Future of the Aviation Industry

Commercial aviation helps drive more than 10M American jobs and 5 cents of every dollar of U.S. GDP
Commercial aviation drives more than $1 trillion per year in economic activity
In 2012, U.S. airlines moved more than 48,000 tons of cargo per day
In 2012, the value of a kilogram of U.S. merchandise exported by air averaged 121 times the value exported by sea
For every 100 airline jobs, some 360 are supported outside of the airline industry
Federal taxes constitute $61 – or 20% – of the price of a typical $300 domestic round-trip ticket
In 2011, U.S. airlines carried 16 percent more passengers and cargo using 10 percent less fuel than in 2000
Domestically, airlines drive 5% of economic activity but account for 2% of man-made GHG emissions
From 2000-2011, airlines reduced GHG emissions by 11% while transporting 16% more passengers and cargo
From 1975-2011, U.S. airlines and their partners reduced significant noise exposure by 99%
Commercial air travel is the safest form of intercity transportation in the United States
In the most recent decade, scheduled air service on U.S. airlines was seven times safer than in the 1970s
From 2000-2012, U.S. airlines improved the on-time arrival rate from 72.6% to 81.9%
From 2000-2012, U.S. airlines reduced the flight cancellation rate sharply from 3.30% to 1.29%
Airfares are a bargain: From 2000-2012, U.S. CPI rose 33% while average domestic fare rose just 14%
Adjusted for inflation, the average round-trip domestic airfare fell 15% from 2000
2007 domestic flight delays cost the United States approximately $31 billion
In 2012, the value of U.S. merchandise exported by air reached an all-time high of $427B
In 2012, U.S. exports of air-travel services reached an all-time high of $39.5B, driving a $5.1B trade surplus
In 2012, U.S. passenger and cargo airlines spent more than $50B on fuel, averaging 36% of operating expenses
In 2012, U.S. airlines posted the lowest annual rate of mishandled baggage ever recorded
FAA projects U.S. air travel demand to top 1 billion passengers in 2027
In 2012, US airlines flew 83.4 million passengers in scheduled international service - a record high
In 2012, the total value of merchandise exported from or imported to the United States by air exceeded $927 billion
In 2012, 7.15 teragrams of merchandise was exported from or imported to the United States by air

	Future of the Aviation Industry
	PubZone1 Richard Anderson, CEO Delta Air Lines *Future of the Aviation Industry* Remarks to the U.S. Chamber of Commerce Washington, D.C. Thursday, April 12, 2012 Nicholas E. Calio: It's my great pleasure to introduce Richard Anderson who, in addition to being the Chief Executive Officer of Delta Airlines, is also my boss as Chairman of the Board of Airlines for America. Over the 23 years that Richard has been in the airline industry, he's earned the reputation as a results-driven leader, not easily intimidated and willing to take on big opportunities, as well as tough challenges that impact his company or the airline industry as a whole. Opportunities like the Delta/Northwest Airlines merger in 2010, which created the platform for management, under Richard's leadership, to build an exponentially better business to the benefit of its employees, its shareholders, its customers and the communities it serves. At the time of that deal, the political environment was neither supportive of, nor conducive to airline mergers. As a result of Richard's success with that merger, it paved the way for further consolidation in the industry, which was much needed. As to tough challenges, Richard has repeatedly taken them on and, if you know Richard, usually with great relish. He's long advocated for a level playing field and a more normalized business environment in the airline industry in the United States. That commitment and business focus has served Airlines for America well during Richard's tenure as our chairman. He has led with great vision and great commitment and dogged determination, the effort to transform and re-brand the old Air Transport Association into a well-funded, well-organized and aggressive advocated for the U.S. airline industry. He's also led our effort to lay out a clear path to create a more competitive global commercial aviation industry in this country through the adoption of a National Airline Policy. This is a major issue not just for airlines, but for the economic global connectivity of this country, and I know Richard's going to talk about that in his remarks. As I said, Richard's stepping up to business challenges is well documented. What is less well documented perhaps is his commitment to social issues that impact all of our personal lives. This was recognized last year when he was given the Sandra Taub Humanitarian Award by the Breast Cancer Research Foundation. He has been a really good friend and a valued counselor to me and It is my great personal and professional privilege to introduce Richard Anderson. Richard Anderson: We're fortunate to have Nick Calio’s leadership at Airlines for America because we are going through a very significant change there in modernizing the organization, and that's really what I want to talk about today. And this is a great opportunity to do that, because everyone here has a significant interest, and all of you here are significant thought leaders in the airline business. And I'm going to make a distinction about a national aviation policy. I'm not here to talk about that. I'm here to talk about a National Airline Policy. That's different than a national aviation policy. And I'll explain to you why. Over the course of the last 20-some years, how many of you remember the Baliles Commission? Some of the people here were on it. How about the Gore Commission? The Mineta Commission? How about Free Flight? How many people here remember Free Flight? I can keep going. Air 21? They were all going to be policy changes that helped this industry, and they all failed. So we have the opportunity now, under Ray LaHood's leadership, to really adopt not an aviation policy, but an airline policy for America. And it's important, because if you look over the last 10 years and you look at airline profitability by region of the world: pick Asia, Latin America, Europe, Middle East, in those regions they've had sustained profitability. In the United States, we haven't. Now…Delta, we're into our third year of significant profitability, but we still have an industry that is not in a stable situation given the tumultuousness of what American Airlines is going through right now. So, I think we have the obligation as policymakers and thought leaders in this industry to be serious about what it’s going to take to have a real National Airline Policy in this country. I can tell you China does. I spend a lot of time there. We have two of the three partners. Our partners are China Eastern and China Southern. I've spent dozens of trips there. They view aviation as a national asset, one of the most important strategic assets of China is their – are their airlines. But we don't seem to have that same sort of vigor here in the United States that I see traveling around the world, whether it be Mexico and the revitalization of Aeromexico, which is now one of the most profitable airlines in the world; or Latin America, Central America. So the past…9/11 – you know, since 9/11 it has been a difficult decade, but without government aid we've made enormous strides in this industry. If you look at where Delta is, where United is, consolidation has really helped, but we have helped ourselves. So we have among the most competitive cost structures and most efficient operations in the world. But we have to have policy that supports the growth of the industry. And this is an important industry. It generates more jobs than manufacturing, okay? If you look at the FAA data – and I've got a deck here, I'll give you my e-mail address and Nick's e-mail address after this, if you send me your e-mail address, I'll send you the presentation, because we've done a lot of research on competitors around the world. And if you look, only the agricultural and oil industry have a greater contribution to GDP versus the U.S. airline industry. So our economy is important. It represents five percent of our GDP, ten million jobs. This is the airline industry. So what are the issues that we face? Well, one, you will always hear Nick and you will always hear all of us talk about the tax burden. So we pay a greater sales tax on tickets than you pay for gun, alcohol or cigarettes. So the tax burden is 20 percent. And now we have a lot of talk in this country that we're going to increase that. And that disproportionate burden, all it does is cause – that has to be paid for. We don't – we don't run an eleemosynary institution. It's going to be put in the ticket price. The ticket prices will go up, demand will go down and capacity will come out. So there's a cause and effect between those two things that's very important. The most remarkable thing is airfares today are probably the best bargain that consumers have had over the last 30 or 40 years. Adjusted for inflation, fares, including ancillary fees are down 30 to 40 percent from where they were at regulation. So it continues to be a phenomenal value, and the hub – and – spoke system has brought a level of convenience to travel in this country that I think we all take for granted. Competition policy. We've only recently been able to get a merger approved. But Boeing gets to buy Douglas and go from two manufacturers to one? The GDS systems go from three to two. We end up with two catering companies. And then when the engine manufacturers get together on a new piece of equipment, they do a joint venture, so we only have one engine choice. So there's consolidation all around the industry, and all of these people that supply the airlines have 8, 10 percent margins. So, our competition policy at Delta took us two years to get our United States air slot-swap transaction done between LaGuardia and DCA. And if you look back on all of the prognosticators back over the years that have posed different mergers, and you look at the data today, the data today will tell you that this is a supercompetitive industry, and will remain a supercompetitive industry for a number of reasons. One, we have ease of entry. Number two, nonstops compete perfectly and one-stops compete perfectly with nonstops, but we still use antitrust analysis from the CAB days. So it's the same methodology, the same work, even though now we have very different networks, very different forms of distribution, open skies across the world, it's a very different world than where we were 30, 40 years ago at the time of deregulation. We ought to have IATA worldwide scheduling guidelines rule all of our slot-controlled airports, and we should have a much different view of competition policy to allow consolidation. Our competitors certainly are around the world. China has three major airlines. Europe has three major airlines. Latin America is quickly going down to two major airlines – or South America is going to two major airlines. Mexico has one. The point is, as you look around the world, what governments are realizing is that they've got to take care of their flag carriers in order to participate in one of the most important sectors in our economy. We got a good look at that summer before last with the ash cloud, and commerce in Europe shut down because we couldn't operate, Delta couldn't operate its 65 flights a day between the United States and Europe. It's an incredibly important part of commerce, so we should have policies that support it. Our open-skies policies need to be modified to be fair skies. So we have instances that are a reflection of how the Chicago Convention works that really don't work for us, because we don't have a fair trade mechanism in our open-skies agreements. So, let's take an example. If the European governments gave Airbus $9 billion, what do you think would happen? Do you think we would have a trade war? Perhaps have a WTO case filed? We've had that happen in the airline industry. Japan Airlines was given $8 billion by its government. We don't even think about that. Instead, we have an open-skies negotiation, and the United States gets four flights for all of its carriers in the middle of the night, and we have to have a route case to distribute those four flights that are going to land in the middle of the night. We need a component in here that has our government understand the importance of aviation trade, because it is a massive positive in the balance of trade. But when we negotiate aviation treaties, we don't have a fairness mechanism in it. We are not advocates on behalf of our industry when we meet other countries to have trade negotiations over aviation, not the way we do under the WTO and its predecessor the GATT. NextGen – great fact for you. Delta's block time in 1956 flying between Atlanta and Washington National in DC-6s was – and is the same as it is today on a 757-200. So our block times haven't changed. I was one year old. So our block time hasn't changed for Delta between Atlanta and DCA since I was one year old. And we talk about NextGen, and we need to make the investment in NextGen, but it's got to be real. So we've been down the road with FANS. How many of you remember FANS, Future Area Navigation Systems? You could have spent $5 million an airplane, and some carriers did. Carrier I worked at, I said no, until they demonstrate that the equipage is going to actually be used and produce value. But we need to get it done, and we need to get it done in a prompt way, because that's really our answer to the emissions problem that we face in aviation over time. And the way to do that is we could save 10 to 15 percent fuel burn in emissions by using the technologies that many of you in this room have done such a great job of developing for us. But we need the commitment both from the manufacturer and from the FAA that, in fact, it's going to be implemented and used. If you think about just this whole other panoply, there's a whole other panoply of what I'll call general regulation. It's extremely difficult to get visas in many countries to travel to our country, and Secretary Locke, before he became an ambassador, did a phenomenal job on a travel and tourism committee that a number of us participated on, with a whole series of recommendations about how to – more visa waiver programs, much shorter wait times, many more visa offices overseas, and let's make our lines short when we come into Customs. Let's make this a welcoming country. That TSA – I must say that John Pistole has done a good job and we're down the road now on TSA pre-check, so that we make flying easy, we make flying easy for people in this country and easy for people that want to come into this country and visit this country. And then I think there's going to be a natural – as the industry evolves,\ the way all consumer industries evolve. When was the last time you looked at all the options to buy a personal computer or an automobile? More and more merchandising, as this industry evolves into a typical consumerlike industry, there's going to be this propensity to regulate more. And we should avoid that. Let customers decide whether they like to travel on an airline that charges for overhead space. It's just another product in the market. There's plenty of choice in the market. Consumers have more perfect information about buying air transportation than any other industry in the world, because the Internet and our Internet sites and the search engines they have, give every consumer virtual shelf space on every single price, option, availability for any ticket, virtually anywhere in the world, any time. Let the consumer decide. They're smart. Everybody's got an app. Apps tells you what to do, right? So let's avoid the propensity to go in and say that the display has to be a certain way or that we're going to regulate this or we're going to prohibit certain kinds of activities. I just think overall in the industry, and I could give you a lot of examples, we've got to evolve to where we understand whether the regulation is really adding. Is the regulation that we're imposing an economic regulation, or an operating regulation? Is it really improving and advancing safety or transparency or a policy that we really like? We still file a lot of the same forms that we filed at the CAB in '78. So we ought to always be thinking about…are we adding regulation that works or that matters or is it just more paperwork? I would be remiss, given the controversy around Ex-Im Bank to just kind of plainly state the case. You know, our purpose there is really narrow, and we wouldn't be raising the issue if Ex-Im didn't really hurt us, and it does. And if you don't believe me, I can't convince you otherwise. I'm just telling you the CEO of Delta Air Lines is telling you it really hurts. And the reason why it really hurts is, when you buy an airplane, you try to build a model of a 30-year financial. And in that model, you got to put the capital cost. And when you buy $150 million wide- body airplane, that's about what they cost, $150 to $175 million, if you put in your 30-year cash flow four million a year for interest every year over 30 years, or one million a year for interest every year over a 30-year period, do you think that MPV is going to change? And it's just as fundamental as that. Our focus is narrow, very narrow. We don't object to that kind of financing for manufacturers outside of airplanes. We don't object to that financing on narrow-body airplanes, but I just got to have an answer to the fact that how do I compete against people that have a $4 million advantage on January 1 of every year, when I start to fly that airplane against them? And that's what happened to us with Air India. Bought two 777s, hard to finance when we bought them, because our credit wasn't that good. It's a lot better now because we paid down $4 billion in debt since then. But – so you buy the airplane, you put it in service, everything is going well, you spent $300 million to buy the two – two airplanes, two wide-body airplanes to serve India, and a carrier comes in with Ex-Im Bank, a government-sponsored airline and basically takes you out of the market because they're pricing $300-$400 a ticket below you. What would you do – those of you that are in private business, how would – I'd love for somebody to give me a good answer to that. I'm not just trying to be extemporaneous about this, but it's difficult. It's very difficult for me to see my foreign-flag competitors, most of whom that receive that financing are investment grade and among the most profitable airlines in the world on a consistent basis, and many of them are my alliance partners, so I'm not going to mention them, but they tell me what it's like. They love it. And we just need a narrow answer to how do we make up that gap. And what we've proposed is transparency, do analysis on what the impact is and help us figure out – you know, I understand what the challenge is, but please don't dismiss the challenge that I'm telling you we have as the CEO of the largest international airline in the United States. Fuel discussion. I'm not talking about refineries, just to put everybody on notice. But fuel – let me talk a little bit about fuel. You know, we don't think the right way in the airline industry about fuel, because if you're at FedEx or UPS or Atlas, or your local utility company or Norfolk Southern Railroad, they have a really big fuel component in their business too, but their business model covers their input costs. And so, part of what we've done at Delta is I've just said let's not be a victim of fuel. If it's 40 percent of your cost structure, you can't just say it's not in your control, because then you've – I mean, you've given up on free will at that point, right? So we've really been about changing our model to be much better at hedging and buying fuel. So the last quarter – our last published quarter, we were at 296 a gallon, and most – most of our competitors were 20 to 30 percent – 20 to 30 cents higher, which is a lot of money when you're talking about jet fuel. A lot of investment in winglets and much more efficient flying. And we just bought 100 737-900s. We aren't relying on any governments to finance those for us. We're going to finance those as a private business normally would, and try to pay cash for most of them. But we do have to make sure at Delta that our pricing, our scheduling, our capacity planning and our distribution cover the cost of fuel. Because at Delta we've determined that there are three important constituencies that will make our airline successful, and that's what we're thinking about. We're thinking about how is Delta successful 10, 20, 40, 50 years from now. And if we take care of our employees – and we do a really good job of that. Last year we distributed over $300 million of profit-sharing and shared rewards to our rank and file employees. So every employee got an extra paycheck last year. And we don't think that the solution in this industry is to always seek concessions from your employees but to make them partners in what we're doing together. The second thing is we've got to take care of our customers. And the third thing is we've got to take care of the people that give us the $26 billion in capital that we have at work at our airline. And if we can do – take care of those three constituencies and build a business model where fuel isn't the independent variable, but it's a dependent variable, we will be a much more successful enterprise over the long run for those constituencies that matter. So that brings me really to the conclusion, which will leave five minutes for questioning. I thought I would read you the statutory objectives of the United States Department of Transportation. Encourage efficient and well-managed air carriers to earn adequate profits and attract capital. Promote, encourage and develop a viable privately owned United States air transport industry. At least ensure quality with foreign air carriers or U.S. carriers. Eliminate discrimination and unfair competitive practices faced by United States airlines in foreign air transportation. So the law is on the books. And I would just hope that we would all bring to bear, given the importance of this industry to our communities, to the manufacturers here, to all the constituencies, that we would all get behind Nick in – in making certain that a National Airline Policy becomes our priority. Because if you look back over the history, we have two great examples in our country of similar transportation industries. The shipping industry, which we don't have one anymore. We don't make ships except military ships in the country. We sort of made a decision that we weren't going to really be in the maritime industry anymore, so we have very few United States flagged vessels, and we don't really have shipyards anymore, and it's had a significant impact, because oil rigs are ships, right, so the oil rigs end up made in Korea and a lot of other places. And then on the positive side, we have the railroad industry. The railroad industry was facing a really pre-cataclysmic situation 20, 25 years ago. I actually have one of the pioneers of that era on my board, David Goode, who's the chairman and CEO of Norfolk Southern for years and years, and guided his railroad through that. And the Congress decided to pass the Staggers Act and another Act, two important Acts that established a national railroad policy in this country. And now we have allowed consolidation, so there's two railroads east of the Mississippi, there's two west of the Mississippi, but we have among the lowest rail rates and highest reliability of any rail systems in the world. So I think that's an – I give you the juxtaposition of those two because I think we have that opportunity. And it's not about grants or aid or any of that. It's just about setting up the right policy structure around the United States airline industry to give what its competitors overseas have, which is a fair shot. Because when we get a fair shot against our foreign-flag competitors, we win. We win. We win. 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