It is indeed a pleasure to be back in Beijing, to speak about the issues and opportunities for our industry, both here, and between our countries.

The title of this conference is as fitting as it is timely – Strengthening Aviation Partnerships. It is difficult to imagine a time when partnerships in our industry have been more critical. The current global economic downturn makes partnerships that much more important.

Real partnerships are long-term commitments that help carry us through even the most difficult times.   So when the world’s economy rebounds, we will fully realize the benefits our partnerships bring.

No one carrier can be all things to all people. No one carrier can have the schedule to meet the needs of all. No one carrier can serve all points on a map. Through partnership, we can fly more customers, more frequently to more destinations.   We can learn from one another about safety advances, environmental improvements and operational efficiency.

We are encouraged by news received earlier today from the U.S. government, giving tentative approval for anti-trust immunity for Continental Airlines to join an alliance already in place between United and Lufthansa and other Star Alliance carriers. With this approval, we can offer travelers greater choice, lower fares and improved access to more of the world.

Such approval enables us to work together to deliver competitive flight schedules and fares in trans-Atlantic markets and improved access to new routes, benefiting customers and their communities. We thank DOT Secretary LaHood for his leadership and thorough review of our application. We are hopeful that this decision will establish a framework for similar joint ventures in other regions, including across the Pacific, further encouraging global airline competition.

For our Chinese partners such a venture could enable us to build on the considerable work we already have under way. Today, we actively participate in a management exchange that enables leaders of each of our companies to learn best practices from the other. We have held eight management exchanges and training sessions in the last few years with the CAAC and our Chinese partners, covering topics ranging from network planning to customer service and ground handling.

In December of 2007, we welcomed both Air China and Shanghai Airlines to the Star Alliance, the world’s largest global airline alliance. We have spent many years forging lasting relationships with both of these airlines. These carriers, strong on their own, are made more so through the benefit of joining 19 other carriers who share their vision of providing seamless connectivity from Beijing or Shanghai to San Francisco, or Tokyo, or Rome. Chairmen Kong Dong and Zhou Chi understand well the benefits of partnership to their companies and their country.

Their customers and the industry as a whole also benefit from the improvements these carriers have made in the last several years, including a focus on service delivery and employee training, advances in travel technology, and state-of-the-art new terminals both here in Beijing and Shanghai Pudong.

This gathering itself speaks to the power of partnerships between the U.S. and China. In coming together at conferences such as these we also create commerce for the U.S. and China as business travel and conferences do – stimulating the economy and providing venues for important business discussion and alignment.

As everyone in this room well knows – air transportation powers the global economy – this is an industry that drives economic and social development. 

And there can be no question as to China’s role in driving the world’s economic growth.   According to IATA, China will be the strongest growth engine in global aviation industry over the next five years – with passenger transport volume reaching 140 million people, and cargo traffic reaching 4.7 million tons by 2010.

Air transportation is a critical part of the global infrastructure and should play a vital role in our collective economic recovery… enabling our cities and smaller communities to connect and compete domestically and globally.

In the U.S., every mayor and every governor knows the economic impact of air transportation to their city or state – the benefit of connectivity through air travel for tourism, employment and for trade. I am certain the CAAC Administrator Mr. Li would say the same is true here.

With the increased opening of the US tourism market to Chinese travelers, the aviation industry in these two countries is expected to usher in significant development in the long term with increasing demand for non-stop flights between our two countries.

So we have a lot to offer our respective countries in terms of our role in economic development.

That said, this is an industry that has confronted challenges from SARS to earthquakes to fuel spikes to today’s recession, and despite the most difficult of times, has continued to provide a vital service. 

We are seemingly always on the front lines, typically in a very visceral way.

And, in response to these challenges, we take the necessary steps to align our businesses with market realities as they occur – just as we are in this unprecedented financial and economic crisis.

Out of crisis, on occasion, comes opportunity… indeed, this is one such occasion… and, we have a significant opportunity.

We must continue to build meaningful partnerships with government, aerospace manufacturers and energy companies.

We need a healthy commercial aviation sector to re-establish and enable a thriving global economy.   We can and should be a part of the solution… and we will continue to do our part.

2008 was a tough year for our industry – and while we are glad to have it behind us, we have no illusions as to the challenges of 2009. Indeed, IATA projects 4.7 billion dollars in industry losses in 2009… a number that is felt across the globe.

Although commentators often referred to oil at $147 a barrel last year, for this industry, jet fuel averaged $25 more than crude, and we actually dealt with prices of up to $180 a barrel. 

At our company, we responded decisively, taking 100 of our oldest and least fuel efficient aircraft out of our fleet.   As we removed these planes, we moved quickly and effectively to get related fixed and variable costs out of the system. 

Our colleagues across the industry made similar decisions, and we were fortunately better prepared from a capacity perspective when the financial crisis and the recession hit the economy and travel began to slow later in the year. Demand has continued to decline, and according to IATA, premium traffic is taking the largest hit. Premium traffic across the Pacific was down nearly 25 percent in January.

In large part, airlines’ survival post-2000 has come through contraction and productivity improvement, with close to a 30% reduction in employment … some 150,000 jobs lost in the U.S.

We also made cuts to our network, as did other carriers. In 2008, we saw a number of carriers who fought vigorously to win air rights to serve China, ask to put those routes on hold until 2010. American postponed the launch of daily nonstop Beijing-Chicago, Northwest postponed Beijing-Seattle and US Airways postponed Beijing-Philadelphia. At United, we reduced the frequency of our Washington-Beijing flight, and temporarily suspended it for the month of February. We also sought permission to delay the start of our San Francisco-Guangzhou route until next year.

These were difficult decisions, and were not made lightly. It’s important to note that they are also temporary decisions, for what we expect will be a temporary market condition and should not be seen as a sign of retreat or a lack of confidence in the U.S.-China market in the near term.

As all in the room know well China is facing similar challenges and is taking actions to manage capacity. For 2009, the CAAC is encouraging airlines to cancel or postpone airplanes that are on order and scheduled for delivery in 2009. The CAAC has also made it clear that no new Chinese airline will be approved for operation before 2010

The FAA last week provided its annual traffic forecast. While they project a decline for 2009, they are forecasting a 4 percent annual increase in passengers beginning in 2010 and continuing through 2010-2025. The market will come back, as will demand and interest in travel between the United States and China. We have no doubt … and as the largest passenger carrier serving China today, we have a keen interest in ensuring that is indeed the case.

It would be tempting, perhaps even logical in this environment, to suggest that the restricted aviation market to China is serving its purpose. After all, the carriers who have rights to serve China are not able to use them fully. We would argue that now is the appropriate time to fully open the market. If carriers have learned one thing during this economic crisis, it is capacity discipline. In the current economy, there is no concern that the market will be flooded with capacity it cannot accommodate. Opening the market now would allow rational capacity decisions, based on current market conditions.

Minister Li (then Chairman Li) wrote as much in his book, “My Way: the Eight Strategies of Air China Towards Success.” I was pleased to be asked to provide a comment for the back cover of the book, along with leaders of several of our Star Alliance Partners. In the chapter “The Strategy for the Future,” Minister Li discussed the pressure of economic globalization and recognized the need for China to take steps to be fully competitive in an open environment.

We fully agree. We are actively exploring ways to deepen and broaden our cooperation with Chinese partners to expand networks, generate efficiencies and provide consumer benefits. We are already seeing the benefits of true open skies with Europe. Allowing the current, decades-old limits on U.S. airlines ownership and control to continue, not to mention recent proposals to tighten those restrictions, is harmful and out of step with how other industries are treated. We need our governments to take steps to remove these types of restrictions.

As the economy improves, the market – China and its millions of air travelers – will benefit from increased competition.

We want to be able to accommodate that growth when it occurs, To do that, we must establish a modern air transportation system both here and in the United States that will be a step change and enable economic growth.

Here, roughly only one-third of the Chinese air space is available for commercial aviation, forcing less than effective routing, which is made worse during poor weather conditions. The CAAC moved last month to open 35 new flight corridors across the country, which will lessen financial impact on carriers, and improve service for customers.

On a long-term basis, as part of its five-year plan set to begin in 2011, the CAAC has committed to improve air traffic control through a number of air traffic management initiatives, infrastructure construction, trials of new technologies and international cooperation. The CAAC, under the leadership of Minister Li, has stated that a key priority is to establish a technologically advanced and reliable air traffic control system and to focus on security supervision, expanding airport facilities, installing monitoring systems and synchronizing airport operations.

At the same time, the CAAC Air Traffic Management Bureau’s goal for the next 10 years is to improve facilities in the east and midwest of China, with plans for a comprehensive data network, ground-to-air communications and automatic surveillance services for international and polar routes in the west.

Much work is under way here, and there is much more to be done. Clearly, partnership between civil and military aviation is critical if the infrastructure is to support and drive growth.

Similarly, in the United States, we are asking that the Administration take the lead, working with Congress, the DOT and the FAA and partner with us to develop what our country truly requires – a comprehensive plan for the aviation sector that will deliver a long-term step change solution to enable efficient and effective aviation. 

We need a committed partnership that believes in the priority of modernization, namely a next generation air traffic control system.

Moving from a ground-based to a satellite-based system will enable more flights to occupy the same airspace, meaning that the on-time performance improvements we are seeing today would still be a reality even with triple the capacity.

Such a system would facilitate the growth and the productivity of travel, tourism, manufacturing and other sectors of our economy.

Importantly, the system would improve safety as everyone – whether in the air, on the runway or in air traffic control rooms and towers – will share the same precise view of aircraft in their vicinity.

The new system would improve the financial outlook for airlines due to greater scheduling and operating reliability and less fuel consumption and improve the travel experience for customers with fewer delays and shorter travel times.

This truly can be a virtuous circle, each supporting the other with a multiplier of positive results.   Modernization enables us to reduce fuel costs and consumption and has a positive impact on climate change.

The Chinese and U.S. governments have both discussed the need to move forward with next gen systems.