U.S. Global Competitiveness and the Role of Aviation

Glenn F. Tilton

Chairman of the Board of Directors

United Continental Holdings, Inc.

Note: As written; not necessarily as delivered

Thanks, Lisa – for those kind words of introduction – and good afternoon.

As Lisa mentioned, it has been seven “interesting” years since I last had the opportunity to address the Aero Club. It was in July 2003, and I had been with United for nine months… a time characterized by the Air Transport Association as “The Perfect Economic Storm” with the US airline industry reporting losses of nearly $13 billion in the prior 18 months – and United was in the midst of our restructuring. As I said in my remarks at the time:

“The prize should be that if our companies get our financial houses in order, we get the opportunity to become truly globally competitive.”

And, that “the airlines of the United States should be the premier carriers in the world – with the most extensive global networks, best customer service, and strongest financial performance, rewarding shareholders.”

As everyone here knows -- with the exception of some funding directly related to actual losses incurred immediately post 9/11 -- the airline industry has not been on the receiving end of massive government bailouts as have the banking, financial services and auto industries. Instead, the industry took action -- addressing many fundamental issues -- whereas a bailout would simply have masked problems that would have continued to undermine longer term, sustainable progress.

Significant actions have been taken across the industry in response to changes in the domestic and global competitive landscape. Actions necessary to position us to be viable and competitive in today’s marketplace… and to further our ambition of “sustained profitability.” The U.S. network and low-cost carriers have pursued consolidation, and, in international markets, pursued closely-integrated global alliances and cross-border joint ventures. And we’ve seen numerous consolidations in the regional sector. Last month United closed our merger with Continental, which was preceded by Delta’s merger with Northwest -- and followed by Southwest’s recently proposed merger with AirTran. When our nation’s anti-trust laws are rigorously applied, without political or partisan interference, industry consolidation and the use of immunized joint ventures can serve as the foundation for sustained profitability and growth.

United and Delta are now competitively positioned in the rankings of world leaders, such as Air France/KLM, Lufthansa and the newly merged combination of British Airways and Iberia, which created Europe’s third-largest airline. Adding to this dynamic competitive environment is the recently announced proposed merger of Chile’s LAN Airlines and Brazil’s TAM Airlines -- that will create the largest airline in Latin America. No single airline can serve all points on the map or all customers. The development of alliances and joint ventures has been a key strategy for U.S. airlines to compete effectively and extend our global reach.

This year, DOT granted antitrust immunity for joint ventures between American, British Airways, Iberia, Finnair and Royal Jordanian; American and JAL; and the expansion of an existing joint venture between United and ANA. The industry is actively pursuing every opportunity available to us to strengthen our global competitive position. In doing so, we provide better seamless service for our customers in small and large communities and connect them to our global networks. The world is changing, dramatically, and, economic growth is occurring on a global platform with the highest growth rates occurring outside the United States, and the airline industry is indeed an engine of growth, critical to the economic recovery and future global competitiveness of our country.

With that in mind, I am pleased to participate in Secretary LaHood’s’ Future of Aviation Advisory Committee – tasked with making recommendations to address aviation challenges, including ensuring the viability and competitiveness of our industry. Also I am pleased to serve on the President Export’s Council. And, congratulate Secretary LaHood on his recent appointment to the President’s Export Cabinet…as the two -- exports and aviation -- are inextricably linked. Aviation is a key enabler of trade, facilitating the mobilization of people, goods and ideas.  A healthy, competitive aviation industry is essential to a productive and efficient export market. 

When the formation of the President’s Export Council was announced in July, we pledged to work to develop a plan of action to help achieve the National Export Initiative’s goal of doubling U.S. exports over the next five years to support several million new jobs. By taking a collaborative approach, combining both the public and private sectors’ best efforts to achieving the administration’s goals, we believe we can make significant progress in strengthening our country’s economy and creating millions of new jobs for American workers.

Access to markets – all markets – is critical. And, bilateral, regional and multilateral trade agreements are integral to achieving trade access and meeting the objectives of the export initiative. The U.S. is not alone in our economic ambition, and, as we all know, every major trading nation is actively negotiating free trade agreements. If our competitors succeed in getting preferential positions in these important world markets, not only do we run the risk of failing to meet our export objectives, we will also fall behind in the global economy and forgo opportunities to create tens of thousands of jobs in the U.S. market.

There are parallel issues impacting exports and aviation – and there are interdependencies across both that have a multiplier effect to the good – or to the detriment -- of both. Action will be required to remove barriers and create a healthy, viable U.S. economy that can compete successfully in evolving global markets just as we must take action to remove barriers to creating the healthy, viable aviation industry our country requires….one that is capable of providing the connectivity and access critical to enabling global business, and being a world leader now, and for the next twenty and thirty years. We appreciate that this administration -- in giving aviation and transportation seats at the table in the Export Council… and Secretary LaHood through the work of the FAAC -- understands the relationship of viability… one to the other… aviation and economic recovery.

Today, an improving economy, the effects of reduced capacity, consolidation and world-wide joint ventures are beginning to deliver results for the industry. IATA is projecting worldwide profits of $8.9 billion for 2010, up from a loss of $10 billion in 2009. While the U.S. airline industry is expected to post year-end profit in the $4 billion range, only time and the sum of our efforts will determine whether profitability can be sustained.

Government can do much to create an environment in which we can build a competitive aviation industry and significantly enhance our ability to enable exports and fuel the economy.

- Ensuring access through opening aviation markets

- Allowing access to global capital

- Modernizing aviation infrastructure

- Ensuring fair and equitable taxation, and

- Harmonizing global standards

We need unfettered access to global markets.

The task of creating a policy environment in which airlines can compete globally, which is precisely the objective of DOT’s 1995 Statement of U.S. International Air Transportation Policy, continues as work in progress. Advances have been made, and Secretary LaHood and his DOT and State Department colleagues should be congratulated for recently concluding the Open Skies agreement with Japan, and last week reaching the historic 100^th Open Skies agreement with Columbia. Expanding international flights to and from the U.S., has increased travel and tourism and U.S. exports, enhancing productivity, job opportunities and economic growth. We must prioritize some of the world’s fastest-growing aviation markets -- Asia, South America, and the Near East – as access to these world economic growth market leaders remains highly restricted.

We need investment.

Despite the many benefits of global airline alliances, such arrangements do not allow our carriers to achieve the significant benefits that would result from allowing increased cross-border investment. Such investments would open the door to additional price, service and efficiency improvements by encouraging the free flow of capital, and facilitating the exchange of expertise and technology. In today’s global economy, cross-border investments occur in virtually every other major industrial and service sector, from automotive to pharmaceuticals to financial services and telecommunications.

We need infrastructure.

The current inefficient Air Traffic Control system drives significant costs and inconvenience, through flight delays and congestion. The FAA recently released a report on the total economic impact of our outdated system, indicating flight delays and cancellations cost our customers, the airlines and the U.S. economy nearly $33 billion in 2007. More than $20 billion of those additional costs were paid for by our customers through lost time and productivity… and the rest paid by the airline industry through increased expenses for fuel, crew and maintenance. This report just confirms what we have known for many years – flight delays are seriously hurting the economy, as well as the profitability and competitiveness of the U.S. airline industry and are frustrating our customers. In the spring of 2009, ATA proposed a detailed plan, “NowGen” that would accelerate the manufacture and installation of required avionics, the installation of associated ground infrastructure, and the development and implementation of new operating procedures. Contrast this investment of an additional $6 billion -- with the $33 billion of economic cost in ONE YEAR caused by the inefficiencies of the current ATC system. NowGen would yield over $12 billion in U.S. economic benefits in the first four years of implementation and generate over 100,000 new jobs distributed widely across the country. These numbers demonstrate clearly the economic and employment impact.

Taxpayers are currently paying directly for our inefficient system and indirectly subsidizing the annual $33 billion negative economic impact of those inefficiencies. Taxpayer dollars were appropriately used to build our current air traffic control system. Increased General Fund support for NextGen equipage incentives and other NextGen programs are clearly necessary, and it is appropriate for the government to provide financial incentives for airlines to equip their aircraft with necessary technology. Placement of avionics on the aircraft is simply a matter of “geography,” driven by the requirements of today’s infrastructure technology – and this is not a cost the airlines can, or should, absorb.

On the ground -- the airports that are critical to the global supply chain and the cities and states that rely on our planes to drive economic development, trade and tourism, must also look holistically at what works for them and for the airlines providing these all important services. Fees and investments must make sense and align with demand, future demand projections, and a business plan that can be of mutual benefit.

We don’t need excessive taxation…

Whether aimed at the consumer or the airlines, excessive taxation continues to be counter-productive to stimulating travel and trade -- with the U.S. airline industry more highly taxed and regulated than any “deregulated” industry. The industry’s tax burden has doubled since 1992 when President Clinton’s airline commission had already concluded “tax policies often have had a major and adverse effect on the industry.” We – and our customers -- are subjected to 17 different federal taxes and fees totaling $17 billion annually. These taxes and fees are administered inefficiently and inequitably by three cabinet-level departments and six different agencies, with little or no coordination on proposed new taxes and fees, or changes to existing rates. Under the current rate of growth, taxes and fees could cost the industry and traveling public an additional $7 billion – about 8 percent of last year’s total passenger revenues – by 2014.

The industry has been advocating for “Do No Harm” for years, in an attempt to simply stop the imposition of new taxes – with little expectation of correcting the inequity of the current tax situation, or its negative impact on travel and trade. Travel and tourism is a perfect example of where a significant U.S. “export” and aviation are inextricably linked. We need to re-establish and improve on the travel and tourism revenues pre 9/11 – which were significantly more than the $120 billion in travel and tourism exports and a positive trade surplus of $21 billion of 2009.

Our industry has the most positive impact on the U.S. balance of trade of any industry, according to the U.S. International Trade Commission. The FAA recently reported that international air traffic constituted roughly one-third of total U.S. airline industry revenues in 2009, and nearly one-quarter of our industry workforce is attributable to international passenger and cargo operations.

Given the role that commercial aviation plays in enabling domestic and international trade, travel and tourism -- over-regulating, over-taxing and not providing for efficient aviation infrastructure, is clearly not in the best interests of our country, our economy or our greater goal of increasing exports.

Given the significance of our role, policymakers need be mindful that this industry -- which is a capital-intensive, significant business -- is critical to the economic goals and well being of our country.

Given the lessons of the past, we must continue to work toward sustainable profitability. Without sustainable profitability there can be no job security for our employees; no level of service and connectivity guarantees for our customers and communities; and no way that we will “earn our way” to a more stable shareholder base that will invest in our industry for the long term.

We have made progress in recent years. Both in the work we are doing within our industry -- and in the priority being placed on aviation by the administration. We look forward to continuing to work collaboratively with the administration and the new congress – to ensure the U.S. has the aviation industry needed to enable America to lead in the global marketplace of today – and tomorrow.

Thank you – and now I would be delighted to take your questions…