James C. May, President and CEO
Air Transport Association of America
Address to the ABA Forum on Air & Space Law
Washington, D.C.
March 10, 2005
I’d like to begin by recalling a quote from Winston Churchill. It was autumn, 1936. Hitler had renounced the Versailles Treaty. He had sent a powerful army into the Rhineland, built a gigantic air force and commenced building a large submarine fleet. And how had the gravely threatened British government responded? As Churchill noted, it was studying the situation. These were his exact words:
“The First Lord of the Admiralty said in his speech the other night, ‘We are always reviewing the position.’ Everything, he assured us, is entirely fluid. I am sure that that is true. Anyone can see what the position is. The Government simply cannot make up their minds, or they cannot get the Prime Minister to make up his mind. So they go on in strange paradox, decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity. So we go on preparing more months and years . . . for the locusts to eat.”
Later on in the same speech, Churchill noted: “The era of procrastination, of half-measures . . . of delays, is coming to its close. In its place we are entering a period of consequences.
I believe that we have reached a similar stage in the making – or unmaking – of our air transport system. After months and years of half-measures and delays, we are entering a period of extreme consequence.
For three quarters of a century, the United States has had the best air transport system in the world. And we have reaped enormous economic and societal benefits. Just try to imagine our just-in-time economy without it. Think of how different our country would be if it were as difficult to fly from Chicago to Seattle as it now is to fly from St. Petersburg to Novosibirsk – the second- and third-largest cities in Russia.
While the distances are about the same, the difference would mean going from 19 nonstop flights per day to zero – and with no same-day connecting service. Surely we would be a much poorer country if that were the case. But our air transport system is rapidly eroding as we speak.
I am not suggesting that it is going to disappear – as did the passenger-carrying railroads of a different era. But I do suggest our nation is in grave danger of winding up with a second-rate air transport system compared with other nations of the world. And if that happens, it would be a giant step toward reduced competitiveness and long-term economic decline.
Most people focus on a single aspect of the problem. They look no further than the airlines. However, despite the fact that load factors reached an all-time high, U.S. airlines lost an estimated $10 billion in 2004, following losses of more than $23 billion in the three previous years. Five large U.S. airlines are fighting to emerge from bankruptcy, and a number of smaller carriers have already liquidated. A lot of people say: If the airlines can’t make money flying full – or nearly full – then they don’t deserve to stay in business. Let the market do its job in sorting out the winners and losers.
I regard that view of the situation as simplistic and part of the problem. It reminds me of the attitude of the townspeople in the classic Western – "High Noon". They know that a gang of bad guys is coming to town – the same gang that terrorized the town a few years earlier. But none of the townspeople will lift a finger to help the sheriff confront the killers. Security’s not our problem, they say; it’s the sheriff’s problem. If he’s killed defending the town, that’s too bad, but it’s his job. And many of the townspeople urge the sheriff and his young bride to get out of town. They think, simplistically, that if he goes away, the problem that is staring them in the face will go away, too. And – as I see it – that is very akin to the idea that all we have to do to resolve the so-called “airline crisis” is to allow a few of the biggest carriers to disappear from the face of the earth.
If U.S. airlines are in trouble – and they certainly are – we need to look at the roles played by all of the stakeholders. We need to look at the action or inaction of others who also have a vital stake in our air transport system. Maybe – just maybe – there’s a submerged element of shared responsibility in this drama.
In this case, the townspeople include the DOT, the FAA, the Department of Homeland Security, the Transportation Security Administration, Immigration and Customs Enforcement, Customs and Border Protection, municipal and state airport authorities all over the country, facets of the business aviation community, and Congress.
The U.S. airline industry isn’t asking for subsidies. We aren’t asking for a bailout. What we are asking for is a common-sense holistic tax and regulatory policy.
The time has come to fashion a new paradigm and relieve the industry from a crippling tax regime that has no parallel in any other mode of transport or sector of the economy. We are asking for greater freedom from antiquated and unworkable rules and regulations that prevent our members from responding to market forces. Finally, and most fundamentally, we are asking for something more than willful ignorance and neglect on the part of our partners in the nation’s air transport system.
One of the first people to bail out in “High Noon” is the town’s judge. Although he says there’s “no time for a lesson in civics,” he does indeed deliver a harsh lesson in civics while cleaning out his office and packing the flag and his miniature scale of justice into his saddlebags. He tells of how the citizens of Athens had opened their gates to a returning tyrant and stood by while he and his band of mercenaries executed the city fathers. In a less cynical spirit, it may be useful for me to review a bit of history relating to the evolution of our air transport system. How did we get to where we are today in terms of shared responsibility for our air transport system?
In 1972, taxes and fees amounted to 7 percent of the total cost of a $200 round-trip air ticket in the U.S. That number has grown, and in the past couple of years, due to higher passenger facility charges and the introduction of the 9/11 fee, it is up to 26 percent. If you purchase a typical $200 ticket, $52 out of the $200 goes not to the airline . . . but rather through it . . . to local, state or federal agencies or authorities.
We acknowledge that a portion of that $52 funds valuable FAA and airport services, but an awfully large percentage pays unrelated expenses, simply because it is easy to tax airlines and their customers. Imagine what would happen at Christmastime if our government decided to impose a 26 percent tax on all retail sales. You would see the bleakest and most cheerless holiday season of all time. Yet that is exactly the situation confronting our airlines today. And it is a mistake to think that only the “legacy” or network carriers are suffering as a result. Virtually all of the airlines are struggling to make a profit, including Southwest. As it has publicly acknowledged, Southwest would have wound up in the red in 2004 had it not been able to hedge against the rising price of jet fuel.
The current administration has been very clear about needing to reduce taxes to get the economy moving. As the president himself has said, “If you want something to flourish, don’t tax it.” Or, as Treasury Secretary Snow has said, “Economics tells us that anything you tax, you get less of.” And Alan Greenspan made the same point just the other day saying, “Any tax increase inhibits economic activity in one way or another. Whatever you tax, you get less of.”
But unfortunately, with respect to aviation, the administration is ignoring its own advice. The president’s Fiscal Year 2006 budget proposes to increase the September 11th Passenger Security Fee by $1.5 billion, raising our annual tax contribution to more than $17 billion from the current level of $15.8 billion. This is a potentially lethal tax. If implemented, it will kill jobs and further rob U.S. airlines of vital revenue needed to restore their financial health and stability.
Historically, spending on air travel in the U.S. has fluctuated in a narrow band between 0.9 and 1.0 percent of GDP. However, since 2001, spending on air travel has plummeted to just 0.7 percent of GDP. That’s seven-tenths of a penny for every dollar of GDP.
What does that tell us?
It tells us that the flying public is more price-sensitive than ever, and that we have taxed air travel to the point where we are getting less of it. Proving the president’s point. Simply, every dollar in new tax is a dollar lost in potential revenue.
But what about the polls that say, “Most Americans would gladly pay a few extra dollars to feel safe and secure when they get on an airplane”?
Doug Steenland, the CEO of Northwest Airlines, answered that very well when he said: “What is wrong with that thought is that it assumes that every person is going to buy a ticket and get on the airplane. . . Congress can pass the security legislation it believes is most appropriate, but it cannot repeal the laws of economics, and, most especially, it cannot waive the price elasticity of demand. For every dollar the ticket price goes up, somebody decides to drive, to use the phone instead, or just not go at all. Our customers have other choices. They can do business by phone, videoconference, or by Internet. They can drive (or) they can stay home.”
And as Mr. Steenland further noted, even though – over the years – the airlines have steadily reduced the portion of your ticket that they keep, the portion of the price government keeps has gone up – dramatically.
Put bluntly, current tax policies are crippling one of the key drivers of growth in our global and mobile society. But I would not want to single out the Bush administration for special criticism on this score.
The fact is the arbitrary use or mis-use of the airlines as a tax-collection agency has a long history. It has been a convenient and stealthy substitute for more open and efficient means of raising revenues or spending limited resources.
When the FAA was first established in 1958, it was funded out of general revenues. About a decade later, its mandate was expanded and an aviation trust fund – financed by a tax on air tickets and cargo shipments – was established for the purpose (then the sole purpose) of financing certain capital improvements, such as new runways. However, the original logic of tying the trust fund dollars to capital improvements that would provide direct benefits to the airlines and the flying public went out the window years ago.
Today the airlines pay $11 billion a year into the trust fund, and what do we get in return? Certainly not services worth anything approaching that amount. About $6.5 billion goes into financing the FAA operating budget – not its capital budget. And a large chunk of that goes into services for general aviation – the operation of private planes or corporate jets – as opposed to scheduled air service.
Since 9/11, despite the stated policy that aviation security is national security; the new Transportation Security Administration and the Department of Homeland Security have become the latest agencies to turn to the airlines as their private tax-collection service. They want the airlines to collect a tax to fund the whole gamut of new security mandates.
Under present circumstances, this is like handing us a shovel and asking us to dig our own grave. In today’s marketplace, with fierce competition between airlines on virtually every route, longer lines at airport checkpoints and the emergence of the Internet as a distribution channel that provides unprecedented pricing transparency to the consumer, it is nearly impossible for the airlines to pass along any cost increase to their customers. We saw that with last year’s run-up in the price of oil. It added $6.2 billion to airline fuel costs versus 2003, over 60 percent of the industry’s estimated loss.
In the two years that I have served as president of the Air Transport Association of America, one of the hardest parts of my job has been to try to explain to people how in the world the airlines could be flying full planes and still losing money.
As a short answer, I sometimes say, “Yeah, the planes are full . . . they are full of cheap seats and expensive fuel.” While that answer is okay as far as it goes, I’m sure it still leaves many people thinking that airline mismanagement or incompetence must somehow be at the root of the problem. But that, most certainly, is not the case.
By any objective measure, U.S. airlines have been extremely aggressive in right-sizing payrolls, modernizing work rules, parking planes, increasing fuel efficiency, restructuring networks, deploying technology and taking other steps aimed at filling seats and reducing costs.
The legacy carriers reduced capital expenditures from $13.1 billion in 2000 to just $2.8 billion in 2003. They also have narrowed the labor-cost gap to their low-cost brethren. Pilots at United, for example, agreed to a 30 percent pay cut over three years and Delta pilots agreed to cuts totaling 32.5 percent.
So, if you want to put your finger on one of the leading causes of the decline in the business of transporting people by air, you need look no further than the matrix of misguided taxes and fees that have been imposed on the airlines over the years. The tax on air travel rivals taxes on tobacco and alcohol – the so-called “sin taxes.” Because we are taxing air travel more, we are getting less of it . . . and the quality of our air transport system is in a state of real decline.
That, my friends, is the painful truth. So what can we do about it?
Let’s begin by recognizing the urgency of the situation and the need for collective action on a variety of fronts, because ladies and gentlemen, I am here to tell you that it is High Noon in the aviation industry.
In the movie of that name, there is a growing sense of urgency that comes with the knowledge that the sheriff has less than an hour and a half to round up special deputies before the leader of the gang arrives on the noon train. As the sheriff makes his rounds – going to homes of friends, to the saloon and finally the church where most of townspeople are gathered for Sunday service – we see multiple shots of clocks reminding us of the passage of time and the closing of the window of opportunity for support or assistance before the final showdown occurs.
And by the way, with $55 oil, the showdown is closer than you think.
I hope and believe that we will be more successful in making common cause with our partners on the Hill, and in all the other places where you would expect to find people who are deeply concerned about the future of our air transport system.
We have a very good idea of what needs to be done to get back to where the air transport system in the U.S. represents a major plus for U.S. competitiveness – and not, as it is today, a looming weakness.
Here – in brief – are the main planks of the campaign that we at ATA are pursuing in our quest for system-wide improvement. It is a campaign that will take up all of our best efforts not just this year, but continuously over the next several years.
- First and foremost…Have Congress kill the $1.5 billion security tax.
- Treat airline and airport security as national security. There is no justification for putting the onus of taxation for national security on just the airlines and their customers. As Senator Daniel Inouye recently wrote in The Hill, “There is not enough money in the world to guarantee security outright, but Congress and the president can set priorities, create budgets and allocate the limited funding we have in ways that reflect our national commitments. Transportation security is now equivalent to national defense. We cannot nickel-and-dime it, nor can we expect industry to pick up the tab.”
- Reformulate the Airport and Airway Trust Fund when it expires on September 30, 2007, in an equitable, cost-based manner. The fund, which was created to maintain and enhance aviation infrastructure, is now being used to provide a majority of the funding for FAA operations, thus relieving the general revenue fund of that requirement. As a result, the system capacity that we need is not available.
- Improve our aviation infrastructure. At the top of the list of needed improvements is a satellite-based air traffic control system. The present system, based on ground-based radars, is antiquated and inefficient. Everyone knows that. It is time to stop studying the problem, to take action, and to be certain the Air Traffic Organization has the power and the resources to strive for efficiency. This is one area where the United States should take the lead in building the infrastructure for an air transport system that the rest of the world will want to emulate.
- Allow deregulation to fully run its course. The government should give airlines greater freedom to achieve the mass or the economies of scale that are needed for survival. The Air France buy-out of KLM – a bold move that has won acceptance in Europe – is a harbinger of change. Our own government should not prevent similar consolidation within the U.S. airline industry. With the continuing trend to open skies, industry consolidation (with the possibility of substantial foreign ownership) will help our industry to compete not just nationally, but also globally.
- And finally, oil. Treasury Secretary John Snow recently said that energy prices are "way too high" and act like a tax on the economy. How much longer will we continue to help OPEC, when their actions are killing this industry? We look to the administration to signal that $55-$60 oil is unacceptable. While we certainly do not dismiss the role of soaring demand in China and elsewhere – the weak dollar, geopolitical disruptions and the rise of speculative investment – we cannot simply sit idle “waiting for the locusts to eat”, as every penny increase in the price of jet fuel burdens us with an additional $187 million in annual expenses.
Those are the top-priority items on our agenda. And, as you can see, we are not asking for any kind of a “bailout.”
We know that there is no one “silver bullet” that will save U.S. airlines that are in, or threatened with, bankruptcy.
And we know we must do our part. Fortunately, all across the airline industry, people have recognized and are facing up to the need for change. But now it is time for our friends and partners in the public sector to do the same.
It’s time to stop studying the crisis afflicting our airlines and time to start doing something about it. We cannot have a healthy economy without having a healthy air transport system, and we can’t have that without having healthy airlines. Today our airlines stand alone in bearing a crushing tax burden. They are further hobbled by unwise regulations and by aging and inadequate infrastructure. Others in the public sector must step forward to help resolve these issues.
Unduly high taxes, unworkable regulations, poorly conceived security mandates, airport hassles and the inefficient use of limited human and fiscal resources by Federal bureaucracies must not be allowed to replace the marketplace as the catalyst for change.
Making the nation’s airlines well again should be an urgent national priority.