U'S' Aviation Policy: The U'S' Industry Perspective

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U.S. Aviation PolicyThe U.S. Industry
Perspective

• David A. Berg
• Vice President General Counsel
• Air Transport Association of America, Inc.

Air Transport Association of Canada Annual
General Meeting November 15, 2004
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U.S. Airline Industry Perspective

• Aviation Policy in the U.S.
• The Impact of Aviation Security on U.S. Airlines
• The U.S.Canada Aviation Relationship

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U.S. Airline Earnings Cumulative Net
Loss2004 Net Loss Will Compound 2001-03 Losses,
Which Exceeded 1995-2000 Gains
Includes 1.9B DAL special charge
Notes 2001 and 2002 include federal compensation
remitted to air carriers under P.L. 107-42
(roughly 5B pre-tax distributed over two
calendar years) 2003 includes federal
reimbursements (roughly 2.3B pre-tax) for
security costs imposed and estimates for
concessions, offset by SARS and the War in Iraq.
Source ATA research
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Aviation Policy in the U.S.

• Policy Goal
• Unified policy that (1) recognizes the effects of
  legislative mandates and externalities on
  aviation, and (2) allows for a healthy commercial
  airline industry.
• Challenges
• Industry Economic Value Not Appreciated
• Fragmented Approach
• Fatigue Factor
• Federal Budget

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Policy Challenges

• The Importance of a Healthy Aviation Industry to
  the U.S. Economy is Not Fully Appreciated
• Total 800 Billion Impact in 2000
• 8 GDP
• Ultimately Drives 10 Million Jobs
• The Government Seems Content to let External
  Factors Dictate Success or Failure

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Commercial Aviation Facilitates Economic
GrowthGDP Contribution 800B (8) in 2000
Any medium that reduces the element of time in
travel and communication will eventually assume a
commanding role in the affairs of men.
Developed in embryo as a Government
undertakingthe American air transport industry
serves as an indispensable instrument of
domestic, overseas, and foreign commerce and
social intercourse. Beyond doubt, the scheduled
air transport industry has influenced and
stimulated many of our other national
industries. Edgar S. Gorrell, President, Air
Transport Association of America (January 1, 1937)
GROSS DOMESTIC PRODUCT
Impact Implicit Share Component
(Billions) Multiplier () The Industry
(Direct) 306.4 3.1 The Source Chain
(Indirect) 224.7 1.7 2.3 The Income Impact
(Induced) 270.9 1.5 2.7 TOTAL GDP
IMPACT 802.0 2.6 8.1
U.S. GDP in CY2000 was 9.9 trillion Source
Global Insight (formerly DRI? WEFA), The National
Economic Impact of Civil Aviation (July 2002)
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Commercial Aviation Facilitates EmploymentJob
Contribution 10.0M (7) in 2000
NATIONAL JOB IMPACT
Direct Other Total Sector (000) (000) (000) Air
Transport (incl. Training) 1,172 1,893 3,065 Aircr
aft 205 701 906 Aircraft Parts 136 465 601 Airport
Expenditures (incl. Svcs.) 437 223 660 Federal
Government (FAA/NASA) 75 38 113 Tourism by
Air 1,680 2,697 4,377 Travel Arrangement 47 172 21
9 Freight Forwarding 7 16 23 TOTAL JOB
IMPACT 3,759 6,205 9,964
Total full-time equivalent U.S. employment in
CY2000 was 135.2 million Source Global Insight
(formerly DRI? WEFA), The National Economic
Impact of Civil Aviation (July 2002)
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Policy Challenges

• Fragmented Policy Approach
• Taxes User Fees
• Airport Fees Development Costs
• Security Costs Fees
• Regulatory Costs
• Operations Maintenance
• Economic / Consumer Protection
• ATC Modernization
• Oil Policy Prices

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Policy Challenges

• The Fatigue Factor
• Congress
• Why are you back again?
• Administration
• White House OMB
• DOT FAA
• Treasury / ATSB

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Policy Challenges

• Federal Funding Insufficient / Inefficiently
  Used
• DHS
• TSA
• CBP
• FAA
• Air Traffic Organization
• Response Pressure for Additional User Fees
  and Taxes

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Aviation Policy in the U.S.

• Policy Goal
• Unified policy that (1) recognizes the effects of
  legislative mandates and externalities on
• aviation, and (2) allows for a healthy
  commercial airline industry.

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Aviation Policy in the U.S.

• ATA Priorities
• Enhance Policymaker Understanding of
• Aviations Role in U.S. Economy
• Focus on Key Issues
• Reduce Tax/Fee Burden
• Support Energy Policy Reduce Fuel Costs
• Improve ATC/Airport Capacity
• Rationalize Trust Fund Contributions
• Reduce Security Costs
• Relax Foreign Ownership Limits

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Key Issues

• Reduce Tax/Fee Burden
• Aviation is Heavily Taxed Over 14 Billion in
  Federal Taxes and Fees in 2004.
• Tax Burden Expected to Grow in 2005
• 200 ticket 26 tax rate
• 300 ticket 20 tax rate
• Nearly triple 1972 rate

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Federally Imposed/Approved Aviation Taxes and
FeesOver 14 Billion Estimated for Fiscal Year
2004
Some taxes and fees shown include collections
from non-U.S. carriers.
Sources ATA Federal Aviation Administration
U.S. Department of Agriculture U.S. Department
of Homeland Security U.S. Office of Management
and Budget
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Special Aviation Taxes and FeesHistorical
Perspective on Federally Imposed or Approved
Charges
Tax/Fee Agency 1972 1992 2004 Passenger Ticket
(Excise) Tax FAA 8.0 10.0 7.5 Passenger
Flight Segment Tax FAA - - 3.10 International
Departure Tax (IDT) FAA 3.00 6.00 13.70 Interna
tional Arrival Tax (IAT) FAA - - 13.70 Frequent
Flyer Tax FAA - - 7.5 Cargo Waybill
Tax FAA 5.00 6.25 6.25 Jet Fuel
Tax FAA - - 4.3/gal Leaking Underground Storage
Tank (LUST) Fuel Tax EPA - 0.1/gal 0.1/gal Pass
enger Facility Charge (PFC) Airports - 3/12 4
.50/18 September 11th Fee DHS - - 2.50/10 Avi
ation Security Infrastructure Fee
(ASIF) DHS - - 315M APHIS Passenger
Fee DHS - 2.00 3.10 APHIS Aircraft
Fee DHS - 76.75 65.25 Customs User
Fee DHS - 5.00 5.00 Immigration User
Fee DHS - 5.00 7.00
Tax applies only to domestic transportation
prorated on flights between mainland U.S. and
Alaska/Hawaii Statutory maximum shown per
segment and per round-trip journey Animal
and Plant Health Inspection Service is currently
part of the U.S. Department of Agriculture, but
is being migrated to DHS
Sources ATA Federal Aviation Administration
(FAA) U.S. Environmental Protection Agency
(EPA) U.S. Department of Homeland Security (DHS)
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Taxes/Fees on a 300 Ticket Have Nearly
TripledUncle Sams Bite Up Sharply Over Three
Decades
2004Taxes 20 (59)
1972Taxes 7 (22)
1992Taxes 13 (38)
Sample itinerary assumes one-stop domestic
round-trip with maximum passenger facility charge
(PFC) per airport 300 total price includes
taxes and fees.
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Pretax Financial Impact of Federal Security
MandatesHOMELAND SECURITY FEES FY04 Projections
as of Nov-04
Note Not incremental post-9/11
Note Previous surveys included war-risk
insurance, but did not include all U.S.
Department of Homeland Security (DHS) fees.
Source ATA
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Key Issues

• Reduce Fuel Costs
• Fuel prices increased more than 60 in 2004
  compared to 2003, equating to 5-7 billion in
  additional fuel costs
• 425M Barrels at 42/bbl v. 31/bbl in 2003 and
  26/bbl in 2002

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Post-2001 Fuel Prices Soaring to Record
HighsCrude Oil to Reach Record High in Nominal
Terms in 04 No Relief Seen in 05
Daniel Yergin, chairman of Cambridge Energy
Research Associates, agrees that it would be a
mistake to underestimate the effect high oil
prices have already had on the world economy. He
points out that thelosses suffered by the
airlines mirror the increase in their fuel bills.
We are not that far behind the high prices of
the early 1980s even in real terms (James
Boxell, Financial Times, September 16, 2004)
West Texas Intermediate at Cushing,
Texas Source PIRA Energy Group and Air Transport
Association
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Post-2001 Fuel Surging to Record HighsCrude gt
50/Barrel Hedging, Point-of-Sale Keep Jet Price
Paid Below Spot
Crude Oil /bbl 2001 26 2002 26 2003 31 2004F
42 2005F 42
FORECAST
West Texas Intermediate (WTI) at Cushing,
Texas Sources U.S. Department of Transportation,
Energy Information Administration and PIRA Energy
Group
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The Industry1 Would Have Been Profitable If Not
For Higher Fuel Prices Third Quarter Operating
Profits Actual and Adjusted2
1 American, Continental, Delta, JetBlue,
Northwest, Southwest, United, US Airways. 2
Adjusted operating profit applies last years
fuel prices to this years consumption
levels. Source Carrier Data
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Key Issues

• Reduce Fuel Costs
• Federal Energy Policy
• Other
• Strategic Petroleum Reserve
• Speculator Impact
• Regulatory Changes
• fuel requirements
• separation requirements, etc.

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Key Issues

• Improve ATC Airport Capacity
• ATC Modernization
• RNP/RNAV Implementation
• Runway and Airport Development Where
• Needed (LAX, ORD, ATL)
• Minimize Business Jet Impact at Critical
• Airports
• Demand Management is Not The Answer

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Key Issues

• Rationalize Trust Fund Contributions
• 100 of FAA's capital expenditures and well
• over half of its operating expenses
• 98 of Trust Fund - Commercial Aviation
• In FY 2004, 9.565 billion from commercial
• users. Only 0.18 billion from the general
• aviation (GA) community
• Business Jet Contribution is Insufficient
  

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Key Issues

• Reduce Security Costs
• 3.8 Billion in 2004 combined fees,
• compliance costs and foregone revenue
• ASIF Fee Increase Attempt in FY 05
• Expect Similar Effort for 06
• Operational Impacts
• New Requirements Coming

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Pretax Financial Impact of Federal Security
MandatesTOTAL 2004 Projections as of Nov-04
Airport charges and capital modifications,
screening of catering supplies and materials,
checkpoint document verifiers, exit lane
monitors, ramp and airfield security,
first-departure-of-the-day cabin sweep, training
and equipment, cargo screening, other
un-reimbursed out-of-pocket expenses
Note Previous surveys included war-risk
insurance, but did not include all U.S.
Department of Homeland Security (DHS) fees fees
shown on fiscal year basis.
Source ATA
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Key Issues

• Foreign Ownership
• Limited to 25 Ownership Voting Rights
• Capital Requirements Unmet
• Expanding to 49 Should Encourage Cross-
• Border Investment
• Three Primary Issues
• Labor Protection
• Military Airlift Requirements
• Security

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Aviation Security

• Looming Issues for Airlines
• Secure Flight (CAPPS II)
• MANPADS
• Cargo Security
• Privatized Screening / Airports
• Registered Traveler
• ASIF Fee Increase
• Congress Must Fund Aviation Security
• Consistent With Responsibilities Given to TSA

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U.S.-Canada Relationship

• Extremely Important Relationship
• 1995 Open Transborder Agreement has Worked
  Well
• Open Skies
• Full Fifth Freedom Rights
• Co-terminalization for Cargo Carriers
• Cabotage U.S. Law
• Foreign Ownership U.S. Law

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The Air Transport Association of America,
Inc.November 2004
Combination ServicesAlaska AirlinesAloha
AirlinesAmerica West AirlinesAmerican
AirlinesATA AirlinesContinental AirlinesDelta
Air LinesHawaiian AirlinesJetBlue
AirwaysMidwest AirlinesNorthwest
AirlinesSouthwest AirlinesUnited AirlinesUS
Airways
All-Cargo ServicesABX AirASTAR Air CargoAtlas
AirEvergreen Intl AirlinesFedEx
CorporationMenlo Worldwide ForwardingPolar Air
CargoUPS Airlines
Associate MembersAeromexicoAir CanadaAir
JamaicaMexicana
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