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Kevin P. Mitchell
Business Travel Contractors Corporation
National Civil Aviation Review Commission
May 28, 1997
Chairman Mineta, distinguished members of the Commission, my name is Kevin Mitchell. I am President of Business Travel Contractors Corporation (BTCC), a corporate buying and advocacy group formed in 1994 to promote a more rationale and competitive air transportation system for business travel. BTCC represents the interests of 45 corporations that annually spend some one billion dollars in air transportation purchases. Thank you for requesting our testimony.
A critically important debate has developed over how the Federal Aviation Administration (FAA) will be funded into the next century. Hanging in the balance are issues of safety, airfare levels and the economic viability of low-fare airlines. Corporations are important customers in this debate and their perspectives and concerns need to be factored into any change in approach to FAA funding.
Corporations are major stakeholders in the outcome of this debate because:
1) corporations contribute more than 50% of the excise taxes used to fund the FAA;
2) moving from an excise tax to a user fee could significantly diminish competition alternatives; and
3) the FAA needs a permanent source of funding that assures travelers that their safety comes above politics and airlines'immediate self-interest.
Proposals have been advanced to replace the 10% ticket tax with user fees based on factors such as per passenger embarkment, miles flown, and available seats. The FAA would be given the authority to establish user fee rates, administer the program and collect the fees for the industry. This approach would allow a federal agency to greatly influence low-fare airlines' cost structures, which in turn affects airfare levels, the types of planes utilized, and where service is provided.
Moreover, this approach would add complexity, increase taxes on the lowest airfares, and dilute the FAA's safety mission. It does not seem prudent to have FAA administrators shift time and attention away from their safety mission to become accountants, tax collectors, and political arbitrators forced to deal with contending factions of the aviation industry.
A recent U.S. GAO study of one user fee proposal by major airlines projected a transfer of some $550M from high-cost airlines to low-fare airlines as a result of implementation. Under such a proposal, air fares might decrease for many corporations. If so, why do corporations support keeping the current excise tax? There are a few important considerations.
First, corporations, and the communities in which they reside, benefit from the marketplace discipline imposed by low-fare airlines and the competitive alternatives they represent. When these low-fare airlines enter new markets and offer affordable fares, new jobs are created and communities enjoy the numerous benefits of economic growth. By offering a competitive alternative, these airlines have forced high-cost airlines to become more efficient with cost reduction programs such as Delta AirLines Leadership 7.5. Likewise, if it were not for these low-fare airlines would we have the competitive responses of Shuttle by United, Delta Express or US Airways considering such a product? Indeed, if the future is to include affordable airfares for all communities, that future will be linked inextricablyto the survival and growth of low-fare airlines.
A user fee would increase low-fare airlines' ticket prices, reduce demand for their products, and weaken these airlines financially. This threat to their very survival runs counter to corporations and communities long-term interests. With an 86% business airfare increase in the last five years and a 28% increase in just the last 12 months, can there be any doubt why corporationsneed financially healthy low-fare airlines? The presence of low-fare airlines is responsible for communities such as Reno, Nevada having airfares 31% lower than other large and medium size hubs. By contrast, communities like Cincinnati, Ohio, with little or no low-fare airline presence, pay premiums of up to 48% over similar sized hubs. User fees inevitably would curtail the spread of low-fare airlines and cut off the benefits of deregulation to all communities. The second reason corporations continue to support an excise tax is the competitive context in which a change in funding approaches is being considered.
Major airlines contend that a user fee is a fairer way of allocating costs and establishing a level competitive playing field. If actions speak louder than words, however, major airlines are not interested in leveling the playing field.
In the early 1990's, competition from numerous low-fare airlines put considerable downward pressure on major airlines' yields. Major airlines began to retreat from price sensitive point-to-point markets and to focus on reducing their cost structures. ValuJet was generating industry record 29% pre tax operating margins; it was the darling of Wall Street.
On January 1, 1996, the excise tax first lapsed and most major airlines were projected to realize more than a billion dollars each in windfall revenues, on an annualized basis. On May 11, 1996, the ValuJet tragedy presented major airlines with an opportunity to redirect their focus away from cost reduction. To exploit travelers' safety concerns brought on by a media frenzy, major airlines subsidized a flood a cheap seats in low-fare airlines' markets and pursued other initiatives directed at low-fare carriers. In filings with the U.S. DOT, low-fare airlines point to a strategic offensive against them that
Perhaps the most egregious initiative by major airlines has been to use the lapsed excise tax to conjure up a false FAA funding crisis followed by an attempt to force through a user fee solution that would, according to the U.S. GAO, transfer $550M in tax liabilities to low-fare airlines.The third reason that corporations support the continuation of the excise tax isbecause it works. No argument presented thus far justifies the "re-engineering" of a simple, efficiently administered FAA funding system that has worked well for years. A user fee set by, administered by, and collected by the FAA would frustrate incentives for FAA to become more efficient, business-like and customer-focused. Moreover, the oversight currently provided by the U.S. Congress is of paramount importance to the integrity of the air transportation system.
In conclusion, the current effort to transfer costs to low-fare airlines is not reform. The real problem corporations and communities face is not the 10% ticket tax, but rather, the excessively high and irrational airfares upon which the excise tax is applied. Major airlines have the option of lowering their share of excise taxes collected by simply lowering their fares!If studies under way demonstrate the FAA funding system requires reform, then corporations, as major customers of the system need to be fully engaged in the process of evaluating alternatives. Moreover, any reform must address marketplace imbalances that currently exist and ensure traveler safety is not subordinated to political expediency.