Listen in as IATA executive Thomas Reynaert speaks to ATW's Karen Walker about why consumer regulations and taxes aimed at airlines can have negative effects.
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Karen Walker (0:11): Hello everyone, and thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week Network air transport editor-in-chief Karen Walker, and I'm delighted to welcome you on board. Now this week I am joined by Thomas Reynaert, who is the senior vice president for external affairs at the International Air Transport Association, or IATA, and Thomas joined IATA just in September and he has a long experience in the global air transport industry, including being the managing director at Airlines for Europe, or A4E. And we are recording this podcast at IATA's headquarters office next to Geneva Airport in Switzerland. So Thomas, first of all, a very warm welcome and thank you for joining Window Seat. I'm delighted to have you with us today.
Thomas Reynaert (1:01): Thank you very much, Karen. Good to see you again.
Karen Walker (1:02): And just before we get talking a little more, we've just heard from the IATA executives, including director general Willie Walsh, some of the key numbers, forecast numbers, that are expected for this year and next year for the global airline industry. So, I'll just run through one or two of those key ones: This year, 2025, it's estimated that the airlines will as a collective make $39.5 billion in profit for this year, going up to $41 billion next year. That sounds like a lot of money, but it isn't really when you look at their costs and compare them with other industries. In fact, profit margin will stay flat this year and next at a very weak 3.9%. The chief economist, Marie Owens Thompson, did make the point that Apple will make more money on selling an iPhone cover than the airline makes from an average passenger. So still in a very weak position when it comes to that—but going to be profitable. And as we know Thomas, that's a good and rare thing in the airline industry. So with that said, let's turn to your role, which is a new role and you came into it in September. Just tell us a little bit about what's your position here.
Thomas Reynaert (2:26): Thank you, Karen. So I'm senior vice president, external affairs with IATA. And what it basically means is I'm in charge with a great team worldwide for what we call advocacy. Some people [call it] government affairs, regulatory affairs, lobbying, public affairs. So we work closely with the regulators, with politicians, legislators. So looking at the regulatory framework across the world, and for IATA advocacy is one of the main pillars and main reasons for its existence. So, we work with our members, the airlines worldwide, in order to improve legislation and regulation. And we really need to do that at two levels. One is, and this is why I think IATA needs to operate, needs to be “glocal,” which means we need to operate globally and we can, because we are a global organization, we have resources everywhere. We have about 40 offices worldwide. We have expertise in all of these offices. So not only global, but also locally, we have the expertise and that's very important in order to have the conversation, to dialogue, based on facts and data based on figures and our expertise with the regulators or the politicians wanting to create something new or wanting to improve regulation in our sector. So that's important because regulation could drive, connectivity could drive the business, but it could also be a threat. It could actually stifle innovation, as we very often see unfortunately too often. So my role is to work with the business units within IATA with the members in support of course, of Willie Walsh's objectives for IATA and the board to make the regulatory landscape, the environment better for our airlines to operate in. So that's my job in a nutshell.
Karen Walker (4:27): You say that it's actually much more difficult than you make it sound, I'm sure, because well first of all, you're dealing with so many different views around the world as to what's the right thing to do with customers and with passengers and airlines, but also everybody seems to think they're an expert on the airlines and airlines get targeted so much for a lot of this, but I love that word "glocally." That's a great phrase. So let's bore down a little bit into this. I think there's probably two main areas here that you have to work on. I mean, we all understand that there are regulations that apply to this industry, but let's talk a bit about the consumer regulation side. Can you give us some examples of where things have the wrong consequences, if you like, they're not actually good for the consumer, let alone the airline. And then maybe talk a little bit about how policy makers should think in terms of consumer regulation when it comes to airlines.
Thomas Reynaert (5:30): Correct, yeah, thanks Karen. Because you do have consumer regulation. Consumer regulation, I think—the consumer regulation we refer to—passenger rights legislation in many cases in our sector is quite different than in other transport modes in other sectors, but in other sectors altogether. And that's because of the specific nature, the way airlines and the environment in which airlines need to operate in a very complex ecosystem, very competitive environment, all the things they need to put in place and pay for if they get the technology, if it's delivered because they're all supply chain issues of course, but all the things that need to be put in place before your flight can leave on time. And so probably most passengers, and maybe it's a good thing that most passengers are not really aware of all these things that need to be in place and need to happen before they can go to the gate, and that we can make sure that their flight leaves on time.
This is actually a very good passenger rights legislation. It's actually a very good example about the whole back office, how complex that is. And that's why regulators need to be properly informed. And this is of course one of our jobs. First of all, I think before we start even to lobby, is really to educate the regulatory question: If you're thinking to do good for the passenger, please consider this, because it will have an impact. And sometimes the impact is not so good. What we've seen now, for instance in EU 261, to make a long story short, of course the EU institutional landscape is very complicated in itself. Again, very briefly explained is you have different institutions that come from a different angle and it's our job and we are talking of course to the European Council, the European Commission, and European Parliament, but they all co legislate, and you see that in some stages now with a revision of EU 261, while the commission proposal was actually a very good one, which was very balanced in the sense that it really wanted to see how passengers are really being taken care of in the new and the future-proof context.
But on the other hand, the European Commission was very much aware of if there are certain, taking certain measures, they want to make sure that it doesn't harm connectivity, but it doesn't make flying so expensive that connectivity could be at risk. And this is where the European Commission actually, for us at least from an operation perspective, they actually had put some requirements, new requirements in that we could work with and that we know that our passengers would've been very happy with. Passengers—and we do lots of polling all the time worldwide, but also in Europe—so what we see is the top concern, well, there's two main top concerns of passengers.
One is of course the affordability, but that's fine. We've got for instance, in Europe, a very competitive market. So as long as there's competition, that's good for the passenger for the price of the ticket. But the second important point is delays. So people want to, yes, delays, they could live with certain type of delays. Cancellations is a real problem. So airlines will do everything of course in any case to not have delays, avoid cancellations as much as possible in any case with a regulation or no regulation, because I'll tell you what, in a competitive environment where we live, if a passenger is not happy with the airline service in question for whatever reason, they'll move to another airline. So the competitive landscape in itself, it's already driving a lot of, we really need to take care of our consumer, our passenger because he or she's paying for that ticket.
But we understand that politicians, regulators, they really want to top some things on that and that's fine as long as it's I think commercially feasible for us, as long as it's operationally feasible and as long as it's really also what the passenger wants. We see now, go back to EU 261, that European parliament, it's very complex, trial process, legislative processes. We are going to be actually, I guess in a very populistic way, we're going to decorate a Christmas tree with lots of presents for the passenger. Even if the passenger doesn't want this presents, they're going to get this presents, for instance, possibility of an extra free cabin luggage. What does this mean? Again, parliamentarianism is a good example of how things can go in the wrong direction. First of all, passengers, most of the passengers, I think only 30% of the passengers really want to pay for that extra bag.
So they don't really need, majority don't really care that much about having a free cabin luggage because they won't use it. The second thing is an operational issue. So the aircraft of today are not designed to actually take all that cabin luggage on board if it were to be free or a second free cabin luggage. Simply, it's not operationally possible to put everything on board. And you can imagine your regular flyer. So you get that with your cabin luggage because the airline has been told that you are entitled to this extra cabin luggage and you get there, you're flying business economy, it doesn't really matter … Well, the flight is full and it's simply not going be possible for everyone to put the extra, that's what it typically do to put it under your seat, which is not the ideal situation. So probably means that it needs to go into the hold.
So delays, people really get frustrated. I would get frustrated, say, well, I thought I was allowed to do this. There's no space. So it's creating operational issues. In this case it's creating more delay, which is exactly what the passengers don't want. So it's actually very counterproductive. Some of these measures that European parliamentarians thinks, that they think that [is] doing a good thing for the consumer actually, is doing actually a bad thing for the consumer, at least for the majority of these passengers. So that’s all to say just one example [of] that and some of the other … We've seen the same tendency in Brazil at the moment. Pre-election modes—Politicians think they need to decorate a Christmas tree again, but actually they're going to achieve the opposite effect. They're going to achieve a ticket price that's going up, because actually if you say you need to include a free cabin luggage, there's no such thing as a free lunch.
So as an airline, you're probably in the long term, you need to increase ticket price for that. So cost is going up and that's not what people like either. So it's having a lot of unintended consequences. We have always been very clear what these consequences would be, but sometimes politicians, and again, I think in certain pre-election modes or in special circumstances, political environments, it's very difficult to convince them. But that's what we continue to do. And working together with the regional associations who are doing a very good job and very often are exactly on the same page as we are, is to form one strong airlines front and really go to the regulator explaining how things are: if you're going to do this, you're going to have this impact. And again, the asset here from IATA is that we have lots of data that we can use so we can actually prove it. We do lots of polling and this is also what our regional airlines or regional associations colleagues really appreciate and us coming to the table as well.
Karen Walker (12:41): And it's also about harmonization, isn't it? It's about having some sort of consistency across because otherwise it can become anticompetitive, and people will shift to where they see the cheaper, better option. And so that's again where you start to lose connectivity, which hurts your economy. And that's where they're not thinking these through. It sounds like a crowd pleaser, Hey, we're going to make your airline do this and this and this, but … .
Thomas Reynaert (13:04): Correct. This is a global business. And certainly in certain regions where it's easy for people to move even into different countries and so on. In Europe for instance, the borders are very close to each other, and we've seen traffic, people taking the car and flying or flying from another country, which is ridiculous. I mean that's certainly not the intention of the regulation.
Karen Walker (13:28): Talk a little bit about taxation. There's two sort of elements here. Corporate tax; corporate tax on airlines as companies. And then of course there's the passenger tax. And as we know worldwide, there's a lot of government authorities and organizations that just think, oh yeah, keep taxing the airlines. That's the easy way. Why is that bad in some ways and other ways where it can work?
Thomas Reynaert (13:56): Well, taxation, passenger tax is not the best way to tax. So it's first of all not good for the sector, but it's not a very efficient way of taxing. As a government, you need to be careful how you tax efficiently. Why is it that? Because it actually is reducing, potentially, connectivity, is reducing growth, is reducing traffic, and therefore it will have a negative impact on your national economy. So that need to think very carefully before they do that. Now there's two different, you refer to different taxes, to corporate tax, which is really bound by international principles from ICAO. One of the main principles there is double taxation. And that's an international principle we continue to support. It's a global business because once you start to fiddle with that system—[which was] globally agreed—and this was globally agreed by all the ICAO member states at the UN level, at the highest level, so it's not good for when the same governments come back home in their capital and say, oh, by the way, now I'm going to fiddle around with the system. It's not good because it's a global business and it will have also not only global impact but also impact on the traffic, on the traffic locally.
The passenger taxes, many of these passenger taxes are, the argument is being used that these are so-called “green taxes” and there's been enough proof out there that the passenger tax is construed is not doing anything about reducing CO2 emission. So in 99% of the cases, if not a 100% of the cases, a passenger tax is not the best way to reduce CO2 emissions. That's what we have CORSIA for, again, a global system that works well and it's best to put all our efforts into a well-functioning CORSIA going forward once it becomes mandatory, people actually have been … countries [have been] signing up and once we pass the voluntary phase.
So that's where you need to focus. So again, it's a bit of the same story where you have a problem or a challenge, what's the best way to tackle it? And a passenger tax doesn't really fit anywhere. It doesn't do the treasury, at least not good enough, because usually, well, it doesn't bring, it's not an efficient way of taxation. You better tax somewhere else. I'm not going into that, but there's different ways of taxation, but I think [it’s] very often politically seen as it's more of a political gesture than a real fiscal optimization. The problem with that is nice political gesture towards for the sake of so-called green taxes or whatever you may call it, or “tax the rich,” it's going to harm connectivity. And so again, it's biting. It's biting back. So the same government who from the ministry or the treasury is saying, okay, I'm going to do something good for the economy is actually going something bad for the economy, and at the end of the day, it's not going to bring in the taxes in the coffer as expected.
Karen Walker (16:46): Have you seen anywhere around the world where they've actually come back from, withdrawn from the tax situation because they've started to see those negative?
Thomas Reynaert (16:56): Exactly. Yeah. Karen, it's a very good point is interesting you mention, let me just mention one country: when I talk about Sweden, the first thing you think about, oh yes, that's one of the heavily taxed countries worldwide across the board, income taxes. So on very high taxes. I mean when you're traveling there, you have VAT and the people living there, they pay all the taxes. They have actually decided recently to abolish their passenger tax all together. All together. They have no passenger tax left. And why is that? Well, for the simple reason, it's an economic, but a societal reason as well, for the reason that actually as of today they haven't recovered from COVID, if you look at the traffic. And so we're also, Sweden was also very much pushing taxation for green taxation and so on, including passenger taxes. They've really come back to this now because the government realizes, oh, this is actually hurting our economy.
We need to get connectivity up again in Sweden domestically, but also internationally. One follows the other, so let's abolish it. So I think this is a very telling example. Germany has this, I would say relatively still, new government. This government has considered a number of options to put more incentives into the growth of the economy. Germany has real challenges there, and this government has taken the right decision that, amongst other things, is that they will freeze the level of their passenger tax as we know it today. There was really a push to increase it, long talked about increasing it, the previous government in particular. But this government had basically said, well, it's not going to be good for the economy. Same reasons Sweden has done it, although traffic growth was different than in Sweden, of course, but it's for economic reasons and the connectivity reasons that they're not going to increase these taxes. So those are, I think, two interesting examples where I think there is hope. And again, clearly it's based on economic, societal rationale, connectivity, societal rationale, and economic—the growth, creating jobs, connectivity, bringing to more business people and tourists to your country. So that's all good.
Karen Walker (19:00): Creating high skill jobs, high value jobs, but maybe some lessons being learned in little corners of the world of realizing the value of airlines and aviation connectivity. Absolutely. And hopefully others then will start to see that. So, Thomas, thank you so much for sharing those insights. Really great to get that from an expert, and I have no doubt that you and the IATA team are going to have a very busy year next year.
Thomas Reynaert (19:27): Thank you very much.
Karen Walker (19:28): But hopefully with success. So again, thank you so much for joining Window Seat. Thank you also to our producer Cory Hitt and of course a huge thank you to our listeners. Make sure you don't miss us each week by subscribing to Window Seat on Apple Podcasts or wherever you like to listen. This is Karen Walker disembarking from Window Seat.
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