For the past few years, the airlines, in a low, plaintiff cry to their government, have been saying “do no harm,” as legislation works its way across Capitol Hill, as new rules work their way through the Federal Aviation Administration and antitrust immunity alliance applications wend their way through the halls of the departments of Justice and Transportation.

After a comment from AMR Chair Gerard Arpey at last week’s analyst call, perhaps what they should be saying is “undo the harm you have already done.”

In response to what might be perceived as a rather naïve question from Morgan Stanley’s William Greene on whether the industry was doing anything to reduce ticket taxes or gain relief from them, Arpey landed a bombshell that was almost completely ignored by analysts and financial press alike. It is clear Wall Street is, as with airline managements, looking for any way to improve the fiscal picture for the industry.

“Bill,” Arpey began, almost nonchalantly, “that’s a good question. I did a calculation the other day looking at the number of customers we carried in the second quarter, and looking at our loss. My back-of-the-envelope calculation was we needed about $17 more per one-way customer to break even in the quarter.

“That doesn’t seem like a gigantic hurdle to get over,” he continued, “but when you step back and then recognize how much taxes and fees are placed on our tickets before we get any revenue, you see why that is more of a mountain than it would otherwise appear to be, despite the economic climate, despite all the other things going on. So, I think, Bill, we’ve not done as good a job as we should have. I think most of our efforts are on trying to convince the government to not do anymore harm in this environment because I believe the President’s budget has a couple of increases to the security tax and maybe one of the other taxes as I recall, and that’s obviously not something that would be wise at this time for this industry.”

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So, why is it the airline industry can’t make money? It is because the cards are stacked against it and taxes are just one of those cards. The industry is one of the most heavily taxed industries in the world. Ticket taxes account for $60, or, 20%, of every $300 ticket. Just with the passenger facility charge increase proposed in the House reauthorization bill, they would rise to $70 or 23% to say nothing of what would happen with increased security and other taxes under consideration.

The International Air Transportation Association notes airlines are the only transport sector that must pay for its own infrastructure. Meanwhile its taxes are so high as to be equal to such sin taxes as tobacco and alcohol.

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The bottom line? Taxes are killing the aviation cash cow. And aviation is a cash cow – not for the stakeholders, however, but for the government to the tune of $18 billion per year last year.

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Congress as well as local and state authorities see travel taxes as a great way to raise revenues without incurring the wrath of constituents, by putting the tax burden on travelers, who are no one’s constituent. But that eliminates the possibility of raising fares to a meaningful level – one in which stakeholders such as passengers, airlines, employees and stockholders – can get a decent return on investment.

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Let’s look at the record on stakeholder return on investment. Despite the $21 billion airlines paid to airports/airways in 2008, overwhelming system delays and efficiencies remain.

On average, according to the Air Transport Association, in the twelve-month period ending September 2008, 138 million system delay minutes drove an estimated $10 billion in direct operating costs for scheduled U.S. passenger airlines. The cost of aircraft block (taxi plus airborne) time was $72.13 per minute, 19 percent higher when compared to CY 2007 costs. Fuel costs in particular, increased 41 percent to $39.35 per minute. Crew costs are estimated to have cost $13.08 per minute, followed by maintenance and aircraft ownership ($10.09 and $7.72, respectively) and all other costs ($1.88).

ATA also points out that delayed aircraft also drive the need for extra gates and ground personnel and impose costs on airline customers (including shippers) in the form of lost productivity, wages and goodwill. Assuming $35.70 per hour as the average value of a passenger's time, as recommended by the FAA, adjusted for BLS employment costs, delay costs to air travelers are considerable and estimated the total cost to passengers to be $4.5 billion. Total costs including airlines ($10 billion) + passenger/shipper time ($4.5 billion) = $14.5 billion. And that is what stakeholders are getting for the privilege of paying $21 billion in taxes.

Mind you, this is an industry that contributes $1.4 trillion to the economy, according to FAA stats released in October and pegged to 2006, a high-growth year that indicates the potential of this industry to contribute even more to the economic well being of the nation. It accounts for $346 million in personal earnings and 10.2 million jobs. It accounts for $692 billion (5.2%) in U.S. GDP. That is what makes it a cash cow, for everyone but the people who work for and invest in airlines.

No wonder Wall Street is asking questions that go to the very heart of what is wrong with the airline business model. At the FAA forecast conference this year, one Wall Street analyst queried airline managers on the panel as to why the industry held so steadfastly to seniority at a time when most employees enjoy the portability of their skills. The collective answer was that the death of seniority will not happen in their lifetime.

Putting it in perspective is a chart released Friday by the Air Transport Association showing taxes paid overwhelmed the market capitalization of the entire industry!

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In February, Aviation Today’s Daily Brief recounted why the industry fails again and again to gain any traction for its programs on Capitol Hill. Arpey is right that the industry has not done a good enough job as evidenced by criticism from House aviation subcommittee members earlier this year. Both House Transportation and Infrastructure Chair Jim Oberstar and Aviation Subcommittee Chair Jerry Costello said that not only has the industry and FAA failed to make a case for their programs, those beyond the Senate and House aviation committees have no confidence in either the industry’s or the agency’s ability to spend any money they might receive wisely. Related Story

To be fair, however, success on the hill and with the public isn’t for lack of trying. How many initiatives have been launched to educate lawmakers and the public about ticket taxes and aviation’s contribution’s to the economy only to have them end up still viewing the industry as largely for the “jet set” as happened this year. And let’s face it transportation is a backwater. It was dead last in President Obama’s budget and it has wallowed for years.

So, something more is happening. While the industry is trying to evolve into a better business model, any effort to gain help, not bailouts, from government hits a wall. That is because the government has long since evolved into its own new business model; one that has gone from being taxpayer funded to user taxes and fees to cover the rising cost of government without raising income taxes as entitlement programs take a bigger and bigger chunk of the pie. That is a reality that is hard to overcome.

The industry tenor changed earlier this year after the pie-in-the-sky initiative for high-speed rail was introduced with great fanfare while doing a masterful job of dissing the industry. The $13 billion tab – all of which would come from the general fund – was a “hey-wait-a-minute moment for the industry. The initiative, itself, would get taxpayers to subsidize an entirely new transportation mode while passengers, shippers and other aviation users pay through the nose. Related Story  Remember aviation is the only mode required to pay for its infrastructure, according to IATA.

“The government requires us to pay for our own system which it refuses to modernize, costing us and our passengers billions and rail passengers get a free ride, and subsidized rail companies get to compete with us,” they asked collectively. “What’s wrong with this picture?”

So, it seems that it is not just the lack of money that is driving Washington to ignore the needs of aviation. “U.S. airlines are simultaneously ignored and hectored,” Long-time aviation editor Perry Flint. “Lawmakers did nothing to help them manage the dramatic and, in large part, hedge-fund-driven oil price bubble last year, yet they complain that carriers have not eliminated fuel surcharges at a time when fuel prices are still well above historical norms.”

“Post-2000, fares have not caught up to expenses, forcing airlines to reduce air service,” said ATA in one the best nuggets from its Friday presentation. “In large part, airlines’ post-2000 survival has come via contraction, with 150,000 fewer jobs and less seating capacity.”

Airlines are desperately cutting costs, trying to become more competitive and efficient by attempting to develop a business model that works in this economy with the volatility of fuel prices. And all legislators can do is complain about the way they do it. This isn’t a damned if you do and damned if you don’t this is just, well….Damn!

There has been a steady drumbeat all year against alliances, maintenance outsourcing and seconding service to regional airlines. While some of the safety issues, such as fatigue and training, deserve attention, there are other big issues afoot such as the fact that profits are the exception not the rule in the industry. Even when they do make money, it isn’t long before an economic collapse eats up the lot and then some.

Lawmakers who introduce legislation focused on alleged threats to consumers and employees, would do better to focus on the overall health of the industry that would create jobs. Right now they bring a whole new meaning to the phrase: with friends like these you don’t need enemies.

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ATA pointed to all the damaging initiatives making their way through Congress. Collectively they not only further threaten industry viability but, at the very least, lead to more reductions in air service and jobs.

• One bill would cause antitrust immunity for international airline alliances to expire every three years and require DOT to reexamine the benefits of each alliance before reapproving
• Another directs FAA to carry out twice-yearly inspections of non-U.S. aeronautical repair stations but lack of FAA staffing/budget and potential to violate international aviation agreements could render it difficult to impossible for U.S. carriers to use non-U.S. MROs
• Airports want to increase the passenger facility charge (from $4.50 to $7.00 per segment), while TSA wants to increase the 9/11 fee (from $2.50 to $5.00 per segment)
• U.S./EU climate laws could add several billion dollars per year in fuel costs (15-25 cpg?). Perhaps as important as the diversion of capital away from fleet renewal to more efficient aircraft, failure to gain the efficiencies from modernization would act as a double whammy against airlines. Airlines not only have to pay for the modernization they are not getting but a penalty for using more fuel than would otherwise be necessary if we had modernization.
• Infrastructure improvements could yield fuel efficiency benefits of up to 12 percent worldwide and between 10 and 15% in the U.S. alone. ATC performance is worsening despite capacity reductions (i.e., NYC)
• Congress has not yet acted on commodities oversight, as fuel prices rise
• Passenger Bill of Rights legislation could exacerbate irregular ops, restrict flexibility
• Implementation of U.S. VISIT/Exit and Secure Flight could inconvenience passengers
• Pandemics governmental quarantines, communication-induced panics
• States proposing to increase fuel taxes California, Hawaii, Florida
• UK Air Passenger Duty to double in 2010; EU disability rules conflict with U.S. rules

It isn’t hard for the industry to make its case because it has a good one. But, it seems, no one is listening, leaving management to only wish for the ability to add that $17 to fares, as Arpey suggested. If only wishing made it so.