Air Transport Association President Carol B. Hallett December 18 address to the Wings Club
Thank you Dan and thanks to all of you, who have been such great supporters of the Wings Club through the years. I know it may be hard to believe -- but after eight years, I am truly going to miss being the head of the Air Transport Association. If you had been
with me last weekend, to hear my husband Jim''s plans for me as his #1 farmhand, you''d really know why I feel the way I do!
That having been said, our airline industry is a tremendous national treasure. It has contributed immeasurably to our strength as a nation. And it is vital to our future success. Today, that national treasure is caught up in a perfect storm. A perfect storm that threatens to devastate the industry and our economy. And that is what I want to talk to you about. With my fast-approaching and secure position on the farm, I can tell you what I really think.
Three converging fronts have brought us this perfect storm. The first was everything that resulted from the September 11, 2001 attacks on the United States. The security issues; the inhibition of travel; the economic drag and added security expenses; and on and on.
The second front, candidly, was the industry''s cost structure. Our industry has always struggled against excessive labor rates -- its major controllable cost. As a result, the industry has been chronically weak, but it has always managed to survive to fight another day. That is, until now.
The third front was the general state of the economy. It was clearly in decline before the attack and has yet to bounce back. The convergence of these fronts has exposed this chronic weakness. And it necessitates a permanent strengthening of the industry. This is of vital importance -- not just to our industry and our employees -- but it is absolutely critical to the health of our nation''s economy.
However, unlike the weather, there are things we can do about the crisis in our skies. First, on the security front, the devastating blow of 9/11 rocked America to its core. Characteristically, we shook off the blow, and came back strong. Our country -- lead by President Bush and his administration, and the Congress -- has risen to the challenge.
We -- the airlines, the airports and the Transportation Security Administration -- are now engaged in the most massive domestic mobilization ever undertaken. Conservatively estimated, we are likely to spend in excess of $10 billion to fully deploy the planned security regime for our aviation system over just the 2002-2003 period. Unlike in business, where the concept it is the planning, not the plan is well understood, things become more difficult when government action is involved.
We ought to let our security experts do what they do best -- establish a smart, effective, efficient and dynamic security system. These experts need the resources to do the job; they need our support and commitment, and they need responsible oversight. Most of
all they need flexibility.
I do not say this in criticism of the Congress, the Administration or most especially the TSA. All of these institutions have stood up and done an incredible job over the past fifteen months. But, what we are doing is mechanically deploying a security system built
around technology, procedures, dates and checklist solutions.
With all due respect, the governmental approach should be tempered by adopting the business model -- to allow adjustments and improvements -- even fundamental rethinking, -- based on real-time information and real-world experience. We must have a responsive, adaptive security regime that changes and learns from experience -- and is not bound to a rigid, routine approach.
And believe me, we need a security system that learns how to keep its secrets. Hardly a day goes by that you don''t hear a story about the details of aviation security. We are all guilty -- and it has to stop! The airlines, the airports, the TSA and -- dare I say it -- even the Congress talk too much.
It is time for all of us to say to the public and the media -- we are simply not going to talk in public about aviation security. There is an appropriate place for those discussions, but it is not on the front page or in front of a camera.
And the security-expense issue is also a huge contributor. The airlines and their customers are now shouldering additional security-related burdens exceeding $4 billion annually. So let me be blunt.
We cannot afford it. It is breaking the back of this industry. And it threatens the strength of the national economy.
The idea that travelers and shippers should pay user fees to have themselves protected from terrorism is outrageous! We don''t charge a security fee to protect our citizens from terrorists when they ride a subway. We don''t charge a security fee to visit a museum.
The attacks on the United States on 9/11 were just that: attacks on the United States and all that it stands for. Defending against such foreign aggression is -- without question -- the responsibility of our government. The more than $4 billion in security-associated
costs and lost revenue should be funded just as we fund the Department of Defense -- not passed on to industry.
The second front was the industry''s cost structure and the inadequate flow of revenue to cover costs. For two decades, the industry''s total revenues have stayed in a tight range between .9 and 1 percent of G.D.P. Even with all of the cycles we have been through -- like 1999 when earnings topped $4 billion and 1992 when losses mirrored that amount -- our total revenues remained in tight sync with the broader economy. In the last year, our revenues have fallen off the chart. They are now about .7 percent of G.D.P. This is an ominous drop, and the disparity between revenues and costs cannot be ignored.
I am constantly amazed when I hear folks -- even those associated with our industry -- try to avoid the obvious. And frankly, I am disappointed to hear some labor leaders ignoring the serious impact of excessive labor costs. Instead they blame excessive Internet fare discounting and mismanagement of pension funds for the industry''s economic woes.
Labor costs are a big part of a complex problem. And they must be dealt with effectively and fairly. Today, average employee compensation for the six large, pre-deregulation, network carriers is nearly $85 thousand per year -- compared to a U.S. industry average of about $50,000. These levels cannot be sustained.
A good friend from Texas who happens to run an airline, once said that he was just a little flea, flying around the hooves of the race horses. Well, unless they adapt and evolve, there is a real risk that those race horses will turn out to be dinosaurs.
Bob Crandall, another friend from Texas, said just last week, There are three problems -- costs, costs, costs. At the heart of these matters are labor costs.
As to the other controllable costs -- airlines are doing everything possible to find savings. Capital expenditures have been cut back by almost 50 percent. Capacity has been reduced by 13 percent. Over 80,000 jobs have been eliminated and 30,000 more have been announced. Nearly 600 additional airplanes have been parked in the desert.
Each carrier and its unions have to determine what best meets their needs. But shouldn''t long-term, secure, well-paying jobs with financially vibrant companies be the goal?
The constant push for industry-leading wages through pattern bargaining -- too often results in less productivity for more money. And it grossly undermines that goal. This thinking has often harmed the very employees who it claims to benefit.
It is noteworthy that several unions have recently agreed to givebacks to help meet the financial needs of airlines – particularly those seeking to reorganize under Chapter 11. These concessions by labor, while applauded, also signal a broken system
of negotiation.
Wouldn''t it be better to reach agreements that assured the long-term health of the industry, rather than continuing this debilitating boom-and-bust cycle?
It''s time for a new approach.
Imagine that United Airlines and US Airways succeed in righting themselves, only to find themselves in the exact same dilemma ten years from now. That would be an intolerable twist of fate for airlines, their employees, and for those who rely on air service. What good is it to fix the current problems of the industry with temporary solutions when permanent ones are required?
The long-term solution must include reform of the Railway Labor Act of 1926. This law, which governs the airline negotiating process, has left the industry vulnerable and urgently needs to be corrected. It has failed to prevent strikes, it encourages acrimonious negotiations, and it leads to agreements that dangerously weaken the airlines. It is an antiquated law written in a different era for a different industry.
This situation became the impetus for establishing Communities for Economic Strength Through Aviation or CESTA, a coalition of more than 400 organizations nationwide. By bringing the voice of the public to the debate, CESTA favors reform of the Railway Labor Act to avoid future crises.
The third component of the perfect storm, was the general state of the national economy. Now if I had the prescription to revitalize the economy, I think I could persuade Jim Hallett to let me out of my farm obligations -- and say…take over the Federal Reserve! Unfortunately, I am not going to get that break.
However, I do know what could be done immediately to put the airlines on the path to recovery. I am talking about taxation -- and the adverse impact of airline-specific taxes on our nation''s economic well being. With its roots in the days when air travel was for the elite, there has long been an inclination to tax air transportation. The result has been airline consumption taxes, which exceed sin tax rates on alcohol and tobacco.
In a relatively strong economy, these taxes dampen demand, but they can, at least in part, be passed on to willing consumers. In today''s environment, however, with soft demand and excess capacity, low prices are the only mechanism available to encourage travel. As a result, there are no add-ons to the price of a ticket. The so-called passenger taxes and fees -- the 13 separate taxes or fees that pre-date the 9/11 charges -- come right off the bottom line of the carrier.
Over the past two years, nearly twenty percent of the industry''s $100+ billion in balance-sheet debt can be related to losses driven by tax and fee payments. This is not simply a problem for the airlines -- it''s a problem for all of us.
As a direct consequence of excessive taxation, the industry is shrinking. Smaller and mid-size communities, in particular, are seeing less service -- or no service. As the local impact of these service reductions reverberates through hotels, restaurants, rental cars, etc, airline losses are multiplied. Upline the job losses will continue for aviation manufacturers and suppliers -- and through these to still other sectors.
As the ATA Board said last week, it is imperative that Congress and the administration take a serious look at the adverse impact of the cumulative tax burden now borne by the airline industry.
Leo Mullin said recently, and I paraphrase -- even if airlines paid industry tax rates that were just slightly less than the distilled-spirits industry and about equal to the handgun industry -- still far in excess of other transportation industries such as rail and bus -- that would reduce our industry-specific taxes by 50 percent and industry savings would total $4.6 billion.
Combine this $4.6 billion savings with the estimated $4.2 billion industry impact of post- 9/11 government security actions and the total reaches $8.8 billion. Ladies and gentlemen, $8.8 billion represents a huge portion of the industry''s 2002 pre-tax losses. These government policy changes would give the industry a fighting chance.
And Leo''s last point brings me to mine -- the risk that major government intervention might be necessitated -- including possible nationalization of the carriers. If industry and labor self-help, combined with government''s addressing the security and tax issues fail, the risk of an industry meltdown is very real.
If we do not address all these problems in a concerted way, the aviation system that unites our country could well cease to function effectively. The last thing in the world any of us wants to see is the government forced to take ownership or control of the airline industry.
We have the opportunity today to act responsibly to restore the economic health of this national treasure -- but time is running out. So before it does, let me be absolutely clear about what needs to change if we are to master the storm.
First, for the airlines.
We need to find a way to reestablish high public regard for the airlines. Just five years ago, the public approval rating for the industry was 70 percent. A recent survey showed approval ratings for the major airlines had dropped to 54 percent. That is unacceptable -- and it is a prescription for political failure as we search for solutions involving public policy choices.
It is a complex situation -- and there are no easy answers. But, the important first step is to recognize that the public expects the airlines to solve their problems. It is not just labor and the government that need to act. And we need to show that we know that, and that we are acting responsibly.
Second…organized labor.
The simple truth is that for the legacy carriers, wages and work rules are out of whack with productivity and revenues. Companies that are losing millions of dollars every day or week -- with no prospect for an early turnaround -- are simply not going to stay in business.
There are choices to be made. Is it full pay to the last day or do we want good, solid, well-paid positions for the long term?
It is not a question of blame. We are where we are and we must deal with the numbers as they stand. But, we need to get serious -- and quickly -- to keep these companies going.
And third and finally, is the government.
As I''ve said, the industry cannot afford the security expenses it has been given. They are dragging the industry down for the third time. We must see security costs assumed fully by the government. Further, in the short term, the industry must have more generalized tax relief as it fights its way back to the surface.
We must deal with all fronts at once -- through a mutual public compact if need be. If only one or two of the fronts move, we''ll still be an industry in crisis. The three are the problem and the three have the solution.
We must act together! We must act now! Because we cannot afford to fail! Thank you.
