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Basil Barimo, Vice President Operations & Safety
Air Transport Association of America
Address to the Maintenance, Repair and Overhaul Conference
Lake Grapevine, Texas
April 20, 2005
Thank you for that introduction and thank you all for joining us for our 10th annual MRO conference. Unfortunately, Jim May could not be here, but sends his warm regards.
The Air Transport Association has been proud to co-sponsor this event with Aviation Week, and today, I’d like to share some insights on the issues ATA is addressing in Washington, D.C. that affect each of us in the airline industry.
But first, I thought I would be interesting to look back 10 years ago when the first MRO conference was held.
Ten years ago, Microsoft rolled out Windows 95, the media buzzed with excitement about something called the Internet, and a presidential advisory council was formed to address a growing concern that most kids only had a passing acquaintance with computers.
Ten years ago, Congress repealed the 55 mile-per-hour speed limit, citing plentiful oil and low fuel prices.
How times change. And as everyone in this room knows, the airline industry has experienced its share of change during the past decade. We’ve had to adapt to new technologies, to changes in the marketplace, and to factors outside our control like fuel prices.
However, one thing holds true both then and now: MROs are vital partners that help airlines manage costs and maintain the best safety record of any mode of transportation in the world. Yes, MROs are getting a lot of press these days. Unfortunately, it’s not well-deserved accolades for helping to drive our industry’s exceptional safety record.
Again, looking back 10 years ago. Then, airlines were paying on average about 56 cents per gallon for jet fuel. Now, the price has nearly tripled to $1.60 per gallon.
In response, the industry has continued to minimize fuel consumption, though operational changes like onboard weight reduction, single-engine taxi, fleet and engine renewal, and minimized APU usage at the gate. Unfortunately, these smart business decisions barely make a dent in our overwhelming financial crisis.
U.S. airlines have lost $33 billion over the past four years, including a whopping $9 billion last year – on top of that, nearly 130,000 jobs have been cut.
Clearly, the U.S. airlines are in trouble, and perhaps its time again to look back even more than 10 years to examine just how we got into this crisis.
In 1972, taxes and fees amounted to 7 percent of the total cost of a $200 round-trip air ticket in the U.S.
Since then, that percentage has steadily grown, and taxes and fees now represent 26 percent of that same ticket.
In specific terms, if you purchase a typical $200 ticket, $52 out of the $200 goes not to the airline, but through the airline to local, state or federal agencies.
It’s true 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. This tax system affects airlines one-and-all.
Virtually all of the airlines are struggling to make a profit, including Southwest which recently acknowledged that had it not been able to hedge against the rising price of jet fuel, it too would have posted a loss for 2004. One puzzling area of concern comes from the current administration, which 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.”
Unfortunately, with respect to airlines, the administration is ignoring its own advice.
The president’s Fiscal Year 2006 budget proposal included a $2 billion increase in the 9/11 security tax, which would raise our annual tax contribution to more than $17 billion.
If implemented, this tax will kill jobs and further rob U.S. airlines of vital revenue needed to restore their financial health and stability.
To add insult to injury, this tax comes at a time when the flying public is more price-sensitive than ever.
In response to weak demand, airlines have had to steadily reduce the portion of the ticket price they keep. In today’s marketplace, it is nearly impossible to pass along any cost increase to passengers – 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.
Put bluntly, current tax policies are crippling one of the key drivers of growth in our global and mobile society.
But getting to this state is not solely the fault of the Bush or previous administrations.
The arbitrary use or misuse of the airlines as a tax-collection agency has a long history.
Let’s keep looking back. When the FAA was first established in 1958, it was funded entirely 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 sole purpose of financing capital improvements such as new runways.
In FY06, the airlines will pay nearly $11 billion into the trust fund. And a large chunk of that goes to services for general aviation – the operation of private planes or corporate jets – as opposed to scheduled air service. In fact, our preliminary analysis suggests that we may be receiving as little as $6 billion in value for that $11 billion investment.
Since 9/11, the 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.
One of our toughest jobs at ATA is to try to explain to people how in the world the airlines could be flying full planes and still losing money.
Simply stated: Planes are full, but they are full of cheap seats and expensive fuel.
By any measure, U.S. airlines have been extremely aggressive in cost cutting, including the operational measures I mentioned earlier.
Carriers have reduced capital expenditures from $13.1 billion in 2000 to just $3.1 billion in 2004 – excluding fuel, unit costs are at their lowest level since 2000.
So, if we examine what has brought us to this crisis state, we need look no further than the matrix of misguided taxes and fees imposed on the airlines over the years.
You’ve heard the comparison between the taxes on air travel and the taxes on tobacco and alcohol – the so-called “sin taxes.”
The result is the same.
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. So what can we do about it?
Let’s begin by recognizing the urgency of the situation – particularly with $55 oil – and the need for collective action on a variety of fronts.
First and foremost…Congress should kill the $2 billion security tax. Airline and airport security is national security. There is no justification for putting the onus of taxation for national security on just the airlines and their customers.
Second…Reformulate the Airport and Airway Trust Fund when it expires on September 30, 2007, in an equitable, cost-based manner. The fund created to enhance aviation infrastructure, is now being used to provide a majority of the funding for FAA operations.
Third… Improve our aviation infrastructure. We need a satellite-based air traffic control system to replace the inefficient, antiquated ground-based radar system of today.
Fourth…allow deregulation to fully run its course. The government should give airlines greater freedom to access foreign capital and achieve the economies of scale that are needed for survival.
And finally, oil. The government cannot simply sit idle while every penny increase in the price of jet fuel burdens us with an additional $187 million in annual expenses.
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 healthy airlines.
Making the nation’s airlines well again should be an urgent national priority.
Thank you.
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