel. I think they we're aiming for a 50/50 blend. I don't think they got to 50% because there wasn't efficient, sustainable fuel available for them to use at Heathrow. So, there's a lot of work to be done, but at least we're going in the right direction. And I think quite positive momentum at the moment, which is really good for the industry.

Peter:

Good. And still staying on this 2030 deadline, Willie, any other developments that are likely in that timeframe and what else can be done?

Willie Walsh:

Yeah. I think the real focus will be on sustainable fuels, but also then turning to technology, will Airbus produce this hydrogen-powered aircraft by 2035? We certainly should have greater visibility by 2030. They're very upbeat about it, I've heard [inaudible 00:10:24] talk about it a few weeks ago, and seemed much more positive than he had 12 months ago. Boeing, less positive about it. They said they've looked into it, they've tested it. I think there's a lot of hurdles to come. And then you've got a number of smaller companies looking at the commuter type aircraft and producing hydrogen power.

Willie Walsh:

So I think by 2030, we're going to have a greater visibility around the potential for what would be a step change in technology such as hydrogen. The critical issue there is, how do we produce the hydrogen There's no point in claiming that hydrogen is the solution if hydrogen is not being produced in a green way. So there's still a lot of work that needs to be done. But the good thing is, there's great commitment now on the part of the manufacturers to make this change a reality. And I think by 2030, we should be able to see whether that's going to happen.

Peter:

So meanwhile, in this decade, the main reliance is presumably going to be on offset, which is highly controversial.

Willie Walsh:

Under the CORSIA system. I think it's less controversial when you look at the facts. I think offsetting as a term has certainly been undermined because some of the offsetting schemes that were being pursued, if you go back five, 10 years ago, really questionable as to whether they were achieving anything. But this is now regulated. The positive about CORSIA is it has regulated offsetting for the industry and the credibility of these offsets has been tested. It is being verified as being audited. So you can see that where the industry is investing in upsetting it is producing a credible result. And I think that is important.

Willie Walsh:

So while I would accept that the general concept of offsetting has been questioned, I don't think the same question can be posed for the offsets that the airline industry will use. So, we will have to continue to rely on offsetting even the sustainable fuels. We're looking at an 80% reduction in the carbon footprint, so there's still a 20% residual that needs to be addressed. And the best way to do that at the moment is through offsetting, but going forward, I think we'll have greater investment in carbon capture, direct air capture. Other forms of offsetting technologies that today are very expensive and low scale will become more widely available and probably more price competitive as well.

Peter:

As you said, there's a lot of chicken and egg in terms of getting to the scale. Willie, one of the issues that isn't actually talked about very often, although it's blindingly obvious, is actually the transparency. We talk about reducing the industry's emissions by whatever date, but actually measuring what they are at the moment and then measuring them from year to year, there's no standardisation is there, between airlines and the way they report. How do we get to that hurdle?

So there can actually be demonstrations that we are reducing our emissions, because you've got corporate buyers who want to know that, you've got boards of just about every company who are going to have to be reporting to their shareholders on these sorts of things. How do you get that level of transparency? Is that something IATA's working on?

Willie Walsh:

Yes, it is. And I think we've got to give some credit to ICAO as well, who have developed the standards. So the good news here, Peter, as you know, there's a direct relationship between the amount of kerosene we burn today and the CO2. So every tonne of kerosene is 3.1, six tonnes of CO2. Airlines have always been very focused on the amount of fuel that they're burning. So we know what it is. I think where there have been issues is where airlines are reporting things like CO2 per passenger kilometre, and there isn't the same standard being used there. So that is something that we are working on in IATA to establish a recommended practise in how you report, were debating. We're going to start with recommended practise. And then we are debating whether we make this a requirement for airline members of IATA to report in a single way, because there are a lot of these CO2 calculators out there which will calculate for you the CO2 on your specific flight.

Willie Walsh:

They're all wrong. And we know that for a fact, some of them grossly overstated, some of them grossly understated. So we've done some work on this. We've consulted widely with the industry and we're going to be publishing something on it in the very near future, but it is an area we've got to get better. And it is critical that people have confidence that when an airline is reporting, that the way their reporting is credible, can be accurately assessed, and can be verified and audited if necessary. So I think that you're right to highlight it. I think in the overall emissions, I'm not overly concerned, but when people are reporting their unit emissions, if you like in the form that they do, whether that's in grammes of CO2 per passenger kilometre, or per available turn kilometre, we've just got to make sure that we're all using the same criteria so that people aren't seeing to be abusing the system.

Peter:

Yeah. But of course you can't make the laws, can you? You can't actually mandate that any carrier does whatever they're supposed to do. And it is a very competitive business. It's in my interest to be saying, "Look, I'm better than you."

Willie Walsh:

But it's not in your interest to lie. And I think that's what's going to happen. Airlines that misstate their performance will get caught out and will get shamed. And I think consumers are very, very cautious about dealing with companies. You saw the controversy in the automotive industry when it was clear that some manufacturers were cheating with the way they were reporting their environmental performance. We've got to make sure that that doesn't happen in the airline industry. And this is where consumer pressure will dictate in effect, the behaviour of the industry. But the good news is IATA covers 82% of the industry, and if we can get an accepted practise there and if necessary, mandate a way of reporting, it, give credibility to it, then I believe the rest of the industry will follow because where we can see evidence of people misreporting, we'll call it out.

Peter:

Okay, that's good. That's transparency. Let's get back to our friends in government. Obviously, there are lots of governments in the world. They all have different views. They're all at different levels, with different objectives, different goals. You have the EU and you have the US, which are obviously leaders in their respective rights. There's really nobody else in the world who has the power to cause a pivot in action. I know you've got a lot of challenges, but how do you from your position, try to get government singing from the same hymn sheet? What's in their mutual interest, that's going to encourage them to do what the industry needs or what they need from the industry?

Willie Walsh:

It's frustrating that we don't see greater cooperation, particularly on global issues. So the pandemic has demonstrated that the world really is split. We have the same challenge, it's the same virus, it's impacting on people in the same way. And yet we've had so many different ways of dealing with it. And that is disappointing. Even within the EU, which has the opportunity to show cohesion early on in this, we saw 27 countries in effect go their own way, which was very disappointing to me, particularly in a post-Brexit environment, when I thought the EU could really demonstrate how important having a united block was. So, there are some global issues that would be much better to see cooperation. I think we're seeing some evidence of that.

Willie Walsh:

The environment is obviously one where again, it's a global issue. There should be a global solution and these opportunities to work through ICAO or the COP that's going on in Glasgow, COP26. That does give an opportunity for governments to at least try and come together and generate consensus around the issue of [inaudible 00:19:08] total agreement. And we've seen a lot of positives over the years on security on safety. I have some concerns. I think the way the safety regulators across the world sort of split apart on the Max issue, the 737 Max, was very disappointing because to me that was politics interfering with safety. And I don't see any role of politics in safety. The advantage of our industry is that when it comes to safety, we work together.

Willie Walsh:

We share information, it's in all our interest to ensure that the industry is safe. I think it was disappointing to see the way regulators were divided on the issue of the Max, that's not helpful. And it's not just an issue for Boeing. It's an issue for the industry. And we don't want to see politics interfering with systems that have proven to support a very safe and efficient industry. So you're right to highlight this Peter, because I think the world, when you would've expected it to come together appears to actually have drifted further apart over the past 18 months.

Peter:

Or perhaps when you would've hoped it would come together anyway.

Willie Walsh:

Yeah.

Peter:

You mentioned security there, Willie. Just looking at the way, and let's take September 11, obviously a big turning point in aviation security. That wasn't really a consensual evolution, was it? And it took a long time. It was basically in many ways, the US bullying everybody else to do it the way they did it. That's a majorative word, but maybe it does need somebody to pick up the cudgels and actually bully the rest of the world into standardisation of borders and how we deal with things now. Do you think that's on the horizon?

Willie Walsh:

I don't think so. You're right. I think post 9/11, the big change in security, it did come from the US and anybody who wants to fly into the US or fly over the US had to comply. And where you dictate the requirements, it certainly drives people to adopt those requirements a lot faster than if you sort of encourage or propose amendments and leave it to people to make up their own minds. So, I think what we did see though in the aftermath of 9/11 was closer cooperation on security. The US responded immediately, but if you look beyond the 2001, if you go into 2003, 4, 5, you saw greater cooperation on a global basis, which again was positive from the industry.

Willie Walsh:

And I think that's the way it works best, you're right. It can sometimes take the actions of one party to dictate the change and engage other governments to get on board. And you would have to say that the vast majority of decisions that were made have certainly been very positive for the security of the industry. It's disappointing if you look, the liquids ban 2006, again, a real threat. Action taken to address that threat. But the idea that we're still dealing with that 15 years later, when technology has overtaken the threat, we know that the technology available to airports can scan liquids. We don't need to take things out of our bags, but we're still requiring people to put them in a one litre transparent plastic bag, because that's what was deemed appropriate back in 2006. This is what frustrates us. When the technology has overtaken the risk, the requirements that were sensible at the time, they should be reviewed and removed where the risk no longer exists.

Peter:

Going back to that example, looking at that timeline in two or three years, to get some sort of standardisation. With where we're at, at the moment we really can't afford two or three years, can we? Let's take from where I'm looking, from sitting here south of Asia, the IATA forecast for 2022 for international in Asia, Asia Pacific, suggests that we're looking at about one 10th of the level of international RPKs that we were in 2019. I was going to say it's a little short of catastrophic. It is catastrophic as it comes to be. And that's based presumably on what, on the fact that there's not standardisation in willingness to open borders?

Willie Walsh:

Yeah. That's exactly it. Like if you look at the latest figures we've produced for September traffic in Asia, Pacific was down 93.2% against... That's international traffic against globally 69.2%. So you can see Asia Pacific region was by far the worst. We've seen recovery. Europe was back, it was minus 57. So we'd seen strong recovery in the domestic markets. And again, you had Russia 29% ahead, Australia, 80% behind and principally down to border closures within Australia.

So the forecast for Asia Pacific represents our best estimate. It's a scenario. I think it's probably the best way to recommend an economic forecast because it's looking at the measures that governments have introduced and assessing their willingness to reduce or remove the restrictions. And principally, that's killing demand. We know where restrictions are removed, people want to fly.

Willie Walsh:

We've seen strong recovery, there's still a lot of confusion, which I think is deterring some people from flying and there is the additional cost of doing testing. But the bottom line is when these restrictions are relaxed and removed, the demand comes back very, very quickly. And the problem with the Asian Pacific is we see very little willingness in the parts of government there to move away from the zero COVID approach. There's been some changes in recent weeks, but it's still very, very slow relative to other parts of the world.

Peter:

It's extraordinarily difficult to extrapolate on what we've got into a vacuum almost in 2022, but let's assume that that projection, that forecast, that estimation is wildly, wildly wrong. So we get back to maybe 70% of 2019 levels, surely that is catastrophic for a number of airlines in this region?

Willie Walsh:

Yeah. It's really worrying. In fact, you've got to give credit to the airlines that have been able to stay in business, given the collapse in the activity that they've been doing. Now, some of the Asian Pacific carriers have benefited from strong cargo. I've said before, you've got to give credit to the industry the way they were able to sort of pivot their traditional passenger business to capture the opportunity that existed through cargo traffic, which produced at least some cash flow for the industry there. But yeah, it's a major, major problem. Several airlines have accessed the capital markets, either through digital debt or equity, but not all have been able to do that. There's been some government support, but again, it hasn't been consistent across the region. So I think you've got to worry about the region in terms of the long term opportunities for the industry.

Willie Walsh:

If we don't see a strong recovery or a stronger recovery than the scenario we've painted for 2022, it is going to leave a number of airlines in a very precarious financial position. And we know that they're on the brink at the moment. So I think governments will have to understand what's likely to happen if these airlines do collapse, because it's going to take a long time for the infrastructure to be rebuilt. And the region is heavily dependent on air transport for international connectivity. So I think a worrying time, certainly for some of the airlines in the region. Great credit to the fact that they've been able to do what they've done to stay in business so far. A lot of hard work in front of them.

Peter:

We've talked many times over the years, Willie, about the ridiculous nature of the aviation industry and the ability to consolidate across borders. Do you think things will become so extreme this time that it may actually prompt some sensibility into that international regulatory structure in this region?

Willie Walsh:

It's a great question, Peter, but unfortunately I don't think so. We're not seeing any evidence of it anyway, at the moment. And you'd like to think that some of these crises do actually lead to a change in the regulatory environment, but I don't see it happening. And I know some people are expressing fear that it may become more protected rather than more open. And given the perilous nature of airline balance sheets, I don't see much consolidation happening, unless you get the consolidation that's in effect, forced upon airlines. You get two airlines equally weak believing that if you put them together, that they can survive. I think it was O'Leary who described it as two drunks holding one another up, rather than falling down on the ground.

Willie Walsh:

So if you can do it that way, but I don't see airlines being particularly brave in the current environment to use whatever strength they have in their balance sheet to pursue M&A activity. So I think consolidation is still going to be a feature of the industry, but I don't think it's going to be a feature in the short term. So that being the case, I think you've got to look at, have the barriers to entry reduced and are we likely to see more new entrants looking at the gaps that are available? And I think that's a real prospect as well, because the traditional airlines balance sheets in effect will be shot. Somebody coming into the industry will probably have a balance sheet that's just as strong. It's always been the problem with new entrants. They tend to come in with insufficient liquidity to last through that startup period. But given the nature of the incumbent airlines, it may well be an opportunity for some new entrants.

Peter:

Perhaps that's the only solution at this stage, Willie. Our time is up. Thanks for going around the houses with us a bit there, but really interesting as always to talk to you and I can only wish you good luck in, what's obviously going to be a difficult period ahead. Thanks for being with us.

Willie Walsh:

Thank you, Peter. Thanks a lot.

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