James C. May, President and CEO
Air Transport Association of America
to the Wings Club of New York
June 21, 2005
Thank you and greetings, everyone. It’s great to be here. I have been looking forward to this opportunity to address The Wings Club. There is no greater forum for discussing flight . . . and the business of flight – whether it is in the making of airplanes . . . or the financing of them; fleet management . . . or yield management; the provision of spares . . . or the securitization of spares. There are many different ways of pushing the envelope – in making the best use of human and material resources, technology and cash.
Where I come from – which is to say, Washington, D. C. – people do not always appreciate the fact that businesses exist in order to make a profit. But I know that there is a different attitude in New York, as the world’s leading financial center and one of the great hubs of global commerce.
There are all sorts of positives to talk about in discussing the airline business today. It’s not all gloom and doom. People are flying again in greater numbers than ever. The biggest airlines have made and are making great progress in cutting costs and restructuring labor contracts. With just a modest improvement in revenue per passenger, most airlines would be tantalizing close to break-even.
More than just reviewing the current state of the airline business, however, I am here to enlist your support in making changes to public policies that are harmful to the industry and contrary to the best interests of everyone who has a stake in the long-term health and vitality of our air transport system, most especially including the traveling public. As I see it, with the upcoming legislation to reauthorize FAA, we have an opportunity to make much needed changes that will secure the future growth and prosperity of our air transport system for many years to come.
What I have to propose is not “rocket science.” It is not some sort of a “bail out.” But it does involve the common-sense application of some familiar principles.
If you want to increase the payload that an aircraft is able to deliver, you look for ways to reduce weight and drag, and to increase lift and thrust. And that is exactly what we need to do to put the U.S. airline industry on a path of sustained growth and profitability.
First, we must eliminate the weight and drag caused by excessive taxes and regulation. We need relief from a crushing burden of taxes and fees that is without parallel in the rest of American business and industry. And then, to increase lift and thrust, we need to apply the same space-age technology that is commonly used in other industries to make better use of airline and airport assets through the creation of a new air traffic system. Our antiquated air traffic control system, based on ground-based radars, should be retired to the Smithsonian – where it can be admired as one of the marvels of 1950s technology. We must proceed swiftly and purposely with the creation of a new satellite-based system – one that will reduce costs, relieve congestion, optimize traffic flow and open up new airspace for future growth.
Let me begin by setting out two sets of facts. One is very much in contrast to the other. Together they describe where we are now, which is in a state of profound uncertainty and disequilibrium that won’t last forever. One way or another, for better or worse, it is a contradiction or disconnect that will be played out over the next several years.
First is the dire financial condition of the nation’s airlines as a whole. Of course, rising fuel costs are partly responsible for that – adding $8 billion in expenses in 2004 compared with 2002. But the fact remains: Three years into an economic recovery, U.S. airlines as a group are still experiencing heavy losses, despite comprehensive cost-cutting and impressive gains in productivity. What’s more – to dispel a popular misconception – the pain extends beyond the so-called legacy carriers. Even the low-cost carriers are far from robustly profitable.
That brings me to my second set of facts. Despite the losses incurred by most carriers, our air transport system – to most people – doesn’t appear to be sick. Indeed, for millions of people, it continues to perform a daily miracle. It delivers tremendous value day in and day out.
Without a doubt, our air transportation system is:
- remarkably safe
- incredibly convenient, and
- incredibly cheap.
U.S. airlines have consistently maintained an outstanding safety and security record. In 2004, the National Transportation Safety Board reported only one fatal accident in 10.5 million scheduled departures. As to convenience, while it might be expected in New York that you can get 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 virtually anywhere in the entire country. As to price – any way you want to measure it – air travel within the U.S. represents a great bargain. Adjusted for inflation, domestic airfares (net of taxes) have actually dropped 51 percent over the last twenty five years.
The fact remains, however, we are in a highly unstable situation – one that reminds me of the ability of cartoon figures to defy the law of gravity when racing off the side of a cliff. According to an unwritten law of physics that applies only to cartoons, an object that is suspended in space tends to remain that way until acted upon by fear. For our part, we cannot expect airlines to remain in a state of suspended animation – losing money hand over fist while continuing to provide cheap fares and the ease and convenience of frequent service to big cities and small towns across the United States. Like Wile E. Coyote in the old Roadrunner cartoons, if we look down we may suddenly discover that we are in free fall.
As a matter of fact, our air transport system is already in a state of measurable decline. Historically, spending on air travel has fluctuated within a narrow band between 0.90 and 1.0 percent of U.S. GDP. Over the past four years, however, it has plummeted to just 0.7 percent. That’s big. It represents $29 billion in lost revenues per year.
Even though people are filling up more airplane seats, they are spending less on air travel. Yes, that’s partly due to cheap fares and the impact of Internet price comparison; but it’s also due to people exercising other options – choosing to drive, to stay home, or to do business by phone or over the Internet. We have clear evidence that more and more people are choosing not to fly. Since 2000, there has been a sharp drop in short-haul domestic travel by plane. What’s more, recent gains in en-TRAIN-ments have outpaced gains in en-PLANE-ments.
The current administration has been very clear about needing to reduce taxes in order to get the economy moving. In the words of Alan Greenspan – “Any tax increase inhibits activity. Whatever you tax, you get less of.” Or as the president himself put it, “If you want something to flourish, don’t tax it.”
Unfortunately, in its aviation policies, the administration is ignoring its own advice. The president’s Fiscal Year 2006 budget proposes to increase special taxes and fees on airlines by $1.5 billion, raising our annual total to $17 billion. Thankfully, Congress disagreed. But, this is yet another recent example of the way aviation is treated as a “cash cow.” And this philosophy is not limited to the U.S. Some in Europe would tax aviation, including U.S. airlines, to fund economic assistance to African nations.
In 1972, taxes and fees amounted to 7 percent of the total cost of a typical $200 round-trip air ticket in the U.S. That number has gotten larger and larger over time. And it has really taken off in the past couple of years, due to security measures. So now 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. Now we all know that the price of laptop computers has been coming down. Does that mean we should jack up the tax on laptops until many people stopped buying them? Can you imagine the howls of anguish from Dell and Apple if the government decided to impose a 26 percent tax on anyone who bought a laptop? Don’t you think businesses and schools would be up in arms against a tax that discouraged the growth of knowledge and productivity? To repeat what Chairman Greenspan said: “Whatever you tax, you get less of.”
In addition to excessive taxation, the industry has been slammed by skyrocketing fuel prices that, like our friend Wile E. Coyote, defy the laws of gravity. Only in this episode, our friend – this time depicting jet fuel prices – has escaped orbit velocity and is last seen heading into outer space.
Simply put, but for the extraordinary price of fuel, the U.S. airline industry today could earn a profit. As industry fundamentals go, the price of fuel is the most significant force affecting the airlines today. Yesterday, oil was trading at an all time high – nearly $60 a barrel. Compare that to median price of $19.90 paid throughout the ‘90s, or even the $31 per barrel paid in 2003, and you begin get the picture.
But the price of oil on NYMEX is not the total picture, because jet fuel is subject to additional market volatility as a specialized refined product. Over the past year, the price differential between crude oil and jet fuel – the “crack spread,” as it is commonly referred to – has steadily grown from just over $6.00 per barrel to more than $14.00 per barrel, a change of nearly 135%. This factor has a huge impact on the price of jet fuel. Today, airlines are paying nearly $1.60 per gallon, compared to $1.14 in 2004 and 89 cents in 2003. Looking ahead, the 12-month forward curve projects a price of $1.75 per gallon for Gulf Coast fuel, typically the cheapest.
Because the airline industry is fiercely competitive, it should surprise no one that these fuel costs do not find their way into ticket prices. This is true of both network carriers and low-cost carriers. While recent price increases have chipped away at this problem, they have not come close to making up for an airline’s monthly fuel bill. This has led industry observers, including many Wall Street analysts, to note that the high price of fuel is preventing the industry from enjoying what would otherwise be an up-cycle. Lehman Brothers’ Gary Chase, for example, has commented that on a non-fuel basis, operating profitability is as good today as it was in the late 1990s.
Having talked about the factors creating weight and drag on the industry, let’s look at where the opportunities lie. Here’s the good news. While Halley’s Comet comes around once every 75 years or so, the FAA’s legislative reauthorization comes around once every 10 years. And it is coming back into view right now. At the Air Transport Association, we are focused on the FY2007 FAA reauthorization as a golden opportunity to revisit the whole gamut of policies related to aviation and the airlines and to fix much of what is misguided or just plain wrong. We may not have the power to set Halley’s Comet on a whole new course. But that is what we can and must do to the FAA as the principal agency entrusted with operation of our air transport system.
When the FAA was first established – back in 1958 – it was funded out of general revenues. Over a decade later, the mandate was expanded and an aviation trust fund – financed by a tax on air ticket and cargo shipments – was established for the purpose (then the sole purpose) of financing capital improvements, such as new runways, that would provide direct benefits to the airlines and the flying public. But that logic went out the window years ago.
Today the airlines pay $11 billion into the trust fund. It constitutes about 70 percent of our tax burden. What do we get in return? Very little, as it turns out. About $6.5 billion goes into financing the operating budget – not the capital budget. And a large chunk of that supports general – not commercial – aviation. We’ve reached the point where less than 20 percent of annual appropriations from the trust fund are made available to expand capacity or improve the efficiency of the system.
As all of you know, despite all kinds of studies, FAA and Congress have failed to take decisive action in modernizing our labor intensive and outdated air traffic control system. Without a dramatic change in the way our nation’s airspace is managed, congestion and resulting delays will be overwhelming for consumers and businesses alike. As it is, 86.5 million ATC delay minutes were responsible for adding an estimated $6.2 billion to direct operating costs for U.S. airlines in 2004.
A key step in moving to fix the system is giving the ATO the resources, freedom and flexibility to implement its game plan. Users of ATO services should expect to pay proportionately for the services they consume but, at the same time, should expect efficient, cost-effective services and accountability.
While the exact structure of the future NAS has yet to be defined, we are convinced that reaching any real solution will require stakeholders to embrace a number of basic Guiding Principles:
1. Employ a Sustainable and Equitable Funding Mechanism
Allocate costs fairly among users
Each user of the system drives certain costs. Users should expect to pay for the costs they drive, but should not subsidize others’ use of the system. The cost of services that benefit the general public, as opposed to the flying public, should be covered by the General Fund.
Create a reliable funding stream
Capacity enhancements are long term investments and should be funded as such. It is absurd to expect the ATO to efficiently deliver on major programs if they are forced to fund them year-by-year. We need Congress to reject historic budget restrictions and consider innovative funding schemes like bonding.
2. Reduce the Cost of the Current System
Consolidate unnecessary facilities
Today’s communication technology eliminates the need for 21 enroute centers and 197 terminal radar approach control facilities (TRACONs). System-wide enroute traffic could be effectively managed from a few facilities at a fraction of the cost.
Decommission obsolete equipment and procedures
Some ground-based navigation equipment is no longer compatible with a modern air navigation system and should be eliminated (Non-directional beacons in the lower 48 states for example).
3. Increase the Capacity of the Current System
Leverage navigation equipment already onboard
Airlines are retiring aircraft with advanced navigation equipment that has not been used to its full capabilities The vast majority of the aircraft operated by ATA member airlines are equipped with advanced flight guidance and management systems capable flying along very precise flight paths that are not dependent upon fixed airways. This shortens aircraft routings and increases system capacity without any degradation of safety. We need to aggressively expand use of this capability.
Achieve VFR arrival and departure rates during IFR conditions
With some exceptions, today’s system works well during fair weather. FAA should continue to partner with weather experts and technology developers to mitigate the impact of weather using improved prediction tools. These systems include, enhanced/synthetic vision systems, aircraft to aircraft technologies, wake turbulence predictive tools, and route flexibility.
Next, rationally segregate different types of aircraft to optimize traffic flow
Different aircraft types operate at different altitudes and speeds. Large transport aircraft generally fly faster and higher than smaller, noncommercial aircraft. Combining various types means that they all fly at the slower speed, reducing flows into an airport or on a route. Segregation could recapture capacity that is lost today by restricting speeds.
4. Build a System that Enables Growth
Embrace a ‘building block’ approach using a scalable, flexible architecture
Although conceptually appealing, the ‘big bang’ approach is impractical for airspace system reform. A more realistic approach will develop and deploy modular technologies that yield immediate operational benefits while becoming the foundation for future advances.
Create incentives for performance and efficiency
Users should be motivated through incentives (operational, financial or otherwise) to embrace new technologies.
Minimize reliance on ground-based equipment
Satellite and aircraft-to-aircraft technologies (like ADS-B) offer dramatically more operational flexibility at a fraction of the cost of today’s system.
Just as the U.S. Armed Forces have done in moving toward a network-centric approach to warfare, we can create a network-centric ATC system that will be able to accommodate a far greater number of operations and be far less costly to maintain and operate.
That is our vision of the future at ATA.
What will it take to achieve that vision?
Quite simply, it will take an act of Congress.
And Congress will be terribly conflicted with multiple messages from competing constituencies from air traffic controllers to corporate aviation advocates to even the airlines themselves.
So the key to success will be selling our case to the American public. If we can generate a real groundswell of support for needed changes, it will translate into the currency that matters most on Capitol Hill: votes.
And that’s where many of you come in.
I began today by saying that I would seek to enlist your support. I will end by saying that I am really looking for more than that. To make a change in public opinion, the people who are in the know – and that includes each and all of you – must be energized and actively engaged.
Why? In the words of the respected economic authority Daniel Yergin, “Every day, the airline industry propels the economic takeoff of our nation. It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also embeds us in that awesome process of globalization that is defining the 21st century.”
We have a once-in-a-decade chance to make much needed and long overdue changes in public polices affecting the future of U.S. aviation and aerospace.
To do so is in our mutual self interest. So lets work together to make the most of it. Thank you.