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Monday, February 6, 2006

Aviation Interest Groups Debate 'Fare Share' Of Underwriting FAA

The quadrennial intramural fight in the aviation community over FAA funding is already under way even before the official kick-off.

Every four years, the U.S. Department of Transportation (DOT) submits a four-year funding bill for the Federal Aviation Administration (FAA), known in legislative parlance as the reauthorization bill. The current FAA reauthorization measure expires on Sept. 31, 2007. DOT was slated to unveil its plan in February, but now insiders say it will be March.

These funding debates have pitted the commercial airlines against the general aviation community as the industry and the government struggle with finding a "fair" way to pay for a major part of the FAA budget.

Just as it did twice under the Clinton administration, DOT is expected to advocate user fees to cover the bulk of the industry's contribution to the FAA budget. The commercial airlines are supporting the concept of user fees but the rest of the industry opposes it. However, the airlines and DOT recognize that the piston-driven general aviation community should be exempt from user fees and simply continue to pay a fuel tax to support the FAA. At the same time, efforts are being made to cast the business aviation community in a different light - one that should be subject to the user fee system.

In a system that dates back to 1970, various constituents in the aviation community have paid into the Airport and Airway Trust Fund through a variety of taxes. Historically, the nation's treasury has paid about 21 percent of the FAA's annual budget. However, in recent years, taxpayers have been paying only about 10 percent of the FAA budget.

As DOT readies it reauthorization proposal, it is confronted with the dilemma of relying less on the general treasury as it faces staggering bills to update the air traffic control network while revenues from the aviation community is falling off.

"With our primary funding source tied to the price of a ticket, lower fares mean a small aviation trust fund," said DOT Secretary Norman Mineta in a recent address to the Aero Club of Washington. "And there is no real relation between the airline ticket tax and the cost or amount of service provided. As a result, in 2005, users paid over $3.5 billion less than it cost to operate the system.

Before Mineta submits a proposal to change the financing structure, the first thing the FAA should do is implement a method to control its labor costs, said James Coyne, president of the National Air Transportation Association (NATA). "To me the effort to impose user fees before the FAA has created controls over its labor costs is a case of putting the chart before the horse," he said at a luncheon last week in Washington. "Failure to do so does not become a user fee, but a fee to pay for the inappropriate costs of the air traffic control system."

Coyne's sentiments are also shared by Kenneth Mead, the DOT's inspector general. Last May, Mead wrote: "The Congress and the aviation community need assurance that the FAA is doing all it can to control costs before decisions can be made about the adequacy of the current funding levels and whether or not additional revenue is needed.

"However, before a defensible and equitable user fee system can be considered, FAA needs to complete its cost accounting system. This will allow the FAA to determine what its costs are and allocate those costs to the various users of the airspace."

In tipping his hand, Mineta said, "I can't give you all the details yet, but I expect that we are going to see a cost-based plan that creates a more direct relationship between the revenue collected and the services provided."

One element of the plan will be to devise a stable revenue source, he said, so that the FAA can turn to the bond markets to finance all its major technology improvements at one time instead of the piecemeal approach of the past.

The FAA would sell bonds backed by a dedicated revenue stream just as airports and local governments do to finance infrastructure improvements.

Due to fluctuations in fuel tax and ticket tax receipts, Wall Street does not look at the existing taxes as a dependable way to pay off the bonds.

More than 100 countries have turned to user fees based on a combination of distance flown and the weight of the aircraft to finance their air traffic control systems, according to the inspector general's study. "Although [the] weight-and-distance charge is direct, and probably more cost-related than an excise tax, it too is less than a perfect measure of a user's cost to the system. While distance is a measure of cost to the system, an aircraft's weight does not materially affect the costs of providing air traffic control services."

Commercial Carriers

The Air Transport Association (ATA), which represents the major mainline carriers, is supporting the concept of a user fee as a better method of cost allocation.

"Clearly, the current trust-fund funding structure - a maze of taxes and fees put in place decades ago when commercial airlines and the military were the only significant users of the air traffic control system - is neither fair nor sensible," said ATA President Jim May in an address late last month to the National Aviation Club. "According to FAA, commercial airlines, including passenger, freight and charter operations, contributed more than 90 percent of the total user taxes in fiscal 2004. Yet their total operations made up only about two-thirds of the flights under FAA control. Some users of the system are not paying their fair share of the costs and that's making matters difficult for all of us.

"There must be a better, more stable, transparent way to fund FAA's efforts - one that imposes costs based on system use, rather than completely unrelated factors such as ticket cost and fuel consumption.

"I believe that there is a straightforward funding mechanism that accomplishes just what is needed - impose a fee on users for services they use and FAA's cost to provide those services. We must establish a fair, equitable and simple cost-based system. The funding should be based on proportional use."

While the Regional Airline Association (RAA) has not taken a position, RAA President Deborah McElroy said the directors have been debating the issue. "We do agree that the airlines are funding more of the system than we are using. Other user groups need to pay fees to cover the costs they impose on the system. The airlines are funding improvements to many airports where there is no commercial service. It becomes a policy question as to what is appropriate."

The RAA may just wait on the FAA proposal before taking a firm position, she told Regional Aviation News. While there is some support for the concept of user fees, McElroy said there are concerns as to how detailed a fee structure should be.

General Aviation

"I am very, very worried about how this fight will unfold," said NATA's Coyne. "I think there will be a tremendous amount of anger and hostility across the aviation industry We have seen a large amount of blaming of each other. The airlines have asserted that we [general aviation] are a segment that is not paying our fair share.

"Virtually all the problems are a function of the reduced amount of taxes collected from the airlines as ticket prices have come down."

Coyne believes the airlines have targeted general aviation because the sector is viewed as an untapped source of revenue.

He noted that the air traffic control network exists for the benefit of the airlines. "To assert that every plane in the sky should pay the same fee is not fair. NATA believes this fight is very, very far from being resolved," Coyne said.

Economist Dan Kasper, of the Cambridge-based LECG consulting firm, believes Congress will draw a distinction between the business aviation sector and those hobbyists flying piston planes. Kasper, who does not represent any industry group and who offered "an unbiased view from 30,000 feet" supports a user fee system.

"As a matter of economics, a user fee is a pretty good thing. It relates your charges to the demand you are putting on the system in a very direct way."

A user charge should not impact non-business general aviation, Kasper said. "However, clearly, there are lots of corporate jets up there. They take the airspace and they take a controller's time. There isn't a good reason to exclude them from a user-based system."

The fuel tax remains the most economical way to recover costs from the general aviation community, he added.

The National Business Aviation Association (NBAA) and the general aviation community are "very committed to continuing to pay a fair share, but pay it via the fuel tax," said Jon Ash, president of interVISTAS and an NBAA consultant. "They don't want to get into user charges for a whole host of reasons."

Ash said the debate would center on just what is "the fair share." While the carrier may use 70 percent of the system's capacity, Ash said that does not mean general aviation is using the remaining 30 percent. Instead, he said, the fair amount for general aviation should be based on "incremental or byproduct costing. The commercial carriers drive the costs. If you were to ground general aviation tomorrow, the savings would be 8 or 9 percent. It is not driving 30 percent of the system."

>>Contacts: James Coyne, NATA, (703) 845-9000; Norman Mineta, DOT, (202) 366-4000; Kenneth Mead, DOT Inspector General, (202) 366-1959; James May, ATA, (202) 626-4000; Deborah McElroy, RAA, (202) 367-1170; Dan Kasper, LECG, (617) 252-9994; Jon Ash, InterVISTAS, (202) 457-0212.<<

2004 Airport And Airway Trust Fund Taxes
Tax Tax Rate Percent of Collection
Ticket Tax 7.5% on airfares
49.7%
Segment Tax $3.20 per flight segment
19.6%
Rural Airport Tax 7.5% on airfares at rural airports
0.8%
Waybill Tax 6.25% on price of air freight
5.4%
General Aviation Fuel Tax 19.3 cents per gallon
1.9%
General Aviation Jet Fuel Tax 21.8 cents per gallon
1.9%
Commercial Jet Fuel Tax 4.3 cents per gallon
5.8%
International Departures $14.10 per trip
14.4%
Alaska/Hawaii Tax $7 per domestic trip
0.8%
Frequent Flyer Tax 7.5% on sales to third party
1.6%
Source: FAA, May 2005
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