CHAPTER THREE

Making
Waves

The first external warning shots,
views on airports

The Narita case

Shaking up IATA with a new management team was the main focus early on in my IATA career. But I knew I also had to make waves industrywide if the association was to have an impact on airline fortunes.

As mentioned, I’m a great believer in personalizing business relationships wherever possible. If you work on an international basis, that means embracing different cultures is a must. But this “classic approach” doesn’t always work. Rules are there to be broken. Breaking the ice in some business relationships sometimes requires turning up the heat.

If anything, though, even greater cultural sensitivity is required when you start breathing fire. It helps you to know where to hit and how hard. And it also helps you to know when to hit. The Narita International Airport case underlines this “last resort approach”.

Narita was the main provider of international flights in Tokyo, Japan, and that gave it the latitude to act as it wished in terms of the fees charged to airlines. It basically had a monopoly and had become the world’s most expensive airport. Landing charges failed to account for the fact that airline prices had dropped 40% since 1984. The Japanese Government supported the airport’s stance and had no interest in pursuing any efficiency drives. Slots were constrained and management flexibility was non-existent. Airlines were losing money left, right and centre and they could no longer afford this arrogant posturing.

To make matters worse, privatization was on the cards. When things get privatized, a necessary first step is making the balance sheet look as wonderful as possible for potential new investors. The Minister of Land, Infrastructure, Transport and Tourism, Chikage Ogi, was a powerful lady. She was a former theater performer, part of the all-female troupe, Takarazuka Review, and was acting up to get the support of the banking system for the privatization process.

The time was right to hit Narita and for me to move up a gear at IATA. It was late 2002. I had been at the association a few months and I needed to move quickly to gain credibility. Speed was of the essence. I had plenty of ideas from my OPODO experience in the formative stage but member airlines and IATA staff needed to see we would be an important part of the value chain and an agent of change. As Leo Mullin had stipulated, they needed to see we were relevant. Internal changes were already apparent but I needed to take my message out to the industry.

I asked my user charges team what was the most difficult case they faced. Narita was the answer and so the airport became my symbolic target. Many members of the aviation value chain makes money apart from the airlines. Some airports return huge profit margins and airframe and engine manufacturers can make good money too. Airlines dream of scraping a double-digit return.

I figured that attacking one of the most entrenched monopolies in the world in one of the most conservative countries would be the biggest gamble I could take. Narita epitomized the bad behaviour seen in so many aviation suppliers. I had no time for Plan Bs, for in-depth analysis, for possible avenues of compromise. If IATA was going to take a leap forward, we had to take on the toughest challenges and win.

Blending Japan and Italy

To be honest, it was a leap with a parachute. I knew Japan and Japanese culture well so I had a good idea how much I was stirring things up. I had conducted three major deals there during my time at IRI. Not all were successful. The notable failure was a joint venture between the car manufacturers Alfa Romeo and Nissan. Alfa Romeo was a jewel in IRI’s crown and had started production of a new car at its Naples plant. But Alfa Romeo couldn’t quite reach the same level of efficiency it had with other models and at other plants. IRI management decided to ask Nissan for assistance. Unfortunately, the idea fell flat. I don’t think the Japanese ever adjusted to the Neapolitan way of life and they were seen as an outside, even interfering, force. In the end, the problems escalated and Alfa Romeo was sold off to Fiat.

A steel production deal was very different. Finsider, one of the largest steel companies in the world, had built a major plant in Taranto, in the south of Italy, which was based on a similar technology used by Nippon Steel in a plant just outside Tokyo. Again there was a problem with efficiency and again we got the Japanese over. We rebuilt a hotel near the plant in a Japanese style and the management group that came over was treated as part of the team rather than outside consultants. It was a resounding success and we achieved the efficiency levels we craved.

The third example falls somewhere between these two extremes. Hitachi and Ansaldo Medical were able to combine on digital medical scanning equipment without any undue effort. Scientists can converse fluently in numbers and formulas—it’s a universal culture.

I needed all of this experience to attack Narita. As NASA would say, failure was not an option. I had to win.

I asked my Airport User Charges team at IATA for some assistance. “Some” was actually a little less than I got. Two months later I reorganized the team, getting rid of most of them, complaining that I wanted lions but had inherited a flock of chickens. They told me that the usual IATA methodology was to ask airlines to assess the level of airport efficiency. This suggested what figures to use for the discussion, and where a compromise might be reached. But the negotiation, they suggested, was usually worthless. Reductions and/or efficiency gains were seldom acquired. The third stage saw the DG get involved. He had to—and this still amazes me—write a letter of complaint. It could be strongly worded (small mercy) but inevitably generated a reply that simply expanded on the original airport feedback. A polite “go away and leave us alone—but don’t forget to send a cheque!”

This, they told me, was the result of most negotiations. It wasn’t a result. A result is a reduction in fees or an efficiency gain of some kind—or, even better, both. With the existing process such a waste of time, I had to take the lead. The user charges team suggested that I shouldn’t expose myself to the risk of failure but I had a very different viewpoint. Leadership is about taking risks, about leading your soldiers into battle. And I knew that if I was successful it would give me the impetus to drive further change.

I had the perfect battleground. IATA had been invited to the Airports Council International (ACI—the airport equivalent of IATA) World Congress in Tokyo and I planned to seize the opportunity. The event was being held at the Tokyo Bay Sheraton, a Disneyland hotel, so it seemed only right to put on a show that exposed what I considered to be the unreal, “cartoon” world that Narita inhabited.

The basic procedure for Japanese meetings is well known. It is polite, formal and heavily structured. It is not usually a good thing to deviate from these well-established rules. Well, I was going to deviate. I was going to stand up on stage and publicly embarrass Narita with a wealth of facts and figures that exposed their overblown prices, their inefficiency and their failure to adhere to ICAO principles. I would tell them that IATA had no time for privatizations that allowed monopolistic behavior to continue, that Narita was the most expensive airport in the world, and that the government should wake up before it slides further into the doldrums.

The last line of the speech noted that IATA would continue to be an active player and a noisy player. If nobody else would wake up the Japanese government, I’d be happy to do it.

Shouting politely

About two weeks before the ACI event I was in Tokyo to receive an award from Prince Takamado on behalf of IATA for 50 years work with Japanese aviation. While there I discussed the situation with our member airline CEOs in the area. I told them that unless the Narita situation changed quickly and dramatically I would create chaos at the ACI event. I said they could decide not to participate at the ACI event if they felt it would be too awkward. I didn’t blame Isao Kaneko, CEO of Japan Airlines and Chairman of the IATA Board, for the year when he suddenly remembered an appointment in China the same day as the ACI event.

But the only person who saw how far my speech would go, apart from my Corporate Communications Director, Tony Concil, was Andrew Drysdale, the IATA Regional Vice President for Asia-Pacific and formerly a successful CEO with Air Pacific. He strongly supported my approach and was given strict instructions not to leak a word of it. I had a meeting with the ACI Board prior to the conference opening and made some “soft” remarks to test the water. Even these were not well-received but that just fortified my decision to go for broke at the conference proper.

I held on to my true speech until the morning of the conference. It got distributed to the interpreters at 7am in the morning. By 7:30am, I had received a call from the Director General of ACI, Robert Aaronson, suggesting I modify the language. I refused and said that ACI would have to cancel my slot because I wasn’t changing a word. But I warned Bob. If ACI did withdraw my invitation I would organize a press conference and tell the world’s media what I thought anyway.

I got to speak. It was a packed room, over 1,000 delegates and media. I was following a keynote opening by the former Japanese Prime Minister, Ryutaro Hashimoto. About five minutes in, I worked up to the crux of the matter. I accused the government of failing to prevent abuse of a dominant market position and said they had given the airport authorities “a license to print money”. I said they should all wake up to the new economic reality and that monopolistic behaviour in the modern age was intolerable. As for the idea of privatizing this mess with the help of Japanese banks, that would meet with the strongest possible objections from the aviation community until we got the transparency and efficiency we craved. “Unless the Japanese government makes some hard decisions it will continue to fall in its regional importance,” I stated.

The first three rows of the auditorium—where all the Government and Japanese officials were sitting—emptied out. I delivered the next part of my speech to their backs as they made, by Japanese standards, an unseemly dash for the exits. I briefly wondered if I had created a diplomatic incident but carried on for another ten minutes anyway, hammering home facts and figures to support my argument.

There was a deafening silence when I finished—no applause whatsoever. But the media clamour started soon after. We went to the Foreign Correspondents Club and the national and international press flocked around me. I got headlines on TV and in the major newspapers, including the Asia Edition of the Financial Times. At my next Board meeting I finally received a round of applause when I updated them on the Narita case.

After my speech in Tokyo, I told every member airline CEO to push what had been said at every opportunity. This would be their homework, their contribution. There would be no let up. The battle had begun and I was in the vanguard.

Lessons learned

It was not a bloody war but rather a cold one, a long silence with communication only through third parties. I went on hammering Narita at several international events. The pressure began to build on the airport as the financial community started to scrutinize its figures.

Bit by bit the airport started making some positive noises. I was happy to grant them a requested extended timeframe for discussions because IATA was now in the driving seat. And I fully understood the privatization issue was clouding matters. But I made it clear that I would give them time and keep silent as long as they gave me something in return: a reduction in charges and greater transparency going forward, which would include proper consultation with airport users.

The final, positive agreement was hammered out in a conference call with Masahiko Kurono, the new CEO of Narita Airport who had taken over shortly after the ACI event. I had a fluent Japanese speaker listen in for me who proved very useful, translating the various whispers on the other end of the line. Kurono and his colleagues never knew that I heard everything they were saying. But in the end, that didn’t matter. It was an open and constructive conversation and was the first step on a journey towards the mutually beneficial relationship we have with Narita today. Kosaburo Morinaka, the new CEO, has been very cooperative and was particularly effective during the March 2011 earthquake, facilitating the necessary flights. The airport has changed a lot—as has Japanese aviation. New airports have been built and Haneda, Tokyo’s other gateway, has finally been opened up to international traffic.

We are seeing a new breed of airport manager in Japan too. Outsiders with good experience of big corporations in the private sector such as Sumitomo and Toyota are coming in and running an airport as a business. Previously, Narita seemed to be a job for many high-level bureaucrats who were seeking a get-rich-quick scheme before retirement. There was absolutely no incentive for them to change the status quo. They just had to sit tight and wait for the golden handshake. Arrangements like the one at Narita explain the Japanese economy at large, which was stagnant for far too long.

The Narita case was a big gamble but it got the attention of the world’s airports, governments and media. IATA had a new modus operandi. The member airlines also understood that a radical new approach was at play. We would shout, politely, and we would use facts and figures to make our point and cause public embarrassment where necessary.

The airline CEOs got behind this strategy quickly. They had taken up the Narita baton and were starting to have an impact in their domestic markets. Initially, it was just me making waves. But I had given the industry courage and no longer was I the only one shouting. It was not the voice of Giovanni that people heard but the voice of the industry.

It set the tone for the rest of my time at IATA. This would not be the association of the last 50 years. We would be a team of lions, not a flock of chickens. Jeff Poole, an experienced negotiator, was hired to head up a new user charges team. The time for quiet diplomats was over and some confidence began to return to the association. The idea of targets was not so daunting, the idea of leadership exciting.

The Taj Mahal with gates

Narita received so much negative publicity that it was becoming clear to all monopoly providers that new partnerships were needed; partnerships in which they responded to users’ needs.

As a businessman and as the Director General of IATA I was well aware that airports needed to reward their capital. Business is business. But in too many cases, airport monopolies were taking too many liberties, running rings around phantom regulators and building monuments to their CEOs. These modern-days pharaohs were constructing their pyramids regardless of airline and passenger requirements.

I never called Toronto Pearson Airport a pyramid to my recollection. I did, however, use the word palace and variants thereof on many occasions. It was the “Palais de Versailles with boarding bridges”, a “Taj Mahal with gates” and so on. Louis Turpen was the CEO, the former head of San Francisco Airport who had constructed an aviation museum there named in his honour. As CEO of Toronto Pearson, he had decided to build a huge new terminal. The airport did need a new terminal but I felt the decision on its scope was taken without adequate consultation with stakeholders or consideration of current events. The decision coincided with the Severe Acute Respiratory Syndrome (SARS) crisis, which was plunging most airlines into the red and some out of business altogether. Whilst some 15 airports reduced their landing fees to soften the blow, Toronto—despite being in the frontline as SARS spread—bucked the trend and increased its charges 29% to pay for its new cathedral.

I started my attack by publicly declaring that Canadian Minister of Transport David Collenette should “dramatically rethink the Canadian air policy agenda”. The Greater Toronto Airports Authority responded by banning IATA from its premises and issued a written warning to airlines not to attend an IATA press conference due for 21 October 2003, which was going to make our feelings about Toronto Pearson clear. Both measures had no precedent in IATA history and both had no effect.

It was inconceivable to me that Canada, an efficient country, should have such high airport charges. The link between aviation and the economy is well documented and the damage to Canada caused by this high charges policy was huge. Moreover, the reaction to 9/11 in the United States had made the airport security process in that country very unpleasant. Nearneighbour Toronto had a real opportunity to grab market share from the United States if it built an efficient passenger and airline-friendly airport.

Then CEO of Air Canada, Robert Milton, supported IATA’s campaign as did the IATA Board. Robert was very active even though he had most to lose by picking a fight with one of his airline’s principal hubs. His courage should be recognized as not many would have done the same. In his subsequent role as Chairman of IATA, he was instrumental in many of the association’s successes and it was no surprise he transformed Air Canada. The fact that Air Canada’s fortunes dipped again was largely due to the industry’s fragile position and the airline’s burdensome pension scheme, which had to hold reserves similar to a government corporation. It shows that an airline CEO should never relax. Recently, on a flight from Geneva to Montreal on Air Canada, a young cabin attendant recognized me and openly asked about the leadership of Calin Rovinescu, the CEO of Air Canada, and the reasons behind Air Canada downsizing. I just smiled and said, “He’s working hard to keep your pension system alive.”

It took a while to shift Toronto’s position but I was comfortable with this having set a long-term strategy that had targeted new management at Toronto. In January 2004 Minister Collenette lost his position, the pressure from the IATA campaign combining nicely with other political developments. IATA continued to air its criticism of the airport management for another eight months. In August 2004 Louis Turpen resigned.

The only other way to force Toronto into submission would have involved some drastic curtailing of services, which would have affected passengers who had no need to be caught in the middle of our fight. The resignation of the two antagonists was the cleanest option and opened the path forward.

The new CEO, John Kaldeway, took a fresh look at the situation and we began a fruitful dialogue. In 2010, Toronto won an IATA Eagle Award, which recognized it as the Most Improved Airport. The GTAA battle has become a case study of how to win best practice from a partner.

One problem still remains with Canadian airports. No government has been strong enough yet to drop Canadian airport crown rents, a mere tax that fattens the federal coffers, but it is only a matter of time.

Airport privatization

Canadian crown rents are a privatization issue. Governments often want to privatize airports, not only generating cash from an initial sale but also charging an ongoing fee from the operator. Airport privatization became a major theme of my time at IATA. This is still ongoing and I don’t imagine the issues surrounding it will go away any time soon. The issue here is not so much fighting our corner but ensuring the right framework is in place. You can’t hand a monopoly to a private company.

Originally, IATA was very pro-privatization. Airports were largely owned by continually cash-strapped governments or government-run authorities and privatization held the promise of fresh investment, professional management and a desire for efficiency. For an airline, it was a chance to deal with a normal business partner rather than a bureaucratic mess.

IATA wasn’t alone in its thinking. Privatization was once the magic word in Western society, the solution to many of life’s woes and the only government model for new infrastructure financing. Actually, it’s a very logical argument. Why should governments use public money to build something that would generate a good return on investment for a properly run business? Everybody benefits, including the end-user who would get a better service for less money.

But a visit to Madagascar in 2006 brought home the dogmatic nature of this philosophy. I had been invited there by Air Madagascar and the Minister of Transport, Roland Randriamampionona. The airline was struggling due to an overly competitive market, the machinations of governments in the region and poor infrastructure. A visit to the airport had been arranged and I had been told that a re-fencing project was almost complete thanks to a World Bank loan. This stopped cattle from roaming the airport, which presumably was a bigger worry to pilots than a bird strike. But one of the conditions of the World Bank loan was that the airport had to be privatized. This was completely inappropriate for a country without a stock market and the economic circumstances I saw around me.

Privatization has become a mantra in some circles. I understand— even agree—with the principle, but the practice has always been a let down because the policy is too often shoehorned into an inappropriate structure. The framework for privatizing an airport should be clear. The government needs to set a service level agreement that specifies deliverables such as waiting time for check-in, baggage delivery, reinvestment levels and so forth. Benchmarking the efficiency of the airport as traffic increases is a must. Any failure to meet these signed levels of service should incur substantial penalties. A strong regulator should enforce the rules of the game, insist on transparency and be prepared to withdraw the concession.

It’s difficult to see at first glance how it can all go so spectacularly wrong. Yet it always has. In July 2006, Grupo Ferrovial, inexperienced as an airport operator, bought the UK airport operator, BAA, for about $16 billion. This was an extraordinary price and sure to involve a crippling debt. The net result is failure. But penalties for this failure were set ridiculously low. From 2003−07, while airlines were reducing fares in real terms, BAA’s charges went up 50%. They got away with an 86% hike for the 2007−12 period. Why? Airlines compete; airports do not.

The irony is that the concept of a regulator originates in the United Kingdom. But it seems incapable of providing one with any teeth. I coined the term “phantom regulator” specifically for the UK market although I’ve had to use it elsewhere since. I hope the UK Government doesn’t mind. I do always try to give it credit for being the first to ruin this good idea. Regulators should continually challenge the concessionaire to be more efficient and any fines should really hurt. Repeated failure to meet service level agreements should mean the end of the concession.

To be fair, the BAA sell-off wasn’t the worst. Ferrovial was inexperienced—but at least it wasn’t a bank. In Australia in the 1990s, an important bank, Macquarie, started to buy up airports. Macquarie Airports’ returns average 47%. It thinks this is okay because that’s the level of return it gets on its other financial speculations. It is completely inappropriate benchmarking. It should be looking at the aviation value chain, not banks.

Auckland Airport is in a world of its own. I was in New Zealand in 2008 to meet with the Minister of Transport, Annette King, a very pleasant lady although very new to the job at that time. She was a former Minister of Health and I joked with her that the industry certainly needed a doctor. I shared with her some insights on the industry and, of course, mentioned that home carrier Air New Zealand was dogged by some very high user charges at its hub airport.

I gave Minister King all the relevant numbers, including margins made in other industries. The likes of Microsoft and IBM, for example, enjoyed returns averaging 20% to 40%. She was amazed when I told her that airlines average less than 1% and even a star performer like Singapore Airlines barely squeezes into double digits in a good year. In 2004, the pretax profit for Auckland Airport was 50%. I said I don’t know who else can make that kind of money. The Mafia, perhaps, but despite being Italian, it wasn’t a business with which I was familiar.

The next morning, all the national newspapers ran stories that explored this comparison between Auckland Airport and the Mafia. A parliamentary commission started an investigation and discovered the land was being valued like a shopping mall, giving rise to high profit expectations. Nothing much has been done though. Auckland Airport’s pre-tax profits continue to impress if you’re a shareholder and depress if you’re an airline.

There is now a privatization problem looming with Brazil. With the soccer World Cup and the Olympics on the horizon, the government has sold off some of its main airports believing a private company could move faster and be more efficient in an infrastructure development process. I’m not sure of the reasoning there but anyway the auction strategy surpassed the government’s expectations. The winning bids for Guarulhos, Viracopos and Brasilia airports reached $13.4 billion (BRL24.5 billion)—about five times the government’s stipulated minimum. The crazy thing is the government will act as a regulator despite retaining a shareholder interest in the facilities. So it is in charge of deciding whether airlines should pay it a huge amount of money. We can guess at the answer. It is not the most promising business model from an airline point of view. How charges and services develop will need to be monitored closely.

There seemed to be a glimpse of light at the end of this privatization tunnel. India’s regulator, the Airport Economic Regulatory Authority (AERA), established a single-till policy meaning all revenue, including commercial activity at an airport, is considered when setting user charges. So, the amount of money an airport makes in its shops from airline passengers goes toward offsetting the charges for the airlines. That seems fair to me.

Unfortunately, it has all gone spectacularly wrong in India with Delhi awarded a 340% price hike, basically because the government wants its slice of the cake. Other airports have put forward three-figure increases for approval. The former Aviation Minister Praful Patel was behind much of what is right about Indian aviation. Aside from AERA, he did a lot with Open Skies agreements and even steered a new terminal at New Delhi International Airport to completion in just 36 months, which must be something of a record for such a heavily bureaucratic industry in a heavily bureaucratic country. But he lacked the political support needed to see his policies through to conclusion and the merger between Air India and Indian Airlines has become a disaster. Kingfisher has been grounded for the time being and the most successful airline to date is Indigo. Jet’s Airway’s famous Chairman and founder, Naresh Goyal, is a leader with brilliant ideas and a very colourful character. He started from scratch and has had a very impressive career. At one point he was implementing the most elegant business class in Asia with the help of a famous Italian designer. He was so concerned about keeping the plans secret that all the mock-ups were set up in the garage of his wonderful London home. I think that shows how competitive airlines can be. Airports don’t have to worry about things like this.

Anyway, the point is that it is very difficult for airlines to be effective when more than 10% of their revenue is spent on unrealistic infrastructure charges, which includes fees from both airports and air navigation service providers. During my time at the helm of IATA, user charges increased $10.1 billion while we secured cost savings in the region of $14.3 billion. Even so, airlines still pay their monopoly-owning partners in excess of $50 billion every year.

For now, I accept that airports cannot cover their costs simply through passenger-related shops and services, so airlines need to pay a fee. But charges must be transparent and fair. And in the future, airlines may not pay airports at all. Airports charge airlines for landing, for parking, for power and for just about anything else they can think of. In return airlines generate and bring airports the paying customers that make their huge returns possible. It seems a lopsided arrangement.

Overall, the situation with airports has improved though and there have been some notable successes, such as Geneva, where we have managed to help turn around what was once a very inefficient facility. Robert Deillon, CEO at Geneva Airport, has managed to oversee significant improvements in infrastructure with a limited impact on charges. We have also worked well with Montreal and Seoul-Incheon. IATA has done the lion’s share of work in securing these improvements and the staff deserve a lot of credit. IATA’s relationship with airports has been tense on occasion but it has steadily improved over the years. Airports now understand that IATA will continue to push them and there has been a definite shift towards partnership.

Stuck for space

One thing ownership doesn’t change is the extent of airport capacity. The lack of it is a serious issue, particularly in Europe, although there are examples elsewhere such as Sao Paulo in Brazil or the New York system. Objections to new runways and extended terminals get plenty of media coverage while the arguments in favour are often an afterthought and portrayed as a minority opinion.

There are some very solid reasons why airports should be built or expanded. Basically, airports provide a huge boost to the economy, locally, regionally and globally. Asia-Pacific understands this and has invested heavily in new facilities that are forever winning “world’s best” awards. Is it a coincidence that China is among the world’s fastest growing economies and it has built 45 new airports during 2005–10 and plans another 52 by 2020? Or that Emirates Airline has become such a dominant force when Dubai International Airport has undergone massive development and the massive Dubai World Central Airport is being readied to become the world’s largest airport serving 160 million passengers per annum? Look at it from the other angle: London Heathrow directly employs the best part of 220,000 people and the terrible decision to stop the third runway puts at risk the $49 billion worth of exports handled by Heathrow that go to non-EU countries. The number of destinations served by the airport has fallen by nearly 20% because of the lack of space, which means less passenger convenience and a lot less economic stimulus. London Gatwick now serves more destinations.

When I met with the UK Transport Minister, Philip Hammond, in 2010, I asked him why the government didn’t have the courage to sign-up to a third runway at Heathrow. I explained how so many jobs, from manufacturing to hedge funds, had already been lost and that more would surely follow. He was very honest in his responses and said, politically-speaking, building a new runway was impossible in the foreseeable future. There has been a change in Minister since but the United Kingdom is still singing from the same hymn sheet.

Not building new runways should be impossible, politically-speaking. Even the environment angle has solid counter-arguments. For example, an extra runway allows greater flexibility in aircraft flight plans, potentially limiting the noise in particular locations.

And CO₂ emissions are being reduced on every single flight. Aircraft fuel efficiency has increased some 70% since the advent of the jet engine and airports have done a great job in improving rail links and using electric-powered ground support vehicles. Despite expansion, most airports have a smaller impact on the environment than they did previously.