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US airlines and A4A face a battle to replace airline "milk cow" thinking by a valid national policy

6th January, 2014

US trade group Airlines For America (A4A) enters 2014 in essentially the exact same position it has been stuck in for over a year – feverishly attempting to convince the US government and legislators that a national airline policy is paramount for the industry to remain competitive on a global scale, especially among carriers in emerging markets whose governments, argues A4A, put less restraints on their airlines.

The campaign so far has been slow to gain traction, evidenced by the recent bipartisan budget deal reached among US legislators that raises security fees collected by the Transportation Security Administration (TSA) from USD2.50 to USD5.60 one-way and a total of USD11.20 for a round trip flight.

Overall, it seems the association faces an uphill climb in engineering a mindset change of the US government’s parochial view of commercial aviation. The lobbying group warns the stakes are high if commercial aviation continues to bear the current regulatory and tax burdens that are widening the competitive gap between US carriers and their global airline competitors. Unfortunately, the group’s message seems to be falling on deaf ears and good old fashioned "use airlines as a milk cow" attitudes continue to prevail. This primitive approach entirely ignores the immense flow on value of aviation to the economy - not to mention its social benefits.

A4A has been waging a battle against increased taxes since 2011

The association’s push for a national airline policy dates back to 2011 when the administration of US President Barack Obama proposed a USD100 tax on every flight and a tripling of security taxes over a five year period.

Airlines succeeded in their efforts to block those tax hikes, but for the FY2013 budget, US Congressman Paul Ryan proposed a doubling of the security fee for every segment flown. In the bipartisan compromise budget authored by Ryan and Democrat Patty Murray the tax did almost double, and is set to take effect in Jul-2014.

See related report: US carriers push for national airline policy as red tape, tax burdens threaten to crush their plans

As the threat of a TSA tax hike loomed throughout 2012 and 2013, A4A argued the agency was somewhat inefficient, noting its budget and staffing increased by 19% and 13.5% from FY2007 to FY2013 while passenger levels fell nearly 11%. None of those arguments proved convincing for a divided US Congress eager to push through a budget compromise that prevents another government shutdown for at least two years and eases current spending cuts known as the sequester. For those legislators the TSA tax increase likely seemed benign, and the estimated USD12.6 billion in savings created for the agency during the next 10 years were too good to pass up.

Obviously the tax increases create heartburn for airlines as consumers end up paying more out of pocket for air travel. A4A estimates that by the time the new TSA tax increases take effect in Jul-2014, total taxes imposed by the government will reach USD62.60 (based on a USD300 one-stop domestic roundtrip), compared with USD38 in 1992 and USD22 in 1972. The negative impact on travel demand is magnified as air fares also creep upwards, along with increasing baggage and booking fees.

Percentage of airline ticket price dedicated to taxes: 1972 to Jul-2014

Airlines continue to be the most regulated among deregulated businesses

During the past couple of years A4A has strictly stayed on message as it has worked to persuade the government and legislators of the necessity in creating and adopting an overarching airline policy.

One of the main - and undisputed - tenets of the association’s arguments is that airlines as a whole carry a much heavier regulatory burden than other deregulated industries. The association argues that presently airlines are required to report traffic data, revenue and expense information, income taxes, maintenance expenses, P&L, and performance data including on-time performance and baggage handling.

Other industries do not have to adhere to similar reporting requirements, A4A argues. Using eight different reporting sets airlines are currently mandated to supply to the federal government, no other travel retail businesses – including hotels, cruise lines and Amtrak – must disclose as much data as the airline industry.

Reporting requirements of airlines compared with other domestic industries

The association takes particular issue with a rule issued by the US Department of Transportation (DoT) that prohibits airlines from raising the prices of optional onboard services after a customer finalises a ticket sale. “That is like saying a ballpark or stadium cannot raise the price of a hot dog for an individual once he or she purchases a ticket,” A4A president Nicholas Calio told members of Congress in Dec-2013. He observed that although DoT has backed off from enforcing that rule, the agency has indicated it will likely resurface in its next round of rulemaking. Perhaps because of the high profile of aviation and the easy publicity that politicians can gain from introducing new rules, the obsession with imposing hurdles at every turn has become a fact of life.

Mr Calio also took issue with a mandate from the DoT that specifies that breakouts carriers supply of various taxes “must be smaller in font than the total price”.

The US is falling behind those governments that champion commercial aviation  

A4A’s most ominous argument for a national airline policy is the how the insular view taken by the US government threatens to diminish the stature of the country’s airline business on a global scale. Sticking to an argument it has made repeatedly for over a year, the association stresses that countries in South America, Asia and the Middle East have broader support for commercial aviation from their respective governments. Citing Asia and the Middle East in particular, A4A believes governments of countries in those regions have encouraged airline growth through policies that reduce costs and encourage capital investment.

Mr Calio told Congress that US foreign airline competitors in the Middle East and China “enjoy domestic tax burdens up to three times lower than US airlines”. A4A estimated that total fees per international passengers in the US were USD42, compared with USD22 in the UAE, USD13 in Qatar and USD16 in China. Although these selective statistics often ignore offsetting benefits and obstacles, the generic argument - that other governments tend to recognise the wider benefits of aviation - is almost certainly correct.

Enduring fewer regulatory and tax burdens results in carriers like Emirates and Singapore Airlines operating younger fleets of widebody aircraft and holding considerably larger order books for twin-aisle jets, Mr Calio concluded. But obviously Singapore and the UAE are much younger and less mature markets than the US, so there is a greater necessity for widebody lift in those countries. The promise of annual double digit passenger growth in those regions and in a fast changing longhaul travel system means these airlines have no option but to invest.

Current and future widebody stats for US major network airlines and the Gulf carriers: as of Sep-2013

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Noting the absence of an industry policy in the US is apparent, A4A concludes 111 foreign airlines from 84 countries flew to the US during CY2013 versus 18 US carriers operating to 82 countries. Again, some of that is due to the maturity of the US economy, which dictates all major global carriers need to have a presence in the country’s major metropolitan areas.

But A4A believes the continuing expansion of carriers from emerging markets into the US is detrimental to the country’s home carriers. “Without a policy shift at home, our airlines will continue to lose market share to the point of being dominated by carriers whose home-country policies enable sustained growth and expansion,” Mr Calio warned, specifically highlighting new service launches by Emirates, Etihad and Qatar. Here A4A has been less than specific about what such an industry policy should contain.

A policy directed towards having Congress recognise that taxing the airlines as "milk cows" is a primitive tool that ignores the massive benefits of the industry to economic and social advancement can not be disputed.

But if it also implies there should be a resort to protective trade barriers that restrict international air travel options, the argument needs a broader perspective. This is an issue we will deal with in more detail shortly. By mingling the two arguments, A4A is perhaps diluting the value of its proposition - and thereby of its chances of success.

It is one thing to argue for removal of impediments on US airline competitiveness, but quite another to argue in favour of protecting an industry that is now one of the most profitable in the world. US airlines retain 55% international market share by seats flown, which compares favourably with trading partners like the UK (47%) and Germany (53%); Singapore has 58% and a liberal country such as Australia has a home airline market share of only 32%. Even the UAE, with a 72% home airline market share, is seeing that percentage erode quickly as its open skies policy allows foreign carriers to exploit the new gateways there - indeed it is an explicit policy of the UAE government to encourage foreign airline participation, in recognition of the flow on benefits which far outweigh the direct national airline-related impact.

In some ways perhaps US legislators have concluded that after all the US legacy carriers were allowed unhampered Chapter 11 restructuring during the last decade, that they can withstand some additional taxes. The view is certainly shortsighted; but US carriers have learned very painful lessons during the last 14 years about how external shocks and stubborn government policy can wreck their businesses. The measure of a truly successful carrier is how a given airline maintains profitability while enduring those challenges.

The US government doesn't appear willing to consider a more enlightened view. Airline "Milk cow" primitivism is not for modern economies

A4A no doubt has faced a formidable challenge during the past couple of years trying to bend the ears of US Congressmen caught up in one of the most divided legislatures in recent memory and convince those representatives major changes are under way in the global aviation industry. Its persistence in sticking to its message that US airlines stand to lose competitive standing is commendable; but it seems Congress is unconvinced that the industry is under any real threat.

That sentiment may be driven by a legislature that largely feels the industry needs to now prove its worth independently, without the curtains of bankruptcy to hide behind. Delta Air Lines appears on a course to sustain its financial stability (although it is taking a protectionist attitude to Gulf carriers), and United and American have aspirations to follow suit.

What inevitably needs to happen is for all countries to knock down artificial barriers to competition in order for all airlines to compete on a global scale. While it seems like a lofty aspirational goal, some regions are moving faster in that direction than others. The US should wake up and realise a mindset change is in order to maintain its competitive edge during the next couple of decades. Unfortunately, a philosophical change is not likely in the short term as Congress is now also making rumblings about taxes on ancillary revenue charges such as baggage fees.

Wider, more enlightened, perspectives need to be applied to the industry, so that US carriers are not constantly confronted by a scenario of devising strategies to sustain profits despite higher tax burdens.

Instead, airlines should be provided an environment where aviation is recognised for the immense bearer of economic and social well-being that it really is - not simply a quick fix milk cow.

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