Case for a U.S. National Airline Policy


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Case for a U.S. National Airline Policy

  1. 1. The Case for a U.S. National Airline PolicyFebruary 22, 2013
  2. 2. Executive SummaryA Vibrant U.S. Airline Industry Is Critical to U.S. Economic Growth and Global Competitiveness » Due to its geography and widespread established population centers, the U.S. economy depends on air transportation more than many other national economies » The U.S. airline industry is the physical Internet of the U.S. economy – connecting domestic markets of all sizes and regions with each other and with rapidly growing global markets » The ability of the U.S. airline industry to drive U.S. economic growth, employment and exports, and to preserve and grow air service in non-hub communities, has been undermined by an uncoordinated patchwork of counterproductive public policies, or lack thereof » In contrast to the United States, many other countries have recognized and embraced their airline industries as strategic assets that enable domestic and international economic expansion » Foreign airlines are growing at a significant rate, reinvesting earnings in their product and expanding their global presence to the detriment of U.S. airlines, with troubling implications for the entire U.S. economy ® 1
  3. 3. Executive SummaryA Strong National Airline Policy Will Drive U.S. Economic Growth and Create More High-Paying Jobs » Without a cohesive policy supporting the integral role of the U.S. airline industry in our economy, U.S. global economic leadership and competitive advantage will suffer » Similarly, domestic air-service levels will suffer, since it is the U.S. airlines, not foreign carriers, that serve U.S. markets, connecting smaller cities and rural communities with our international gateways » U.S. policymakers could leverage the recommendations of multiple federal commissions, including those of the Future of Aviation Advisory Committee (FAAC), regarding global competitiveness, taxation/regulation, infrastructure and energy » There is clear precedent for federal policy action - in the 1970s, U.S. policymakers helped revitalize our freight rail industry, which is now the envy of the world » There also is precedent for inaction, as seen in the demise of the U.S. maritime industry » A strong national airline policy would restore and enhance U.S. airline industry viability and enable it to increase air service across the nation, boost economic growth, expand exports and create more high-paying U.S. jobs ® 2
  4. 4. Why Is a Comprehensive Airline Policy in the National Interest?The U.S. Airline Industry Is a Critical Enabler of Commerce 1990 2000 2011 Moves People 465.6M 666.1M 730.8M Passengers Enplaned Exports Air-Travel Services $15.3B $20.2B $36.7B Moves Goods 16.4B 30.9B 37.0B Cargo Revenue Ton Miles $110.5B $284.4B $423.6B Exports High-Value Merchandise @ $72 per kg @ $101 per kg @ $117 per kg Sources: Bureau of Transportation Statistics T1, Bureau of Economic Analysis, Census Bureau ® 3
  5. 5. Why Is a Comprehensive Airline Policy in the National Interest?Commercial Aviation Is a Key Direct Contributor to the U.S. Economy Direct U.S. GDP contribution of example, selected industries (2009) GDP contribution ($B) Oil and gas extraction $142 Farms $104 Commercial Aviation $87 Motor vehicles manufacturing $78 Motion picture and sound recording $60 Plastics and rubber products $57 Aircraft and engine manufacturers $37 Spectator sports $33 Gambling $33 Rail transportation $31 Furniture $24Note: Not intended to be a comprehensive ranking, example industries only to give a point of comparison; aviation-related data extrapolated from FAA economic impact report; aircraft andengine manufacturers include Boeing, GE, Pratt, Honeywell, Collins, etc.Sources: BEA industry accounts; gambling and spectator sports from BEA Travel & Tourism satellite account data; FAA Air Traffic Organization, ―The Economic Impact of Civil Aviation onthe U.S. Economy‖ (Dec. 2009); BCG analysis ® 4
  6. 6. Why Is a Comprehensive Airline Policy in the National Interest? The U.S. Airline Industry Is a Major Source of High-Quality, Middle-Class American Jobs Average wages, 2011: employees of U.S. scheduled passenger airlines vs. private industry, all occupations Employees of U.S. $63k passenger airlines earn 40% more than $45k the average private industry U.S. workerage Annual Base Pay,U.S. Avg Annual Base Pay, private industry, all occupations U.S. Passenger Airlines *Sources: Bureau of Labor Statistics Occupational earnings tables: United States, December 2009 – January 2011, Table 4; A4A U.S. Passenger Airline Cost Index ® 5
  7. 7. Why Is a Comprehensive Airline Policy in the National Interest?Unlike Foreign Airlines, U.S. Airlines Connect Small- and Medium-sized Communities to the World » The network of U.S. communities served by U.S. airlines never will be replicated by foreign airlines » The connectivity between large U.S. cities and the global economy is inextricably linked to the connectivity between those cities and smaller U.S. communities provided by U.S. airlines All Scheduled Passenger Air Service International Gateways Only » Unlike foreign carriers, U.S. airlines serve small, rural and other non-hub cities and communities throughout the country ® 6
  8. 8. Why Is a Comprehensive Airline Policy in the National Interest?Unlike U.S. Airlines, Foreign Airlines Were Profitable in Most Recent Decade Aggregate airline industry net income, 2001 to 2010 $18.1 billion $5.7 billion ($31 million) ($54.4 billion) USA Europe Asia-Pacific Middle EastSources: DOT Form 41 for all reporting U.S. passenger and cargo airlines; IATA ® 7
  9. 9. Why Is a Comprehensive Airline Policy in the National Interest?Recent U.S. Passenger Airline Industry Profits Are Less Than $1 Per Passenger Net Income as % of Revenue Net Income per Enplanement 1.0 $2 0.4 0.2 $0.77 $0.50 0.0 $0 (1.0) ($2) (2.0) ($4) (3.0) ($6) (4.0) (5.0) ($8) (6.0) (5.4) ($10) ($9.22) 2001-2010 2011 YTD 3Q12 2001-2010 2011 YTD 3Q12Sources: For 2001-2011, A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of operating revenues; for 2012, A4Aanalysis of earnings reports of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways ® 8
  10. 10. Why Is a Comprehensive Airline Policy in the National Interest?When U.S. Passenger Airlines Lose Money, They Have No Choice But To Lower Costs by Reducing Serviceor Cutting U.S. Jobs» Reduced U.S. passenger airline industry earnings results in reduced air service, fewer U.S. jobs, delayed fleet renewal, reduced in-flight service options, and, for some airlines, bankruptcies Full-Time Equivalent Employees Scheduled Daily Domestic Flights Pre-9/11 to post-recession through to present Down Sharply from Jan. 2001 to present 536.4k 29.8k 21.7k 381.6k 376.2k Aug-2001 Apr-2010 Present 2001 Present ® 9
  11. 11. The Five Core Components of a U.S. National Airline PolicyTo Enhance the Economic Viability and Global Competitiveness of the U.S. Airline Industry,Grow Our Economy and Create U.S. Jobs Rationalize Tax Burden Rationalize Regulatory Burden Enhance Global Competitiveness Modernize and Reform Infrastructure Mitigate Jet-Fuel Cost and Price Volatility ® 10
  12. 12. Rationalize Tax BurdenAirlines and Their Customers Paid Nearly $19 Billion in Federal Taxes and Fees in 2012 FY2012 Collections ($Millions) from Airlines/Customers $492 $390 $18,847 $2,729 $8,711 DHS = $3.76B $496 $648 $360 $1,873 $385 $2,777 FAA = $12.32B* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, A4A ® 11
  13. 13. Rationalize Tax BurdenFederal Taxes on a $300 One-Stop Domestic Round Trip* Ticket Now Exceed $60 1972 Taxes 1992 Taxes 2013 Taxes 7% ($22)* 13% ($38)* 20% ($61)** Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; total ticket price includes taxes ® 12
  14. 14. Rationalize Tax BurdenAir Travel is Taxed Higher Than Other Transportation Sectors and “Sin” ProductsAir travel is taxed higher than other transportation sectors... …and higher than many so-called "sin" products that are taxed to discourage use Federal tax rate (%) 25 Federal tax rate (%) 25 20% 20 20% 20 15 15 10 11% 6% 10% 10 5 5% 5 -50 <1% Airline Gasoline Cruise -50% 0 ticket1 tax2 tax Amtrak Airline Distilled Firearms Beer5 travel3 ticket1 spirits4 1. Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; total ticket price includes taxes 2. Federal tax percentage (18.4 cents per gallon gasoline, 24.4 cents per gallon diesel) based on June 27, 2012 prices (including state and federal taxes of $3.69/gallon diesel 3. US government has suggested investments in high speed rail infrastructure while increasing airfare taxation (PFC and security fees); consists of 2011 net loss margin which is funded by federal government; 15% excisetax pre-1962 4. Based on $20 sale price per 750ML bottle 5. Based on an average price of $1.00 per can Sources: MIT Ticket Tax; US Department of Treasury;;; US Energy Information Administration; IMF; BCG analysis ® 13
  15. 15. Rationalize Tax BurdenAirlines and Passengers Are Not Receiving Value for Their Federal Tax Dollar,Agency Inefficiencies on the Rise Federal Aviation Transportation Security Customs and Border Protection Administration AdministrationAir traffic control (ATC) problems were the CBP staffing levels at major Since 2005, Congress has increasedprimary cause of late arrivals in 2011 commercial airports are TSA’s budget by 26%, yet passenger inadequate, especially during peak traffic has decreased by 1.3% Despite billions of dollars invested in arrival times new technology and procedures, airline Notwithstanding negative passenger flight times between many major U.S.  During peak arrival times, passenger traffic growth, TSA’s screener workforce cities have actually increased since the wait times can exceed well over one has increased by nearly 300%, from mid-1990s hour, deterring international travel to 16,500 in 2004 to 45,000 today the U.S., thereby costing the economy According to the FAA, delays and billions of dollars annually According to government audits, TSA cancellations cost the U.S. economy over wastes hundreds of millions of taxpayer $30 billion annually dollars annually by inefficiently deploying screening technology to commercialAccording to recent government audits, cost airports. Examples include:overruns in long-term, core NextGenprograms will delay more near-term, cost-  $184m worth of equipment kept in storagebeneficial projects, including deployment of  $30m spent on ineffective ―puffer‖ portalsperformance-based navigation (PBN)  $50m-$100m in procurementprocedures inefficiencies annually  Removal of 173 ―backscatter‖ FAA’s process for developing PBN and body scanners other new NextGen procedures is time- consuming and fragmented ® 14
  16. 16. Rationalize Regulatory BurdenAcross the Globe, U.S. Airlines Face a Litany of Imposed or Pending Regulationsthat Do Not Enhance Safety or the Passenger Experience Environmental Rules Security Rules California green chemistry/consumer product rule Secure Flight development and watch list vetting California ground service equipment emissions standards Federal Air Marshal seating Air cabin environment bleed air assessment Explosive Trace Detection outside USA Noise restrictions (e.g., LAX) Gate screening in foreign countries EPA airport hydrants rule Security tamper-evident bags per ICAO Stormwater permitting Liquids, aerosols, and gels per ICAO Petitions for a U.S.-specific CO2 standard for aircraft Cargo screening (e.g., U.S., UK, India) Proposal to extend OSHA regulations into aircraft cabins Foreign baggage arrival rescreening TSA Pre-Check (CAPPS, boarding pass) Advance Cargo Information requirements* Economic/Consumer Rules Environmental Rules standard for aircraft International a CO2 certification ICAO development of Rules Full-fare advertising ICAO development of a new particulate matter certification standard for aircraft Denied boarding compensation changes ICAO adoption of a new noise certification standard for aircraft 24-hour ticket hold and refund Limited airport access (e.g., China/Japan) Prohibition on ancillary fee changes post-purchase Discriminatory landing fees (e.g., Italy) Discriminatory taxes (e.g., Philippines) Baggage information on web, ticket EU Emissions Trading Scheme 30-minute status notification UK Air Passenger Duty Detailed ancillary revenue reporting EU Regulation 261: Passenger Rights Display of products in Global Distribution Systems Proliferation of EU Noise Regulations 3-hour tarmac delay rule Proposed Noise Fees (e.g. YUL) Slot and/or perimeter restrictions (e.g., DCA, NYC) German Departure Tax Foreign ownership restrictions Climate financing through UNFCCC *2010: Honduras/Mexico/Netherlands/Nigeria 2011: China/Ethiopia/EU/Philippines, ® 2012: Korea/Liberia/Panama/South Africa/Sudan/UAE, 15 2013: Ghana/Israel/New Zealand/Turkey
  17. 17. Rationalize Regulatory BurdenAirline Customer Service Subject to a Greater Degree of Government Reporting Requirementsthan Other Key Service Industries Rental Cars Telecom Cruises Airlines Amtrak Hotels Buses Cable Service Delivery Reporting  No No No No No No No Full-Fare Advertising (incl. taxes)  No No No No No No No Ancillary Revenue Reporting  No No No No No No No 24-Hour Purchase Refundability  No No No No No No No Detailed Reporting of Demand  No No  No No No No Detailed Reporting of Costs  No No No No    Reporting of Avg. Prices Paid  No No No No No   Operational Contingency Plans   No      ® 16
  18. 18. Modernize and Reform InfrastructureNextGen has the Potential to Reduce Flight Delays and Cancellations, which Cost the U.S. Economy Over $31Billion Annually Annual Impact (in $B) of Flight Delays and Cancellations $4.0 $31.2 $2.2 $9.4 $7.3 $3.7 $4.6 Sched. Delay Sched. Buffer Longer Flights Irregular Ops Lost Demand Reduced GDP TOTAL Sources: ―Total Delay Impact Study: A Comprehensive Assessment of the Costs and Impacts of Flight Delay in the United States,‖ FAA and NEXTOR (as revised and republished on Dec. 16, 2010) ® 17
  19. 19. Modernize and Reform InfrastructureExpedite Implementation of NextGen Procedures that Leverage Existing Airline Investments » Existing NextGen technologies and aircraft equipage, including performance-based procedures, can deliver immediate benefits for airlines, passengers and the environment, at a fraction of the cost of longer-term NextGen programs like ADS-B In and Data Communications » To justify further U.S. airline investments in NextGen aircraft equipment – especially given over $50 billion in losses since 2001 – the FAA must make the business case for longer-term NextGen programs by: » Establishing technical and operational specifications and standards that enable airlines to leverage NextGen investments already made » Certifying NextGen equipage » Conducting more simulations, demonstrations, trials and flight evaluations with U.S. airlines » Postponing any NextGen equipage mandates until such business case has been made ® 18
  20. 20. Enhance Global CompetitivenessInternational Market Growth is Critical to Long-term U.S. Airline Industry Economic Viability, ConstitutesIncreasing Share of Total Seating and Cargo Capacity International Share of Seating and Cargo Capacity Network 2000 2013 Change Network 2000 2013 Change Alaska 11.0 7.3 (3.3) Atlas 63.1 81.9 18.8 American 34.1 42.3 8.2 FedEx 41.0 47.4 6.4 Delta 24.3 41.4 17.1 UPS 34.1 52.2 18.1 Frontier — 11.2 11.2 Hawaiian 2.7 35.8 33.1 JetBlue — 17.5 17.5 Southwest — 2.0 2.0 Spirit — 14.2 14.2 United 36.4 46.2 9.8 US Airways 13.8 27.1 13.3 Virgin America n/a 2.7 n/a* Non-domestic ASMs as a share (%) of systemwide ASMs, including regional affiliates; for cargo carriers, RTMs are used instead of ASMs Sources: A4A analysis of Innovata (via Diio Mi) sample-week operations for the month of July; for cargo carriers, the analysis is based on CY2000 and YTD Oct. 2012 ® 19
  21. 21. Enhance Global CompetitivenessYet the Top-Performing* Airlines in the World are Primarily Foreign AirlinesRank Airline Score (1-99) Rank Airline Score (1-99) Rank Airline Score (1-99) 1 AirAsia 80.9 21 Air Transat 59.4 41 Air France-KLM 48.4 2 Air Arabia 78.3 22 Southwest 59.4 42 Royal Jordanian 48.2 3 Ryanair 78.2 23 IAG (BA-Iberia) 57.6 43 US Airways 48.1 4 Hainan 76.7 24 Air New Zealand 57.6 44 Turk Hava Yollari 48.0 5 Allegiant 76.5 25 Aeroflot 55.7 45 Air Mauritius 48.0 6 Transasia 72.2 26 Virgin Australia 55.4 46 China Southern 47.4 7 Vueling 71.9 27 Icelandair 55.2 47 TAM 47.4 8 Copa 70.6 28 Cathay Pacific 54.6 48 Air Canada 47.3 9 Singapore 70.0 29 Kenya 53.8 49 Air China 46.7 10 WestJet 68.9 30 JetBlue 53.7 50 Republic 46.7 11 All Nippon 67.5 31 Hawaiian 53.4 51 EVA 46.6 12 Regional Express 67.5 32 United 53.3 52 Shandong 45.2 13 Aer Lingus 67.4 33 SkyWest 53.3 53 China 45.1 14 Alaska 66.1 34 LAN 51.9 54 Delta 44.9 15 Spirit 65.1 35 AviancaTaca 50.7 55 AMR 44.2 16 Easyjet 65.0 36 Norwegian 50.7 56 SAS 43.4 17 Qantas 63.8 37 Aegean 50.0 57 El Al 42.7 18 Cebu 63.6 38 PAL 49.0 58 Thai 41.8 19 Lufthansa 60.1 39 Chorus-Jazz 48.4 59 Korean 40.2 20 Garuda 59.7 40 Finnair 48.4 60 China Eastern 39.0*Among publicly-traded airlines. Proprietary scoring methodology is composite of five categories: liquidity, financial health, earnings performance, fuel cost management and asset utilization.Source: ―Indonesia’s AirAsia Tops Annual Aviation Week Airline Rankings,‖ Aviation Daily (July 2, 2012) and Aviation Week’s Top-Performing Airlines Study ® 20
  22. 22. Enhance Global CompetitivenessWithout More Proactive Federal Airline Policies, U.S. Airlines Will Continue to Lose Ground to theirForeign Airline Competitors“The central government brought up the idea of building a harmonious society that creates a favorable environmentfor the development of the civil aviation industry.” - Mr. Li Jia Xiang, Director, Civil Aviation Administration of China Level of Proactive Airline Policies* Low High United United States Kingdom Germany France Canada Brazil India Japan Singapore UAE China *Source: BCG and A4A analysis; types of airline assistance considered includes direct subsidies and tax, regulatory/competition, and infrastructure ® 21
  23. 23. Enhance Global CompetitivenessForeign Airlines are Projected to Order Five Times as Many Widebody Aircraft asNorth American Airlines7,0006,000 Growth Replacement5,000 1,9404,0003,000 820 4,6902,000 600 2,410 4801,000 610 1,090 890 40 710 300 0 Asia/Pacific Europe/C.I.S. Africa/Middle East America Non-North North America Latin Sub-Total: America ® 22
  24. 24. Enhance Global CompetitivenessGulf Airline Widebody Aircraft Orders are Over Three Times as Large as U.S. Airline Orders Widebody Aircraft On Order Total - 430 Etihad - 76 Qatar - 130 Total - 130 American - 14 Hawaiian - 18 Emirates - 224 Delta - 18 US Airways - 30 United - 50 U.S. Carriers Gulf Carriers Source: Diio (as of January 14, 2013) ® 23
  25. 25. Enhance Global CompetitivenessInefficient Visa Policies Deter Inbound Travelers, Costing the U.S. Economy Billions of Dollars Annually Percent of travelers surveyed (from respective countries below) indicating that: Difficult-to-Impossible to Visa Process Deters USG Security Measures Travel to USA Travel to USA Deter Travel to USA 94.5 78.3 80.2 52.9 45.1 36.9 37.5 30.3 31.3 China India Brazil China India Brazil China India Brazil Source: U.S. Travel Association; Mandala Research survey of 500 recent visitors from each of three countries ® 24
  26. 26. Enhance Global CompetitivenessDespite Using Less Fuel, Costs are at Record-high Due to Market Volatility Using Less Fuel But Spending More Money Due to Rising Prices Million Gallons per Day Billion Dollars per Year Dollars per Gallon (Gulf Coast) 56.2 55.9 $50.4 50.8 $3.06 $33.2 $1.72 $16.8 $0.85 2000 2005 2011 2000 2005 2012 2000 2005 2012 Source: BTS (T2: 921) for U.S. airlines Source: BTS for U.S. airlines Source: Energy Information Administration ® 25
  27. 27. The Case for a Comprehensive U.S. National Airline Policy » The U.S. airline industry is a critical engine of U.S. economic growth and employment » U.S. airlines are essential to connect nonhub markets to U.S. and global economic networks » Foreign governments have embraced the role of their airline industries through affirmative policy support, giving their airlines a competitive advantage over U.S. airlines » These contrasting approaches harm the global competitiveness of the U.S. airline industry, which adversely affects the entire U.S. economy » Three bipartisan, federal airline industry commissions representing all segments of the aviation industry, including labor, have provided a policy blueprint » Clear U.S. and foreign precedents exist for comprehensive policy action » Congress and the Administration should establish and implement an affirmative, cohesive U.S. National Airline Policy ® 26
  28. 28. ‹#›
  29. 29. » Repeal the commercial jet-fuel tax » Prevent any increase to the Passenger Facility Charge (PFC) cap, TSA passenger security fee, and Rationalize Tax Burden any new taxes or fees » Alleviate the inequity that currently exists because the level of federal aviation taxes and fees paid by airlines and their passengers is not commensurate to the level of services received Rationalize Regulatory » Promote regulatory reform to ensure that rules are solely based on sound science and cost/benefit analysis Burden » Eliminate or modify regulations that drive excessive costs and/or inefficiencies » Accelerate the implementation of the most cost-beneficial elements of NextGen, including performance-based navigation procedures » Oppose NextGen equipage mandates until FAA makes business case for investment Modernize and Reform » Harmonize NextGen regulations with comparable international regulations Infrastructure » Reduce passenger security and customs wait times » Accelerate economically viable public and private efforts to further reduce aviation emissions through technology, operations and infrastructure » Foster further consolidation and continued expansion of immunized global alliances » Seek fair competition in markets where foreign governments distort the marketplace through direct and indirect subsidies » Reform U.S. visa policies by reducing processing times and adding processing locations Enhance Global » Promote equitable and adequate allocation of CBP resources to ensure that passengers do not Competitiveness experience excessive wait times when entering the country » Stop proliferation of environmental taxes and cap and trade schemes such as the European Union’s Emissions Trading Scheme (ETS) through proactive support of a global sectoral approach to address worldwide aircraft emissions » Curb excessive speculation and prevent manipulation in the oil futures market » Promote R&D and deployment of commercially viable, sustainable alternative fuels and advancedMitigate Jet-Fuel Cost and aircraft technologies Price Volatility » Bolster domestic fuel production in an environmentally sound manner » Reduce excessive tariffs on jet fuel shipments to airports ® 28
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