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Oct242011

« The Ultimate Unintended Consequence: Government Proposals Will Kill Small Community Air Service »

Ten Reasons Why

I’ve been on the road for six weeks, traveling to communities large and small to discuss the grim future of small community air service in the face of economic pressures on regional airlines.

Those pressures only begin with jet fuel at a price equivalent of $120 per barrel, but the factors are many. They include the reality that: 

2) There are no aircraft of 50 seats or less in the production pipeline

3) All regional flying contracts will come up for bid between now and 2017 and likely will not be renewed by the mainline carriers

4) Low Cost Carriers in a regional market’s catchment area are drawing traffic to larger airports at the expense of smaller airports

5)  A growing pilot shortage will hurt the regional carriers first as regional pilots will find work on the mainline

6) Proposed FAA flight time/duty time regulations that put new limits on pilot flying hours will force regional carriers to hire more pilots to do the same amount of flying the sector is doing today

7) Congress, in a questionable response to the Colgan crash, passed a law requiring 1500 hours of training time for a commercial pilot

8) Most manufacturers won’t produce commercial airplanes smaller than 100-seats as most airlines can’t afford to sustain many routes with smaller planes

9) Negotiations between mainline pilots and management over new scope language is as emotional and contentious as it has ever been.

10) Proposed tax increases certain to punish the smallest of markets.

The Administration’s 2012 budget proposal already levies a $100 fee for every airplane departure in controlled airspace, costing passengers and the industry more than a billion dollars a year.  It also seeks to double the “security tax” paid by passengers to $5 per one-way trip, and triple the tax to $7.50 by 2017.  The total price tag for that proposal: $25 billion – $15 billion of which would be diverted for deficit reduction. The proposals together will cost passengers and the industry $36 billion over the next 10 years.

Air Transport Association of America CEO Nicholas Calio said it best when he said Washington is treating the airline industry like it treats  alcohol and cigarettes – taxing the hell out of it  as it does with “sin taxes” as if Congress actually wanted to discourage flying.  While I assume that’s not the government’s intent, it may well be the result.”

I do find it ironic that the government is seeking to tax an industry an incremental $36 billion over the next ten years after it lost $65 billion over the past ten years.  But I digress.

Let’s not forget that the airline industry ranks as the third greatest producer of economic activity in the US.  In my view, there is no way the industry can absorb these financial and regulatory pressures imposed by Congress without negatively impacting airlines and their role in driving economic activity. And the industry’s first response would be to remove marginal capacity from the system of production.  Where will they look to trim capacity even further – San Francisco to New York or Cincinnati to Des Moines?

Of course, airlines might try to pass new costs onto passengers, just as most industries do when faced with higher costs and limited opportunities for expansion. In this market, however, it is hard enough to simply add a few bucks to the price of a ticket to cover the rising cost of oil.  Imagine the impact of trying to pass on costs that will total billions at a time business and leisure travelers are counting pennies.

Typically, excise taxes like sin taxes work best in industries that have more control over the pricing. That is not the case in the airline industry.  Sin taxes are most successful on industries that produce products with price inelastic attributes.  The airline industry can hardly be termed an industry that produces a product with inelastic characteristics.

The ATA estimates the proposed taxes would lead to a 2.3 percent reduction in capacity at a possible cost of 9,700 airline and related jobs – and that’s just the impact from a tax increase.  Still unknown is the cost of the other factors outlined above, which alone would inevitably lead to fewer flights and fewer routes flown.

The mainline will hurt some. With fewer regional jets feeding the big carriers, how many larger aircraft do we need?  Some traffic will be captured at airports that continue to receive service within the catchment area of an airport losing service - but not all.  Some traffic may find its way onto competitor aircraft. And some demand may fall out of the system entirely.  In any instance, overall demand will suffer over the long term as marginal supply is removed from the system.

But the brunt of the damage will be felt in the small communities that rely heavily on regional carriers.

One of the things that bothers me most about Washington’s view of the airline industry is the clear bias in favor of the so called low cost carriers.  These airlines have been brilliant in cherry-picking profitable routes and creating networks designed for profitable flying. But it was the legacy carriers, not the LCCs, who invested in the assets to serve the nation’s smallest airport markets and sustained routes that, were subsidized by other flying.  It is the network carriers that keep small markets connected to the global air transportation grid. 

Unfortunately, the economics serving all these small cities are fast eroding because of factors the airlines don’t control, oil costs at the top of the list. But the lawmakers and regulators should step back and fast and realize how their well-meaning proposals could result in a loss of service to small markets across the nation.  The politicians will probably find a way to blame the airlines for cutting service while the real blame falls with those proposing “easy” fixes now that will do far-reaching economic damage  in the future.

Reader Comments (6)

First off, there isn't an industry in this country that doesn't whine about being "overtaxed."

Having made that point, how do you know that Congress isn't really trying to find a back-handed way to discontinue air service to smaller cities and towns altogether? Based on the FAA funding debacle, it seems that the House's underlying agenda is to completely shut down the EAS program. I do feel it needs reform, but not complete abandonment. If Congress is successful in gutting the EAS system, the slippery slope toward the total abandonment of air service to small town America will follow. Taxing air travel to death may be the way for Congress to do this. After all, every law has "unintended consequences."

All of this hearkens back to the formation of Amtrak. The real (although not widely expressed) intent of the National Railroad Passenger Corporation was to get rid of rail passenger service altogether; not keep it operating. The immediate effect was the discontinuance of half of the rail service in place before Amtrak's inception (much of which needed to go bye-bye). However, the mixed rationale behind Amtrak's creation (and the need to provide questionable service for political reasons) is much of why its been both half-heartedly supported and not allowed to innovate or rationalize. I won't get into a long dissertation on Amtrak. My larger point is that we may get stuck with Amair, which, like Amtrak, must serve conflicting masters.

I wouldn't be surprised that the real intent here is to shut down all air service that requires a "subsidy." Although all air service (and transportation in general, even the automobile) IS subsidized, one way or another. The common wisdom in many political circles nowadays is that government is inherently innefficient and evil; and must be done away with at all costs (while drawing paychecks or subsidies from the taxpayers of course). This attitude puts air service to smaller cities and towns in real jeopardy.

10.24.2011 | Unregistered CommenterDesertGhost

Ironic that same day as your comments, Delta and United increased fares $2-$5 each way -- following a like-magnitude industry fare hike less than two weeks ago. Price elasticity is blind to fares or fees. The dual fare increases will presumably "kill" far more service to small communities than the proposed $100/flight fee. Seriously, the industry's hypocrisy knows no bounds. The 50-seat jet replacement issue is moot given it is possible to fly a 76-seat fast turboprop block-time neutral out to ~400 miles at lower trip costs and far lower seat costs, a comparison that only gets better as fuel costs increase.

10.24.2011 | Unregistered CommenterBob Mann

Bill, my friend, I thoroughly enjoy your blog, but your adoption of the term "sin taxes" disappoints me. Neither the existing taxes nor the proposed ones are "taxes" in the economic sense of the word: They are user charges that pay for the government's cost of providing air traffic control, security screening, and airport improvements. The one possible exception is the proposed $100 departure fee, which I have heard serves a deficit-reducing function (but I have not seen the details of the proposal to confirm this).

There is a valid argument to be had as to whether the revenues collected are spent efficiently, there is a strong case to be made that the airline industry subsidizes business and general aviation, and one can rightly argue that at least a portion of aviation security expenses should be borne by the general public. There is certainly a huge problem with a disconnect between the charge structure in place and the cost of services provided (a problem that argues for making at least part of the user charges a flat, per-departure charge). But to call these charges "sin taxes", thereby inviting comparisons to alcohol and tobacco taxes that by design are meant to discourage consumption, changes the discourse from a public policy debate to something else.

Your blog is two clicks away from research that shows that in inflation-adjusted dollars, the average U.S. airline ticket tax has remained constant since at least 1993. This, if nothing else, should dispel the notion that rising airline taxes are a driving force behind the industry's troubles.

10.25.2011 | Unregistered CommenterJoakim Karlsson

No airline in the US will buy an ATR due to the Roselawn accident. Just look what happened to the ATR's American used after that accident. They now fly only on warm weather routes. Fedex in the only other carrier using ATR's for freight only. Continental, now United is the only US operator of 76 seat turboprops (Q400). Most passengers in the US do not like flying on anything with a prop. That is why 50 seat RJ's became so popular with passengers. Unfortunately as the author points out 50 seat RJ's are not profitable any longer.

As far as the "impending pilot shortage" is concerned, that is a big bunch of bull. In this country (USA) there never has been, is not now, nor never will be a pilot shortage. The only shortage of pilots in the US is qualified pilots who are willing to work for nothing.

Airline fares are way too low for most airlines to be profitable. Every major airline in the US except American (a matter of time before that happens) and Southwest, has gone bankrupt at least once. It makes no sense to keep operating losing money by undercharging your service. Any PT135 charter operator will tell you that.

The proposed new pilot flight time and duty rule changes are long overdue. Some of these changes could be made without the FAA going through the White House approval process just by changing some interpretations of several rules. Instead we get the usual FAA footdragging.

10.25.2011 | Unregistered Commentermww

Alaska Air Group's Horizon Air unit flies nothing but the 76-seat Q400 fast turboprop (48 of the type) to all-weather Cat III minima in the Pacific Northwest, soon, in the State of Alaska. Horizon retired the CRJ700 from its fleet, with the Q400 that replaced the jet providing significantly better economics with strong customer acceptance. Several majors besides Alaska, Continental and United who presently contract for Q400 operations are evaluating the Q400 for jet replacement by regional partners. The Q400 is not an ATR, which suffers from the image problem the other writer mentions.

10.25.2011 | Unregistered CommenterBob Mann

Eye opening presentation.

The revised “Flight and Duty Time Limitations” regulation is at the OMB for review and will be released late in November.

I thought of Pittsburgh airport as I read down the list of external pressure weighing on the airlines.

Capacity reduction is inevitable.

10.27.2011 | Unregistered CommenterJohn

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