Thank you, Mr. Chairman for inviting me to talk about the effects of Hurricane Katrina – both immediate and longer term – on U.S. air carriers and their employees.
For the airlines, the immediate impacts from Katrina were reduced fuel supplies, some airport closures and dramatically increased fuel prices. Having lost 13 percent of jet fuel refining capacity and the two major pipelines that serve the East Coast, we were forced to manage our way through potential shortages in order to avoid service interruptions. By tankering extra fuel where needed, we successfully averted a crisis - but at a significant cost. Although the supply situation is much improved, we are not out of the woods entirely and we continue to manage around tight supplies at some airports.
We were, of course, impacted by airport closures, principally Gulfport-Biloxi and New Orleans. Service in the region has largely been restored with the exception of New Orleans, where commercial service is just resuming. The more lasting impact from Katrina, however, is the dramatic increase in the price of jet fuel, which was already at record highs before the hurricane ravaged the Gulf Coast. Let me put this problem in perspective.
In January 2002, the price of jet fuel on the spot markets averaged nearly 56 cents per gallon. Shortly before Katrina, the price stood at $1.87 per gallon. Following Katrina the price peaked at $2.36 per gallon, and today it is at $1.92 per gallon, a 243 percent increase over four years.
Driving the price of jet fuel is the cost of crude oil, now hovering in the mid- to upper $60 per barrel range, and the additional premium that refiners charge to produce jet fuel, the so-called “crack spread.” This premium has grown dramatically in recent years, and it exploded after Katrina. In 2002, it averaged $3.63 per barrel. Shortly after Katrina it peaked at $30 per barrel. For all of 2005, we estimate the premium average will exceed $15.00, a 414 percent increase over four years. No business model at any airline can survive with sustained jet fuel prices of $90 - $100 per barrel.
Unfortunately, the future is not bright. Our latest forecast shows that we will pay $9.2 billion more for fuel in 2005 than in 2004. In 2005, for roughly 452 million barrels of jet fuel, the industry spend will be $30.6 billion. No wonder we now project a $10 billion loss for 2005 on top of the $32 billion loss after 9/11 through 2004.
To cope with this unprecedented situation, the industry has taken, and continues to take, allpossible steps to reduce or mitigate fuel consumption, just as we were doing before Katrina. From 2001 to 2004 alone, thanks to newer fleets, single-engine taxi, lower cruise speeds, onboard weight reduction, access to more direct ATC routings and a host of other measures, our fuel efficiency jumped 18 percent. In fact, fuel efficiency has tripled since 1971.
Airlines also have responded by sharply reducing or limiting controllable costs, revising longstanding collective bargaining agreements, streamlining operations, refining – and in some cases reducing – hub operations and improving employee productivity. Overall, productivity has risen 17 percent since 2000, up to 2.2 million available seat miles per full-time employee. And we are parking less-efficient airplanes. The “Big 6” passenger airlines reduced their operating fleets by 502 airplanes from December 2000 to December 2004. Unfortunately, these efforts have resulted in the loss of some 135,000 industry jobs.
For this same group, capital expenditures fell from $13.1 billion in 2000 to $3.1 billion in 2004. Likewise, unit operating costs excluding fuel fell from 10.36 cents per available seat mile (or ASM) in 2002 to 9.72 cents per ASM in 2004, a 6.2 percent improvement.
These efforts have been nothing short of astonishing. It is clear that if not for the prices we must pay for jet fuel, the airline industry would be profitable. Indeed, we remain at the mercy of oil markets and the federal government. As Gary Chase of Lehman Brothers observed on March 15:
“The airline industry has moved aggressively to reduce costs in the face of unprecedented challenges… On a non-fuel basis, operating profitability…is as good as it was in the late 1990s. While these facts are exciting…, they may also be totally moot if oil prices do not return to [historical norms]… [W]e see a materially greater chance for oil prices above $50 than below $40 over the next several years. Unfortunately, high fuel prices are consuming what would otherwise be an upcycle for the industry.”
It must also be recognized that at the end of the day, Katrina’s impact is not limited to the airline industry. Every $1 increase in the price of a barrel of crude puts another 5,500 airline jobs at risk. The U.S. airline industry drives about $1 trillion in economic activity in the U.S. and 10 million jobs. Ultimately, the harm to the industry caused by Katrina will work its way into the broader economy.
What, if anything can be done to respond to this situation? As noted in my written statement, we have a number of suggestions:
First, the government can take at least one step to help – grant a one-year holiday from the 4.3
cents-per-gallon jet fuel tax. This tax, imposed in 1993 was intended to be temporary and
dedicated to deficit reduction. It was later redirected into the Airport and Airway Trust Fund but remains on the books to this day while similar taxes on other fuels utilized by other
transportation modes have been repealed. Suspend this unfair tax but ensure the Trust Fund remains whole.
Second, we must find and produce more oil in the U.S., including reserves from the Arctic
National Wildlife Refuge and the outer continental shelf. Other environmentally concerned
nations are tapping into their off-shore oil and natural gas reserves. We must do the same if our aviation network – indeed our entire transportation system – is to remain sound and competitive in the face of growing worldwide demand for oil.
Third, we must add refining capacity in the U.S. In the long term, if we do not build new
refineries and grow overall refining capacity, we are fated to suffer even higher prices for all refined products, including home heating oil. The government should encourage the location and development of refineries across the U.S., not just in the Gulf Coast region.
Fourth, Congress and the appropriate federal regulatory bodies should exercise their oversight responsibilities to ensure that markets are driven by consumer demand and market forces, not speculation. Even prior to the run up of oil prices after Katrina, there were calls for the Government Accountability Office (GAO) to examine the Commodity Futures Trading Commission’s (CFTC) oversight of domestic petroleum trading. Consideration should be given to whether the measures in place to limit the impact of speculative trading are adequate. Likewise, the dramatic growth in the premium charged for refining crude into jet fuel merits review.
Finally, I would like to take just a moment to touch on the industry’s support of the relief efforts after the hurricane stuck. In the days immediately following the disaster, ATA member airlines began airlifting Hurricane Katrina victims out of New Orleans to several locations around the nation. Dubbed “Operation Air Care,” ATA coordinated the scheduling of aircraft and crews that 15 airlines donated to this vital effort. This effort helped to evacuate over 13,000 people on over 130 flights to at least 9 locations. I am proud to say that this effort was industry-wide, financial condition notwithstanding, and included many employees who volunteered their time.
In closing, Hurricane Katrina serves as a reminder of the central role that this industry plays not only in our economy, but in society at large. If this nation is to continue to grow and prosper, the importance of this potent capability that responded so well in a time of crisis must be recognized and served by rational policies that foster economic well-being and growth in the airline industry. This country needs a stable airline industry capable of providing diverse passenger and cargo services in the good times and bad. Taxes and fees imposed on the industry must be brought under control, and the government must adopt an energy policy that expands this country’s oil production and refining capacity while respecting environmental concerns.
(Oral Statement)
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