As the Senate prepares to debate the Lieberman-Warner cap-and-trade bill, the airline industry's trade group says a mandatory cap on emissions is not necessary because the airlines have already taken steps to improve their environmental record. During today's OnPoint, James May, president and CEO of the Air Transport Association, discusses his industry's emissions record and explains how airlines are being affected by rising fuel costs. May explains what, he believes, Congress should be doing to help the airlines meet their alternative fuels and environmental goals. He also addresses the hot-button issue of airline consolidation and discusses how this could affect the airlines' bottom line.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is James May, president and CEO of the Air Transport Association. Jim, thanks for coming on the show.
James May: Delighted to be here Monica.
Monica Trauzzi: Jim, we're seeing skyrocketing fuel costs affecting industries throughout the country and the airlines have been adding on fuel surcharges to sort of help balance out these rising prices. What is the airline doing to address the cost of fuel short term?
James May: There is not subject it's more important to us. We're going to spend $60 billion in '08 on fuel. That's about $18-$20 billion more than we spent last year. It is our largest cost center. It's the number one cost and it's driving us absolutely crazy. We can't put enough increases in fares to offset this extraordinary rise. So, we're putting winglets on airplanes. We're working on reducing the amount of time on the ground, reducing the amount of taxi out time. We're reducing the weight of the aircraft by as little as five magazines per aircraft, putting in different kinds of seatback trays. Everything we can do from taxiing on one engine as opposed to two as we taxi out to get ready to take off, to hooking up to ground power as opposed to running the engines when we're sitting at the gate to run air conditioning and so forth, we're doing because of the extraordinary cost of oil.
Monica Trauzzi: What does this mean for the day-to-day operational stuff though? I mean are you flying fewer planes to sort of help balance is out?
James May: We have significantly begun the process of cutting back on capacity as we would call it in the industry. We're eliminating some destinations altogether. We're cutting back on frequencies. We're trying to learn how to fly smarter. We're working with a lot of new air traffic control techniques and technologies that allow us to fly more direct routes to cut time out of our system. But interestingly, we are also flying somewhat slower because it's a more fuel efficient way to go. And all of that benefits the environment, because since 1978 we've saved a very significant amount of fuel. We're traveling with more people using less fuel today than we ever have in the past. And we've had 110 percent reduction in our greenhouse gas emissions since '78 because of that relationship to fuel and the conservation that's necessary.
Monica Trauzzi: What do you think the government should be doing to bring down the price of oil? There's some talk about freezing putting oil into the Strategic Petroleum Reserve.
James May: Right.
Monica Trauzzi: Is that a way to go?
James May: I think they should, number one, stop filling the SPR, the strategic reserve at today's outrageous prices. Two, I think they should release 100 to 200 million barrels of oil over an 18 month period to try and re-inject supply back into the market. Number three, I think they ought to look at margin requirements for people who are trading or speculating in oil. And, number four, I think they ought to put a restriction on the people who can speculate or trade in commodities like oil to require that they are actual end-users, that they take delivery of the product as opposed to just trading in the paper market, which has about 14 times greater than the physical market for oil today.
Monica Trauzzi: What about consolidation? There's a lot of talk about airline mergers.
James May: Right.
Monica Trauzzi: And some people say that that could help bring the price down, the price of a ticket down. It could help with the rising cost of fuel. And other people say that that's a very short-term fix to a long-term problem.
James May: Look at it from the other end of the telescope, I think Monica. I think mergers are inevitable in this business and I think they are inevitable in particular when you look at the price of oil being what it is today. What impact it's going to have on prices I think remains to be seen and I wouldn't be able to sit here and project for you today. But I think that the overall health of the industry is going to demand that we have some consolidation in the business and it's only sensible when you look at the prices that we're paying for oil today.
Monica Trauzzi: Is the economic slowdown that we're seeing currently going to have an impact on the amount of emphasis your industry can put on environmental issues?
James May: Well, you know, that's the crux of the whole debate as I testified before Congress the last couple of weeks, is just exactly that equation. We are very environmentally sensitive. We've had very significant gains in our fuel efficiency and that is the best metric to measure how well we're doing from an environmental standpoint. So, it's not inexpensive to be green. You've got to invest in new technology, in new airplanes, spend time as we are in developing alternative fuels, doing all of those things to remain green and it's expensive. Under Lieberman-Warner we are required, under the transportation fuels provisions of that proposal, to actually pay the oil companies for permits to emit carbon dioxide for example. And that's going to cost us somewhere between $5 billion and $9 billion a year over the next few years, $100 billion between now in 2025. And that's all money that we could be using to improve, yet again, our fuel efficiency. If we don't have to do that alone our goal is to get another 30 percent more fuel efficient by 2025. That's taking 13 to 14 million cars off the road, on top of the equivalent of 18 million cars we've already taken off the road for our fuel savings. So it's a backwards kind of an equation. We are, under the terms that bill, being penalized for trying to do well and I think that that legislation, inadvertently, siphons off the financial resources that we need to invest in new planes, new aircraft technology, avionics. The amount of money that we're going to have to spend in avionics to comply with next-generation air traffic control systems is about $22 billion over the next 15 years. Where does that come from if at the same time we're having to spend $100 billion to comply with the terms and conditions of Lieberman-Warner? It doesn't make any sense.
Monica Trauzzi: So, what's a better alternative then? What should the government be doing?
James May: I think the government should promote our ability to become more fuel efficient. They should invest in alternative fuels as we are investing in alternative fuels. I think they should put up the hundreds of billions of dollars that are going to be required for next-generation air traffic control systems because we are a pure function of fuel burn. That's how we develop an environmental record.
Monica Trauzzi: So, you don't think there should be a binding cap?
James May: I don't think there should be a binding cap. I think we have a greater market incentive; it's called $126 a barrel oil. I think we've got a greater market incentive to be fuel efficient and therefore environmentally friendly than any other business in America today.
Monica Trauzzi: You mentioned alternative fuels.
James May: Sure.
Monica Trauzzi: What alternatives specifically are you guys working on for the future?
James May: We're founding members of an outfit called CAFI, Commercial Aviation Fuel Initiative, and we're looking at everything from ways to develop environmentally sensitive coal-to-liquid technology, which has been in use in the aviation business for some time. But we recognize it has begun a way that we can sequester the byproduct of the process, the Fischer-Tropes process, to biofuels, biomass fuels, anything that we think will meet the specifications, and the rather demanding specifications that we require for use of fuel in an aviation environment, which is at extreme temperatures and extreme altitudes.
Monica Trauzzi: Going back to emissions.
James May: Yes.
Monica Trauzzi: What's your take on a proposal by the European Union that would require all airlines to purchase emission credits tied to the amount of fuel used for flights to and from Europe?
James May: Well, I know this is going to come as a great shock to you, but we oppose it. And, again, it is trying to place a marketplace incentive on something that we are already more than incentivized to do, which is ...
Monica Trauzzi: They say they're trying to push action on emissions, on emissions control.
James May: Yes, and in the European way of looking at things their way of forcing action on emissions control is to require people to fly less. So if you like to go to New York for the weekend or if I like to fly to Florida fly-fishing, whatever the case might be, they don't want -- there are many in the community in Europe that don't want us to enjoy those privileges and they think the best way to achieve environmental progress, if you will, is to limit people's ability to fly. I don't agree with that. I think what we ought to have is a goal that says how do we find ways to fly more people, more goods, more often, more fuel efficiently than ever before? And that's what we're working on.
Monica Trauzzi: The biggest misconceptions about the airline industry relating to the environment, what are they?
James May: I think that CO2 has a different effect at 37,000 feet than it does on the ground. It doesn't. It has the same effect on the environment at altitude as it does on the ground. Secondly, that we're big polluters. As a practical matter, we're 2 percent of emissions today worldwide and all of the folks that know anything about this business think that even in 2025, with growth being taken into account, we're going to be 3 percent. So, if you want to tackle the problem, tackle those people that account for a huge percentage of greenhouse gas emissions as opposed to those that are doing 2 percent and who, by the way, have a very, very efficient record that is being improved upon on a regular basis.
Monica Trauzzi: The public is also becoming concerned about their carbon footprint now and a lot of people are wanting to buy offsets for the miles that they fly.
James May: And for almost every one of our carriers you have that opportunity, directly through the carrier and there are a number of places you can go where if it isn't through the carrier you can do it independently.
Monica Trauzzi: OK. We will end it right there on that note then.
James May: Thanks Monica.
Monica Trauzzi: Thanks for coming on the show.
James May: Invite me back.
Monica Trauzzi: We will.
James May: All right.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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