submitted to the future of aviation advisory committee may 19, 2010 the economic conditions for u.s....
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Submitted to the Future of Aviation Advisory Committee
May 19, 2010
The Economic Conditions for U.S. Airlines
The Air Transport Association of America, Inc.
Combination Services
AirTran AirwaysAlaska Airlines
American AirlinesContinental Airlines
Delta Air LinesHawaiian AirlinesJetBlue Airways
Southwest AirlinesUnited Airlines
US Airways
All-Cargo Services
ABX AirASTAR Air Cargo
Atlas Air Worldwide HoldingsEvergreen Int’l Airlines
FedEx CorporationUPS Airlines
Associate Members
Air CanadaAir JamaicaMexicana
2 www.airlines.org
Air transport has become an essential economic and social conduit throughout the world. Beyond the benefits of fast and inexpensive transcontinental travel, air transport also has become a vital form of shipping for high-valued items that need to come to market quickly…
— World Bank (www.worldbank.org/airtransport)
The Future of Aviation Advisory Committee
The Committee will focus principally on five issue areas: balancing the industry’s competitiveness and viability, ensuring a world-class aviation workforce, ensuring aviation safety, securing stable funding for aviation systems and addressing environmental challenges and solutions.
The following slides provide pertinent information concerning each of these issue areas. In general, the slides illustrate the economic challenges the industry faces in attempting to achieve financial stability, including: reduced consumer demand, high taxes and fees, fuel prices that are volatile and well above historic levels, and looming new impositions related to carbon emissions and increased PFCs.
The slides also illustrate the industry’s exceptional safety record.
3 www.airlines.org
Commercial Aviation: An Economic Enabler
5 www.airlines.org
“Aviation is the glue that keeps the global economy together. Without widely accessible and well-priced air travel, the global economy will quickly become less global.”
— Dr. Mark Zandi, Chief Economist & Co-Founder, Moody’s Economy.com (August 2008)
$1.225 trillion/year in economic activity $371 billion/year in personal earnings 10.9 million jobs
“The Economic Impact of Civil Aviation on the U.S. Economy” (FAA, Dec. 2009)
Commercial aviation helps drive:
Commercial aviation contributes: $731.5 billion/year to U.S. GDP 5.2% of U.S. GDP
“Economic growth and prosperity are determined in large part by access to the global economy. And, just as islands require bridges to the mainland….communities require bridges to the global economy. Air transportation is that bridge, providing the necessary access for U.S. cities…to enjoy a ‘Virtuous Circle of Economic Growth.’”
“The Plane Truth About Air Service and Economic Development,”Global Aviation Improvement Network, Booz Allen (March 2001)
“Every day, the airline industry propels the economic takeoff of our nation. It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century.”
— Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report
Source: 1993-2004 from McKinsey study ; 2005-2010F from IATA data/forecasts of global net income and estimates of invested capital
Global Context: Airlines Challenged to Cover Cost of CapitalAirlines Not in a Position to Make Large Investments in New Markets or Equipment
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F0
2
4
6
8
10
12
14
Return (ROIC)
Cost (WACC)
Per
cen
t
www.airlines.org6
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
Airline Industry Profitability ElusivePretax Profit Margin Highly Cyclical and Well Below U.S. Corporate Average
Pre
tax
Pro
fit
Mar
gin
(%
)
Sources: (1) IRS Statistics of Income (Historical Table 13) – “Net income (less deficit)” divided by “Total receipts”; (2) ATA Cost Index
www.airlines.org7
Average of U.S. Corporations
U.S. Passenger Airlines
1991-2000 2001-2008 2009
0.72
8%
0.56
5%
0.46
5%
Demand for Domestic Air Travel Has Not RecoveredSmaller Portion of U.S. Economy Being Spent on Air Travel Means Revenue Shortfall
Source: ATA analysis of BEA and BTS data
8 www.airlines.org
Annual Passenger Revenue Shortfall(in $Billions) vs. 1991-2000 Average
“The events of 9/11 marked…a permanent decline in domestic airline demand. We estimate that the gap between pre-9/11 demand and the post-9/11 period demand resulted in…the equivalent of the industry having no domestic revenue in 2007 and 2008.” (“9/11 Revenue Impact in Context,” Barclays Capital, Feb. 10, 2009)
2001-2008 2009
($20.1) ($37.5)
Domestic Passenger Revenue as Share of U.S. Gross Domestic Product
(60)
(50)
(40)
(30)
(20)
(10)
0
10
20
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(49.
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TL
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; (8
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EM
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.9)
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EN
; (0
.5)
MIA
; 1.
7 B
WI;
4.2
M
KE
; 6.
6
Sources: Innovata (May 7, 2010) and Federal Aviation Administration
What a Difference Two Years Have Made in Airport Ops62 of the 65 FAA “Large” and “Medium” U.S. Airports Have Lost Scheduled Flights
9 www.airlines.org
% Change in Scheduled-Service Departures: 2Q 2010 vs. 2Q 2008
Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm)
DOT: Avg. Domestic Ticket Prices Just Above 1999 LevelsU.S. CPI Rose 41 Percent from 4Q 1995 to 4Q 2009, Leaving Prices $85.86 “Short”
4Q95
4Q96
4Q97
4Q98
4Q99
4Q00
4Q01
4Q02
4Q03
4Q04
4Q05
4Q06
4Q07
4Q08
4Q09
$2
87
.81
$2
78
.35
$2
93
.55
$3
16
.21
$3
17
.98
$3
40
.11
$2
99
.83
$3
08
.85
$3
15
.77
$2
97
.28
$3
14
.76
$3
18
.16
$3
29
.77
$3
44
.82
$3
19
.31
$405.17
www.airlines.org10
Note: BTS reports average fares based on domestic itinerary fares (round-trip or one-way for which no return is purchased). [Averages do not include frequent-flyer or “zero fares.”] Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase .
May 19, 2010 – “While air fares in the fourth quarter of 2009 declined 6.1 percent since the fourth quarter of 2000, overall prices measured by the inflation rate rose 24.1 percent during that period. In the 14 years from 1995, the first year of BTS records, air fares rose 10.9 percent compared to a 40.7 percent inflation rate . In 1995 dollars, the average air fare in the fourth quarter of 2009 was $227, compared to $288 in 1995 and $300 in 2000.”
$8
5.8
6
Actual Avg. Prices
CPI-Linked Prices
Jet Fuel Prices* in 2009 Exceeded Historical AverageDecisions About Staffing, Scheduling, Aircraft Purchasing Made in Broader Cycles
1991-2000 2001-2008 2009 YTD 2010
$0.59
$1.53 $1.69
$2.13
11
* Simple average of spot price per gallon in New York Harbor, U.S. Gulf Coast and Los Angeles (from EIA Weekly Petroleum Status Report)
www.airlines.org
“It is very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand.” Economist Nouriel Roubini, Inside Commodities Conference (11/4/09)
“I have no problem with the notion that $75 or $80 a barrel oil is a fair market value in a healthy economy, but we’ve got ahead of ourselves.” Stephen Schork, Inside Commodities Conference (11/4/09)
“[O]il, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand… The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.” Nouriel Roubini, NYU, “The risk of a double-dip recession is rising” (8/23/09)
U.S. Aviation* Taxes/Fees Up Substantially From 2000Airlines and Flying/Shipping Public Have Not Received Commensurate ROI
www.airlines.org12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000 FAA TaxesAirport PFCsDHS Taxes
Source: ATA, BTS, DHS, FAA* U.S. passenger and cargo carriers; FAA taxes are commercial aviation only
Collections, in Billions
2-J
an
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15
-Ja
n-0
92
9-J
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11
-Fe
b-0
92
5-F
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10
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92
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13
-Ma
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7-M
ay
-09
9-J
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22
-Ju
n-0
96
-Ju
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91
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30
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91
2-A
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-09
25
-Au
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98
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15
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10
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v-0
92
3-N
ov
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7-D
ec
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18
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c-0
94
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01
5-J
an
-10
29
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b-1
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ar-
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ay
-10
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
1,500,000
1,600,000
1,700,000
1,800,000
Trading of Oil Futures Surging in Spring 2010Daily Paper Trade (Million Barrels) of Oil via Exchanges*
Sources: Citi Futures, EIA, IEA, New York Mercantile Exchange (NYMEX) and London IntercontinentalExchange® (ICE)
* NYMEX West Texas Intermediate (WTI) + ICE WTI + Brent
www.airlines.org13
< BBB- (speculative or “junk”)
>= BBB- (investment-grade)
Ex
xo
nM
ob
il
Mic
ros
oft
Pfi
zer
Wa
l-M
art
eB
ay
Am
azo
n
QA
NT
AS
So
uth
we
st
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fth
an
sa
Bri
tis
h A
ir
TA
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Ala
sk
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Co
nti
ne
nta
l
De
lta
SA
S
Am
eri
ca
n
JA
L
Je
tBlu
e
Un
ite
d
US
Air
wa
ys
Air
Ca
na
da
Air
Ja
ma
ica
Air
Tra
n
One U.S. Passenger Airline Has Investment-Grade CreditNo Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P
14 www.airlines.orgSources: Standard and Poor’s as of Dec. 18, 2009 and http://online.wsj.com/article/BT-CO-20090420-711716.html
U.S. Passenger Airlines* Market Value in ContextMarket Capitalization (Billion USD) as of Mar. 31, 2010 @ 1:00 PM EDT
15
ExxonMobil (XOM)
Microsoft (MSFT)
Wal-Mart (WMT)
Amazon (AMZN)
eBay (BAY)
All Publicly Traded U.S. Passenger Air-
lines*
$316.4
$258.8
$212.0
$60.5
$35.2
$38.4
www.airlines.org
* U.S. Passenger Airlines
AAI AirTranALK AlaskaAMR AmericanCAL ContinentalDAL DeltaHA HawaiianJBLU JetBlueLCC US AirwaysLUV SouthwestMESA MesaPNCL PinnacleRJET RepublicSKYW SkyWestUAUA UnitedXJT ExpressJet
Source: MSN Money - http://moneycentral.msn.com/investor/research/welcome.asp
Economy, Fuel, Taxes, Regulation Continue Toll on Jobs*U.S. Passenger Airline FTEs* Down More Than 30% from May 2001 All-Time PeakM
ar-
90
Ma
r-9
1
Ma
r-9
2
Ma
r-9
3
Ma
r-9
4
Ma
r-9
5
Ma
r-9
6
Ma
r-9
7
Ma
r-9
8
Ma
r-9
9
Ma
r-0
0
Ma
r-0
1
Pe
ak
Ma
r-0
2
Ma
r-0
3
Ma
r-0
4
Ma
r-0
5
Ma
r-0
6
Ma
r-0
7
Ma
r-0
8
Ma
r-0
9
Ma
r-1
0
45
0.5
43
9.1
44
5.3
44
1.1
43
5.6
42
9.8
43
7.7
37
9.7
39
7.2
41
7.4
50
4.0
53
8.7
54
4.4
46
5.6
46
0.8
44
1.2
42
8.5
40
4.9
40
7.9
41
5.5
39
2.1
37
7.3
* Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/)17 www.airlines.org
“Why are companies still laying people off if the economy’s looking better? A closer look at the airline industry might help answer that question. While carriers say they see glimmers of evidence that the plunge in passenger demand that began a year ago is bottoming out, they aren’t seeing many signs that travelers are coming back or are willing to pay more for tickets… And now fuel prices are rising again, giving more cause for alarm.” Susan Carey, “Airlines Illustrate Why Layoffs Continue,” Wall Street Journal (Nov. 6, 2009)
Commercial Aviation Drives 10.9M U.S. JobsEvery 100 Civil Aviation Jobs Generate Approximately 330 Jobs in Other Industries
18 www.airlines.orgSource: Federal Aviation Administration, “The Economic Impact of Civil Aviation on the U.S. Economy,” (December 2009)
0%-4.9%5%-9.9%10% or above
With Each Decade, U.S. Airline Safety Improves MarkedlyFatal Accidents per Million Aircraft Departures in Scheduled Service
20 www.airlines.org
1970-79 1980-89 1990-99 2000-09
0.8810
0.5050
0.2919
0.1230
Source: ATA analysis of data from the National Transportation Safety Board
U.S. Passenger Fatalities per 100 Million Passenger Miles
21 www.airlines.org
Auto (1) Bus (2) Rail (3) Airline (4)
0.78
0.04 0.04 0.01
Source: National Safety Council Injury Facts®, 1997-2006 averages
1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System2. Does not include school buses; data from the NSC Fatality Analysis Reporting System3. Data from the Federal Railroad Administration (FRA)4. Large and commuter airlines, excluding cargo; data from the National Transportation Safety Board (NTSB)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Fatal Accidents Scheduled Departures Fatal Accident Trendline
Source: National Transportation Safety Board (NTSB)
Fat
al A
ccid
ents
pe
r M
illio
n S
ch
edu
led
De
par
ture
s*
* Scheduled passenger and cargo operations of U.S. air carriers operating under 14 CFR 121; NTSB accident rates exclude incidents resulting from illegal acts
With Each Decade, U.S. Airline Safety Has ImprovedSince Deregulation, < 0.5 Fatal Accidents per Million Departures
Sc
hed
ule
d A
irline
De
pa
rtures
(Millio
ns
)
Based on U.S. Bureau of Transportation Statistics (Form 41) and National Transportation Safety Board air carrier data available as of November 2009.
0%
5%
10%
15%
20%
25%
30%
35%
40%
0.00
0.05
0.10
0.15
0.20
0.25
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Acc
iden
ts w
ith
Mai
nte
nan
ce a
s P
rob
able
Cau
se(p
er 1
00,0
00 D
epar
ture
s)Safety Improves with
Increased Outsourcing
Amount Outsourced
All Maintenance Related Accidents
Sh
are
of
To
tal M
ain
ten
ance
Sp
end
ing
Ou
tso
urc
ed
Fatal Maintenance Related Accidents
Mechanical Dispatch Reliability
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
Mec
hani
cal D
ispa
tch
Relia
bilit
y, %
U.S. Operators of Boeing Commercial Jet Transports
Source: Boeing
Sources: ATA, BTS and Innovata (via APGDat )
2009 Domestic Seating Capacity Fell Most Since 1942Market Forces, Policy Resulted in Largest Post-WWII Contraction in Aviation History
26 www.airlines.org
19
32
19
34
19
36
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
(40)
(20)
0
20
40
60
80
100
(16.2) (6.9)
An
nu
al P
erce
nt
Ch
ang
e in
Do
mes
tic
AS
Ms*
* An available seat mile (ASM) is one seat flown one mile
Source: ATA analysis of federal tax code
Tax Bite on a $300 One-Stop Round Trip* Has Nearly TripledGrowing Take by U.S. Government and Airports Leaves Less Revenue for Carriers
www.airlines.org27
Airfare Taxes
* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees.
2010 Taxes20% ($61)*
1972 Taxes7% ($22)*
1992 Taxes13% ($38)*
$2,890
$1,756 $407$569 $283
$448
$7,233
$2,106$487 $469 $16,648
* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers
Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA
DHS = $3.5B
FAA = $10.3B
“Special” Tax Burden* Was $16.6 Billion in 2009In Addition to Typical Federal, State and Local Corporate Taxes (e.g., Income, Property, Sales)
2009 collections ($millions) from airlines
28 www.airlines.org
Federal Aviation Administration (FAA)
Department of Homeland Security (DHS)
U.S. Airports
Commercial66% ($7,978)
BizJet17% ($2,034)
GA Piston6% ($710)
Military, FSS, etc. 11% ($1,312)
Commercial95% ($11,423)
BizJet5% ($573)
GA Piston0% ($38)
FAA COSTS BY USER GROUPSource: Federal Aviation Administration FY05 Cost
Allocation Study as applied to total FY08 Trust Fund revenues
AIRPORT & AIRWAY TRUST FUND TAXES PAID
Source: Federal Aviation Administration Trust Fund Revenue Collections
Airlines Account for 95% of Funding But Only 66% of CostsDollars in Millions, Based on FY08 FAA Budget
www.airlines.org29
Cross-Subsidy: $3,445
2005 2006 2007 2008 2009
35.7
40.9
49.0 49.3
51.2
EWR/JFK/LGA/PHL Share (%) of Major-Airport Delay Minutes
Source: FAA OPSNET for OEP 35 airports
Billions of Aviation Taxes Have Hardly Made a DentNew York-Area Delay Share Continues to Rise, Begging for Accelerated NextGen Implementation
30 www.airlines.org
2000 ($0.82)
2001 ($0.78)
2002 ($0.72)
2003 ($0.85)
2004 ($1.16)
2005 ($1.66)
2006 ($1.97)
2007 ($2.11)
2008 ($3.07)
2009 ($1.90)
10,000
10,000,010,000
20,000,010,000
30,000,010,000
40,000,010,000
50,000,010,000
60,000,010,000
$16,787,334,749.0$14,991,769,736.0$12,813,212,487.0$15,487,272,266.0
$22,741,604,813.0
$33,175,241,878.0
$38,771,888,440.0
$41,861,502,122.0
$57,849,854,321.0
$32,290,032,485.0
In 2008, U.S. Passenger and All-Cargo Airlines Spent $16B More on Fuel Than in 2007 and $42B More Than in 2003
Sources: ATA, Energy Information Administration, Department of Transportation
Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs
32 www.airlines.org
Gallons
“The U.S. airlines…have a relatively low proportion of their 2008 fuel needs hedged, because hedging high and volatile fuel prices is expensive and may require posting cash collateral.”
Standard & Poor’s (March 11, 2008)
1978 1980 1990 2000 2005 2009
2.9 3.1
3.8
4.9
5.8 6.1
Airline Fuel Efficiency Has Surged Over Three DecadesRevenue Ton Miles (RTMs) per Gallon – U.S. Passenger and All-Cargo Airlines
Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and gallons (T2-Z921)
* U.S. passenger and cargo airlines operating worldwide – passenger and cargo revenue ton miles (RTMs) in all services
www.airlines.org33
“We’re not aware of any other major user of fossil fuels or those who tap into the electrical grid targeting as aggressive a reduction in their carbon footprint as the global airline industry….”
“Should you consider buying carbon offsets next time you log on to your computer?” Airmail 349, Merrill Lynch (Jan. 16, 2009)
The Environmental Way Forward – Globally
www.airlines.org34
Global Sectoral Approach Framework for Aviation
– International and domestic aviation emissions under framework
– Collective aviation-specific emissions targets• Fuel efficiency: annual average improvement of 1.5% through 2020• Growth of the industry’s emissions “carbon neutral” beginning in 2021• Aspirational goal of 50% reduction in emissions in 2050 (vs. 2005 levels)
– Targets all subject to government investment and “do no harm” – so technology, operations and infrastructure improvements flourish
Why These Targets?
– They address the key concern . . . growth . . .• While global aviation currently contributes only 2% of the world’s man-
made CO2, many are concerned that growth in demand = growth in emissions
– While seeking to keep sufficient resources within the industry to allow it to continue its strong record of continuous environmental improvement
Global Approach Requires International & U.S. Adoption
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Framework should be established under ICAO
– International Civil Aviation Organization (ICAO) is the authority for international aviation emissions
Framework should be incorporated in domestic legislation
– Not a “carve out,” but a “carve in”
– Complementary policy framework – countries must:• Accelerate ATC modernization, including federal funding for aircraft equipage, training, etc.
• Support development and deployment of aviation alternative fuels
• Reinstate (and increase) research and development and investment for aircraft technology
– All of these efforts should be taken in context of solid energy policy, including stable fuel supplies and appropriate oversight and control of energy futures trading/speculation
ATA Alternative Fuels Commitment is Predicated on Performance — We Are Feedstock- and Technology-Neutral
April 22, 2008—The members of the Air Transport Association of America (ATA) are dedicated to the development and deployment of safe, environmentally friendly, reliable and economically feasible alternatives to conventional petroleum-based jet fuel. We recognize that this effort presents significant technical and financing challenges…We commit to work with future suppliers who potentially can integrate alternative fuels into our operations… To foster the development and deployment of alternative jet fuels that meet our objectives, ATA is a founding and principal member of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a consortium of government agencies, airlines, manufacturers, airports and current and prospective fuel suppliers that are coordinating work on the research and development of alternative jet fuels, including technical specifications, environmental aspects, production and distribution.
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To foster the development and deployment of alternative jet fuels that meet our objectives, ATA is a founding and principal member of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a
consortium of government agencies, airlines, manufacturers, airports and current and prospective fuel suppliers that are
coordinating work on the research and development of alternative jet fuels, including technical specifications, environmental aspects,
production and distribution.
In addition…we seek to engage potential suppliers who are capable of providing alternative aviation fuel that can reach our airports within the next few years, in particular, while also encouraging
potential suppliers who may be developing alternatives that will be realized in the longer term.
The Bottom LineExcerpted from Fitch Ratings Airline Credit Navigator (April 13, 2010)
“Given the urgent need for balance sheet deleveraging through the next industry demand cycle as the key to ratings improvement, Fitch will be focused first and foremost on the free cash flow (FCF) generation performance of U.S. carriers as the recovery takes hold in 2010…
Without exception, the U.S. legacy carriers face heavy debt maturities (and in some cases rising cash pension funding obligations) that simply will not be funded entirely out of internal cash flow over the next several quarters even if a solid global ⎯recovery takes shape. This will force many carriers to continue borrowing in 2010 and 2011, delaying any significant progress toward deleveraging their extremely weak balance sheets.
Renewed speculation surrounding potential mergers and industry consolidation reflects the notable improvements in the industry operating outlook and the long-term logic of increased concentration in a largely commoditized industry that remains vulnerable to external demand and fuel price shocks. Fitch continues to see further industry consolidation as a necessary and inevitable part of the U.S. airline industry’s effort to ensure more durable financial profiles through economic cycles…”
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Source: Fitch Ratings “Airline Credit Navigator: Spring 2010 (April 13, 2010)
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