Airlines to Airports: We Have a Problem

By May, James C. | Executive Speeches, October-November 2004 | Go to article overview

Airlines to Airports: We Have a Problem


May, James C., Executive Speeches


Winston Churchill once said that the Americans and the British were two people separated by a common language.

One could make almost the same point about airlines and airports. Sometimes it seems that we are two people separated by a common interest in civil aviation.

We have often quarreled over expansion, modernization, noise and emissions, landing fees, and other issues. Too often, it seems, the one tiling that is most lacking in civil aviation is "civility." I hope not to make that mistake today as I seek to accomplish three things.

First is to explain why--two years into a recovery, and a little more than three years after 9/11--we have a growing financial crisis in the airline industry

Second is to point out some of the implications for the airport community and the U.S. economy as whole.

And third--quite frankly--is to seek your help. Today the airlines are experiencing various difficulties that we haven't been able to solve on our own.

Remember the loud bang that Jim Lovell and his crew members heard on Apollo 13? Let me say to you,just as he so famously did to another group of ground-based professionals gathered in this city: "Houston, we have a problem!"

Financially speaking, the nation's airlines are running out of breathable air.

From 2001 through 2003, U.S. airlines lost more than $23 billion. Losses this year will exceed $6 billion. We have major carriers that are bleeding cash and at the outer limits of their borrowing capacity Two of the nation's six legacy carriers are in bankruptcy, and a third is fighting to avert the same fate.

There also is a popular misconception that things are going well for non-legacy carriers, but they too are projecting sharply reduced earnings or even losses. Some of you may ask: Why can't the airlines just learn to do more with less--cutting costs and raising productivity?

Well, to begin with, the airlines are aggressively attacking costs. They are scrutinizing every penny. Since August 2001, 123,000 U.S. airline workers have lost their jobs--about one out of every six employees. Surviving airline workers have experienced cuts in both wages and benefits. Moreover, worker productivity is up 11 percent versus pre-9/11 performance. On an annual basis, airlines have cut capital spending 62 percent and slashed operating expenses by 13 percent. There's more, especially with regard to fuel efficiency, which I'll address in a moment.

The problem is not a failure to manage controllable costs. The real problem is an overwhelming assortment of costs that a) are beyond airline control, and b) are nearly impossible to transfer. With no offsetting revenues, these costs have fallen straight to the bottom line and are responsible for the huge losses that have occurred despite major improvements in operating efficiencies.

I'll talk about wily airlines are not able to pass cost increases to consumers.

But let me first set out a few of the most important elements of the financial equation:

      Federally imposed or authorized taxes and fees
   now account for about $52 on an average $200
   domestic roundtrip ticket with one connection
   each way. That's 26 percent. It's nearly twice
   the rate on commercial air travel from a decade
   ago and more than triple the rate of 30 years ago.
   In aggregate, these taxes and fees--including
   PFCs--are the biggest uncontrolled cost--a
   staggering $14 billion annual burden on the airlines
   and our customers.

      A second uncontrollable cost is security. I know
   you share our pain with unreimbursed security
   costs. Congress has agreed in principle that airline
   and airport security is a federal responsibility.
   That should mean that federal funds are provided
   to cover the cost of post-9/11 federal security
   mandates. But it hasn't happened, and, as
   result, the airlines will take a hit amounting to
   almost $4 billion in 2004. … 

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