- The Washington Times - Wednesday, July 10, 2002

The economic underpinnings of the airline industry are fragile, even in the best of times. Historically, the industry has operated on a precarious balance of profit and loss, but has always managed to move from one crisis to the next and, in the process, to drive a huge sector of the economy.
But there are ominous signs that government decisions following the September 11 terrorist attacks and related costs the industry has had to sustain may have tipped the scale so far out of balance that we cannot manage our way back to equilibrium unless government policies are modified.
The airlines lost $7.7 billion last year despite federal compensation for the September system shutdown and its related losses. In the first quarter of this year, those losses continued to mount by another $2.4 billion. Today, the industry is carrying an on-balance-sheet debt burden of nearly $110 billion, with debt-to-capital ratios more than double those of other industries.
For virtually its entire history, the airline industry has suffered from an inability to keep wages in line with productivity. More than any other factor, this has left the industry teetering chronically on that fine balance point between success and failure. It is a situation that is unhealthy for the airlines, for their employees and for the economy in general.
Although this affliction has left the industry vulnerable to failure and needs to be corrected, it is not what has placed the industry in peril and threatens the broader economy. Much of the cause traces to governmental policy decisions that have imposed higher taxes, witnessed dramatically increased industry costs and depleted industry revenues from the reduction of mail and freight.
The consensus projection of a $4.7 billion industry loss in 2002 is nearly equaled by the total estimated increases in taxes, security-related costs, insurance rates and the revenue losses from other governmental policy decisions. Under current conditions, the airlines have no ability to pass these costs through to the consumer. Rather, these taxes decrease the revenues derived by airlines to run their operations and require the airlines to accumulate more debt to continue operating. That ballooning debt will impede a healthy, growing industry for years to come.
The total impact of civil aviation in the United States has been measured at a full 9 percent of the gross domestic product. That is more than $900 billion and 11 million jobs, with commercial aviation generating directly, indirectly and through induced spending and hiring $800 billion of that figure. Clearly, the aviation industry is a substantial component of the U.S. economy.
Prior to September 2001, the airlines planned to acquire 283 new aircraft in 2002, with options for 186 additional aircraft. These numbers have already been cut by 30 percent. With hundreds of aircraft sitting idle in the desert and $110 billion in debt to be serviced, placing new orders is virtually out of the question for many carriers.
Similarly, the acquisition and improvement of new systems and facilities benefiting the traveling public will be curtailed. With those cutbacks, jobs in aviation and in the broader economy will continue to stagnate. Without pricing power, but faced with mounting costs, airlines are scrupulously careful in trying to maximize what revenues they can derive. This always leaves more marginal markets in danger of losing service. The answer to correcting this situation flows from what we know is wrong.
We need to change the way government thinks about aviation security and the idea that travelers should pay "user fees" to be protected from terrorism. We should expect the government to allocate the appropriate resources to defend all of us against these threats.
We need to halt the excessive taxation of the airline industry. Excessive taxation particularly at a time when the industry lacks any ability to pass on these costs runs the risk of destroying the circulatory system of our economy at the very time we need it to be at optimal performance.
We need to focus our national resources on a system that provides both excellent security and excellent customer service. In doing so, we need to make the best possible use of technology, including information technology.
We need to eliminate the imposition of unfunded mandates on the industry. Security costs for protection against terrorism must not be masked with other labels and passed on to the industry.
Finally, we need to do everything possible to support the creation of the Department of Homeland Security and to consolidate its financing and controls. President Bush's proposal to establish this Cabinet-level department rightfully recognizes aviation security as a federal governmental responsibility and a subset of national security. And as such, we believe that general tax revenues should finance these aviation security functions.
The stakes are high. Nothing is more serious than the safety of society, and the strength of America's economic system that supports it.

Carol Hallett is president and CEO of the Air Transport Association.


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