Airlines Make Big Profits But the Federal Government Pays Many of their Costs and the Atmosphere Receives the Airplane Pollution
In a story last month published in USA Today (7/24/2014), “Several airlines announce record profits“, American Airlines, which was in bankruptcy court last year and merged with U.S. Airways in December, announced the company’s first dividend since 1980, based on record quarterly profits of $1.5 billion.
United Airlines, the only major U.S. airline to lose money in the first quarter, announced second-quarter income of $919 million, an increase of 51% from the same period a year earlier.
Southwest Airlines, the largest carrier of U.S. passengers which began its first international flights July 1, also reported record quarterly net income of $485 million or 70 cents per diluted share, which beat analysts’ expectations of 61 cents. Southwest is offering workers a one-time bonus of $200 each to thank them. And JetBlue Airways announced its 17th consecutive quarter of profitability.
The next time you hop on a plane to go on an exotic vacation, or to give an important presentation at some far off land or distant conference, or go on an unnecessary (or necessary) business trip, or fly to see the Olympics, the Super Bowl, the Rose Bowl, or maybe just go pay a visit to someone you haven’t seen for awhile, know that the ticket price is really just a fraction of the “true” cost of traveling by jet airplane.
Over the past five years, the Obama administration has repeatedly called for cutting fossil fuel subsidies in the form of tax breaks and other incentives. But the amount of money the federal government forfeits through subsidies has increased steadily over that time period, reaching $18.5 billion last year, according to a new report from the environmental group Oil Change International.
That total is up from $12.7 billion in 2009, largely because oil and gas production has increased in the United States. Next year, domestic oil production is expected to reach the highest level since 1972. The Obama administration regularly touts its “all of the above” energy strategy, which includes increased oil and gas production.
The Oil Change report includes a variety of subsidies in its accounting, including tax breaks, incentives for production on federal lands (such as royalty fees that haven’t been adjusted in 25 years) and tax deductions for clean-up costs. And if state subsidies for oil, gas and coal production are also included, the total value climbs to $21.6 billion for 2013.
A 2011 study by the consulting firm Management Information Services, Inc. (MISI) estimated the total historical federal subsidies for various energy sources over the years 1950–2010 in the U.S.. The study found that oil, natural gas, and coal received $369 billion, $121 billion, and $104 billion (2010 dollars), respectively, or 70% of total energy subsidies over that period. Oil, natural gas, and coal benefited most from percentage depletion allowances and other tax-based subsidies, but oil also benefited heavily from regulatory subsidies such as exemptions from price controls and higher-than-average rates of return allowed on oil pipelines.
In September 2009, Obama and other G20 leaders pledged to phase out fossil fuel subsidies to help curb global warming. Obama also called for eliminating subsidies in 2012 and 2013. And the administration’s 2015 budget proposal again calls for a major cut to fossil fuel subsidies.
But Congress so far hasn’t acted to cut the subsidies. The report argues that as long as those incentives remain in place, the federal government is “essentially rewarding companies for accelerating climate change.”
“We’re spending more taxpayer dollars every year to fund fossil fuels that we can’t afford to burn, according to climate science,” said Steve Kretzmann, executive director of Oil Change International. “Subsidizing fossil fuels at this point is climate denial.” [article by Kate Sheppard, “Federal Government Still Spending Billions To Subsidize Fossil Fuels”, Huffington Post, 7/9/2014]
Essential Air Service (EAS) is a U.S. government program enacted to guarantee that small communities in the United States, which, prior to deregulation, were served by certificated airlines, maintained commercial service. Its aim is to maintain a minimal level of scheduled air service to these communities that otherwise would not be profitable. This came in response to the Airline Deregulation Act, passed in 1978, which gave U.S. airlines almost total freedom to determine which markets to serve domestically and what fares to charge for that service. The program is codified at 49 U.S.C. §§ 41731–41748.
The United States Department of Transportation (DOT) subsidizes airlines to serve rural communities across the country that otherwise would not receive any scheduled air service. As of November 1, 2013, the Essential Air Service subsidized 160 communities, of which 43 were in Alaska, whose guidelines for service are separate and distinct from the rest of the country. The decision as to what degree of subsidized service a community requires is made based on identifying a specific hub for the community and from there determining the number of trips, seats, and type of aircraft that are necessary to reach that hub.
The budget for EASs increased from $131.5 million in 2011 to $214 million in 2012 to $234 million in 2013 and to $241 million in 2014.
The true cost of flying includes the consequences of burning the fossil fuels which end up in the earth’s atmosphere. Consider also the uses of the land, wetlands or other uses that the airport and its runways and taxiways that your plane uses must have replaced and the other impacts the airport and its uses have on the surrounding environment. Finally, consider the costs and materials that are obtained for building the airport and airliners and the impacts of the many service vehicles operating at each airport and the impact of their emissions on the environment, too. Also consider the impacts of mining, drilling, and transport of fuel to the airport, possible fuel pipeline construction, and the potential for fuel spills, contamination of land and water resources, and the potential for fuel explosions associated with operation of the airport, transportation of the fuel, as well as the possible environmental effects associated with manufacturing airliners like the one you are flying that regularly use the airport. Most of these types of impacts are very real and can impose significant negative consequences to people, animal life and our environment but seldom do they have any recognized monetary cost thus they they go unpaid for by those who profit from the public’s use of the airplanes and the airport.
Ignorance, or purposefully ignoring negative, nonmonetary environmental effects of flying to exotic locations may seem blissful, at first; but when the environmental effects of millions of people doing the same things, but when many millions of people are flying daily, at different locations throughout the world yet in the same atmosphere are considered collectively, and over time, the consequences upon our atmosphere and therefore our planet can be very significant, dangerous and ultimately catastrophic, especially when combined with the billions of other sources of fossil fuel burning being done irrefutably caused our planet and oceans to warm, causing sea level rise, and ocean acidification, and increased severity of extreme weather events, ignorant over the cause and effect of burning fossil fuels and global warming is not only dangerous but foolhardy.
Yes, those jet airplanes and propeller driven airplanes burn significant volumes of fossil fuels every day in the world, in flight, taking-off and landing, thereby adding significantly to the increasing concentration of of the gas “carbon dioxide” (CO2) and other greenhouse gases that end up in the Earth’s atmosphere, daily, thus contributing to the increasingly grave rate of global warming.
Data from a Milwaukee Journal Sentinel article by Joe Taschler of the Journal Sentinel Aug. 9, 2014
“Airlines seeing friendlier skies as profits rise
Airlines may be making record profit again but who is realy paying for most of the cost?
Airlines are making money again, with U.S. carriers reporting record profits for the second quarter of this year, but don’t look for them to use that money to add flights or upgrade service.
Where airlines once burned through cash the way a jumbo jet burns fuel, these days they are content to stay in a financial holding pattern.
The profits are either given back to investors, in the form of dividends or stock buybacks, or used for expansion, said Jay Sorensen, president of IdeaWorks, a Shorewood airline industry consulting firm.
“I don’t think the latter is going to happen, in terms of expansion,” he said. “Airline management is going to push back against that because that’s what got them into trouble in the first place.”
Southwest Airlines CEO Gary Kelly all but said as much in a July 24 conference call to discuss the company’s second quarter earnings.
“Right now, the demand is very strong and it is balanced very nicely with the supply of seats,” Kelly said. “We’re going to manage our growth very carefully so that we don’t upset that balance.”
Southwest, the market share leader at Milwaukee’s Mitchell International Airport, reported record second-quarter profit of $465 million and set records for full planes and passenger fare per mile. Revenue rose 8%. In July, the airline’s planes were 86.7% full.
Those numbers certainly are strong, but the recent past continues to haunt airlines, leaving them gun-shy about spending money.
“The only other thing that I think needs to be mentioned here is that we’ve lived through a brutal decade where every balance sheet in the industry was stressed and most went bankrupt. So you just can’t extrapolate 2014 into infinity,” Kelly said.
“We do want to make sure that we err on the side, financially, of being conservative and being very well prepared for the unpredictable,” he added. “The unpredictable’s happened a lot to us in 43 years.”
More service cuts
Among other carriers, American Airlines, only eight months removed from bankruptcy, said it will pay its first dividend in 34 years, a cash payout of 10 cents per share.
American reported net income of $864 million in the second quarter. Excluding special charges related to taxes and bankruptcy and merger costs, the profit was $1.5 billion, a quarterly record for the carrier.
So will it put any of that money into additional services? No. Actually, it’s cutting some in-flight meals.
The carrier, in the process of merging with US Airways, will stop serving free meals to first-class and business-class passengers on flights shorter than 2 hours and 45 minutes, beginning Sept. 1.
American now serves full meals on flights longer than two hours. The change is being made as part of the US Airways merger and is meant to keep consistent policies between the two airlines.
The airlines will continue to serve snacks such as fig bars, pretzels, fruit and cookies on shorter flights. Passengers in the economy sections can buy meals on flights longer than 2 hours and 45 minutes.
“We have to make sure our customers have a consistent experience, no matter what airline they choose,” American Airlines spokesman Casey Norton said.
Making up ground
To be fair, American is doing things to bolster its business using the profits it earned in the quarter.
The carrier will spend more than $2.8 billion on debt and aircraft lease prepayments, $1 billion to buy back shares and pay $600 million toward additional pension contributions.
All of those moves make sense.
“When you run an organization that was bankrupt or operating with poor financial results, it becomes threadbare. They need to make capital investments. They need to consider salary increases or profit-sharing increases,” Sorensen said.
“Hallelujah, they are making money,” he added. “They need it.”
Still, the timing of the meal service cutbacks was poor.
“That’s not the message that should be given right now,” Sorensen said. “The message should be that, ‘We are profitable. We are maintaining or improving the product for the consumer.'”
Four carriers, Southwest, Delta, American/US Airways and United, control more than 80% of the domestic airline market. All four serve Milwaukee.
With so much of the industry concentrated with a few carriers, it hasn’t made attracting new service to Mitchell any easier.
Attracting more air service is a top priority for Mitchell management, Harold Mester, public relations manager for the airport, said in an email.
“We meet with airlines on a regular basis, including frequently hosting airline executives in Milwaukee. We also invest significant resources into promoting Milwaukee as a cost-effective alternative for air carriers looking to serve the Chicago market,” he said.
The airport also has an air service incentive program to help offset the costs of new or expanded service from Milwaukee, he added.
Still, the airport has made some gains. “We now have year-round nonstop service to Seattle, San Francisco and Los Angeles, which were previously served on a seasonal basis,” Mester said.
Southwest is adding service to Cancun, and Frontier recently added some Florida service.
Adjusting to a new order
The Milwaukee County owned and operated airport is adjusting to the new order in the airline industry and its status of no longer being a major airline hub.
“Milwaukee’s air service is resetting in the wake of the airline industry’s new business model that parked feeder planes and moved to full-size mainline jets,” Mester said.
That new model also means that, if planes aren’t full, they won’t be flying a particular route for long.
It’s the butts-in-seats model. If there are not enough butts, the seats go away.
At Southwest, for example, trips flown in July were 113,099, down 3.7% from 117,402 in July 2013. Year to date, the airline’s trips flown as of July was 740,080, a 5% drop from 779,508 in 2013.
“Air service is largely ‘use it or lose it,'” Mester said. “Growth in population, employment, industry, commerce, conventions and tourism are the biggest factors that create demand and result in more air service.”
Industry watchers don’t expect things to change much.
“The industry is happy to bask in the glow of making money for once,” Sorensen said.
While touting green technology, and lobbying the federal government on environmental policy, Sergey Brin, Larry Page, and Eric Schmidt have put 3.4 million miles on their private jets in recent years, polluting the atmosphere with 100 million pounds of carbon dioxide. Their trips, according to flight log data I analyzed, included single-day jaunts and brief corporate meetings, but also what appear to be hundreds of exotic vacation destinations.
Perhaps someone should introduce them to Google Hangouts?
Few Americans would care that a successful tech company with substantial travel demands and nearly $60 billion in revenue over the past year maintains a fleet of private jets that guzzle fuel by the millions of gallons. But Google uses campaign contributions to strong-arm federal lawmakers into hamstringing everyone else with restrictive environmental regulations, while Google execs cavalierly jet off to exotic vacation spots around the globe on the taxpayers’ dime.
In a story by Justin Bachman, 7/23/2013, Bloomberg News lays out the arguments being made to get Uncle Sam out of the business of directing airplanes. This debate is hardly new, although the meat cleaver Congress took to the federal budget in January has given the proposal new impetus and appears to have made leaders of the labor union, the National Air Traffic Controllers Association, ready to discuss fundamental changes.
STORY: Some Air Traffic Controllers Watch Over Empty Skies
The Federal Aviation Administration cut $637 million from its $16 billion budget this fiscal year as a result of the sequester and faces similar cuts in the year beginning Oct. 1. In April, the traveling public felt the first effects of the reduced funding with furloughs hitting some 50,000 FAA employees and touching off about 2,300 flight delays. Days later, after heavy press coverage and outrage from airlines, Congress passed legislation allowing the agency to transfer funds to end the furloughs.
The basic change would be to fund traffic control not with taxes but through a “fee for flight”—a twist on the medical profession’s fee-for-service model—collected by a government corporation or a public-private partnership of some sort. About two-thirds of the costs of operating the U.S. air-traffic system derive from excise taxes on airline tickets and jet fuel, Bloomberg News reported. And with appropriations from Congress serving as the basis of long-term capital projects, the FAA’s ability to complete a transformation to a satellite-based routing system—as well as other large, capital-intensive efforts—has been called into question.
“The idea that you pay for $20 billion dollar infrastructure projects out of annual operating cash flow is nuts,” Robert Poole Jr., a co-founder of the libertarian Reason Foundation and a long-term advocate of moving ATC out of the federal government, said at the June conference. “You wouldn’t run any business that way.”
STORY: The GOP Plan to Get Air Traffic Safety on the Cheap
Dozens of countries, including Australia, Canada, and Germany, have relinquished the management of flight traffic to various private and public-private organizations in a bid to increase efficiency, lower costs, and boost safety. Funding air traffic control through fees also allows the agency in charge to issue bonds and pay for large projects, Poole has argued. Many of those agencies even enjoy investment-grade credit ratings.
There’s also the matter of public safety and bragging rights: For decades, the U.S. has boasted the safest air traffic system, and some foresee that title being supplanted by other nations that operate their airspaces differently. Others, however, argue that controllers should be government employees and that privatization could compromise safety. “I do know that the current system is broken and this conversation needs to start to happen,” Rinaldi said.
The federal budget sequester may advance an old proposal that was once broadly unthinkable: privatizing the U.S. air traffic control system.
In a story today that’s well worth reading for anyone who flies, Bloomberg News lays out the arguments being made to get Uncle Sam out of the business of directing airplanes. This debate is hardly new, although the meat cleaver Congress took to the federal budget in January has given the proposal new impetus and appears to have made leaders of the labor union, the National Air Traffic Controllers Association, ready to discuss fundamental changes.
“My organization has pivoted,” Paul Rinaldi, president of the controllers union, said at a symposium in June on modernizing air traffic control in response to the deep budget cuts. “If we do not mature, have this discussion, find a way to sustainably fund this system properly so that we can modernize it, we are going to fall way behind the world.” (A video of the panel discussion on FAA funding can be viewed here.) The union has not advocated any particular approach or called for air traffic control to be privatized, hoping instead to foster a wider, public discussion of the issue.