The Importance of Aviation to Enabling Economic Recovery

Glenn Tilton
Chairman, President and Chief Executive Officer, United Airlines
and Chairman, Air Transport Association of America
to the European Aviation Club
Brussels, Belgium
May 7, 2009

In a well written editorial, Air Transport World this month said recent activities in the U.S. Congress, and I quote “again illustrate the vast gulf separating how politicians (and some regulators) view airlines and virtually every other private sector activity.” It questioned why, in a time of economic crisis, some politicians are trying to introduce additional regulations.

The purpose of that regulation? To “protect” consumers from…airlines.

While the editorial was referring to the U.S. Congress, they are but a proxy for global regulators and legislative bodies, all who in different ways are claiming to "protect" consumers.

The editorial went on to point out that airlines are “simultaneously ignored and hectored.” Their tongue in cheek conclusion was: ”… we forget. Airlines are different.”

Different indeed, we are. This is an industry that has systemically failed to earn its cost of capital – yet is inhibited from managing itself as a true global business, thereby unable to leverage costs and services. We are, in fact, hamstrung by rules that hang onto inarguable historic misconceptions that do little but exacerbate industry problems.

To those of us in the industry it often seems as if we wake up to a different challenge every week – from terrorism, to incredible fuel spikes, to a global recession such that this world hasn’t seen in over seven decades, to today’s most recent challenge – the H1N1 virus, commonly known as the swine flu.

We are seemingly always on the front lines, typically in a very visceral way. Yet, despite the most difficult of times, we continue to provide a vital service. But is this industry given credit for any of this? No, because airlines are different.

Indeed, regardless of all the challenges this industry continues to confront, we have some legislators considering ways to further limit the industry’s ability to manage itself as any truly global industry might…in a cost-effective, potentially sustainable way. Because airlines, I suppose, are different.

This is hardly the time for further protectionism in our industry. This industry is too important not to address our challenges directly and cooperatively. Air transportation IS different in that it powers the global economy. It is an industry that drives economic and social development – to the tune of more than $3 trillion US a year and 8% to global GDP. And we all know that number will grow – needs to grow – as we move beyond this current recession.

We will do our part – and just as importantly, we have proven we are capable of doing our part. But we need governments to work with us – to partner with us – across the globe to put policies in place, and the infrastructure in place, to allow us to meet the demands that will be placed on us.

Globalization has made the world flatter and passengers rightly expect global connectivity. No one carrier can serve all customers, and no one carrier can serve all points on a map.

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

Yet we hear some sentiment that these alliances may not be in the best interest of the industry and its customers because they worry alliances are too concentrated.

The market share data tells a different story. Air-France-KLM, the largest carrier in Europe, has 8 percent of intra Europe flying. Contrast that with what many consider to be the most competitive market for autos, the market here in Europe. VW enjoys a 20 percent market share in Western Europe.

In the U.S., proposed measures in Congress would seriously hamper our ability to form alliances. The view is that alliances amount to monopolistic mergers, which are unfair to the public. When Congressman Oberstar, who is seeking a review of alliances, asked whether this is what he voted for when he voted for U.S. airline deregulation in 1978, he answered: “Hell, no.”

Perhaps the question was not properly framed. If Rep. Oberstar voted for more competition, lower fares and more routes and service then he did indeed get his vote’s worth and then some.

Here in the EU, we are confident that the commission will find the alliances, such as Star Alliance and Oneworld, to be pro consumer.

As you are no doubt aware, we are seeking anti-trust immunity for Continental to join our immunized alliance with United, Lufthansa and Air Canada. In its recent tentative approval of antitrust immunity for the alliance, the U.S. Department of Transportation found that our proposed alliance does in fact benefit customers and competition.

Here are some facts that led to that initial conclusion:

• The Air Transport Association estimates that approximately 15,000 jobs have been created at U.S. carriers as a result of alliance relationships.
• International alliance carriers charged fares that were approximately 27% below those charged by non-aligned carriers on interline routes
• In 2000, it was estimated that the Star Alliance generated passenger benefits of around $100 million per year.
• One study indicates pure alliance membership reduces prices for customers by 4%, code sharing by a further 7%, and antitrust immunity by an additional 16% over code sharing.

Customers care about convenience, simplicity and a fair price. That’s what alliances bring to our customers. Shared terminals. Easy ticketing to their final destination. Prices that are more than competitive.

In the end, the U.S. Senate may well not side with those opposed to alliances, and we remain encouraged that we will see final approval in the U.S., and in the EU, as we did back in 2002 for our alliance with Lufthansa and SAS.

Lufthansa and our partners here in Europe understand the benefits of alliances, for our customers and our employees. They understand that to be successful we must be global businesses. We would not have near the level of service we have in Germany today without our cooperation with Lufthansa.

As one of our better informed papers, the FT noted in an editorial last month in response to proposals that would undermine alliances: “This protectionism is a harmful relic of the past.” It went on to say…”The greatest improvements in the air traffic market followed its liberalisation within the EU. Replacing national designation with European designation of carriers led to EU-wide competition and made low-cost airlines possible. Continued liberalisation along the same lines, but at the global level, must be policymakers’ goal.”

We could not agree more.

As you have heard me say before, we support an open market where we would compete as other global industries do, and let the market, the consumer, drive the outcome.

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

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 proposed 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 are enthusiastic about phase two open skies talks that will begin next month.

We believe the market place – not regulators – should determine where it makes sense to invest or fly. The regulatory complexity and constraints prevent us from attracting foreign capital or investing in non-U.S. airlines, opportunities available to other global industries.

We were pleased to hear Geoff Hoon, Secretary of State for Transport, say in Washington DC earlier this week that he supports the relaxation of foreign ownership rules, and I quote, "to give European and American carriers a bigger home market and the ability to operate like any other competitive international company."

We were also pleased to see Canada and the EU sign an "open skies" pact on Wednesday that allows EU and Canadian carriers to fly between any EU and Canadian airport and holds the potential for further liberalization.

At the same time, we realize this industry needs modernization to be able to meet the demands that global economic growth will bring, and to meet our responsibilities to our world’s environment. We need a committed partnership on every continent that believes in the priority of modernization.

In the US, Transportation Secretary LaHood has indicated that modernization is a priority, and that it will happen under the watch of this administration and the leadership of the DOT and FAA.

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 delivering today for customers would still be a reality even with triple the capacity. Importantly, it would also mean lower carbon emissions.

We need similar improvements here in Europe with a single European Sky that would enable trans-Atlantic interoperability.

We know such improvements both in Europe and the US would enable us to reduce delays, support growth and reduce emissions.

As an industry, our impact on the environment is relatively small. Airlines today account for about 2 percent of the world’s man made carbon emissions. With improved routing and lower fuel consumption enabled by modernization, emissions could be reduced by up to 12%.

We must have appropriate government policies, leadership and legislation to achieve this important objective; and it is vital to link any and all government aviation climate change policies to them. In addition to what we call “next-generation” infrastructure, we need to support alternate fuels that reduce emissions together with the research, development and production of fuel efficient airframes and engines.

This truly can be a virtuous circle that has a multiplier effect: Modernization will enable us to improve safety and reliability; to reduce fuel costs and fuel consumption, which in turn has a positive impact on climate change.

We also believe that we must take a global view to international aviation emissions and reach a global agreement that is fair and equitable to all involved.

Any revenue raised from the commercial aviation industry should be re-directed into aviation-related environmental and efficiency improvements. And, future government revenue-raising initiatives from aviation must take into account the already excessive burden imposed on the industry and the current use of such revenues.

This industry is also different in that it bears more than its fair share of financial burdens. Further financial burdens on an industry that is swimming in red ink will cause collateral damage to the very cities and communities we serve and connect, just when we need to stimulate the global economy and create jobs.

As governments look at alliances and rules for future collaboration, we ask they look at the benefits to consumers, the support for further global expansion and the sustainability of those actions – which in turn impact our employees and our shareholders.

Our simple “ask” of our own Administration and Congress in the US is to work with us. Partner with us… and clearly, do no harm. We would ask the same here in the EU.

We would benefit greatly from less regulation and a normalized business environment that facilitated smart, market-based business decisions and would cease to treat us differently than all other industries... a scenario that would best benefit all our constituents.

Absent that outcome, we ask that we be allowed to conduct our business within the current reality of this “semi-regulated” industry. That significant investments made on that understanding be honored.

We need to be able to invest in people, planes and product, and we need to find a way to earn our cost of capital… as any publicly traded company should.

As I said when I began this speech, and as I said when I spoke to my US colleagues at a similar gathering in Phoenix a few weeks ago:

This is an important industry that deserves better, not … “different.”