Volatility and losses have been the norm for the airline industry, as has its systemic failure to earn its cost of capital and achieve any level of consistent financial resilience, Glenn Tilton, chairman of the Air Transport Association (ATA) and chairman and CEO of UAL Corporation said in remarks to the UK Aviation Club.
“The industry has lost nearly $50 billion worldwide since 2000 and a staggering $11 billion last year alone,” Tilton said, arguing that a safe, secure, sustainable, and profitable airline industry that provides good value to customers is in the best interests of governments, economic recovery, and global competitiveness.
“We are critical to commerce – supporting tens of millions of industry related jobs – yet we are forced to shed airline jobs in order to survive. Economic viability is critical for our industry, just as it is for any other industry – or indeed, any government. The business environment that is “essential” and “normal’ in virtually every other industry, is outside the grasp of commercial aviation,” Tilton said.
Tilton said that the airlines are constrained by regulation from taking the necessary steps to be successful on a sustainable basis in the global market place. “The barriers to the airline industry’s economic viability are primarily protectionist policies that perpetuate outdated and restrictive regulation; as well as excessive taxation, inadequate infrastructure; inefficient security costs and other legacy issues.”
“Until governments eliminate the barriers that have been erected over time – until we are permitted to utilize the tools that enable businesses to grow and prosper – our future is not likely to be materially different from our past,” Tilton said.
“Businesses cannot be “protected” from the reality of global competition,” he noted.
“Otherwise, this underperforming industry – that is severely undercapitalized, and that suffers from government micromanagement when it is vigorously if not viciously competitive -- will not provide the efficient global network needed for 21st Century.
The elimination of economic barriers to the free flow of capital is critical to the long term viability and profitability of the industry”.
Airlines operate internationally under a patchwork of international agreements put in place through the post World War II system of bilateral agreements, Tilton said, noting an independent study that recently found that liberalization could expand GDP in 12 economies by nearly a full percentage point.
“The bilateral system prevents cross border consolidation, keeping the industry financially handicapped. In the 60-plus years since the first bilateral was signed, airlines have generated an aggregate return considerably below our cost of capital of some at 6-8 percent.”
Tilton underscored the value of airline alliances by citing this week’s JAL announcement it would stay with American Airlines in the Oneworld alliance, following a hard-fought and expensive battle to have a Japanese partner.
Tilton also took aim at excessive taxation as a major constraint on airlines. “To put our industry tax and fee burden into context: US airlines and our customers annually pay a total of some $23 billion to the FAA, the Department of Homeland Security and airports – Payments that are not far from the US industry’s current total market cap of some $30 billion. Ironically we do succeed in one financial objective; we are a very effective cash cow for government.”
“We are a global industry that powers the global economy. It is time that government enables our ability to function as such, rather than inhibit us. Treat us like any other global business, and our customers, our employees, our investors, the cities and economies we serve, and ultimately governments will all benefit,” Tilton concluded.
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