Speech by James C. May: The Witching Hour in U.S. Aviation - Between Contending Forces of Good and Bad

James C. May, President and CEO
Air Transport Association of America 
10th Annual Aviation Forecasting Conference
Sponsored by the Boyd Group
Savannah, Georgia
October 17, 2005

One of the great things about speaking at a conference hosted by Mike Boyd is the well-known fact that Mike likes to have fun. You can follow his example in being a little outrageous.

Since we are meeting in Savannah, one of the most beautiful and magical of cities, I am going to point out a few similarities between two different groups of eccentrics:  The characters you find in “Midnight in the Garden of Good and Evil” – the famous book (and movie) about Savannah – and some of the characters you find in and around the aviation industry. I hope this will serve the purpose of exorcizing . . . or at least quieting . . . a few of the demons that have haunted our industry. Then I’d like to give you an accounting of where we are and where we may be headed in the U.S. airline industry.

First of all, there’s the courtly old man in “Midnight in the Garden” who walks around Savannah holding a dog leash that is not attached to any dog you can see.  People call out to him:  “Still walking the dog, Mr. Glover?”  In the most powerful of ways, Mr. Glover reminds me of the news media and some in Congress on the subject of “airline subsidies.”  Apart from some temporary relief in the immediate aftermath of 9/11 – which was more than paid back to the government with a few months tax receipts – there have been no subsidies, no bail-out, no federally funded rescue of the airlines. We have been reimbursed for some government-mandated security costs. But if you really want to talk subsidies, look at agriculture.

In fact, far from being subsidized, the airlines – through a punitive system of taxes and fees – are subsidizing a multitude of other users of our air transport system.  But nothing you can say will convince the news media of this truth. So, day after day, they go on walking the imaginary dog – flailing their arms and voicing their alarm over non-existent “subsidies.”  This is an excellent example of a larger phenomenon that Mike pointed out in a recent column.  As he wrote – “The accepted ‘facts’ are often nothing more than ‘everyone knows’ opinion.  Yet they seem to be stated over and over, with nobody daring to question them, lest the questioner be burned at the stake as a heretic.”

My next character from “Midnight in the Garden” is good old Joe Odom – who loves to throw parties. Everybody likes Joe.  They don’t care if he is a squatter – who has borrowed someone else’s house to do his nonstop partying.  One obvious stand-in for Joe Odom is business aviation – people who fly about the country in lavishly appointed private jets.  They are getting an essentially free ride from the FAA for the use of infrastructure and services paid for by the airlines. We – the airlines – pay more than $11 billion a year into the aviation trust fund that supports the FAA.  They – the users of private business jets – pay a pittance.

Then there is Luther Driggers, the inventor, who keeps a captive fly buzzing around his head, tied by a thread to the buttonhole of his lapel.  According to rumor, Luther is plotting to poison the town’s water supply.  Who does Luther remind me of?  Well, I’ll tell you:  He reminds me of myself – in my position as president of the Air Transport Association, which is charged with looking out for the best interests of the nation’s airlines in Washington, D.C.

No, I am not suggesting that we get rid of the town’s water supply.  However, I do believe that another important part of our infrastructure – the nation’s air traffic control system – should be retired to the Smithsonian, where it can be admired as one of the marvels of 1950s technology. Based on ground-based radar, today’s system is antiquated and inefficient. We must proceed swiftly and purposefully with the creation of a new satellite-based system – one that will reduce costs, relieve congestion, optimize traffic flow, and open up new airspace.

Now – before I leave “Midnight in the Garden” behind – let me cite my favorite single passage from the book. It’s a real eye-opener. Listen to how the book’s author came to spend so much time in Savannah.  He writes:

“In the early 1980s, it happened that New York City embarked on a nouvelle cuisine eating binge.  Every week, two or three elegant new restaurants would open to great fanfare. Dining out became the most popular leisure activity in town. One evening, as the waiter was reciting a lengthy monologue of specials, I scanned the prices of the entrees on the menu – $19, $29, $39, $49 – and it occurred to me that I had seen that very same column of figures earlier in the day.  But where?  It suddenly came to me.  I had seen it in a newspaper ad for supersaver air fares from New York to cities all across America. As I recall, the veal-and-radicchio entrée cost as much as a flight from New York to Louisville or any of six equidistant cities.”

As you may have guessed, Savannah was one of those cities. And so it happened that the author John Berendt – who was then living on a reporter’s wages in New York – passed up the fancy food and began to make regular trips to Savannah. His book was financed by cheap air fares.

Of course, our air transport system is responsible for millions of other benefits that most people take for granted. Let’s stop to consider how good – how truly extraordinary – it really is. Our air transport system is:

• remarkably safe
• highly convenient, and
• incredibly cheap

U.S. airlines have consistently maintained an outstanding safety record. Scheduled air travel is far safer than travel by car, bus and rail or – for that matter – private aviation.  As to convenience, while it might be expected that you can fly from New York to virtually anywhere in the world in one day, what is remarkable about our air transport network, is that you can do the same thing from small communities across the nation.

Take the little town of Pasco, a scenic and sun-drenched community of 37,000 people located at the confluence of Columbia, Yakima and Snake rivers in southeastern Washington.  It’s a great place to go to if you enjoy the outdoors, and there are over 50 wineries within a 50-mile radius of the town. In 2004, there were an average of five daily passengers between Pasco and Boston – not enough traffic, obviously, to warrant direct air service between the two cities.  However, there was, and is, abundant and economical one-stop service between them: no fewer seven daily options to choose from that go through the hubs at Denver, Salt Lake City and Seattle, with the price of a roundtrip ticket at less than $500. So, any time of day you want, you can fly into or out of Pasco – connecting with Boston or any other major city.  Little Pasco averages 241 enplanements a day. The town is thriving because it is plugged into the flesh-and-blood / the aluminum-and-jet powered equivalent of the Internet – a networked system that is fast, cheap, and easy to access.

And yes, air travel is cheap. Adjusted for inflation, domestic airfares (net of taxes) have actually dropped 51 percent over the last twenty-five years. That is how much the price of air travel has fallen in the years since John Berendt, the author of “Midnight in the Garden of Good and Evil,” first latched onto those fantastic supersaver bargains. Of course, in the early 80s, Berendt wasn’t able to click onto the Internet to ferret out the lowest fares.  Because of the Internet, as Gerald Grinstein, the chief executive of Delta Air Lines, said recently, competition between the airlines on price has come to resemble “an intersection on a highway that has a gas station on every corner . . . If one is a penny higher, they are going to do less business.”

Grinstein has advocated what he calls “the five-percent solution.”  If airlines could increase their revenues for each passenger by just five percent, they could offset most of the devastating impact of the tremendous surge in oil prices.  Over the past four years, crude oil has tripled in price – going from just under $20 a barrel in 2001 to an average of nearly $60 in 2005. Add in the price of refined jet fuel or “the spread” and we are paying well over $100 a barrel.

But as we have seen time and again over the past few years, airlines have been unable to raise prices or – if they do – to maintain them for any length of time.  “In the current revenue environment,” as Gary Chase at Lehman Brothers has noted, “the industry cannot pass all additional costs along to consumers.”  As a result, despite airline efficiencies fuel and taxes continue to take their toll.

So that brings me to where we are today.  There’s good news and bad news.  As we speak, the United States still has the best air transport system of any country in the world – bar none.  Unfortunately – even tragically – it may not stay that way for long. 

Our air transport system isn’t just hurting; it is being bent to the breaking point as a result of mounting airline losses, soaring fuel prices and badly misguided federal aviation policies.   We are in real danger of losing a large part of one of our most precious assets – being “free,” as Southwest Airlines has proclaimed in its ads, “to move about the country.”  If that happens, it will be a giant step toward reduced competitiveness and long-term economic decline.

We are estimating that U.S. airlines will lose a further $9.5 billion in 2005 – and that is right in line with how much the industry’s bill for jet fuel has gone up in the past few years.  This year’s losses come on the heels of $32.3 in losses from 2001 through 2004.  Taken together, that more than erases the $23 billion in cumulative earnings for the industry from 1995 through 2000.  In fact, it wipes out those earnings almost twice over. 

Does that matter?  As incredible as it sounds (to me, anyway), some of the supposed “experts” will tell you, in all seriousness – “No, it doesn’t matter. The market will sort out the winners and losers.” This viewpoint or argument overlooks a couple of important facts. Number One:  It’s getting harder and harder to find any winners among the nation’s airlines.  Virtually all of them are hurting – the low cost carriers as well as legacy airlines. Even Southwest Airlines would have lost money in 2004 if it hadn’t been able to hedge against increases in the price of jet fuel. 

And Number Two: There is no evidence to support the view that the path to prosperity leads through an accelerated process of bankruptcy and liquidation. We’ve been down this path before. As the recent GAO report pointed out, we’ve already had scores of bankruptcies – with no fewer than 162 bankruptcy filings by airlines between 1978 and 2004. In the GAO’s carefully stated opinion, the elimination of the overwhelming majority of those airlines . . . through liquidation or merger . . . has done nothing – repeat, nothing – to lift the prospects of the surviving carriers. I might add that most of the airlines that have been wiped out were, in fact, low-cost carriers, or LCCs. Unfortunately, in the limbo-limbo land of airline economics, a number of LCCs have gone out of business because – no matter how much they shimmied – they still couldn’t get their costs down to a low enough level to justify their low fares.

Business history offers several examples where falling prices led to an explosion in demand and to rising profits that spurred further investment and growth. You can think of what Henry Ford did in the car industry or what Steve Job and Bill Gates did in personal computers.  But nothing like that is happening in U.S. aviation. Since 2001, total spending on air travel in the U.S. has plummeted – from 0.95 percent of GDP down to 0.72 percent. 

The fact is, even though we have a rising revenue stream, total revenues today are still $30 billion short of where they were before 9/11.  The fact that we have as many or more passengers has been more than offset by the fact that they are paying less for their tickets – and that more and more of what they do pay isn’t going to the airlines at all. If you purchase a typical $200 airplane ticket, $52 out of the $200 goes not to the airline . . . but rather right through it . . . to local, state or federal agencies or authorities.  That makes us one of the most heavily taxed of all industries. Despite the often stated policy that airline security is national security, the airlines and their passengers are being taxed to pay for a raft of new security measures.  As Oliver Wendell Holmes said a long time ago, “The power to tax is the power to destroy.”  Given the number of carriers that are either in bankruptcy or close to it, it’s not too much to say that U.S. airlines are being taxed to death.

Despite all of our problems, I must also tell you that a lot of good things are happening within the industry. Productivity is up more than 25 percent over the past four years.  By any objective measure, U.S. airlines have been extremely aggressive in right-sizing the payroll, modernizing work rules, increasing fuel efficiency, restructuring networks, deploying new technology and taking other steps aimed at filling seats and reducing costs.

But will all of this do any good? Is it too little too late?  Is it even possible to revive the airlines and keep our air transport system from continuing shrinkage and decline?

Because this is an aviation forecasting conference, Mike asked me to look into my crystal ball and answer some of those questions.  Unlike the airlines themselves, I am in the fortunate position of being able to hedge.  I will start by separating out some of unknowns from the knowns, or some of uncertainties from the certainties. Then I’ll comment on some “public policy” issues – leaving the “business case” to the experts in this room.

The major uncertainties are intertwined with one another:

• I really don’t know what the price of jet fuel including the spread is going to be in 2006, 2007 or 2008.
• And I don’t know what the future shape of the industry will be, in terms of the pace of consolidation or the survival or demise of several major or regional carriers. Mike Boyd can forecast that future.
• There is, however, a big question mark hanging over the ability of our air transportation system to continue to provide frequent and high quality service to many small and medium-sized communities.  As Mike Boyd has pointed out in his communiqués, if one or more of the major network carriers go out of business, it is folly to expect that others – either the regional carriers or discount carriers – will come in to fill the void left by the collapse of hub-and-spoke systems.  The little carriers that serve places like Pasco are like the pilot fish that accompany whales in the ocean deep.  Destroy the whales and you destroy the smaller creatures that have evolved to serve them.

Now there are a few things that we do know.  Here, to my way of thinking, are the major certainties:

• There is no reason that the airlines shouldn’t be capable of making a profit.  Why should we be any different than other business in that regard?  We are in the business of providing an essential service.
• But even knowing that, I also know that insanity consists of doing the same thing over and over and expecting to get a different result. Major change is needed. People inside the airline industry have demonstrated their willingness to change.  But that is not enough.  We need to move forward with far-reaching changes in public policies relating to aviation and the airlines.
• I also know that we have a superb opportunity right now for making those kinds of changes.  The reauthorization of the Airport and Airway Trust Fund comes up once every 10 years.  It is coming up again now.  At the Air Transport Association, we are focused on the FY2007 reauthorization as a key opportunity to de-construct existing policy and to re-construct it on sensible lines that will provide not just for the maintenance of our air transport system as it exists today, but for its further growth and improvement.

Here – in brief – are four of the main planks of the campaign that we at the ATA are pursuing in our quest for system-wide improvement.  It is a campaign that will take all of our best efforts not just this year, but continuously over the next several years. 

1. We must reform the fundamental thinking behind the existing trust fund that has historically required the commercial airline industry to pay virtually one hundred percent of expenses, although it is only a consumer of about two-thirds of air traffic services and related infrastructure.  Under the existing structure, literally billions of dollars are being diverted from commercial aviation.  This forced subsidy must end if we are to start to restore the health of the commercial industry.
2. At the same time, we must provide the FAA with the mandate, the authority and the resources to move rapidly to the satellite-based air traffic management system I mentioned earlier.  As consolidation and modernization bring efficiencies, we must also see the results reflect themselves in dramatically reduced system costs.  With these responsibilities, we must insist too on real accountability from the government.
3. While we embrace the logic that consumers of true government services – services that are efficiently provided – should expect to pay for those services, we reject the idea that this excuses passing on expenses for unrelated public policy goals to the commercial airlines.  For example, there is no justification for the billion dollar annual subsidy we pay to support non-commercial airports.  This type of public policy goal must be acknowledged for what it is – and be supported from General Fund tax dollars.
4. On the subject of General Fund support, we agree emphatically that the massive public good derived from commercial aviation more that justifies greater public investment in aviation.  By the same token, the General Fund should be the source of support for protection against aviation terrorism – just as it supports other national defense priorities.

Bottom line: In 2005 we estimate that the airline industry will bear a $16 billion tax and fee burden in support of the government.  Unless we begin making dramatic changes, and the 2007 Trust Fund reauthorization is a great place to focus, this massive burden will continue to undermine not only our industry, but also our nation’s economic and overall well being.

Those are the top-priority items on our legislative agenda.  And none are “bail-outs.”

One of the benefits of conferences like this one is that it pulls together people from across the aviation community – including airlines, airports, airplane manufacturers and other suppliers, and one or two of our best-known aviation gurus.  That is why I jumped at the opportunity to address this group. 

It really is Midnight . . . the witching hour . . . for our industry. We are caught between conflicting forces – some good and some bad.  At this exact time, it is impossible to say whether our nation’s air transport system will continue to be the best in the world, or whether it will continue in a state of decline.

There is a massive job to be done in educating Congress and the public at large and convincing them of the need for change. It requires all of our efforts. The stakes have never been higher than they are today.  So let us come together in fighting the good fight for a revived and improved air transport system. 

Thank you.