Wingman: Should Free Flight Avionics Investments Be Put Off?

At a time when Wall Street expects major U.S. airlines to report more than $2 billion in first-quarter losses, one might think this hardly the time to think about investing in future airspace efficiencies.  The major airlines, especially, are continuing to reel from lower revenues and dismal profits caused by a price resistance from business travelers, some economic weakness, and higher oil prices, labor costs and security costs.

Despite signs of improved traffic, the nation’s largest carriers – except Southwest – have suffered big first-quarter losses, following a disastrous fourth-quarter, and are still expecting more low yields in coming months.

Because of this crises, the government bail-out loan guarantees, created by Congress immediately after last fall’s terrorist attacks, may need to be tapped by several hard-pressed airlines.  America West has applied already, US Airways appears about to, and United is considering it openly.  Smaller, already weak carriers, such as Vanguard Airlines, Frontier Flying Service, Evergreen International Airlines, and Spirit Airlines have already submitted applications.

Airlines have until June 28 to apply for the loan guarantees, which are being overseen by the Air Transport Stabilization Board.  But because of the stringent requirements attached to the financial assistance program, carriers aren’t standing in line to ask for them.  When America West received a $429 million loan guarantee, it was forced to give the U.S. government the opportunity to purchase nearly 19 million America West shares – about a third of the entire company – at a price of $3 each.  No wonder why Michael Wascom, speaking for the Air Transport Association, called this program a financing choice “of last resort.''

As followers of the industry know, there is much uncertainty and genuine angst for airlines now.  After reporting a $575 million loss in this year’s first quarter, American Airline’s Chairman and CEO, Donald J. Carty, wondered, “whether the business models of the airline industry…still work in this new environment.  My own view…is that we are seeing something very different than the normal cyclical downturn that many of us have experienced in the past.”

The something very different may be more profound than many in the industry yet realize.  We might be getting a strong hint from the latest Business Travel Coalition survey released this past week.  The polls respondents aren’t casual vacationers; these are the “road-warrior” types who buy about $2.9 billion in domestic U.S. air transportation services annually.

Here’s what their answers add up to:

• Business airline travel is down.  Business travelers are making fewer trips on airlines – at least the major carriers.  Large corporations cut air transport spending by 16.5 percent last year, and 60 percent said they are looking to reduce expenditures on airline services this year.  Seventy-four percent reported that they expect to make some of the reductions permanent.

• High ticket prices are the biggest reason.  High business fares are the biggest reason for avoiding air travel.  Airport hassles are next.  "Importantly, the combination of perceived high price of business travel and the hassle of security processes are significantly dampening business travel," the report said.  Not specifically addressed in this report, the added frustration of flight delays, which was such an issue only a year ago, is bound to come back, as overall air traffic increases.

• Low-cost carriers are gaining.  Avoiding high-cost carriers is one way business is reducing travel cost.  Of those surveyed, 72.8% said their organizations increased the number of segments flown on low-fare carriers by 68.5%.  They do this even if it means flying to secondary airports.

• Alternative travel is up.  Business travelers (about 75%) are driving or taking trains more often – especially for distances under 500 miles.  In addition they are using video and teleconferencing in lieu of traveling at all.  More than three-quarters of companies plan to increase videoconferencing and Internet technologies to avoid air travel this year.  The use of private aircraft – owned, leased or chartered – is also growing.

• Yield is down.  When they do fly on airlines, business travelers are buying more lower-cost, nonrefundable tickets, even when it means inconveniences, such as a Saturday night stay-over.  The use of nonrefundable tickets by business travelers rose to 57 percent in January and February of this year, from 54 percent during the same period in 2001, and 50 percent in 2000.  The average one-way air fare fell three percent, from $372.37 in 2000 to $361.56 in 2001.

Is Free Flight Now A Quixotic Exercise?

Against this backdrop of gloom, does spending money to update cockpits, or invest anything other than mandatory equipment when specifying new airplane avionics make any sense?  Wingman believes it does, but with important conditions.

In previous comments on this subject, Wingman has said that government could create an incentive program that would be self-financing, using “ benefit cash equivalents” (BCEs) resulting from future airspace efficiencies to pay for the financing needed to make the avionics’ investment.  (See “Why Guaranteed Loans Are Needed For Free Flight Avionics,” as well as, “More Can Be Gained From GAIN, and “How To Get Users To Invest In Free Flight Avionics.”)

Actually, as strange as this proposition may seem, Wingman believes that while the timing hardly seems opportune, a bold move that inspires the creative imagination of American enterprise may be successful if sold to the Congress and public in a convincing way.  Here are five suggestions for doing just that:

1. Begin with the premise that U.S. air transportation operates as a system that is shared by government, through its ATC services, and the operators who use it.  Both ATC and airplanes require subsystems – airborne avionics and ground-based surveillance radars, for example – along with experts (pilots and controllers) to make it work.

2. Further assume that improving this system, in a timely way, will not happen when the government service provider essentially has no financial interdependence with the user.  What Wingman is saying, is that government pays no direct price for failing to modernize its airspace, but the user loses real money by investing in an expected benefit that doesn’t materialize when his government “partner” fails to perform.  (Wingman believes this lack of “shared hurt” is the main reason why users – especially airlines with their financial backs against the wall – find it nearly impossible to make meaningful investments in the avionics on which airspace modernization depends.)

3. Don’t in any way refer to this effort as an airline bail-out.  This initiative isn’t intended to help out any weak performers, inept managers or demanding unions – or their opposites for that matter.  Nor is the program meant to help any user group more than another.  Wingman believes it should include all airspace users, small commercial operators to major airlines, and from sport airplanes to business jets.  It’s a suggestion aimed at realistically dealing with the problem of airspace modernization.

4. Don’t think of this program as “loans” to buy Free Flight equipment (although one might argue the point).  Instead call the arrangements something like “advances” to make them more politically acceptable.  Insist that the advances can only be used for buying specified avionics, and the BCEs can only be used to repay the advances.  Both the advances and BCEs are tied to the airplanes flown by the users, not to the users themselves, which means if the airplane is transferred to another entity while the advance is still outstanding, its obligations transfer with it.  (A number of details, such as a transfer to a foreign owner, will have to worked out.)

5. Design these arrangements in such a way so as to keep them off airline (or other user’s) balance sheets.  The rationale for this suggestion starts with the notion that the borrower is essentially the government, not the user.  The user is, however, responsible for the equipment’s maintenance and security while under the program.  After a sufficient number of BCE credits are accumulated in the user’s account, the equipment’s ownership is then transferred to the user, without any real cash changing hands.

6. Use this time, when airliners are underutilized and airline personnel are being laid off, to accomplish the preliminary requirements of this project.  Assign currently underused resources – especially those in engineering, flight operations and finance to put this program into motion.  Flight operations personnel will be needed to help the FAA design the procedures required to accelerate and maximize Free Flight’s expected benefits.  Engineers will be needed to help design and oversee the substantial aircraft modifications required.  Airline financial analysts and capital acquisition specialists will be needed to help design the mechanisms needed to make the “BCEs” or benefit cash equivalents work.

Finally, if you think this is too much for Congress to think about during these times of budget constraints, consider these numbers:

The Bush Administration has suggested an FAA capital modernization budget of  $3.0 billion for 2003.  Of that three billion, $1.7 billion is earmarked for airspace modernization projects.  Then, compare those numbers to the potential benefits of Free Flight – which have never been seriously disputed.  The 1995 RTCA report on Free Flight implementation gave these attention-getting examples: $1.47 billion per year in 2005 from better routing, $16.8 million per year from optimizing speed, and $3.5 billion per year from eliminating gate and en-route delays for the largest U.S. airlines.  These only-partial efficiency benefits sum to about $5.1 billion annually.

Today there are about 4,500 passenger jets in the U.S.  That translates into an annual savings of about $1.14 million per airplane.  That can buy a lot of avionics.

While, there has been skepticism about whether other factors, such as a lack of runways will negate some of these benefits, there has been little disagreement that their approximate magnitude is huge.

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