March 30, 2003
Statement of James C. May
President and Chief Executive Officer
Air Transport Association of America before the
Committee on Energy and Natural Resources
U.S. Senate
Hearing on Oil Supply and Prices
February 13, 2003
Mr. Chairman and members of the Committee, I am James C. May, president and chief executive officer of the Air Transport Association of America. I appreciate the opportunity to appear before you today to discuss the impact of current oil supply and price issues affecting the airline industry and its customers.
By way of background, ATA’s member airlines* collectively account for approximately 95 percent of the revenue passenger miles and freight ton-miles flown in the United States. With fuel representing our second largest item of expense, the recent fuel price run-up is a particular cause of concern for the future of the airline industry.
State of the Industry
The airlines are in perilous financial condition. Two major airlines, representing more than twenty percent of the industry, are in bankruptcy. Passenger carriers have reported over $10 billion in 2002 net losses. Industry debt now exceeds $100 billion, while the industry’s $15 billion total market capitalization continues to decline. Our ability to borrow to support continuing losses is evaporating. The few airlines that have been able to achieve a profit are doing so under tremendous adversity - and with the prospect of war on the horizon, the overall picture is bleak.
The reasons for the imperiled condition of the industry are clear. Revenue has declined sharply following the 9/11 attack on America. Although carriers are aggressively reducing costs where possible, stubbornly high fuel prices and escalating security and insurance costs, among other things, have combined with a particular vengeance in an under-performing economy. We have embarked on an unprecedented program of self-help to address this “perfect storm” of adversity: The industry has already achieved annual savings of over $10 billion in capital and operating expenses, and efforts are well underway to remove billions more in costs. Issues such as fuel prices, however, are obviously beyond our ability to battle alone. That is why today’s hearing and the interest of the Committee in taking action are so important.
The industry was suffering from the softening economy in early 2001. The events of 9/11, however, drove losses that year to $7.7 billion, despite the $5 billion in government compensation for the costs of the terrorist shutdown of our aviation system. Last year the picture darkened when despite industry cutbacks in spending, losses topped $10 billion. And analysts predict that the industry will lose another $4 to 6 billion this year, meaning that airlines are on target to lose about $25 billion in the 2001 to 2003 period.
Current Fuel Price Trends
In the first eleven months of 2002, our fuel prices increased by 27%. Even more alarmingly, since the beginning of December, this rate of increase has grown to 55%. This run-up is being fueled by conditions in the U.S., where oil futures have soared on high demand combined with weak supplies and war jitters. As a result, Jet A spot fuel prices have increased 100% in just one year. We have not experienced price increases of this magnitude since the Gulf War buildup in the fall of 1990. However, the circumstances the industry finds itself in today are vastly different. The current fuel price increase is taking place against a backdrop of economic chaos in the airline industry. There is no cash cushion, no borrowing capacity, and no apparent relief in sight.
On the surface, the sources of our current fuel price problems are Venezuela, the weather, and the Middle East situation. Since the beginning of the general strike in Venezuela in December, we have seen a significant reduction in our crude oil stocks and refined product inventories. At the same time, the more severe winter weather we have been experiencing in the home heating oil belt, has resulted in a steep decline in home heating oil inventories.
Added to the reduction in supply, the tensions and uncertainties surrounding availability of Middle Eastern supplies has resulted in the price of crude oil being bid up. Moreover, Iraq is currently exporting 2.3 million barrels per day. In a scenario that includes a complete shutdown of Iraqi oil, and with Venezuela remaining out of the picture, demand would exceed OPEC’s capacity by a substantial margin. Under such a scenario, prices are likely to continue to rise.
Impact of Fuel Cost Increases on Airlines and Consumers
Increases in fuel prices affect the airlines in two ways; the cost of fuel has an obvious and direct impact on the cost of operation, and fuel cost increases have repeatedly triggered economic recessions, which in turn result in a substantial decline in demand for air travel and air cargo. Fuel price increases have a particularly adverse impact on airlines because even in good time fuel costs constitute roughly 10-12% of our operating expense. Every penny increase in the price of jet fuel costs the airline industry $180 million a year. In the absence of pricing power - the ability to pass these costs along in the form of higher airfares - these increases come right off the bottom line.
An even more pernicious aspect of the fuel price increase is the relationship between the economy and air travel. The link between fuel prices and the health of the economy is clear. Three of the major recessions of the past thirty years can, in large measure, be attributed to the steep increases in fuel prices that accompanied the 1973 Middle East oil embargo, the 1980 Iran Crisis, and the1990-91 Gulf War. (See Chart I below) The airline industry is inextricably tied to the overall economy - even minor recessions result in reduced demand and increased sensitivity to prices for leisure as well as business travelers.
Past fuel spikes and attendant recessions have brought about widespread hardship in the airline industry. As Chart II shows, airline profitability suffers as a direct consequence of a weakening economy. During the first Gulf War, almost half of the major airlines filed for protection under Chapter 11 of the Bankruptcy Code, long-standing airlines went out of business, more than 100,000 airline employees lost jobs, and the industry went into a financial tailspin from which it took years to recover.
We all have much at stake - it is not simply a matter of airline finances; it is the national economy. Civil aviation has a profound impact on the U.S. economy. A recently completed analysis performed by DRI-WEFA found that in calendar 2000:
[1] Civil aviation’s total impact on the U.S. economy amounted to 9 percent of GDP.
[2]$343 billion and 4.2 million jobs were produced in civil aviation or in industries related to civil aviation such as travel and tourism.
[3]Combined direct, indirect, and induced economic impact of civil aviation totaled $904 billion and 11.2 million jobs.
Unquestionably, the financial situation of the airlines has had a negative effect on the U.S. economy. Of the jobs lost in the United States since 9/11, fully half - 462,000 jobs according to the Bureau of Labor Statistics - have been in the travel and tourism sector. As airline pain spreads, communities across the country are rapidly affected. Forced contraction in the industry means less service or no service to some communities, increasingly isolating them from the economic mainstream. The adverse impact on consumers and the broader economy is extensive.
Conservation Measures
The airlines are doing everything they can to conserve fuel. Throughout the history of commercial aviation, airlines have insisted upon the most fuel-efficient aircraft possible and have worked with airframe and engine manufacturers to reduce fuel consumption. Today’s fleet is nearly three times more fuel-efficient than the fleet we were operating at the time of the first OPEC fuel crisis. In fact, our fuel conservation efforts have resulted in a fuel consumption rate of almost 40 passenger miles per gallon in today’s aircraft - a rate that compares favorably with the most fuel-efficient automobiles.
Changes in cruise speed, use of flight simulators, sophisticated flight planning systems, increasing load factors and the introduction of newer, more aerodynamic aircraft designs combined with modern engine technology, are all recent success stories. Airlines continue to look at every possible facet of their operations to further improve fuel efficiency through measures like taxiing on one engine, delaying startup and push back, removing all discretionary weight, and using ground power instead of on-board auxiliary power units while at the gate. These and similar measures are increasingly being used where commensurate with safety considerations to save fuel and, not incidentally, to reduce emissions. However, as of today our options for further dramatic improvements on the order of what we have been able to achieve over the past few decades are limited.
Recommended Actions
ATA recommends several actions to alleviate the situation and reduce the cost burden that falls so heavily on oil-dependent consumers like the U.S. airline industry. First, we urge the Congress to press the Administration to implement releases of at least one million barrels per day from the Strategic Petroleum Reserve (SPR) until the arrival of the Middle East oil expected as a result of the OPEC quota increase to offset Venezuelan sources. We believe that these releases - whether in the form of loans to refiners or sales - will have an immediate impact on crude and refined product prices, significantly reduce the so-called “war premium” currently hanging over oil markets, and help stave off further economic dislocation.
Secondly, as a modest demonstration of a national commitment to bringing oil prices down, the 4.3 cents per gallon jet fuel tax adopted in 1993 must be repealed. Repeal of this tax, which currently adds about $600 million annually to the airlines’ fuel cost burden will have an immediate benefit on cash flow at a time when air carriers are running low on cash.
The Strategic Petroleum Reserve was established to compensate for times of supply disruption. Based on both inventory and price data, we are currently suffering a supply disruption. While some people suggest that the SPR is like a rainy day fund and should be tapped only during the most adverse circumstances, the fact is, Mr. Chairman, we are in a storm. The higher oil prices we are experiencing are devastating to the airlines, the travel and tourism sector, and the overall economy. A 1 million-barrel per day release from the strategic petroleum reserves would be the equivalent of major tax relief at no cost to the U.S. Treasury. It would provide a huge boost to our struggling economy.
In the absence of a crude oil infusion, the high prices we are seeing today will spread as the spring refinery turn-around season commences. The continuing strain on inventories will linger into the summer driving season with the attendant high prices and further dampening effect on the U.S. economy. Thus, we believe that the entire economy will significantly benefit were the administration to begin releases from the strategic petroleum reserves. Instead of refined product drawdowns we would have the opportunity to keep our refineries running full out, and the summer season gasoline stock build could begin on schedule.
A release from the SPR will have an immediate impact on the prices paid for jet fuel, home heating oil and other consumer fuels. Remember that every penny the price drops for jet fuel is a cost saving of $180 million to the airline industry, $70 million to the home heating oil consumer, and $750 million to motorists. Previous releases have demonstrated the salutary effect on oil market, but more often than not these previous releases have been a too small and too late - like taking an over-the counter remedy for an infection that has been allowed to fester for weeks. We can not wait until the effects of higher fuel prices have spread throughout the economy - we need an immediate infusion of relief.
Conclusion
Mr. Chairman, the national economy has much riding on the outcome of our engagement with Iraq. Even before we enter the fray, however, the Congress and the administration can take steps in the area of energy policy to control the runaway price spiral currently underway. We urge you to repeal the 4.3 cents per gallon jet fuel tax now and to call upon the administration to release crude oil from the strategic petroleum reserves in order to deliver some short term economic relief for the industry and ultimately our customers.
The problems facing the airline industry have a direct and substantial effect on the overall economy. By the same token, the prescription we propose will have broad benefits for all of our citizens during this period of economic uncertainty. When the economy benefits, the airlines, our employees and our customers benefit as well.
*ATA member airlines include: Airborne Express, Alaska Airlines, Aloha Airlines, America West Airlines, American Airlines, American Trans Air, Atlas Air, Continental Airlines, Delta Air Lines, DHL Airways, Emery Worldwide, Evergreen International Airlines, FedEx, Hawaiian Airlines, JetBlue Airways, Midwest Express Airlines, Northwest Airlines, Polar Air Cargo, Southwest Airlines, United Airlines, United Parcel Service Airlines, and US Airways. Associate members include: Aeromexico, Air Canada, Air Jamaica, KLM Royal Dutch Airlines and Mexicana.
From:
http://www.air-transport.org/public/testimony/display2.asp?nid=6433
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