ATA: REMARKS TO THE INTERNATIONAL AVIATION CLUB

The following information was released by the Air Transport Association of America:

Nicholas E. Calio

President and CEO

Air Transport Association

Remarks to the International Aviation Club

September 27, 2011

I was prepared to deliver a different speech a week ago, appropriately focused on only International issues. But then, the Obama Administration issued what is nothing less than an all-out assault on the U.S. airline industry and our passengers in the form of two separate tax-increase proposals to offset the deficit.

Airlines are the physical Internet, connecting people, products and the world driving the global economy and creating millions of jobs. To further burden this already financially challenged industry is both illogical and a job destroyer.

It's not just the Administration. There are indications that some members of the Congressional Super Committee view these tax increases as "low-hanging fruit."

What is troubling to me - and should be of great concern to all of us - is that the U.S. government continues to use the airline industry as a cash cow; rather than seeing airlines as a growth enabler and a strategic asset.

What the government is proposing suggests just the opposite. It will make a bad situation even worse. What ATA proposes instead is a National Airline Policy.

Something positive, something bipartisan that will drive economic growth and create jobs in this country in the short, medium and long-term rather than a convenient answer for a political impasse.

The airline industry in the United States leads all other businesses in having the greatest number of stand-alone taxes and fees imposed upon it and its customers by the federal government - 17 in all. Yet, in a deficit-reduction plan that is supposed to make taxes more equitable, the Obama Administration proposes the addition of a huge new aviation tax and the tripling of an existing one.

The Administration has asked Congress to impose yet another stand-alone tax on aviation - number 18 - a mandatory $100 charge for every airplane departure. This tax would cost airlines and our customers $11 billion over the next ten years . . . from an industry that lost FIVE times that amount during the previous 10 years.

In addition, the Administration wants Congress to double the passenger security tax to $5 per one-way trip, and triple the tax to $7.50 by 2017.

By any objective measurement, these proposed aviation tax increases are inequitable.

Federal taxes and fees already constitute $61".. or 20 percent". of the cost of a typical $300 domestic round-trip ticket. The overall federal aviation tax burden has tripled since 1972.

No other form of transportation bears the cost of federal security, including Amtrak, transit, cruises or maritime.

In short, the Administration is proposing a huge new tax on the least profitable and most highly taxed industry in the economy while all its competitors are left untouched.

Given a razor-thin profit margin of just over 1.5 percent last year, airlines will have no choice but to try to offset the higher taxes by raising air fares or reducing service. The reduction in service will hit the less profitable routes and small and rural communities the hardest.

Airline tickets are already priced to sell. "Pricing elasticity," a concept most of our policymakers don't understand, makes it nearly impossible for airlines to pass on additional costs to passengers.

This is particularly true in very small communities, some of which are served by airplanes with a few as nine seats. A departure fee of $100 on such services simply cannot be sustained or passed on to passengers - especially those passengers who would already by paying more due to a doubled security fee.

Governments in other countries view airlines differently.

In the last 10 years, the global aviation market has evolved: building infrastructure, buying planes, and increasing service to dozens of new markets.

We have great examples of economies that do get it - and view aviation as a strategic asset.

Take China, one of the fastest-growing aviation markets. In the past 10 years, the country has ordered nearly 1,900 new aircraft. Earlier this month, Boeing predicted that China would need

$600 billion worth of new aircraft over the next 20 years. That's 5,000 planes - nearly as large as the entire current combined U.S. fleet. China plans to build nearly 80 new airports in the

next decade.

Likewise, India and Brazil are among the world's fastest-growing markets. India's domestic aviation market has tripled in the past five years - while Brazil has doubled during that same period.

The Middle East Nations use aviation strategically as a key growth enabler. The region projects further investments of some $90 billion for additional airport projects - with Dubai, Abu Dhabi and Doha already vying to be global aviation hubs - and succeeding at it.

Etihad Airways, which did not exist 10 years ago, today serves more than 45 countries. Emirates, the world's largest airline by international capacity, has an aircraft order book valued at $66 billion, and plans to take delivery of two jets a month"for the next six years.

These markets, and their respective governments, understand the competitive necessity and opportunity a vibrant aviation system provides - one that connects them to the rest of the world and gives them a competitive advantage in delivering real jobs and real economic value.

The point can be made that these markets are not mature like those in the United States and Europe or Japan, so growth is to be expected. But the critical role of aviation is certainly not limited to emerging or the highest-growth economies.

In fact, to be relevant in the 21st century, every country that wants to be competitive in a global market will need access to the most efficient physical connections across a worldwide aviation network.

Given that, why does the U.S. government continue to penalize airlines, the businesses and the passengers that rely on us for domestic and global connectivity, when there are so many highly profitable industries that operate in favorable tax and regulatory environments?

The business environment for airlines in the United States is, candidly, impossible. We are saddled with tax and regulatory mandates and restrictions that are unheard of for other industries.

We report more details about our performance - whether we are on time, how many complaints we had, and how many flights we canceled - than any other industry. Can you imagine if the cable TV industry reported complaints? Or, if the metro rail systems had to report their on-time performance? Or the hotels when rooms weren't ready?

Aside from our reporting requirements, our tax burden is skewed relative to other industries. Our customers pay more in federal taxes for air travel than they do on alcohol, tobacco or guns.

A look at cruise lines also provides an interesting comparison. Customers on cruises are not charged a security fee. The U.S. Coast Guard provides security. Customs officers enable ships to travel to other countries.

For these benefits over the past five years, Carnival, as just one example, paid the equivalent of just about 1 percent of its $11 billion dollars in profits in taxes.

The airline industry combined has not enjoyed a comparable profit to this one cruise company over the same period. Over the last ten years, U.S. airlines have lost more than $55 billion and 160,000 jobs - more than a third of the entire airline work force. And that will only deteriorate further.

Ironically, while our airlines fail to consistently earn even a modest profit, commercial aviation drives more than $1.2 trillion in annual economic activity and more than 10 million well-paying American jobs. Of the industries that contribute the most to our economy, aviation is number three, right behind energy and farming.

At the same time, according to Fortune Magazine, of the 53 principal industries that make up the nation's economy, airlines are dead last in profitability.

U.S. airlines move 50,000 tons of cargo per day - these goods and exports by air are 130 times the value of exports transported by sea, and at nearly $400 billion in value, constitute nearly one third of the total value of U.S. exports.

Those are pretty compelling numbers.

The President has called to double exports in five years. But it is hard to know how that will be accomplished if the tax and regulatory environment forces carriers to further reduce capacity, as it will.

To start, we need the President, members of Congress and regulators to understand the cause and effect of their actions on the industry.

More importantly, we need their support for the creation of a National Airline Policy - and we need it now.

Four federal panels have reviewed the challenges confronting the airline industry since 1993. Most recently Secretary LaHood's Future of Aviation Advisory Committee proposed solutions that were strikingly similar to the other 3 panels including:

Reduce the industry's tax burden;

Expedite implementation of a satellite-based air traffic management system;

Expand access to rapidly growing global markets; and

Enable the U.S. airline industry to attract investment.

Secretary LaHood said the FAAC recommendations would not be put on a shelf. Let's be honest - they have been.

Let's pull them off the shelf. Let's write a flight plan - a National Airline Policy that provides the foundation from which airlines in the United States can operate successfully.

We need to finally address the issues that are stifling our airlines' ability to be a sustainable industry in its own right. Inaction, or worse, punitive interference, while other countries move forward, puts us at greater risk to foreign competition.

We are not opposed to competition. In fact, we admire and envy our competition, and other countries, for what they are doing to promote aviation as the lifeblood of their economies.

If we had a National Airline Policy in place, if we were trying to implement the FAAC rec's, the President's tax increase would not ever be on the table.

Nor would we face a variety of regulations which add significant costs without sufficient basis or commensurate benefits.

I'll mention a few: One: a proposal that carriers be forced to give all their proprietary fee data to the Global Distribution Systems - for free! Great idea"let's strengthen that duopoly.

Two: As the GAO noted two weeks ago in a 111-page report: the three hour tarmac-delay rule is prompting airlines to cancel flights, leaving passengers scrambling AND stranded.

And, three: and perhaps the most egregious, a pilot flight and duty time rule that does little to promote safety as is claimed. It is not based on data or science, nor does it account for differing business models.

When implemented, it is going to:

Cost thousands of jobs - over 27,000 according to OW study

Shrink capacity and network size in the United States, and

Giving foreign carriers, who have far more rational rules, a competitive advantage.

It's worth taking a minute to consider the combined financial impact on the industry of just the proposed changes to the flight and duty time rule and the deficit-reduction plan. Together, these proposals will cost the industry and our passengers nearly $5 billion a year.

These additional costs are to be imposed on an industry that in 2010 - one of its best years - made a combined profit of less than $4 billion. The math is self-evident. This is not an equation that works if you want to have a sustainable U.S. airline industry, let alone one that is globally competitive.

Our economy will continue to be increasingly global. Airlines will continue as the only mode of transportation that can efficiently move people and goods around the world.

The U.S. government can continue its treatment of airlines; the safest mode of transportation in the U.S. - safer than walking - which will ensure the industry withers.

There is precedent - bad as it may be - for such inaction - the U.S. maritime industry. From its height more than 60 years ago, the U.S. maritime industry has shrunk to a tenth of its former size, and carries just 2 percent of total world tonnage today.

The reasons cited for the decline of the maritime industry may sound familiar - less favorable U.S. tax policies, overregulation, competition from foreign-flag ships from rapidly growing global markets, and a lack of a coherent national maritime policy.

Better precedent exists for changing course and getting it right as we did with the U.S. railroad industry, which was failing 40 years ago. Then, from 1970-1980, Congress passed 3 laws that put railroads on the right track and moved it from worst to first.

ATA and its members are ready and willing to work collaboratively with the U.S. Government on our nation's priorities for the future, using all the good work that has already been done to address the issues facing the airline industry.

Through a National Airline Policy, the government can put a regulatory and tax structure in place that will enable the airline industry to function as a business, be sustainably profitable"create jobs, and grow the economy.

Thank you.