Airlines Fight Fuel Tax To Save Fragile Profits
After recently pulling out of a long and dizzying financial tailspin, United States airlines are now fighting an impending tax on jet fuel they say will plunge their rising profit lines back earthward.
On Oct. 1, the federal government plans to lift an exemption on a 4.3-cents-per-gallon tax that would raise the current price of commercial jet fuel by about 8 percent.
The US Treasury Department, confronting opposition in Congress, has sought to justify the tax by pointing to the revival of the airline industry. This year the industry is expected to eke out a $1 billion profit on $80 billion in revenue.
A continued exemption "would be unfair to other sectors of the transportation industry" that already pay a similar tax, Cynthia Beerbower, deputy assistant treasury secretary for tax policy, recently told the Senate Finance Committee.
The airline industry says it is the victim of harsh politicking over federal budget reductions. The Clinton administration seeks to squeeze airlines in order to ease intense pressure to slash funding for besieged federal programs, say industry representatives.
"We're getting up off the mat, and this is potentially the body blow before we have recovered our breath," says Chris Chiames, spokesman for the Air Transport Association (ATA), the airline industry's lobbying arm in Washington. Bills to repeal the annual tax have been introduced in both houses of Congress.
Industry analysts and executives say the tax would undermine short-term profitability at a cost to the industry of more than $500 million annually. (US airlines reported a pretax loss last year of $1 billion.) "We have an incipient recovery and we don't want to see it nipped in the bud by a huge levy added to the $6.5 billion in taxes we already pay as an industry," says United Airlines spokesman Joe Hopkins.
The total tax equals 0.6 percent to 1 percent of current industry revenues, a big chunk considering that profit margins in good years usually do not exceed 6 percent, according to a report by Moody's Investor Services. The levy could also hobble long-term efforts to reduce debt and rebuild equity.
Currently, the industry's collective debt has risen to 96 percent of the value of its total capital. The tax would equal 30 percent of the industry's combined equity, according to Moody's. "Even under the best of circumstances, it will take [the industry] the greater part of the remaining decade to reduce leverage to levels consistent with an investment-grade rating," Moody's said.
Given current economic growth, the tax would probably push three airlines into bankruptcy within two years, according to Aviation Forecasting & Economics, Inc. The firm, which assesses the credit quality of 100 airlines, did not identify the companies. USAir, Continental Airlines, and Trans World Airlines are considered the industry's most vulnerable carriers.
"This is a very insidious tax," says Michael Lowry, president of Aviation Forecasting & Economics in Lake Oswego, Ore. The levy would eventually prompt layoffs in the industry of between 15,000 and 32,000 employees, according to the firm.
Treasury officials say the industry has exaggerated the impact of the tax. They note government estimates that the levy will account for just a small fraction of the average carrier's current expenses. Carriers say, however, that because they can count on just a slim margin of profit in good years, even a small tax packs a wallop. For example, during the first six months of this year United logged a $154 million profit. The levy would annually cost the airline an estimated $80 million, a big proportion of the projected profit for 1995, says Mr. Hopkins.
The industry profits follow collective losses of $13 billion and layoffs of 120,000 employees in the first five years of the decade, according to the ATA. A threefold surge in jet-fuel prices after Iraq's 1990 invasion of Kuwait, the fear of international terrorism during the Gulf war, and the US recession cut badly into passenger traffic and denied the industry profitability until this year.