James C. May, President and CEO
Air Transport Association of America
FAA Forecasting Conference
March 25, 2004
Greetings everyone. I am delighted to be here. As many of you may know, I am a first- time participant at this FAA forecasting conference. I believe it’s critically important to reflect on the state of commercial aviation today, and I thank you for the opportunity. I am also delighted to be in the company of my fellow panelists who have a rich history in this great industry.
Let’s begin with a little context. Commercial aviation is a prime driver of the U.S. economy. We employ about 600,000 people today and generate more than $100 billion in annual revenue. We also are at the center of America’s just-in-time economy, broadly responsible for more than 10 million U.S. jobs in the U.S. travel and tourism industry and more than 8 percent of U.S. GDP.
Put another way, as the health of airline industry goes, so goes the health of the U.S. economy. As we enter 2004, we leave one of the most cataclysmic periods that any industry has ever faced: 9/11, SARS, the downturn in the U.S. economy, the Iraq War are just a few of the events that have shaped our recent history. In response, in the last two years, U.S. airlines cut more than $10 billion in annual costs and more than 140,000 jobs. Scrutinizing and reducing every major cost center, as well as improving operations and introducing productivity savings. And, our job is far from over. We need to continue to economize in every phase of the business.
The forecast is that U.S. carriers remain in a fragile, but improving operating environment. The industry managed to cut its losses in half, from about $11 billion in 2002 to $4 billion in 2003 -- aided by a partial one-time reimbursement of $2.4 billion in security costs. Industry experts say demand is somewhat better, but is coming back in smaller, more measured increments. Volumes are improving but yields remain weak – 18% below early 2001. If this FAA conference had been held in January, I would have said that despite the challenging environment, we were modestly optimistic. Many Wall Street analysts saw air travel picking up and were bold enough to predict breakeven or modest profits in 2004.
But now in March 2004, world energy markets are in turmoil. Driven by OPEC cutbacks, increased energy demands in greater Asia, and the lower buying power of the U.S. dollar, oil prices are topping $38 per barrel. And they are expected to be above $35 for the rest of the year.
Many Wall Street analysts have lowered their U.S. carrier forecasts based on predictions of record-high oil prices. It is higher fuel prices and the lack of pricing power that have driven these lowered forecasts. Let me cite two examples. Last week, UBS analyst Sam Buttrick widened his industry loss forecast from $500 million to $2.3 billion. Similarly, Ray Neidl of Blaylock & Partners suggested high fuel prices today jeopardize any hope for industry profitability in 2004. Neidl said "If fuel prices stay at current levels and airlines cannot pass these fuel costs on to consumers…then the industry will not return to profitability this year."
Air carriers are operating in an intensely competitive environment, which is reshaping industry business models. We expect more consolidation as an industry and the government needs to permit these market forces to work. We are operating in a global economy and policy-makers must treat aviation accordingly. The federal government’s enthusiasm and efforts to liberalize/deregulate international aviation should be equally applied to the U.S. domestic marketplace.
That said, let’s review some of the challenges we face.
Fuel Expenses
Airlines are doing everything possible to minimize consumption (i.e., onboard weight reduction, single-engine taxi, newer fleet/engine mix, optimal routings, and minimized APU usage at gates).
When cash is available and the gamble makes sense, we hedge. But today’s prices, at about $37 a barrel are killing the industry. There is not much we can do with the weak dollar, production in OPEC, demand in China and supply disruptions in Venezuela.
We believe the federal government’s current policy of filling the Strategic Petroleum Reserve (SPR) is unnecessarily inflating the price of oil $2-6 per barrel. We believe a go-slow approach is required when oil prices top $30 per barrel. There is some precedent for this type of action and it would cost the federal government absolutely nothing to implement. Zero. Zip.
Every dollar increase in the price of oil adds $425 million in industry expenses, money that CANNOT be reinvested in jobs and other capital improvements.
If you look at recent oil increases, then 4 dollars X $425M = $1.7B = 21K jobs. There is no certainty individual airlines would hire more people, but the math is clear. Simply put, fuel is an essential component of our just-in-economy, and today’s prices are stifling growth. And, we are not alone. The U.S economy is lubricated by oil. From airlines to truckers to rail…from small business to agriculture, our economic growth is being stifled by high oil prices. It is essential that our government do all in its power to drive those prices down.
Security
Now, let me just touch on the security challenge we face – while security is no longer an issue which directly involves the FAA, it’s clearly central to the future of U.S. aviation. Handled poorly, it is a growth killer.
Honestly, this is a challenge facing our entire society. How do we provide an essential level of security – effectively and efficiently – and still keep air transportation inviting to the public? And for that matter, rail and ports as well.
There is no one answer and no simple answer.
Fact is, it involves close, daily cooperation between the government, the airlines and the airports on hundreds, if not thousands, of issues.
That is a process we are still working to make seamless. We have a way to go.
The next real test on the horizon is going to come this summer. We need to have the plans in place to move vacation travelers through our airports without a return of the “Airport Security Delays” headlines and hour long lines.
Admiral Stone and his team at TSA have indicated a willingness to work out the details, with airline and airport input applied against TSA’s staffing resources. Officials at the DHS are cooperating.
But the time for talk is over. We now need to get busy and get it done.
Longer term, issues like inline screening, Cargo security, Registered Traveler, CAPPS II, TWOV, U.S. Visit and a multitude of automation and information innovations will have a role to play – but, to mix my metaphors – we have to walk before we can run so people will continue to fly. We must focus on getting through the challenges of the next few months, to keep delays to a minimum while providing appropriate screening, and while looking to new technologies down the road.
And, let’s not forget that security is a fundamental function of National Defense and is a responsibility of the federal government. Simply put, we cannot reverse our losses while continuing to pay north of $3 Billion annually for unfunded security mandates.
Taxes and Fees
Meanwhile, airlines remain among the most heavily federally taxed industries in America. Customers pay more federal taxes to fly today than consumers pay to buy alcohol, tobacco or gasoline. At the same time, the average cost per mile is less than 12 cents, which is about the same as it was in 1987.
We believe Congress and the federal government should consider reform measures that restore some tax equity.
We need tax and fee reform that imposes only justifiable burdens on the commercial aviation industry.
We need tax and fee reform that removes national defense security burdens from airlines and their customers.
We also need tax and fee reform that evenly spreads airport and air traffic management costs among all system users, including general aviation.
We are not looking for special consideration. Government at all levels must recognize that certain costs must be shared by ALL who benefit from aviation.
Airport Agenda
Our next challenge involves our friends and partners in the Airport community. And I don’t use the term “partner” lightly. We have a symbiotic relationship. We depend on one another. A very recent example of cooperative action involves trying to solve the summer traffic issue which was initiated just yesterday. But there must be a recognition that we are living in trying times. I am concerned that too often, too much emphasis is placed on “winning control” by the airports and their associations; little or no recognition that their destiny (along with a major portion of the economy) depends upon establishing a strong, vibrant, economically successful airline industry.
The history of airport spending is rich with examples of the "edifice complex.” Too much money placed on design over function. Instead, a better focus should have been tying improvements to more capacity, less traffic congestion or improved safety. Over the past several years, it is fair to say that expectations have been adjusted and many airports have shown restraint in revising their plans to reflect the new budget realities.
Unfortunately, some airport operators, such as LAX, still don't get it. We need to work toward an airport/airline relationship that ties every dollar spent on airports toward real improvements.
DOT should use its authority and position to help ensure that airport development enhances the national air traffic and air space systems, and does not further hinder the recovery of the airline industry.
Operations/Air Traffic Management
Our next challenge involves ATM. The good news is that traffic is approaching pre 9/11 levels, and has already surpassed them at some locations. But, demand for airspace will soon exceed capacity. It’s a situation that requires immediate attention and action.
We’re pleased that the FAA’s air traffic organization, led by Russ Chew, is stepping up to the challenge. Growth without Gridlock and other efforts to accelerate runway construction are positive steps, and we will continue to collaborate on capacity issues. We salute the leadership at the FAA and DOT. They have been good partners on safety and air traffic management.
In particular, a lot of effort has gone into improving aircraft flows across the skies this summer. And we thank the Secretary for his leadership. We're concerned though, that a shortage of security screeners could create bottlenecks at many airports … adding to the traveler hassle-factor that we're trying hard to eliminate. I was pleased that the FAA Administrator Blakely raised this issue in her speech this morning.
Other initiatives can be taken at low cost and high return, including:
- Required Navigation Performance (RNP): increases airport arrival/departure rates; needs wider implementation.
- Domestic Reduced Vertical Separation Minima (DRVSM): increases enroute airspace capacity for little cost.
- Express lanes in the airspace between major business centers: traditional air traffic routes are sometimes inefficient.
- We need to really examine the historic first come/first serve concept of handling airport traffic. Does it serve the most people in the best manner?
Artificially restricting capacity through so-called “demand management” is not an acceptable alternative. It simply masks a failure to meet demands for service.
DOT, FAA and the government in general should actively support the industry’s recovery, particularly when it can take no-cost or low-cost actions, and avoid discretionary imposition of costs/regulatory burdens.
We know, perhaps better than anyone that money is tight and tough decisions have to be made about where to spend it. In the end, FAA needs a fully funded F&E budget to grow capacity.
Conclusion
I’ve gone on too long, so let me take a moment to summarize. Our industry is critical to the U.S. economy. We are in a fragile time in our history. On the verge of recovery from a truly “Perfect Storm”. But in the face of high oil prices, a lack of tax equity, burdensome security implementation affecting summer traffic, a need for innovative ATM concepts and a necessarily improved relationship with our airport partners that recovery is in peril. We have the chance to return to this conference in 2005 with rosy forecasts. But it will take hard work, cooperation and an understanding by our government that the health of the airlines is in many ways a metaphor for the health of the economy.