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Wed, Oct 26, 2011

Guest Editorial: The Ultimate Unintended Consequence

Ten Reasons Why Government Proposals Will Kill Small Community Air Service

By William Swelbar

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.

William Swelbar

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:

  • There are no aircraft of 50 seats or less in the production pipeline
  • All regional flying contracts will come up for bid between now and 2017 and likely will not be renewed by the mainline carriers
  • Low Cost Carriers in a regional market’s catchment area are drawing traffic to larger airports at the expense of smaller airports
  • A growing pilot shortage will hurt the regional carriers first as regional pilots will find work on the mainline
  • 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
  • Congress, in a questionable response to the Colgan crash, passed a law requiring 1500 hours of training time for a commercial pilot
  • Most manufacturers won’t produce commercial airplanes smaller than 100-seats as most airlines can’t afford to sustain many routes with smaller planes
  • Negotiations between mainline pilots and management over new scope language is as emotional and contentious as it has ever been.
  • 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 (pictured) 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.

This article was reposted in its entirety with the permission of the author. William S. Swelbar is a Research Engineer in the Massachusetts Institute of Technology’s International Center for Air Transportation, where he is affiliated with the Global Airline Industry Program and Airline Industry Research Consortium.

FMI: www.swelblog.com

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