U.S. Aviation Industry Debates Funding

WASHINGTON (MarketWatch) -- Airlines are clashing with general aviation companies over who's driving the costs and who has to pay the bill for using the nation's aviation system.

Major commercial airlines support the Federal Aviation Administration's idea of replacing its tax-based funding system with user fees charged at the same rate to all users. They're hoping to save money.

But general aviation companies, the small aircraft industry defined as all aviation other than military and the big commercial airlines, is fighting to maintain the tax-based system. They're afraid they will lose money.

"We need a much more equitable system," FAA administrator Marion Blakey said in a recent phone interview. Blakey said that a new system wouldn't be "just additive to the current system. It's really changing it."

Under the current system, the FAA -- the agency responsible for regulating civil aviation in the U.S. -- gets 80% of its funding from the Aviation Trust Fund, which includes all taxes paid by users. These include taxes on passenger tickets and fuel. They all expire in September 2007.

The Trust Fund was established to support the development of a nationwide airport and airways system and to fund investments in air traffic control facilities. The fund provides grants for construction and safety programs, for investments in the air traffice control systems and for research on aviation safety. During its history, it also funded all or some protion of the FAA's operations.

Although the trust fund's dollars generally increased over the past five years, the agency argues that factors such as low-cost carriers are slowing the growth of its resources.

In the next couple of weeks the agency will come up with a proposal that would radically change its funding system, FAA sources said. The adoption of a user-fee mechanism is one option that has fueled the most debate.

With a user fee, a Boeing 747 that carries 170 people would pay the same fees as a small jet, which has only 20 people on board.

"User fees provide a stable revenue resource," said James C. May, chief executive of the Air Transport Association, in a recent speech at the International Aviation Club in Washington.

The FAA proposal for a new funding system for the next decade would have to pass Congress before the end of the next year, when all the trust fund taxes will expire.

"FAA is going to need the industry's full support as it tackles fundamental systemic challenges," May said. He pleaded for user fees, arguing that Canada, France, Germany and Australia are using such a mechanism successfully.

But airlines are the main advocates for such a change.

Businesses and owners of private jets strongly oppose the idea, saying that user fees would add new bureaucratic costs.

The FAA administrator said it still has to be determined which mechanism will be considered. FAA officials declined to reveal details about the estimates regarding the costs associated with a user-fee system and its impact on the airline industry and its customers. The costs are expected to be part of the proposal, which has not been yet finalized.

It's all about the money

General aviation associations complained that user fees would transfer costs from airlines to small commercial airlines and business jets.

The airlines "are hoping to shift $2 billion to the general aviation community," said Ed Bolen president and CEO of the National Business Aviation Association, in a phone interview. "They are proposing a system in which all airplanes are treated the same."

NBAA is an industry group that represents over 7,000 companies that own or operate general aviation aircraft.

Two other organizations -- the General Aviation Manufacturers Association and the Aircraft Owners and Pilots Association -- share Bolen's concerns.

"If they want to create a new source of revenue by imposing user fees, [they] are going to destroy the [general aviation] industry," said Katie Pribyl, spokeswoman for the General Aviation Manufacturers Association.

The airlines responded: "Nonsense...That's ludicrous," said David A. Castelveter, a spokesman for the Air Transport Association, in phone interview. The ATA represents 17 airline companies and other members of the industry.

"If the FAA costs are the same, why should one organization subsidize these corporate fat cats -- for lack of a better term -- for operating in the system?"

Castelveter argued that the general aviation industry wants "to fly their airplanes for their commercial business at the expense of the commercial passenger."

But Chris Dancy, a spokesman for the Aircraft Owners and Pilots Association, does not agree. The group has more than 400,000 members, and the bulk of its members are people who fly small aircraft.

Dancy said that FAA funding problems were generated after airlines had cut ticket prices, which has meant less money for the aviation trust fund. "If the problem is with the airlines, why not fix that?' he added.

"We are concerned that our members will have to pay more [with a user-fee system] to be able to fly," said Dancy.

Pribyl of the General Aviation Manufacturers Association agrees.

"If you want to modernize a system tell us ... how much money you need and tell us what we are going to get for our money," she said.

ATA's May said that airlines paid 90% of the $9 billion raised last year, but used only two-thirds of the airport services. "Meanwhile, business aviation used 15% of the system, but pay only 4%," he added.

Fear of more beaurocracy

Bolen of NBAA said higher bureaucratic costs would likely push up the rates.

He said that Canada, which switched to user fees, has experienced five rate increases in the last five years in the business aviation community. "That is a concern," Bolen pointed out.

Both AOPA's Dancy and Pribyl of GEMA worry about more bureaucracy.

"The tax system is less than a penny on the dollar to collect the FAA fees ...We are talking about an entirely new bureaucracy ... to collect those fees," Dancy said.

But ATA's Castelveter strongly rejected the allegedly administrative burden that a user-fee system would impose. "It's just the opposite," he said, suggesting that two types of user fees are under consideration.

"Instead of paying a myriad of taxes, you will have two fees: one for the time in the system [in the air] and another one for the ability to get on and get off [land and take off]."

Who will control the FAA funds?

The fight over FAA's future funding system is not just about the money. It's also about control.

Right now Congress sets the fuel tax, the money goes into the federal Treasury, and then Congress sends it to the FAA. Bolen of NBAA said that the problem is that airlines want to be more involved in the decision-making process.

"When they are talking about user-fees ... money is controlled less by Congress and more by either the industry paying the fees or some groups," he said. "We are concerned ... that rates can rise faster if they are not controlled by Congress."

Dancy of AOPA also said that if the FAA will set up a user fee, then Congress will be removed from the equation.

While it is not clear what role the Congress will play in the new system, the general aviation community's concerns have been triggered by the ATA's May, who pleaded to take Congress out of the process.

Castleveter, the ATA spokesman, stressed that airlines, which pay the bulk of the cost, want to say something about fees and the FAA's funding system. "There never has been before the opportunity for the users who pays the most to say something about it ... There needs to be some changes in the governance," Castleveter said.

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