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Bad government policies will drive up transportation costs
By Vaughn Cordle, CFA / March 10, 2009
LaHood's recent interview suggests that the administration will cave in to the demands of the ATC
controllers. A quick examination of the AATF FY 2007 budget request shows that controllers cost $212.5k
each per year on average - 21% more than the average pilot, which is down 40% since 2000. If the initial
estimates are correct, per capita controller costs will increase to $244.4k per year, a 31% cost premium to
average pilot costs.
With LaHood's backing, the labor costs of ATO operations may increase 15%, or close to $1 billion.
Currently, those labor costs account for 77% of total ATO operations and 49% of total FAA expenditures. In
terms of revenue, ATO labor currently eats 57% or so of the funding for total FAA costs. Contrast this with the
22% [of revenue] consumed by labor in the airline industry.
The scary part is that trust fund revenue could be 10-15% lower this year because of the gap down in
passenger and cargo volumes, which means that labors' share of revenue soars to more than 70%. This
clearly becomes a labor bubble in this important government agency, something similar to what happened
to the airlines in 2003 before the rash of bankruptcies. The difference is that labor costs will not be
decreased in this government agency regardless of the financial distress imposed on the economy or the
airline industry.
What LaHood is doing to placate ATO controllers is clearly not in the best interest of the air-traveling
consumer, taxpayers, or other airline stake holders.
Making labor happy with big pay raises reflects a misguided and weak Obama Administration that appears
to be oblivious to what's happening in the airline industry. Big labor is being rewarded while taxpayers and
passengers are stuck with the bill. It's easy to conclude that air travel consumers will be hit hard with higher
government-mandated fees/taxes.
If my initial estimates are correct, the current AATF funding cash gap is around $2 billion, and this will
increase by $1.5 billion (12.5%) or so because of the decrease in airline and cargo revenue. Taxpayers, via
the general fund, must cover the negative AATF cash flow. Add the $1 billion labor cost increase to that, and
the gap widens to around $4.5 billion. Now, include the new $1 billion per year carbon tax (my
initial estimate), and becomes clear that higher transportation costs are in the pipeline.
One more point. AATF does not account for the cost of assets in the same way as private companies. In
other words, the funding gap is significantly understated. Using a 5% (of revenue) depreciation rate, it could
be argued that the real cost of running ATO/FAA is understated by about $600 million annually. The current
FY 2007 budget request calls for a $13.75 billion cost of operation, with revenues in the $12 billion range last
year.
Air travel consumers and tax payers should be alarmed by what Obama and Congress are going to do to this
country and our airline industry. I am certainly alarmed, and so are my Wall Street, labor, and supplier clients.
The carbon tax - regardless of form - makes for very bad policy because it increases unemployment and is
regressive. Moreover, from what I understand, the evidence that lower C02 emissions from industry and
consumers will reduce global temperatures is shaky at best.
By Vaughn Cordle, CFA / March 10, 2009
LaHood's recent interview suggests that the administration will cave in to the demands of the ATC
controllers. A quick examination of the AATF FY 2007 budget request shows that controllers cost $212.5k
each per year on average - 21% more than the average pilot, which is down 40% since 2000. If the initial
estimates are correct, per capita controller costs will increase to $244.4k per year, a 31% cost premium to
average pilot costs.
With LaHood's backing, the labor costs of ATO operations may increase 15%, or close to $1 billion.
Currently, those labor costs account for 77% of total ATO operations and 49% of total FAA expenditures. In
terms of revenue, ATO labor currently eats 57% or so of the funding for total FAA costs. Contrast this with the
22% [of revenue] consumed by labor in the airline industry.
The scary part is that trust fund revenue could be 10-15% lower this year because of the gap down in
passenger and cargo volumes, which means that labors' share of revenue soars to more than 70%. This
clearly becomes a labor bubble in this important government agency, something similar to what happened
to the airlines in 2003 before the rash of bankruptcies. The difference is that labor costs will not be
decreased in this government agency regardless of the financial distress imposed on the economy or the
airline industry.
What LaHood is doing to placate ATO controllers is clearly not in the best interest of the air-traveling
consumer, taxpayers, or other airline stake holders.
Making labor happy with big pay raises reflects a misguided and weak Obama Administration that appears
to be oblivious to what's happening in the airline industry. Big labor is being rewarded while taxpayers and
passengers are stuck with the bill. It's easy to conclude that air travel consumers will be hit hard with higher
government-mandated fees/taxes.
If my initial estimates are correct, the current AATF funding cash gap is around $2 billion, and this will
increase by $1.5 billion (12.5%) or so because of the decrease in airline and cargo revenue. Taxpayers, via
the general fund, must cover the negative AATF cash flow. Add the $1 billion labor cost increase to that, and
the gap widens to around $4.5 billion. Now, include the new $1 billion per year carbon tax (my
initial estimate), and becomes clear that higher transportation costs are in the pipeline.
One more point. AATF does not account for the cost of assets in the same way as private companies. In
other words, the funding gap is significantly understated. Using a 5% (of revenue) depreciation rate, it could
be argued that the real cost of running ATO/FAA is understated by about $600 million annually. The current
FY 2007 budget request calls for a $13.75 billion cost of operation, with revenues in the $12 billion range last
year.
Air travel consumers and tax payers should be alarmed by what Obama and Congress are going to do to this
country and our airline industry. I am certainly alarmed, and so are my Wall Street, labor, and supplier clients.
The carbon tax - regardless of form - makes for very bad policy because it increases unemployment and is
regressive. Moreover, from what I understand, the evidence that lower C02 emissions from industry and
consumers will reduce global temperatures is shaky at best.
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