The Future of Flight:Changes and Challenges in 21st Century U.S. Aviation

Dec 14, 2012

Photo: Bloomberg

The past decade or so has largely been a rough one for the aviation industry. There was 9/11, new security regulations, and lots of red ink that only recently has stopped spilling. Over the last decade, U.S. air carriers experienced more than $50 billion in losses, according to Airlines for America (A4A), the largest airline trade association in the country. The industry has started to see some profit over the last two years, though very little. In 2011, the 11 U.S. passenger airlines’ aggregate net income was a meager $390 million, a 0.3% profit margin. This for a U.S. industry that supports 10 million jobs and drives more than $1 trillion in U.S. economic activity, according to A4A.

The future of aviation, however, looks brighter. It promises new ultra-efficient aircraft, a modernized air traffic control system, and the potential for greater revenue and jobs. That is, if the ever-present hand of government does not stifle an industry it seeks to regulate.

Efficiency Driving Aviation Innovation

Some of the most promising innovation is happening in fuel efficiency. Jet fuel is the biggest cost to airlines. The global aviation industry is forecast to spend $207 billion on fuel in 2012, which is about 33% of industry operating expenses, according to the International Air Transport Association (IATA). To mitigate these costs, industry is taking steps to improve efficiency and reduce fuel use.

From 1978 to 2011, U.S. air carriers achieved a 120% increase in fuel efficiency, but some of the biggest gains have come recently. In 2011, for example, U.S. airlines saw 16% more traffic than in 2000 but used 2.3 billion fewer gallons of fuel, reports A4A.

“One thing driving innovation in engine manufacturing these days is efficiency,” says Brian Elson, vice president of Government Relations at Rolls-Royce North America, which builds jet engines for commercial aircraft. New engines are designed to fly farther and longer whiles using less fuel, the key factors being reliability and fuel burn, says Elson.

Carriers are also working to reduce fuel burn by using a variety of tactics, including removing excess weight from the cabin and craft and towing between gates. Several carriers have also made multi-billion dollar purchases of new more efficient aircraft, engineered to better conserve fuel.

These efforts allow airlines to reduce expenses and work toward lower consumer ticket prices, which are largely a function of operating costs, taxes, and other fees paid to federal overseers. (Taxes can account for 20% or more of a domestic ticket price, according to A4A.) Reducing costs is an industry priority, as it allows U.S. carriers to offer lower domestic prices and better compete abroad.

The aviation industry has taken the lead in developing alternative biofuels. Multiple stakeholders came together under the banner of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a co-sponsored effort by the Aerospace Industries Association, Airports Council International - North America (ACI-NA), A4A and the Federal Aviation Administration (FAA). The impetus for the initiative was common industry concerns about fuel - supply security, affordability and price stability, and the environmental impact.

Biofuels are made from organic materials and are used in multiple modes of transportation. Ethanol, made from corn starch or sugarcane, is common in automotive gasoline; biodiesel, made from soybeans, is used to power diesel engines. The aviation industry has developed fuels that burn as efficiently as jet fuel and can be used in any standard engine. What’s needed now is the production of non-food stock plants at sufficient volumes and at a cost cheaper than jet fuel.

“Biofuels have to be cost competitive,” says Perry Flint, IATA’s Head of Corporate Communications for the Americas. “We certainly cannot pay more than we’re paying now for conventional jet fuel, and hopefully it would cost a lot less.”

Upgrading the Air Transport System

The FAA is implementing its Next Generation Air Transport System (NextGen), which moves the U.S. air traffic control system to satellite-based navigation. Currently, aircraft must follow flight paths determined by navigation beacons on the ground, which forces planes to zigzag across the country rather than flying the most direct route. Using GPS technology, planes will be able to fly shorter routes, saving time and fuel. This will reduce the traffic in the air while also reducing delays and increasing safety.

“A lot of gas is wasted when aircraft are waiting on ground because the air space is congested,” says Elson. “NextGen makes more efficient use of the system.”

NextGen promises benefits, but it demands large investment on the part of the airlines and airports. Carriers must implement new technologies and train pilots and other crew to use it. This is a significant expense. NextGen will offer many benefits once fully implemented – 2025 by FAA estimates. Before NextGen is the ubiquitous system, however, carriers will not see the efficiency and financial benefits.

Airports also face costs. Some technology and systems will be funded by airport user fees. However, for NextGen to succeed, many airports will need to fund additional capacity and technical systems, says Debby McElroy, Executive Vice President for Policy and External Affairs at ACI-NA.

“Our main concern when we talk about NextGen is that all of the partners are working together,” says McElroy. “Everyone is important – the airports, the airlines, general aviation and the FAA – and we need an integrated policy where we understand and agree on the best way to move forward. In order for people to confidently make the needed investments, we have to make sure the business case is there.”

NextGen will not come cheaply. House Committee on Transportation hearings earlier this year estimated the overall cost of NextGen upgrades will reach $40 billion – $20 billion for airport investments and $20 billion for airlines to upgrade their fleets. In a time when airline profits are virtually nil, hefty investments that will not pay off for more than a decade are hard to justify. Overall, the aviation industry is cautious about absorbing high costs because of past experience.

“The simple fact is that the industry has had situations in the past where they have invested [in different initiatives] and they were not able to take advantage of those new capabilities in the real world,” says Flint. “The industry recognizes that NextGen is very important, but the challenge is that the industry is reluctant to make forward investments in equipment and training without a guarantee of some near-term payback.”

What is more, government delays do not inspire confidence that NextGen will be fully implemented by the estimated completion date, still more than a decade away. In 2011, Congress failed to reach an agreement on reauthorization for the FAA. When the agency’s budget expired, 4,000 employees were furloughed and 219 projects were brought to a standstill. Additionally, a GAO report on NextGen implementation found that the FAA’s estimates on cost and schedule may not be reliable.

This undermines private sector certainty over NextGen’s future. There are efforts, however, to find ways around these challenges. The NextGen Advisory Committee (NAC) is a federal advisory committee to the FAA with the goal of fostering industry collaboration on NextGen implementation. The NextGen Fund is also contributing. Established under the FAA’s 2012 reauthorization, the fund is a public-private partnership (PPP) to help general aviation and commercial airlines acquire and implement NextGen equipment. The PPP is bringing more than $1.5 billion in private sector capital to finance NextGen investments.

"Accelerating NextGen aircraft equipage will unlock real economic growth and benefits, such as job creation, as soon as equipment orders are placed," says Russ Chew, NextGen Fund’s general partner. “Accelerating NextGen equipage will create up to 32,000 jobs and $23.5 billion in economic growth over its five-year ramp-up period."

A Draft Horse to Pull the Economy

Although U.S. airline industry was deregulated in 1978, it remains a heavily regulated industry.

“Regulation is a huge issue for airlines in the United States,” says Flint. “It is supposed to be a deregulated industry, and yet there are expectations put on it that are put on no other industry.”

Every flight in the United States must receive FAA direction to taxi, takeoff and land. Airlines are required to hold reservations for 24 hours and include taxes and fees in the ticket price. Further, there are steep fines for exceeding a government-determined time limit for waiting for takeoff. Facing delays, it is more financially prudent to cancel a flight than risk the more expensive fines. Bear in mind that once away from the gate, air carriers must follow the direction of the FAA. If air traffic is congested and the FAA instructs an aircraft to wait for takeoff, why do airlines face federal fines for following the direction of a federal agency?

“Unfortunately, we are seeing a U.S. retreat from the free market principles it had with deregulation, and in its place we have micromanagement that’s regulating how airlines compete,” says IATA’s Director General and CEO Tony Tyler.

While airlines were deregulated in 1978, airports were not.

“We are living with Nixon-era regulations that really aren’t appropriate for a modern global industry,” says McElroy. “Regulations are placed not only on our operations, but also in terms of how we manage the airport revenue – that’s unique for us.”

Indeed, though they are private enterprises, airports must follow government guidelines on how they raise and use funding. More than this, the government has a significant say in not only the regulatory standards for airports but also the way in which airports meet those regulations. Regulators often use a one-size-fits-all approach to dictating how airports will meet a litany of rules, but every airport is different. McElroy says airports need flexibility in determining how to satisfy regulations.

“What we need are performance-based regulations that allow airports to meet the regulation in the most efficient and operationally feasible way,” says McElroy.

Regulation also erects barriers to foreign-investment in U.S. aviation. Non-U.S. citizens cannot own and operate a U.S. airline. They cannot own more than 24.9% voting control or hold total equity of more than 49%. Further, the U.S. market is closed to foreign competition. Non-U.S. carriers are denied cabotage in the United States, meaning they cannot pick up and fly passengers between U.S. airports.

U.S. carriers face a litany of taxes, fees, and fines stemming from a variety of regulations and policies, and the Obama Administration’s 2013 budget proposes even more taxes on aviation. The consistent presence of government in the industry’s operations interrupts the spirit of free enterprise that drives the American economy.

“The value of aviation is not as a chicken to be plucked,” says Flint, “but as a draft horse to pull the economy.”

U.S. aviation generates billions of dollars in economic activity, fostering revenue and jobs in other industries, such as tourism and logistics. The future of flight holds many opportunities for U.S. business and economic growth, but continued heavy government intervention threatens the U.S. aviation industry’s potential.

CORRECTION: Originally, the piece stated that the NextGen Fund was established under the FAA’s 2011 reauthorization. In fact, the reauthorization took place in 2012.

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