STATEMENT OF PAUL R. IGNATIUS, PRESIDENT, AIR TRANSPORT ASSOCIATION

Mr. Chairman and members of the committee, my name is Paul R. Ignatius. I am President of the Air Transport Association which represents virtually all of the scheduled airlines of the United States. The airlines now account for more than 75% of all the intercity passenger miles provided by public transportation in this country, carry most of the first-class mail and thousands of tons of freight. To accomplish this, they use only about 4% of the petroleum consumed nationally.

I appreciate this opportunity to appear before the Senate Interior and Insular Affairs Committee to discuss the Administration's energy proposals, with particular emphasis on their impact on the airlines. The concern this Committee has shown for energy matters over an extended period of time and its continuing effort to insure that complex questions are resolved in a manner broadly serving the national interest are commendable.

Also commendable, I believe, are many features of the Administration's program. The airlines strongly endorse the following elements of the Administration's program:

Increased public education on energy conservation;

Activation and development of naval petroleum reserves;

Development of a strategic petroleum storage system;

Establishment of thermal efficiency standards for new buildings;

Tax credits for home insulation;

Expanded research and development of alternative energy sources; and Continued petroleum product price controls, including incentives to allocate a greater share of costs to gasoline as a conservation measure.

We disagree, however, with the Administration's plan to impose new taxes on crude oil and to decontrol domestic oil prices. Our objection arises from the adverse impact these proposals would have on the airlines and other common carriers and because we believe they would add to the twin problems of inflation and recession that affect the U.S. economy.

On December 9, 1974, at a hearing before a panel of Cabinet officers chaired by Secretary of Commerce Dent, I made the following comments on behalf of the airlines:

"As noted in the 'Project Independence' Report, near-term achievement of our energy goals can be attained only on the demand side of the energy equation-conservation, and in the transportation sector, any appreciable savings are likely to come only from improved auto efficiency and shifts from the private auto to public transportation. Public transport modes, including the airlines, must be assured adequate supplies of fuel at reasonable prices. In this connection, we believe that for the present at least, existing price controls on domestic crude oil should be retained and that consideration be given to their extension to areas of domestic crude production not now under price control.

"If the government believes that economic methods, such as taxes, are needed to trigger a shift from private to public transportation, it is important that the methods be in consonance with the objective. Thus, a tax on fuel used in public transportation would be inconsistent with the objective, and in addition force inflationary price increases on users of public transportation."

A month later, on January 9, 1975, at a press conference in Washington, I responded to a question on crude oil taxes that the press thought likely to be included in the Administration's program, I sate:

"The principal purpose presumably is to reduce consumption of petroleum. I don't think anybody whether he is an individual or a representative of a company or industry can do anything other than support efforts to reduce consumption. We clearly have to do it, and I think everyone who has studied the situation has concluded that.

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"At the same time I am hopeful that whatever programs are proposed and adopted designed to reduce consumption of fuel at the same time don't add to the inflationary pressures that are already present, or worsen the economic situation that is already present. And in that regard, I would be concerned if public transportation found it necessary to pass through in the form of substantially higher fares the amount of a new tax on petroleum. My reason is not difficult to explain. If the trucks and the trains and the busses and the airlines have to pass through this tax to the users of transportation, then the cost of everything will go up whether it is a loaf of bread or a pair of shoes or whatever."

When the President announced his energy proposals in his State of the Union message on January 15, 1975, they contained the tariff and tax on imported and domestic crude oil, and the intention to decontrol the price of "old" oil on April 1, 1975. Knowing of the concern expressed by the airlines about these proposals, FEA Administrator Frank Zarb invited me to meet with him on January 18th. Mr. Zarb told me that he and other members of the Administration understood that the energy proposals might have a severe impact on the airlines, and that the Administration's plan to lessen the impact of higher fuel prices through a reduction in the corporate income tax rate from 48% to 42% would be of only limited value to the airlines. Without in any way suggesting at that time that the Administration was prepared to make any adjustment to lessen the program's impact on the airlines, Mr. Zarb nevertheless said he was anxious to obtain additional factual information in order to have a better understanding of the extent of the problem. We have had subsequent discussions with Mr. Zarb and his staff and other Administration representatives, and I wish to commend them for the interest they have shown.

IMPACT ON THE AIRLINES

Let me now review briefly the impact on the airlines of the Administration's energy proposals. We believe that the proposals could increase our annual fuel costs by about $1 billion, as follows:

The $2/bbl. excise tax on domestic and imported crude would cost the carriers in their domestic operations about $400 million annually.

Decontrol of the price of domestic crude would cost the carriers in domestic operations about $500 million annually.

In addition to these costs, totaling some $900 million, there would be added costs of about $100 million due to the use of domestic fuel in international operations of U.S. carriers.

It is important to note that increases of this magnitude-and the amount will vary from about $1 billion to about $900 million depending upon estimates of projected fuel consumption--would be on top of the overwhelming price increases for jet fuel already sustained by the airlines. During 1974 the price of jet fuel doubled for domestic airlines and tripled for U.S. international carriers, adding approximately $1 billion to airline costs. Sizable fare increases were requested and approved but the additional costs have still not been fully recovered. With air travel markets in a weakened condition as a result of the general economic downturn, the airlines understandably are reluctant to raise fares again in order to recover additional fuel costs.

At the request of Administrator Zarb, the Air Transport Association's staff prepared estimates of the impact of the Administration's energy proposals under several different fare and capacity assumptions. These preliminary estimates are being reviewed by Administration officials. While the estimates are tentative in nature and do not necessarily represent what the aggregate of individual carrier decisions might actually be in dealing with the proposed fuel cost increases, they nevertheless reveal the general extent of the problem. The principal points emerging from the tentative analysis are these:

The airlines face a difficult year in 1975 quite apart from the problem of the proposed fuel cost increase.

The added costs of the Administration's energy proposals, amounting to approximately triple the total airline industry profits for 1974, could result in double-digit domestic fare increases as well as fewer flights, employee lay-offs, and forced grounding of valuable airline equipment-all in the face of a troubled national economy.

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If the domestic trunk airlines attempted to absorb these added costs without a fare increase at a load factor of 65% (as some Administration analysts have suggested), it is estimated that capacity would have to be reduced by 25%, thereby denying air transportation to a large number of communities and individuals requiring it. In addition, between 450 and 500 aircraft would have to be grounded and between 45,000 and 50,000 airline employees would have to be furloughed. The impact of these increased costs on the operations of local service, all-cargo, and U.S. international airlines would be similar and would significantly increase the adverse effect on the nation's air transportation system.

If, on the other hand, the trunk lines attemping to deal with the problem by raising fares, the amount of the needed increase would depend upon the reduction in capacity that was tolerable from a public service standpoint. At a 15% fare increase, capacity would have to be cut by approximately 11%, aircraft grounded would total 250-275, and from 25,000-30,000 employees would have to be furloughed. Again, the effect on local service, all-cargo, and U.S. international airlines would magnify the problem.

The analysis leads to an unmistakable conclusion: the effect of the fuel cost increases on the airlines and the public service would be devastating with or without a fare increase. There is no magic solution such as raising the load factor that will make the problem go away. Airline managements more than most people understand the importance of higher load factors as a means of increasing profitability, but this approach is simply not a feasible way to deal with the problem of fuel cost increases of this magnitude.

Accordingly, we have told Administration officials that some way must be found to cushion the impact of these enormous cost increases if we are to have a viable air transportation system. This could be accomplished by exempting the airlines and other common carriers from the proposed increases. Various methods could be employed to accomplish this purpose, such as timely rebates, or exclusion of jet fuel from the pass-through of increased costs stemming from the Administration's program.

While adjustments of this type appear to us to be necessary within the framework of the Administration's proposals, the airlines continue to believe that the Administration and the Congress should adopt a different approach to the energy problem, one which, in the words of a New York Times editorial on January 31, 1975, avoids "the socially destructive consequences of dealing with the energy problem through reliance on indiscriminate price increases for essential and non-essential fuels alike." This leads me to the concluding comments of my statement.

CONCLUSION

The nation's scheduled airlines believe that the time has indeed come for serious action on energy policy and conservation strategy. That action should involve both the Executive and Legislative branches of government, as well as significant contributions from the private sector, and should proceed in an expeditious manner.

The airlines strongly support conservation efforts which will insure the most productive use of our energy supplies. Airline management and employees have already instituted conservation programs which resulted in savings of about one billion gallons of jet fuel in 1974 while, at the same time, carrying about six million more passengers. Government has a significant role to play in such efforts by providing tax and economic incentives for elimination of wasteful consumption. At the same time, government policy must recognize that a satisfactory level of economic performance requires substantial energy consumption and that an unfocused and abrupt across-the-board slash in energy consumption can cut unnecessarily and severly into our economic muscle.

Government policies which would impose substantial additional fuel costs on already hard-pressed industrial users, public utilities, and common carrier transportation would be inflationary and could add to the recession. Moreover, such measures fail to deal with the central problem of limiting consumption of gasoline. The airlines support limitations on the consumption of gasoline and believe that consideration should be given to measures designed to achieve this purpose. For example, in an editorial on February 3, 1975, arguing for a tax on gasoline rather than on all oil products, the New York Times pointed out that