Glenn Tilton
Air Transport Association Chairman
and UAL Corporation President, Chairman and CEO
Remarks to the Wings Club of New York
January 21, 2010
Thank you, Dave, for that kind introduction.
Thanks also to the board of the Wings Club for inviting me to speak today, and I am delighted to be joined by the newest member of the UAL Board of Directors, Jane Garvey, former FAA Director.
It is a pleasure to be back at the Wings Club and in New York, a great city that is known for commerce – and also known for its ability to pull together in the face of significant catastrophe.
As we have witnessed the devastation in Haiti, our industry has responded with the kind of support that makes us proud; with commitments to fly missions to get supplies and aid workers into Haiti, and to get those in need out.
The logistics of coordinating an international relief effort of this magnitude with virtually no air or ground infrastructure are daunting, but we’ve been through this before and our people know the drill.
Aviation plays a critical role in relief efforts, just as it plays a critical role in the economic well-being of our country.
I will start my remarks with what I consider to be a reasonable premise to frame our discussion, that being:
A safe, secure, sustainable and profitable airline industry that provides good value to customers is in the best interests of U.S. economic recovery and global competitiveness.
So, let’s talk about the issues that are barriers to that premise … such as excessive taxation; inadequate infrastructure; outdated regulation and dysfunctional behavior – both within and outside the industry.
I know it is hardly a surprise to anyone in this room that the majority of these factors are the same today as they were six years ago, when I last spoke at this forum. Nor should it be a surprise that they have been with us for long before that time.
One of the significant challenges to any successful business is to create a culture in which everyone is willing to identify and discuss important and difficult issues; and that is what I will attempt to do today … put all the issues on the table.
Until all the facts are considered by all the stakeholders; this industry is not going to reach its potential and will fall further behind in meeting the needs of a fundamentally and forever changed global marketplace.
While the size of the earth certainly has not changed physically, developments and advances in technology have created a series of business networks – transportation, communications, finance – that have effectively succeeded in shrinking our world.
That said, it still requires an investment of time and effort to physically get from one point to the next.
The undeniable truth is that air transportation is the most efficient way, and across some geography the only realistic way, to move people and high value goods that drive essential commerce.
On that basis alone, we could make the case that the U.S. should capitalize on its longstanding aviation leadership with the ambition to be a leader in the 21st Century.
Indeed, the U.S. airline industry has the potential to be the thriving economic engine of our nation’s global competitiveness.
Which brings us to the dilemma we confront.
The U.S. airline industry is a critical economic engine of commerce.
We drive 8 percent of global gross domestic product and $1.1 trillion in U.S. economic activity, but paradoxically, the industry has lost nearly $60 billion in the past decade, $28 billion in just the last 2 years.
We support more than 10 million industry related U.S. jobs, but we shed jobs in order to survive – more than one third of all airline jobs, to be exact, in the last 9 years.
We in this industry face a continuing and daunting challenge: How to navigate to sustainable profitability in light of our financial instability?
Economic viability is critical for our industry, just as it is for our country.
And… safety, security and jobs are not detached from economic viability.
It is an unfortunate but accurate commentary on the U.S. passenger airline industry that losses and volatility have been the norm, as has our systemic failure to earn our cost of capital and achieve any level of consistent financial resilience.
Poor access to capital, limited ability to invest in new technologies and passenger amenities, shrinking fleets, reduced service, continuing losses, and poor credit ratings are not the touchstones of a thriving, vibrant, sustainable industry.
Without dramatic course correction, our future is not likely to be materially different from our past. Our airlines will continue to be marginalized and the U.S. will become a less relevant player in the global economy.
We must be able to operate successfully in a global business environment.
We must have access to the tools that enable businesses to grow and prosper, and government must eliminate the barriers to our success that have been erected over time.
The business environment that is “essential” and “normal’ in virtually every other industry, is outside the grasp of commercial aviation – we are constrained by regulation from taking the necessary actions to be successful on a sustainable basis in the global market place.
Why is that?
What is so unique about this industry that it should be inhibited, some might say prohibited, from operating like any other global business?
These constraints, in turn, impact the very things government is rightly concerned with today – our ability to sustain jobs, to grow jobs, to provide service to communities and to enable growth in other industries, including travel and tourism that depend so heavily on consumer access to frequent, efficient air travel.
Government is not the only factor inhibiting our success. Exacerbating government sources of constraint are issues for which we in management, and sometimes labor are responsible.
From unsustainable labor contracts which have been agreed to because they were expedient and non confrontational (at the time) to non-compensatory fares offered in an effort to gain market share or generate cash (at the time)
to devastating over-capacity – managements have made decisions that have simply compounded our industry’s economic dysfunction and eroded industry credibility.
Does anyone think that undermining a realistic chance for sustainability through expediency in compensation, airfares or over-supply is in the long term interest of our employees, our customers or our shareholders?
Are the communities we serve or is our success in a global economy any better as a result of such short-term thinking?
Immediate gratification often yields long term adverse consequences; and, ironically and sadly, ultimately hurts the very people these expedient decisions were intended to satisfy … 185 bankruptcies in 30 years.
History is certainly prelude to the future; but history does not have to repeat itself.
All stakeholders can learn from the past, and if we choose to, create a very different proposition for our future and the role we should play in the economic recovery of this country.
Recognizing the seriousness of the systemic failures of commercial aviation, Secretary LaHood recently convened a Federal Advisory Committee of all stakeholders, including airlines, airports, labor leaders, investors, consumer advocates and manufacturers.
We should applaud the Secretary’s leadership in bringing everyone together and encouraging an open and candid discussion.
It will be critical that all the issues are on the table and that everyone is willing to discuss them openly and constructively, so that Secretary LaHood’s Committee can agree solutions and develop a meaningful road map to restore the financial health of the industry.
The Committee, its overseers, and the Congress can drive the changes necessary to enable the industry to create economic stability, sustainability, and future profitability – through a commitment that acknowledges and supports our fundamental priorities.
This is no small opportunity.
The Committee has the platform from which it can call for barriers to be torn down, enabling the market to work.
We should address the protectionist environment in which we find ourselves;
an environment that has become even more protective of the status quo during the recent economic downturn.
The reality of today’s world, is that protectionism serves our international competitors well, and exacerbates the dilemma for the U.S. industry.
What is it that motivates the protectionist’s view of the industry, much less the world?
The result of so called “protection” – is an historically underperforming industry.
One that has shrunk when it should be growing and that is severely undercapitalized.
Protectionism does not work. It will not work because you cannot protect businesses from the reality of global competition.
We are indeed a global industry.
We bring the world closer together, yet we are constrained by anachronistic restrictions that preclude us from using business tools and options available to virtually every other industry for investment, cross border ventures, business alliances, mergers and acquisitions.
What is the rationale for this policy?
Does it make sense to differentiate so significantly between airlines and communications or financial services?
Using the communications industry as an example … the four largest wireless providers in the United States:
- AT&T and Sprint are wholly owned and operated by U.S. corporations;
- Verizon Wireless is approximately half owned by British Vodaphone;
- and T-Mobile is a wholly owned Deutsche Telekom subsidiary.
Each is the product of mergers and combinations; each is the beneficiary of cross border capital flows, is profitable and is investing in the future in order to expand the reach of its business.
The same is true of financial services – an industry not without its recent challenges.
Within blocks of this venue you can open an FDIC insured savings account at Woori Bank, a Korean financial institution, arrange a personal or business loan at the National Bank of Pakistan, or finance a major real estate transaction at Mitsubishi Trust.
And that doesn’t even take into account the major role that RBS, TD, and UBS; huge banking enterprises headquartered in Scotland, Canada, and Switzerland, have on the U.S. economy.
In the context of access to and the free flow of capital, the global financial network – the life blood of commerce – has fewer restrictions to operate in the U.S. than airlines do.
Dozens of foreign financial institutions compete with their U.S. counterparts for the whole range of financial products and services which enable business.
Excessive taxes do not enable business.
What is it about this economically challenged industry that compels legislators to continuously impose taxes and regulators to regularly ratchet up their fees?
Taxes imposed by airports, the FAA and the Department of Homeland Security represent as much as $60, or 20 percent of a $300 domestic round trip ticket.
The aviation sector and its customers suffer a federal tax burden that is typically higher than the sin taxes levied on alcohol and tobacco.
Ironically, we do succeed in one financial objective; we are a very effective cash cow for government.
Policy makers occasionally make light of the increased tax burden by saying that passengers will gladly pay; yet these same policy makers complain loudly when we attempt to levy an additional fee in order to restore our companies to break even, much less profitability.
The concept of price elasticity appears to be lost on those in Washington who pile on fees and taxes, all the while demanding the retention of services provided by the airlines out of an ever decreasing revenue stream.
This means each additional tax dollar imposed on the industry implies airlines must cut costs and jobs even further.
We have already cut deeply, and with the industry operating at a loss, the only remaining option is to increase fares or cut service to counter the effect of these increased taxes.
Government should cease the imposition of new or increased taxes and fees which burden an already overtaxed industry as well as our customers.
To put our industry tax and fee burden into context: Annually, airlines collect a total of some $23 billion from our customers and ourselves to pay to the FAA, homeland security and airports – Payments that are not far off our current total market cap of some 30 billion dollars.
Are there many industries whose annual tax burden matches its total market cap?
Secretary LaHood’s Committee should closely examine the full impact of the combined tax and fee burden – and the ramifications for our industry – especially given current pressure on Capitol Hill to raise taxes and fees even more.
Looming on the not too distant horizon, we face more taxes related to the environment.
Government should aggressively support a global sectoral approach to climate change for aviation to eliminate the very real risk that aviation will get hit two or three times from different jurisdictions for the same flight.
With fuel our highest cost, government should enhance oversight of energy markets to reign in excessive speculation and the resulting volatility of oil prices.
Against the back drop of recent government bailouts of industries perceived to be too critical to fail, our industry is not looking for a hand out – indeed, quite the contrary.
We are simply asking for the same freedoms available to other businesses to make fundamental decisions – so that we can pay our own way.
To that point, the air traffic control system is our operating infrastructure; funded largely by us and by our passengers.
What many of us find to be the most disappointing aspect of the government’s discriminatory treatment of the airlines is its failure, for more than a generation, to provide infrastructure consistent with the needs of our industry and the customers we serve.
The government must accelerate and fund the next-generation air traffic control system.
Secretary LaHood has assured us that ATC modernization is a top priority for this administration – that is welcome news and another demonstration that this may be the time to finally make progress.
I would like to close with a few thoughts on the objective we all share:
A safe, secure, sustainable and profitable airline industry that fulfills its potential to be the successful economic engine of our nation’s global competitiveness.
From my perspective there are a number of undeniable basic tenets – and they draw the roadmap for a successful and sustainable industry:
Let’s accept the premise that airlines enable commerce and tourism, create jobs, connect small communities and large cities to the rest of the world and contribute 8 percent of global GDP.
Let’s recognize that airlines want to provide job security for our employees and a return for our shareholders, invest in the products and services that our customers need and want by successfully competing with the best airlines in the world.
Let’s refrain from making decisions of convenience that will prove to be unsustainable as the business cycle evolves, and let’s understand that we cannot create prosperity and jobs that are not sustained by profitability.
And finally, let’s agree that government has a key role in tearing down the barriers to sustainability and refraining from the temptations to impose new impediments.
There is no business that does not benefit from knowing and acknowledging its challenges – and we should certainly know ours.
Each of us contributing – directly and indirectly – to Secretary LaHood’s Committee must be willing to discuss and debate such important and difficult issues and do good work – because this must not be a missed opportunity to better our future.
And any Congressional follow up to the Committee’s work must not remain unfinished business, to be put over for another and another and another Congress to address.
The stakes are too high.
Thank you.