ATA Chair Remarks to the ABA Forum on Air & Space Law

Glenn Tilton
Air Transport Association Chairman
and UAL Corporation and United Airlines Chairman, President and CEO
Remarks to the ABA Forum on Air & Space Law
September 25, 2009

Thank you, Paul, for that kind introduction.

I am pleased to be asked to return to speak at this forum – this time I have the pleasure of talking with you with the additional perspective of my industry colleagues, as chairman of the board of directors of the Air Transport Association.

I am joining you today, having just concluded United’s annual strategy meeting with our board of directors. Much of what I will talk about today was part of our industry discussion. Having that conversation with those who represent our shareholders is interesting indeed.

When I met with you nearly five years ago, United was in the midst of our restructuring and the industry was working through the most recent cycle of bankruptcies that destroy investor value, harm employees and potentially disrupt service to customers and communities -- a total of 185 in 30 years, and nearly 40 in the last nine years.

At that time, I focused my remarks on the work we were doing at United … and your conference discussed industry issues, such as excessive regulation and foreign ownership restrictions.

Although the industry has done much in the intervening years to reorganize -- including significant actions in response to last year’s unprecedented fuel price spikes and the global recession that followed – there has been little to no progress in globalizing the business environment in which we operate… an environment as you well know, that inhibits our ability to make business decisions considered “essential” and “normal” in any other industry.

No one denies that commercial airlines play an important and permanent role in contributing to the US economy. We enable commerce and tourism, we create jobs, connect small communities and large cities to the world – and we contribute 8 percent of global GDP.

In that context, it sounds like an industry you might want to consider for your children’s college fund … or, perhaps not.

This is an industry that epitomizes the definition of dilemma.

Although we provide absolutely essential service to the public and we enable tremendous collateral wealth creation – we have been systemically incapable of earning our own cost of capital.

Although we are constrained by regulation from taking the necessary actions to strengthen our businesses, actions that could provide investment in product and services – we are asked to believe the current regulatory environment is intended to “protect” the industry.

So … protect the industry from what?

One has to wonder why it is that there is seemingly so little interest in a serious discussion of this dilemma… and why is there is so little interest in getting at the root cause of our industry’s dysfunction?

Such discussions are taking place in other industries – including those that are relative “new comers” to the world of dysfunction…

In the world of finance and auto manufacturers, when faced with the dilemma of systemic failure, the discussion was “robust” and included significant government intervention and billions of dollars pumped into those industries.

In the deliberation that led to the economic stimulus package rapid rail, which largely does not exist in this country made its way into the discussion and was awarded 8 billion dollars for its development.

For Air Traffic Control modernization?

Zero.

Why is that?

What is so unique about this industry that it is precluded from operating like any other global business? Why are we not having that conversation?

As we consider that question, I thought I would emulate any good lawyer (and I am married to one) -- and start where you start… with the facts… the facts that frame the reality of this industry.

The impact of the global economic recession is severe, and the International Air Transport Association provides some compelling projections:

Over the past two years, the industry is expected to lose close to $28 billion dollars. In comparison, in 2001 to 2002, as a result of 9/11, the industry lost a combined $24 billion dollars.

We face historic capacity declines.

With demand down, yields are also under pressure all across the globe. This year alone, IATA projects that $80 billion in revenue will disappear.

In addition, we face tough credit markets.

We are experiencing the greatest drop in revenue and credit availability in this industry’s history. The industry is doing the work it can to build cash reserves and initiate liquidity actions across the spectrum of rather constrained opportunity.

But, this does not help build long-term and healthy balance sheets for an industry that has “systemically failed to earn its cost of capital.”

We face “creeping” protectionism and “re-regulation” proposals that restrict our ability to manage the industry in a sustainable way.

Regardless of all the challenges this industry continues to confront, we have those who consider and propose actions to further impede the industry’s ability to compete and grow.

Global markets demand business models that allow for capital investment, consolidation and cross border ventures.

We have a couple of options: either return to a period of full regulation, or get out of the way and let airlines operate like any other global industry.

As an industry, we are fragmented, with serious limitations to our ability to invest, merge or cooperate. As such we must work through the regulatory patchwork that exists today to find creative opportunities to profitably meet our customers’ needs.

We will continue to do our part – and we need policymakers and governments to work with us – to partner with us – across the globe to put policies in place that address the business and regulatory challenges, put critical infrastructure in place, and allow us to meet the demands that will be placed on us.

It is a fact that globalization has made the world flatter and passengers rightly expect global connectivity. In response to consumer demand commercial aviation has changed dramatically in the past 10 years, with significant growth of low cost carriers, primarily providing point to point service.

The network carriers have greatly expanded their networks, continuing to connect small communities to international destinations. Still, no one carrier can serve all customers, and no one carrier can serve all points on a map.

Due to the current regulatory impediments, the only way we can attempt to provide the global connectivity the market place demands is through alliances with other carriers.

Sometimes involving anti-trust immunity, alliances allow us to serve thousands of markets – including many small communities – reached only with connecting service.

Immunity is critical to successful alliances. With immunity, carriers have the incentive to create deeply-integrated, efficient partnerships that increase service and enhance competition.

We are pleased that Continental will join United in the Star Alliance next month. Clearly others intend to build their alliances as we see other US carriers pursuing international alliance partners.

We are already seeing the benefits of open skies with Europe, enabling new routes and creative solutions to enter new markets. At United we are looking at every opportunity to strengthen our company, such as our joint venture with Aer Lingus.

The proposed new route from Dulles to Madrid would not be economically viable for us on our own, but with Open Skies, an expanded partnership with Aer Lingus becomes possible.

We were pleased to hear Robert Rivkin, DOT general counsel, talk yesterday about “maintaining and expanding the existing Open Skies arrangements," calling antitrust immunity “crucial for that.”

We are supportive and encouraged by Open Skies discussions with Japan, and look forward to this opportunity to develop our partnership with ANA, as we have in our trans-Atlantic alliance.

Interest in Japan, and alliances, is escalating as both Delta and American are in discussion with Japan Air Lines about options reportedly ranging from a joint business venture to possible equity investment.

I know you have discussed such issues at this conference; the parameters under which the Department of Justice still assesses anti-trust immunity might be considered anachronistic. Alliances can and will enable airlines to better compete, but they are not the only solution.

The effects of our inability to invest across borders will continue to contribute to our dilemma.

Regulatory complexity and constraints should not prevent us from attracting foreign capital or investing in non-U.S. airlines, opportunities available to other global industries.

Strategic industries such as pharmaceuticals, energy, telecommunications and the auto industry all benefit from global investments.

Recently, economists and other industry commentators have again joined the chorus supporting industry consolidation.

These experts recognize not only the benefits of consolidation to carriers, but to consumers and communities as well.

Given the way that the industry has evolved, the DOJ -- looking at only city pairs, and failing to consider the expansion of low cost carriers -- suggests that a new perspective may be appropriate.

We support open markets. We believe the market place should determine where it makes sense to invest or fly.

This industry was “deregulated” more than 30 years ago, yet the nonsensical constraints on this industry remain and must be removed.

Conversely, we would like the attention turned to what government can and should do best: build the necessary infrastructure.

We are asking that the new Administration take the lead, working with Congress, DOT and 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 air traffic modernization.

We are very encouraged by Secretary LaHood and Administrator Babbitt’s statements that this is a top priority of the administration.

To establish a modern air transportation system that will enable economic growth and a return to leadership for the United States – will require partnerships.

As an industry, we are committed and engaged in bringing ideas that will accelerate modernization.

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.

The Joint Economic Committee estimates that more than $40 billion of cost a year caused, historically, by air travel delays could be saved by businesses, passengers and shippers across the U.S.

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

Airlines understand the need to address the adverse effects of climate change, and have proposed a strategy that focuses on providing stable jet fuel supplies and prices, and viable, environmentally friendly alternatives to petroleum-based jet fuels. We also support aviation environmental research programs to develop new airframe and engine technologies.

We need the appropriate government policies, leadership and legislation to achieve these objectives and it is vital to link any and all government aviation climate change policies to them.

A global, sectoral approach for aviation administered by ICAO under a post-Kyoto framework is critical to avoid duplicative regulation and cost on this industry.

As environmental issues gain momentum, governments must resist the temptation to impose additional costs on this already overburdened and overtaxed industry.

The theme for this conference is an apt one -- Course Correction: Strategies for Changing Times. We hope the new administration and Congress embrace this concept in regard to commercial aviation.

The country needs a healthy commercial aviation sector to re-establish and enable a thriving economy. Our “ask” of the Administration and Congress is to work with us. Partner with us… and clearly, do no more harm.

To compete globally – and create a sustainable enterprise -- we need to stop “protecting” this industry.

What are we protecting it from?

Growth?

Profitability?

New jobs?

Global competitiveness?

Those are protections we can do without.

Let’s have the conversation. ​