The Case for a U.S. National Airline Policy

February 22, 2013

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Executive SummaryA Vibrant U.S. Airline Industry Is Critical to U.S. Economic Growth and Global Competitiveness

» Due to its geography and widespread established population centers, the U.S. economy depends on air transportation more than many other national economies

» The U.S. airline industry is the physical Internet of the U.S. economy – connecting domestic markets of all sizes and regions with each other and with rapidly growing global markets

» The ability of the U.S. airline industry to drive U.S. economic growth, employment and exports, and to preserve and grow air service in non-hub communities, has been undermined by an uncoordinated patchwork of counterproductive public policies, or lack thereof

» In contrast to the United States, many other countries have recognized and embraced their airline industries as strategic assets that enable domestic and international economic expansion

» Foreign airlines are growing at a significant rate, reinvesting earnings in their product and expanding their global presence to the detriment of U.S. airlines, with troubling implications for the entire U.S. economy

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Executive SummaryA Strong National Airline Policy Will Drive U.S. Economic Growth and Create More High-Paying Jobs

» Without a cohesive policy supporting the integral role of the U.S. airline industry in our economy, U.S. global economic leadership and competitive advantage will suffer

» Similarly, domestic air-service levels will suffer, since it is the U.S. airlines, not foreign carriers, that serve U.S. markets, connecting smaller cities and rural communities with our international gateways

» U.S. policymakers could leverage the recommendations of multiple federal commissions, including those of the Future of Aviation Advisory Committee (FAAC), regarding global competitiveness, taxation/regulation, infrastructure and energy

» There is clear precedent for federal policy action - in the 1970s, U.S. policymakers helped revitalize our freight rail industry, which is now the envy of the world

» There also is precedent for inaction, as seen in the demise of the U.S. maritime industry

» A strong national airline policy would restore and enhance U.S. airline industry viability and enable it to increase air service across the nation, boost economic growth, expand exports and create more high-paying U.S. jobs

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Why Is a Comprehensive Airline Policy in the National Interest?The U.S. Airline Industry Is a Critical Enabler of Commerce

Sources: Bureau of Transportation Statistics T1, Bureau of Economic Analysis, Census Bureau

1990 2000 2011

Moves PeoplePassengers Enplaned

465.6M 666.1M 730.8M

Exports Air-Travel Services $15.3B $20.2B $36.7B

Moves GoodsCargo Revenue Ton Miles

16.4B 30.9B 37.0B

Exports High-Value Merchandise$110.5B

@ $72 per kg $284.4B

@ $101 per kg$423.6B

@ $117 per kg

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Why Is a Comprehensive Airline Policy in the National Interest?Commercial Aviation Is a Key Direct Contributor to the U.S. Economy

Direct U.S. GDP contribution of example, selected industries (2009) GDP contribution ($B)

Furniture

Rail transportation

Gambling

Spectator sports

Aircraft and engine manufacturers

Plastics and rubber products

Motion picture and sound recording

Motor vehicles manufacturing

Commercial Aviation

Farms

Oil and gas extraction

$24

$31

$33

$33

$37

$57

$60

$78

$87

$104

$142

Note: Not intended to be a comprehensive ranking, example industries only to give a point of comparison; aviation-related data extrapolated from FAA economic impact report; aircraft and engine manufacturers include Boeing, GE, Pratt, Honeywell, Collins, etc.

Sources: BEA industry accounts; gambling and spectator sports from BEA Travel & Tourism satellite account data; FAA Air Traffic Organization, “The Economic Impact of Civil Aviation on the U.S. Economy” (Dec. 2009); BCG analysis

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Why Is a Comprehensive Airline Policy in the National Interest?The U.S. Airline Industry Is a Major Source of High-Quality, Middle-Class American Jobs

Average wages, 2011: employees of U.S. scheduled passenger airlines vs. private industry, all occupations

*Average Annual Base Pay, U.S. Passenger Airlines

U.S. Avg Annual Base Pay, private industry, all occupa-

tions

$63k

$45k

Employees of U.S. passenger airlines earn 40% more than the average private industry U.S. worker

*Sources: Bureau of Labor Statistics Occupational earnings tables: United States, December 2009 – January 2011, Table 4; A4A U.S. Passenger Airline Cost Index

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Why Is a Comprehensive Airline Policy in the National Interest?Unlike Foreign Airlines, U.S. Airlines Connect Small- and Medium-sized Communities to the World

» The network of U.S. communities served by U.S. airlines never will be replicated by foreign airlines

» The connectivity between large U.S. cities and the global economy is inextricably linked to the connectivity between those cities and smaller U.S. communities provided by U.S. airlines

International Gateways OnlyAll Scheduled Passenger Air Service

» Unlike foreign carriers, U.S. airlines serve small, rural and other non-hub cities and communities throughout the country

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Why Is a Comprehensive Airline Policy in the National Interest?Unlike U.S. Airlines, Foreign Airlines Were Profitable in Most Recent Decade

Sources: DOT Form 41 for all reporting U.S. passenger and cargo airlines; IATA

USA Europe Asia-Pacific Middle East

($54.4 bil-lion)

$5.7 billion

$18.1 bil-lion

($31 mil-lion)

Aggregate airline industry net income, 2001 to 2010

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Why Is a Comprehensive Airline Policy in the National Interest?Recent U.S. Passenger Airline Industry Profits Are Less Than $1 Per Passenger

Net Income as % of Revenue Net Income per Enplanement

2001-2010 2011 YTD 3Q12(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

(5.4)

0.4 0.2

2001-2010 2011 YTD 3Q12($10)

($8)

($6)

($4)

($2)

$0

$2

($9.22)

$0.77 $0.50

Sources: For 2001-2011, A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of operating revenues; for 2012, A4A analysis of earnings reports of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways

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Full-Time Equivalent EmployeesPre-9/11 to post-recession through to present

Scheduled Daily Domestic FlightsDown Sharply from Jan. 2001 to present

Why Is a Comprehensive Airline Policy in the National Interest?When U.S. Passenger Airlines Lose Money, They Have No Choice But To Lower Costs by Reducing Service or Cutting U.S. Jobs

» Reduced U.S. passenger airline industry earnings results in reduced air service, fewer U.S. jobs, delayed fleet renewal, reduced in-flight service options, and, for some airlines, bankruptcies

Aug-2001 Apr-2010 Present

536.4k

376.2k 381.6k

2001 Present

29.8k

21.7k

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The Five Core Components of a U.S. National Airline PolicyTo Enhance the Economic Viability and Global Competitiveness of the U.S. Airline Industry,Grow Our Economy and Create U.S. Jobs

Rationalize Tax Burden

Rationalize Regulatory Burden

Modernize and Reform Infrastructure

Enhance Global Competitiveness

Mitigate Jet-Fuel Cost and Price Volatility

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Rationalize Tax BurdenAirlines and Their Customers Paid Nearly $19 Billion in Federal Taxes and Fees in 2012

PFC (Airp

orts)

9/11 (TSA)

ASIF (TSA)

Immigration

CustomsAPHIS

Dom. Psgr. (

A...

Int. Psgr. (

AATF)

Cargo (AATF)

Jet Fuel (A

ATF)

TOTAL

$2,777

$1,873 $385$648 $360 $496

$8,711

$2,729 $492 $390 $18,847

FY2012 Collections ($Millions) from Airlines/Customers

* 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, A4A

FAA = $12.32B

DHS = $3.76B

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Rationalize Tax BurdenFederal Taxes on a $300 One-Stop Domestic Round Trip* Ticket Now Exceed $60

2013 Taxes20% ($61)*

1972 Taxes7% ($22)*

1992 Taxes13% ($38)*

* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; total ticket price includes taxes

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Rationalize Tax BurdenAir Travel is Taxed Higher Than Other Transportation Sectors and “Sin” Products

Federal tax rate (%)Federal tax rate (%)

1. Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; total ticket price includes taxes 2. Federal tax percentage (18.4 cents per gallon gasoline, 24.4 cents per gallon diesel) based on June 27, 2012 prices (including state and federal taxes of $3.69/gallon diesel 3. US government has suggested investments in high speed rail infrastructure while increasing airfare taxation (PFC and security fees); consists of 2011 net loss margin which is funded by federal government; 15% excise tax pre-1962 4. Based on $20 sale price per 750ML bottle 5. Based on an average price of $1.00 per can Sources: MIT Ticket Tax; US Department of Treasury; TTB.gov; Gaspricewatch.com; US Energy Information Administration; IMF; BCG analysis

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15

10

5

-50

-50%Cruise tax

<1%

Gasoline tax2

6%

Airline ticket1

20%

Amtrak travel3

20

15

10

5

0Beer5

5%

Firearms

10%

Distilled spirits4

11%

20%

Airline ticket1

25

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Air travel is taxed higher than other transportation sectors... …and higher than many so-called "sin" products that are taxed to discourage use

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Rationalize Tax BurdenAirlines and Passengers Are Not Receiving Value for Their Federal Tax Dollar, Agency Inefficiencies on the Rise

Air traffic control (ATC) problems were the primary cause of late arrivals in 2011

Despite billions of dollars invested in new technology and procedures, airline flight times between many major U.S. cities have actually increased since the mid-1990s

According to the FAA, delays and cancellations cost the U.S. economy over $30 billion annually

According to recent government audits, cost overruns in long-term, core NextGen programs will delay more near-term, cost-beneficial projects, including deployment of performance-based navigation (PBN) procedures

FAA’s process for developing PBN and other new NextGen procedures is time-consuming and fragmented

Federal Aviation Administration

Customs and Border ProtectionTransportation Security

Administration

CBP staffing levels at major commercial airports are inadequate, especially during peak arrival times

During peak arrival times, passenger wait times can exceed well over one hour, deterring international travel to the U.S., thereby costing the economy billions of dollars annually

Since 2005, Congress has increased TSA’s budget by 26%, yet passenger traffic has decreased by 1.3%

Notwithstanding negative passenger traffic growth, TSA’s screener workforce has increased by nearly 300%, from 16,500 in 2004 to 45,000 today

According to government audits, TSA wastes hundreds of millions of taxpayer dollars annually by inefficiently deploying screening technology to commercial airports. Examples include:

$184m worth of equipment kept in storage

$30m spent on ineffective “puffer” portals $50m-$100m in procurement

inefficiencies annually Removal of 173 “backscatter”

body scanners

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Rationalize Regulatory BurdenAcross the Globe, U.S. Airlines Face a Litany of Imposed or Pending Regulationsthat Do Not Enhance Safety or the Passenger Experience

Environmental Rules

Economic/Consumer Rules

Security Rules

Environmental Rules

California green chemistry/consumer product ruleCalifornia ground service equipment emissions standardsAir cabin environment bleed air assessmentNoise restrictions (e.g., LAX)EPA airport hydrants ruleStormwater permittingPetitions for a U.S.-specific CO2 standard for aircraftProposal to extend OSHA regulations into aircraft cabins

Secure Flight development and watch list vettingFederal Air Marshal seatingExplosive Trace Detection outside USAGate screening in foreign countriesSecurity tamper-evident bags per ICAOLiquids, aerosols, and gels per ICAOCargo screening (e.g., U.S., UK, India)Foreign baggage arrival rescreeningTSA Pre-Check (CAPPS, boarding pass)Advance Cargo Information requirements*

Full-fare advertisingDenied boarding compensation changes24-hour ticket hold and refundProhibition on ancillary fee changes post-purchaseBaggage information on web, ticket30-minute status notificationDetailed ancillary revenue reportingDisplay of products in Global Distribution Systems3-hour tarmac delay ruleSlot and/or perimeter restrictions (e.g., DCA, NYC) Foreign ownership restrictions

ICAO development of a CO2 certification standard for aircraftICAO development of a new particulate matter certification standard for aircraftICAO adoption of a new noise certification standard for aircraftLimited airport access (e.g., China/Japan)Discriminatory landing fees (e.g., Italy)Discriminatory taxes (e.g., Philippines)EU Emissions Trading SchemeUK Air Passenger DutyEU Regulation 261: Passenger RightsProliferation of EU Noise RegulationsProposed Noise Fees (e.g. YUL)German Departure TaxClimate financing through UNFCCC

*2010: Honduras/Mexico/Netherlands/Nigeria2011: China/Ethiopia/EU/Philippines, 2012: Korea/Liberia/Panama/South Africa/Sudan/UAE, 2013: Ghana/Israel/New Zealand/Turkey

International Rules

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Rationalize Regulatory BurdenAirline Customer Service Subject to a Greater Degree of Government Reporting Requirements than Other Key Service Industries

Airlines

HotelsRental Cars

Cruises

Amtrak Buses CableTelecom

Service Delivery Reporting No No No No No No No

Full-Fare Advertising (incl. taxes) No No No No No No No

Ancillary Revenue Reporting No No No No No No No

24-Hour Purchase Refundability No No No No No No No

Detailed Reporting of Demand No No No No No No

Detailed Reporting of Costs No No No No

Reporting of Avg. Prices Paid No No No No No

Operational Contingency Plans No

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Modernize and Reform InfrastructureNextGen has the Potential to Reduce Flight Delays and Cancellations, which Cost the U.S. Economy Over $31 Billion Annually

Sources: “Total Delay Impact Study: A Comprehensive Assessment of the Costs and Impacts of Flight Delay in the United States,” FAA and NEXTOR (as revised and republished on Dec. 16, 2010)

Annual Impact (in $B) of Flight Delays and Cancellations

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» Existing NextGen technologies and aircraft equipage, including performance-based procedures, can deliver immediate benefits for airlines, passengers and the environment, at a fraction of the cost of longer-term NextGen programs like ADS-B In and Data Communications

» To justify further U.S. airline investments in NextGen aircraft equipment – especially given over $50 billion in losses since 2001 – the FAA must make the business case for longer-term NextGen programs by:

» Establishing technical and operational specifications and standards that enable airlines to leverage NextGen investments already made

» Certifying NextGen equipage

» Conducting more simulations, demonstrations, trials and flight evaluations with U.S. airlines

» Postponing any NextGen equipage mandates until such business case has been made

Modernize and Reform InfrastructureExpedite Implementation of NextGen Procedures that Leverage Existing Airline Investments

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Enhance Global CompetitivenessInternational Market Growth is Critical to Long-term U.S. Airline Industry Economic Viability, Constitutes Increasing Share of Total Seating and Cargo Capacity

Sources: A4A analysis of Innovata (via Diio Mi) sample-week operations for the month of July; for cargo carriers, the analysis is based on CY2000 and YTD Oct. 2012

Network 2000 2013 Change

Alaska 11.0 7.3 (3.3)

American 34.1 42.3 8.2

Delta 24.3 41.4 17.1

Frontier — 11.2 11.2

Hawaiian 2.7 35.8 33.1

JetBlue — 17.5 17.5

Southwest — 2.0 2.0

Spirit — 14.2 14.2

United 36.4 46.2 9.8

US Airways 13.8 27.1 13.3

Virgin America n/a 2.7 n/a

Network 2000 2013 Change

Atlas 63.1 81.9 18.8

FedEx 41.0 47.4 6.4

UPS 34.1 52.2 18.1

* Non-domestic ASMs as a share (%) of systemwide ASMs, including regional affiliates; for cargo carriers, RTMs are used instead of ASMs

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International Share of Seating and Cargo Capacity

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Enhance Global CompetitivenessYet the Top-Performing* Airlines in the World are Primarily Foreign Airlines

*Among publicly-traded airlines. Proprietary scoring methodology is composite of five categories: liquidity, financial health, earnings performance, fuel cost management and asset utilization. Source: “Indonesia’s AirAsia Tops Annual Aviation Week Airline Rankings,” Aviation Daily (July 2, 2012) and Aviation Week’s Top-Performing Airlines Study

Rank

1 AirAsia 80.9 21 Air Transat 59.4 41 Air France-KLM 48.42 Air Arabia 78.3 22 Southwest 59.4 42 Royal Jordanian 48.23 Ryanair 78.2 23 IAG (BA-Iberia) 57.6 43 US Airways 48.14 Hainan 76.7 24 Air New Zealand 57.6 44 Turk Hava Yollari 48.05 Allegiant 76.5 25 Aeroflot 55.7 45 Air Mauritius 48.06 Transasia 72.2 26 Virgin Australia 55.4 46 China Southern 47.47 Vueling 71.9 27 Icelandair 55.2 47 TAM 47.48 Copa 70.6 28 Cathay Pacific 54.6 48 Air Canada 47.39 Singapore 70.0 29 Kenya 53.8 49 Air China 46.7

10 WestJet 68.9 30 JetBlue 53.7 50 Republic 46.711 All Nippon 67.5 31 Hawaiian 53.4 51 EVA 46.612 Regional Express 67.5 32 United 53.3 52 Shandong 45.213 Aer Lingus 67.4 33 SkyWest 53.3 53 China 45.114 Alaska 66.1 34 LAN 51.9 54 Delta 44.915 Spirit 65.1 35 AviancaTaca 50.7 55 AMR 44.216 Easyjet 65.0 36 Norwegian 50.7 56 SAS 43.417 Qantas 63.8 37 Aegean 50.0 57 El Al 42.718 Cebu 63.6 38 PAL 49.0 58 Thai 41.819 Lufthansa 60.1 39 Chorus-Jazz 48.4 59 Korean 40.220 Garuda 59.7 40 Finnair 48.4 60 China Eastern 39.0

Airline Score (1-99) Rank Airline Score (1-99) Rank Airline Score (1-99)

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Enhance Global CompetitivenessWithout More Proactive Federal Airline Policies, U.S. Airlines Will Continue to Lose Ground to their Foreign Airline Competitors

*Source: BCG and A4A analysis; types of airline assistance considered includes direct subsidies and tax, regulatory/competition, and infrastructure

“The central government brought up the idea of building a harmonious society that creates a favorable environment for the development of the civil aviation industry.”

- Mr. Li Jia Xiang, Director, Civil Aviation Administration of China

UnitedStates

UnitedKingdom Germany France UAE ChinaCanada Brazil India Japan Singapore

Low High

Level of Proactive Airline Policies*

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Enhance Global CompetitivenessForeign Airlines are Projected to Order Five Times as Many Widebody Aircraft as North American Airlines

Asia/Pacific Europe/C.I.S.

Africa/Middle East

Latin Amer-ica

Sub-Total: Non-North America

North Amer-ica

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2,410

1,090 890300

4,690

710

820

600480

40

1940

610

Growth Replacement

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U.S. Carriers Gulf Carriers

United - 50

Emirates - 224

US Airways - 30

Qatar - 130

Delta - 18

Etihad - 76

Hawaiian - 18American - 14

Total - 430

Total - 130

Enhance Global CompetitivenessGulf Airline Widebody Aircraft Orders are Over Three Times as Large as U.S. Airline Orders

Widebody Aircraft On Order

Source: Diio (as of January 14, 2013)

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Enhance Global CompetitivenessInefficient Visa Policies Deter Inbound Travelers, Costing the U.S. Economy Billions of Dollars Annually

Percent of travelers surveyed (from respective countries below) indicating that:

Source: U.S. Travel Association; Mandala Research survey of 500 recent visitors from each of three countries

China India Brazil

78.3 80.2

94.5

China India Brazil

36.9 30.3

37.5

China India Brazil

31.3

45.1

52.9

Difficult-to-Impossible toTravel to USA

Visa Process DetersTravel to USA

USG Security MeasuresDeter Travel to USA

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Using Less FuelMillion Gallons per Day

But Spending More MoneyBillion Dollars per Year

Due to Rising PricesDollars per Gallon (Gulf Coast)

2000 2005 2011

56.2 55.9 50.8

2000 2005 2012

$16,787,334,749.0

$33,175,241,878.0

$50.4

2000 2005 2012

$85.00

$171.56

$3.06

Enhance Global CompetitivenessDespite Using Less Fuel, Costs are at Record-high Due to Market Volatility

Source: BTS (T2: 921) for U.S. airlines Source: BTS for U.S. airlines Source: Energy Information Administration

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The Case for a Comprehensive U.S. National Airline Policy

» The U.S. airline industry is a critical engine of U.S. economic growth and employment

» U.S. airlines are essential to connect nonhub markets to U.S. and global economic networks

» Foreign governments have embraced the role of their airline industries through affirmative policy support, giving their airlines a competitive advantage over U.S. airlines

» These contrasting approaches harm the global competitiveness of the U.S. airline industry, which adversely affects the entire U.S. economy

» Three bipartisan, federal airline industry commissions representing all segments of the aviation industry, including labor, have provided a policy blueprint

» Clear U.S. and foreign precedents exist for comprehensive policy action

» Congress and the Administration should establish and implement an affirmative, cohesive U.S. National Airline Policy

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The Case for a Comprehensive U.S. National Airline PolicyPrecedent for Affirmative, Cohesive Policy: Enactment of Three Rail Industry Reform Bills Between 1970-1980 Helped Revitalize U.S. Freight Rail Industry

Percent of travelers surveyed (from respective countries below) indicating that:

Investing in FutureReturn on Capital up 4x Since

Rail Bills Enacted Regaining Market Share

» From 1980-2010, U.S. railroads invested $480 billion (over 40 percent of revenues) in infrastructure

» Spending 5x average U.S. manufacturer on capital expenditures

» Four largest freight railroads invested more in their tracks than almost all states spend on their highways

Average return on capital (%)

8

6

4

2

10

02000s

8.0%

7.0%

1980s

4.4%

2.0%

1960s

2.8%

3.7%

1940s

4.1%

Post-Rail Reform Bills

Pre-Rail Reform Bills

Railroad share of intercity freight (%)

50

40

30

20

10

0’10

43%

’00

39%

’901

37%

’80

35%

’70

40%

’60

44%Post-Rail Reform Bills

Pre-Rail Reform Bills

Sources: Association of American Railroads, The Economist, BTS, National Transportation Statistics, BCG analysis

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Rationalize Tax Burden

Rationalize Regulatory Burden

Modernize and Reform Infrastructure

Enhance Global Competitiveness

Mitigate Jet-Fuel Cost and Price Volatility

» Repeal the commercial jet-fuel tax» Prevent any increase to the Passenger Facility Charge (PFC) cap, TSA passenger security fee, and any

new taxes or fees» Alleviate the inequity that currently exists because the level of federal aviation taxes and fees paid by

airlines and their passengers is not commensurate to the level of services received

» Promote regulatory reform to ensure that rules are solely based on sound science and cost/benefit analysis

» Eliminate or modify regulations that drive excessive costs and/or inefficiencies

» Accelerate the implementation of the most cost-beneficial elements of NextGen, including performance-based navigation procedures

» Oppose NextGen equipage mandates until FAA makes business case for investment» Harmonize NextGen regulations with comparable international regulations» Reduce passenger security and customs wait times» Accelerate economically viable public and private efforts to further reduce aviation emissions through

technology, operations and infrastructure

» Foster further consolidation and continued expansion of immunized global alliances» Seek fair competition in markets where foreign governments distort the marketplace through direct

and indirect subsidies» Reform U.S. visa policies by reducing processing times and adding processing locations» Promote equitable and adequate allocation of CBP resources to ensure that passengers do not

experience excessive wait times when entering the country» Stop proliferation of environmental taxes and cap and trade schemes such as the European

Union’s Emissions Trading Scheme (ETS) through proactive support of a global sectoral approach to address worldwide aircraft emissions

» Curb excessive speculation and prevent manipulation in the oil futures market» Promote R&D and deployment of commercially viable, sustainable alternative fuels and advanced

aircraft technologies» Bolster domestic fuel production in an environmentally sound manner» Reduce excessive tariffs on jet fuel shipments to airports

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