Moving the World:  Global Aviation and the Global Economy

Thank you, Lester, for that kind introduction.

And I would like to express my thanks to Marshall Bouton, Ambassador Bindenagel and the Chicago Council on Foreign Relations for all their work in bringing us together today.

And I would like to thank all of you for coming together for this important exchange of information and ideas, especially those of you who have traveled from Europe, Canada and Mexico to join us today.

In particular, I would like to mention:

• Undersecretary Jeffrey Shane from the U.S. Department of Transportation;
• Deputy Assistant Secretary John Byerly from the U.S. Department of State; and
• John Roberson, Commissioner of the City of Chicago Department of Aviation.

We are here today to talk about the challenges the U.S. aviation industry is facing as it moves to compete in the global marketplace.

Two years ago, I stood before a similar audience at a meeting of the Aero Club in Washington and spoke on this same topic.

I said…and I quote:

“Beyond United’s survival, there has to be some higher-order reason for restructuring.  What is that reason?  What is the prize?”

I said that, “In my view, the prize ought to be that if our companies get our financial houses in order, we get the opportunity to become truly, globally competitive…The competitive pressures are clear and they point in one direction - toward the globalization of this industry.   That cannot happen unless the industry and government work together to re-examine regulations that diminish our opportunity to succeed in the global marketplace.”

I am here, two years later, to make very much the same point.

Unfortunately for the U.S. aviation industry, the regulatory environment has not changed at all.

Two years ago, United was at the beginning of our restructuring.   Today, we have...in fact…done much of the work required to put our financial house in order.

United faced significant challenges that some in the aviation industry thought we could not possibly overcome.

At the beginning of the restructuring process, we made a strategic decision to retain United’s valuable assets until it was clear to us how those assets could best be utilized to make the business stronger. 

Then we began, very thoughtfully and methodically, to do the hard work to make United competitive again.

On the cost side, our results are dramatic. We are on track to reduce our costs by $7 billion annually.

Our operations are in the best shape ever. Our on-time performance is dramatically improved, last year it was the third best in company history. Our on-time arrival results surpass the industry. Our complaints and mishandled baggage rates are sharply lower as well.

Our service is better than ever.

In fact, we were the only major carrier to improve the quality of service in 2004, according to a study by Wichita State University.

We are also posting industry-leading revenue performance.

A major part of our positive revenue story is that United reallocated capacity from the U.S. domestic market to the international market where revenue premiums have remained higher.  We could not have made that choice, if we had jettisoned our network.

United also retained our five leading domestic hubs and, through our restructuring, gained the flexibility to put the right products in the right markets at the right price.

We are earning the right to compete in the U.S.

United’s restructuring challenges closely reflect the problems all the major carriers in this country are facing.

I believe that the work we are doing is leading the transformation that all U.S. network carriers must undergo, if they are to remain relevant in the marketplace.

Aviation does indeed “move the world.”  Strong international carriers bring people around the world face-to-face for the exchange of ideas, cultures and economic opportunities. They allow businesses to do business here in the U.S. and across the globe.

As a result, the productivity and performance of U.S. network carriers matters to you and to the U.S. economy.  The better we at United do our job for our customers here in Chicago or at any of our other hubs, the better U.S. business performance can be. Our efficiency, our on-time performance plays an important role in business productivity.

Just as airlines compete, airports compete, cities compete and nations compete in the global aviation business.

Take Chicago for example.  This city stands at the central crossroads of travel for this nation and O’Hare is United’s biggest and most important hub.

We can fly you to Buffalo or to Beijing, to Frankfurt or to Des Moines.  In fact, in 2004 we added 16 new international routes to our network, the biggest international expansion United has ever undertaken without an acquisition.

While low-cost, point-to-point carriers play an important part in U.S. travel today, the JetBlues and Southwests do not do that.

Perhaps more importantly, especially for today’s discussion, United also brings people to Chicago and the rest of the U.S. from Beijing, Shanghai, Frankfurt, Munich, Nagoya, Sydney, Buenos Aires…and connecting with our Star Alliance partners…from almost 200 other international cities.

Incredible business opportunities are coming to this country from around the world, especially from the booming economies in Asia. A quarter of United’s service is now flying to and from Asia.

Having the best connectivity to emerging and growth markets is essential to Chicago’s future and is equally important to the country.

O’Hare has to be relevant to the globalization going on in the world economy.

If O’Hare does not provide the capacity and facilities that it must to stay competitive, another U.S. gateway will.

Mayor Daley and John Roberson certainly understand this. The business community and the people of Chicago must work together to implement the expansion needed at O’Hare to meet new competitive challenges and opportunities with adequate airport capacity.

At United, we are doing the work that will let us provide the connectivity – with our own service and through our alliances – that the U.S. must have to remain competitive.

While we know we have more to do to complete our restructuring and, beyond that, to continue to be a strong competitor, the question is, will United and the other major network carriers in this country be allowed to compete on a global scale?

The signs are even clearer today than they were two years ago that the industry is moving toward a global industrial structure – similar to events we saw years ago in the auto industry and in telecommunications.

This is a positive development.   What is not positive – in fact, what is alarming – is that the U.S. is not leading this process.

For the first time in the history of aviation, U.S. carriers are no longer the largest, strongest companies leading the way.

The evidence is there in recent aircraft orders.  The last big innovation in aircraft was the Boeing Triple Seven.  In 1995, United was the launch customer for Boeing and participated actively in the Triple Seven’s design. Today’s latest technology in aircraft design is found in the Airbus A380 and the Boeing 787. The Airbus A380 will be the largest aircraft in the world, transporting as many as 555 passengers. 

While both these aircraft offer tremendous advantages for the industry, only a handful of orders for the 787 have come from the U.S. passenger airline industry. And in fact, there are no U.S. passenger orders for the A380.

I want to make it clear that I am only discussing U.S. passenger carriers today.   The issues we face are not shared by the two leading U.S. express-package carriers – FedEx, our co-sponsor here today, and UPS.  They have ordered many new aircraft.

In fact, these companies are engines of economic growth for the U.S.  Their market shares combined make up 80 percent of the domestic express package market.  And, they have expanded internationally to become leading brands around the world.  In fact, they are a model for what the U.S. passenger industry should – and could – look like.

Instead, U.S. passenger carriers are fighting for survival in a hyper-competitive domestic market.  U.S. carriers have lost over $30 billion since 9/11 – and losses continue to mount. 

The domestic market is suffering from an excess of capacity that has resulted in the lowest fare levels in ten years.  Even the most efficient competitor is finding it impossible to fully pass along ever-increasing fuel costs.  Southwest, the model of efficiency in our domestic industry, would have lost money in the first quarter if it had not hedged fuel at about $26 a barrel.

This financial devastation is strictly a U.S. crisis.   In virtually every other region of the world today, the airline industry has recovered and is profitable again.

In Europe, Air France is strong enough financially to buy KLM, becoming the world’s largest carrier by revenue – a position held either by United or American in recent years.  Lufthansa is buying Swiss International Airlines – the former Swissair – and BA is considering acquiring the Spanish carrier, Iberia.

In the Asia/Pacific region, it’s the same story.  Qantas is expecting a profit of close to $1 billion Australian.  Singapore now owns 49 percent of Virgin Atlantic and has launched the longest nonstop routes in the world – from Singapore to Los Angeles and New York.

Cathay Pacific of Hong Kong is orchestrating a take-over of the only other major Hong Kong carrier – Dragonair – and has invested hundreds of millions of dollars in China’s flag carrier Air China in what appears to be an attempt to build an Asian “super-carrier.”

Strong carriers are also emerging in Latin America and the Middle East.

With the support of their governments and regulatory policies that encourage growth, major airlines around the world are merging across borders to develop “super-carriers.”  They are positioning themselves to compete in a truly global market, and they will have the financial strength to be “super-competitors” as well.

This raises an obvious question:  Why is the U.S. airline industry so ill-prepared to compete in the global marketplace, compared to our international competitors, and even compared to FedEx and UPS? 

Unfortunately, unlike many other governments around the world, the U.S. government has taken an approach to our passenger airline industry that favors a policy of fragmentation and inconsistent regulation.

Since deregulation in 1978, the U.S. government has pursued a policy that encourages the maximum number of domestic carriers and discourages consolidation, which prevents the development of strong carriers with national coverage. 

The regulatory prescription that follows from this “more-is-always better” view gives special favors to new entrants in the industry and non-network carriers.

Here at O’Hare, American and United voluntarily helped relieve airport congestion by giving up slots and depeaking schedules.  Now there is a proposal from the FAA that would reallocate those slots to new entrants and foreign carriers.

So while the biggest problem facing the U.S. industry is excess capacity, the primary policy driver in the U.S. is to introduce more capacity. 

Beyond this outdated philosophy, the U.S. has no consistent aviation policy.

After United made our way through the ATSB process, the Federal Reserve and the Treasury told us that, with the good work we had done, we should turn to the financial markets.  Ironically, however, federal law precludes a significant source of reliable, long-term investment which could come from international sources.

What we do not need is further intervention by regulators. 

Now is the time to face the next challenge:  Ensuring that U.S. carriers are able to compete in the global marketplace.  

No matter how well United or any U.S. carrier transforms its business, none of us will be an integral part of the future of global aviation…unless there is real change in the U.S. regulatory environment and the creation of a coherent national policy on aviation.

U.S. policy makers must develop an unbiased, long-term aviation policy that simply permits our airlines to behave like “normal” businesses. 

Here are some specific thoughts on how we might get there.

First, it’s time to treat this industry like any other competitive business, without special rules and regulations.  Before the government intervenes, there should be direct evidence of some market failure.  It’s time to complete the deregulation process, and expand it across borders.

Secondly, the U.S. needs to reverse the bias against airline size and remove the barriers that prevent us from becoming competitive on a global scale.  To compete with the “super-carriers” that are emerging internationally, U.S. carriers need to gain their own scope and scale. 

The U.S. government should reverse course and encourage the development of larger, stronger international carriers that can compete with the likes of Air France/KLM or Cathay Pacific/Air China.

Third, the government should repeal the 1938 federal law that bars foreign ownership of more than one-quarter of a U.S. air carrier. This restriction has emerged as one of the most significant barriers to this industry becoming more global.

Is there something special about the airline industry that justifies these limits on foreign ownership?  I come from the oil and gas business where  British Petroleum was able to buy significant oil and gas reserves in the U.S. with the acquisition of Amoco and Arco. Many other industries are also consolidating across borders.

Are airlines more “strategic” than energy reserves?  I don’t think one can make that argument successfully. 

This prohibition not only blocks the capital investment this industry so desperately needs, it excludes U.S. airlines from participating in the “super-carrier” evolution.

These are the issues that need to be considered – and soon.  Why are U.S. carriers faring worse than carriers in other regions?  What does the development of super-carriers mean for the U.S. economy?  Will U.S. carriers be able to compete?   And if not, what should be done?

The health of the city of Chicago, our national economy and U. S. leadership in the global economy of the future all depend on making the right decisions now.

These are complex and difficult issues to face.  But the magnitude of difficulty does not mean that we can turn our backs on our responsibility to find a solution.

United is no stranger to complexity or difficult issues.  Two years ago, many of the actions we contemplated as part of our restructuring were deemed impossible.  But we made the tough decisions and we are doing what has to be done.   

There is a huge opportunity for U.S. aviation in the emergence of global commerce. The U.S. leadership and everyone in this room today must act decisively if we are to take advantage of that opportunity.

Now I will be happy to open the floor to questions.

For related information, read Mike Whitaker's April 12, 2005, speech to the DOT regulatory review public meeting.

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