Airline Subsidies: Overview

Introduction

The importance of the aviation industry to the American economy became more obvious in the years since the September 11, 2001, terrorist attacks. When air travel declined after the attacks, the federal government took action to save what it deemed to be an essential part of the American economy, extending large subsidy payments to airlines to help them recoup their losses. Those in favor of subsidies feel that it is the government's duty to bail out the airlines, since it is in the public's interest for airlines to continue to operate at a reasonable cost. Opponents feel that subsidies and other financial aid packages unfairly bail out selected industries, while leaving others to fend for themselves amid economic turmoil.

The cost of running an airline is indeed high, but perhaps not as high as most people assume. For example, airports and air traffic control towers are owned and run by the government. Employee training for pilots and mechanics, often one of the most expensive undertakings for any business, is provided by the US military at no cost to the airlines. Even before the massive subsidies instituted by the government after the terrorist attacks on September 11, airline companies were paid for idle aircraft, for agreeing to be a part of the government's Reserve Air Fleet. Federal law also prohibits foreign companies from operating airlines within the United States, giving US airlines limited competition for domestic flights. American aviation companies are also allowed to engage in code-sharing in order to reduce costs, while maintaining or expanding their travel routes.

Ever since the airline industry was deregulated in 1978, the government has paid to keep small airports and aviation companies in business, in an attempt to increase Americans' access to air travel. Like the current subsidies, this "Essential Air Service" is often criticized as wasteful and expensive. Whatever their intentions, say critics, subsidies quash the natural competition in the aviation industry, by giving struggling companies a financial advantage by using taxpayer money. Many claim that subsidies have more to do with the political interests of subsidy advocates than with the economic interests of the nation.

Understanding the Discussion

Civil Reserve Air Fleet: Aircraft owned by private airlines, but contracted out to the US military, which allows the airlines to receive government funds when they are idle. Membership in the Reserve Air Fleet means that a company's aircraft can be commandeered by the US military in emergencies for necessary airlifts.

Code-Sharing: When two or more airline companies brand their flights under a single name and flight number. The involved companies cross-promote their services, and agree to coordinate their flights. For example, if Company A offers flights between London and Boston and Company B offers flights between Boston and Los Angeles, and the two companies share codes, each company can advertise flights from Los Angeles to London, even though the trip is actually handled by two separate companies.

Essential Air Service: Instituted as part of the Airline Deregulation Act of 1978, Essential Air Service was designed to provide smaller towns with air transportation, which they might not otherwise have, in order to maintain economic equity with more populous cities. Essential Air Service was intended to last only until 1988, but became permanent ten years later. As travel on subsidized airlines decreased, the companies required greater subsidies to continue operation. The cost of subsidizing Essential Air Service quadrupled in its third decade, costing the federal government about $110 million in 2006.

September 11, 2001, Terrorist Attacks: A series of attacks on the United States, in which four commercial passenger planes were hijacked and crashed into the World Trade Center towers in New York City, the Pentagon in Arlington, Virginia, and a field in Pennsylvania.

Subsidy: A monetary amount granted to a company by the government, which, when combined with customer payments, allows the company to realize a profit. The purpose of subsidies is to allow companies to continue making a profit during slumps, without raising prices for consumers. Airline subsidies vary, based on the dollar amount of business a company generates.

History

Prior to the signing of the Airline Deregulation Act in 1978, the federal Civil Aeronautics Board (CAB) regulated all domestic air travel and transport, controlling ticket prices, routes, and schedules. Amid economic troubles in the early 1970s, the American railroad industry fell on difficult times, with one of the major railroad companies declaring bankruptcy in 1976. Congress became concerned that airlines would suffer the same fate. Meanwhile, consumers were paying higher and higher airfares. The 1978 Airline Deregulation Act allowed airlines to more freely compete, which benefited consumers and many of the airlines, but also resulted in several major airlines declaring bankruptcy.

One method employed by airlines to reduce costs since deregulation has been code-sharing. Airlines that engage in code-sharing often claim that this practice allows them to offer better, more efficient service to their customers, but most critics feel that it is merely a marketing scheme to mislead customers into believing that a company has drastically increased their service area, when in fact they have just partnered with another company.

In the immediate aftermath of the September 11, 2001, terrorist attacks, the federal government grounded all non-emergency civilian aircrafts, a drastic action that had never been taken in the country's history. All flights were suspended until the morning of September 13. The federal government immediately recognized the effect that the attacks would have on the airline industry and the overall US economy, and began formulating plans to help the industry recover from the expected downturn.

People were understandably apprehensive about flying after the attacks, especially once rumors arose that Saudi nationals, including members of the bin Laden family, had flown out of the country while the rest of the country was grounded. To combat the problems plaguing the industry, the US government provided aviation companies with $5 billion in grants, and set up a loan program for $10 billion.

On September 18, the US airline industry requested $24 billion from the government for tax relief, public relations, and legislation clarifying that the airlines themselves were not going to be held liable for the attacks. The request was quickly scaled back to $17.5 billion, but further requests were submitted for government-run security checks, air marshals stationed on all flights, and secure cockpit doors.

Despite the swift action of the government, stock prices in airlines dropped drastically after the attacks, and tens of thousands of airline employees were laid off. The struggling Midway Airlines company ceased operations almost immediately. The Essential Air Service budget was stretched thin, and many of the smaller airports included in the program lost their subsidies. Most of them managed to survive the economic turmoil, and continue to receive as much as $650 per passenger from the government.

Opponents of these kinds of subsidies tend to feel that the airline companies bear the responsibility of pulling the industry out of its slump. The responsibility should not fall on the taxpayers, they say, especially considering that some of the increased airline costs, such as higher gas prices, are already borne by taxpayers. Furthermore, critics question the aviation industry's special status. Most other industries, they note, are not bailed out when they fall on hard times. As far as they are concerned, failure and bankruptcy, as much as success and competition, are just part of capitalism and the American system of free enterprise. Supporters of airline subsidies tend to feel that the government needs to improve air travel in order to justify subsidies. Providing funding for airlines, only to maintain the current level of safety, efficiency, and cost, they say, does not go far enough, even though it is a step in the right direction.

From 2001 to 2003, the aviation industry incurred $24.8 billion in losses. Compounding their expected losses due to renewed national fear of flying, the industry had to deal with the rising cost of jet fuel, which rose 40 cents a gallon in 2002. In 2005, the federal government began to decrease its airline subsidies, while also instituting increased security measures, thereby significantly increasing operating costs for aviation companies. Screening fees for a typical flight rose from $2.50 to $5.50, which was applied as a tax to ticket prices. Airlines protested this move, claiming it would only further hurt their business, which was still recovering from the long slump.

Airline Subsidies Today

In October 2006, there were one hundred cities in the United States with federally-subsidized air transport service, even though there was an average of only three passengers per flight. A flight that cost a passenger $88 was possible because the federal government contributed over $700 to the airline.

Major airlines had to cut back their service, leading to overcrowded planes and airports in major hubs like Chicago and Dallas. In January 2007, American Airlines realized its first annual profit since September 11, 2001, even while the profits of other companies, such as Southwest Airlines, declined.

In Europe, where the aviation industry is still regulated, airlines also experienced financial difficulties after September 11. Sabena Airlines in Belgium and Swissair in Switzerland both shut down in late 2001, though Swissair later reopened in conjunction with another airline. Aer Lingus in Ireland eliminated about 2,000 jobs in order to remain in business. Nevertheless, the European Union has strict rules against subsidies, and governments that want to provide aid to their aviation industry, the way the United States does, are unable to do so.

In February 2011, the Senate voted to preserve the Essential Air Service (EAS) program, which provides millions of dollars in subsidies for small airports. However, President Obama's federal budget proposal, released that same month, included cuts to airline subsidies of $1.1 billion. According to a report from the US Government Accountability Office in 2019, while changes had been made to the EAS over ensuing years that had made some communities ineligible for the program, waivers had also been given by the Department of Transportation (DOT) that allowed such communities to continue receiving subsidies. At the same time, beginning in 2017, the administration of Donald Trump had proposed budgets that involved eliminating the program due to arguments that it was not reasonable to have taxpayers funding the program, especially because many communities taking part were close enough to major airports to take advantage of those services.

In October 2019, US tariffs of up to $7.5 billion on European Union goods annually went into effect following a World Trade Organization (WTO) ruling that allowed for the sanctions to move forward. This decision was based upon the organization finding that the United States was within its rights to counteract damages it claimed to its aerospace industry caused by the European Union, over a period of several years, granting subsidies considered illegal according to WTO rules to plane-making company Airbus, a rival of the US company Boeing. Only months later, in March 2020, amidst the ongoing global pandemic of the disease COVID-19 caused by a novel coronavirus that had led to drastic efforts to slow the spread of the virus in the United States that included severe travel limitations, a large stimulus package was signed by Trump that provided for at least $50 billion in grants and loans for the airline industry. Airlines, which cited drastic decreases in passenger volume due to the pandemic, had requested aid to counteract such effects.

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