Companies like Emirates, Singapore Airlines, and other international airlines are renowned for their growth and performance. On the other hand, U.S. airlines are known for quite the opposite, lagging far behind their foreign competition in almost every measure. In my opinion, U.S. airlines cannot compete with these large foreign carriers due to three factors that are largely out of their control: their large route network, taxes, and the lack of a consistent national airline policy.
U.S. airlines hold a geographic and demographic disadvantage when it comes to establishing an efficient route network. U.S. airlines must maintain multiple hubs over a large area and support a large and diverse domestic network, whereas most foreign carriers need only to support one or two major hubs that support much smaller domestic networks and larger international ones.
To help visualize this assertion, consider the route networks of Emirates (top) and United Airlines (bottom). These are not complete route maps, but rather highlights that hopefully convey the obvious.
We can clearly see that Emirates has a hub that is perfectly situated geographically and demographically. Their route map illustrates Dubai as a true super hub that sits at the meeting point of Africa, the Middle East, Asia, and Europe. Contrary to U.S. carriers, they do not have a large domestic or regional network to worry about. Instead, their flights carry high-yield and long-haul international traffic. The same can be mostly said of the large European carriers, who maintain one or two hubs and have high traffic concentrations there.
On the other hand, United maintains multiple hubs and as a result, their traffic is not as concentrated as other global airlines like Emirates. It’s easy to say that U.S. airlines should just reduce the number of hubs, but because of the large demographic disparity across the country, they must have this large presence in order to tap into different markets. For example, Houston serves as the primary gateway to Central and Latin America for United because of the large Hispanic population in that city. Thus, although U.S. carriers can boast a large number of destinations and very diverse network, it’s also a large burden to have to cover such a large area.
U.S. airlines suffer tremendous disadvantages in taxes compared to their peers around the world, heavily affecting their ability to compete among the aforementioned top-tier international carriers. According to an MIT study called the “Airline Ticket Tax Project,” the effective tax rate for the average domestic ticket in the United States is about 15%. Jeff Smisek, CEO of United Airlines, was not kidding when he said that U.S. airline tickets are in a higher tax bracket than the “sin tax” for items that are discouraged, like alcohol, tobacco, and firearms.
What do all of these taxes consist of? For starters, there’s the Passenger Facility Charge, which can be up to $18 roundtrip. Then there is the Federal Segment Tax of $3.80 (applied for each flight on a ticket, so itineraries with connecting flights are charged more), Federal Excise Tax of 7.5% of the base fare, and the September 11th Security Fee of $2.50 applied to flights that takeoff from a U.S. airport (there’s a possibility it will get doubled to $5 per flight).
In the European Union, airline taxes are also high, at least on par or higher than U.S. taxes according to Joakim Karlsson of MIT and his thesis, “Incidence of Ticket Taxes and Fees on U.S. Domestic Air Travel.” He says that EU airlines are taxed at 18-19% on average for intra-European flights, based on a 15-day fare sample provided by Amadeus, S.A. and after factoring in air traffic control costs.
*In the original version of this article, I included a paragraph here along with a figure showing the disparities between tax rates on routes that U.S. airlines compete with foreign carriers. After further review, I decided that the information I provided was incomplete and interpreted incorrectly, thus resulting in my decision to remove it.
It does not make sense that airline tickets would be taxed so much to the point that it would seem the government is trying to discourage their purchase. After all, civil aviation activity accounted for 5.2% of the U.S. Gross Domestic Product in 2009 and supports millions of jobs. So why are airlines, an industry that contributes plenty, being taxed so much?
NATIONAL AIRLINE POLICY
The lack of a consistent national airline policy within the United States government severely inhibits reliable progress within the U.S. airline industry and threatens competitiveness now and in the future.
What does a national airline policy imply? According to Airlines For America, a trade organization representing U.S. airlines, there should be five objectives for such a policy: rationalize the tax burden, rationalize the regulatory burden, modernize and reform infrastructure, enhance global competitiveness, and mitigate jet fuel cost and volatility. By these objectives, the airlines are stating that they do not want more regulation, but rather government support and backing of creating a new and competitive environment that allows U.S. airlines to thrive in the free market.
Why do we need a national airline policy? Currently, the fastest growing regions for commercial air travel are the Middle East and Asia. North America is a very mature market and one that can use some upgrades, especially for infrastructure. Governments of key Middle East and Asian countries are throwing their support at the airlines, utilizing them as tools to develop their rapidly growing economies and helping them develop these crucial upgrades. By not adopting a national airline policy, the United States is not being competitive and risks falling behind these developing countries very soon.
Adopting a national airline policy will help solve large problems like integrating the NextGen air traffic control system, which will boost capacity of U.S. airspace and reduce environmental emissions, among other benefits. It would also simplify the complex Federal Aviation Regulations into a safe, lean, and practical set of rules.
These are some of the reasons that U.S. airlines have trouble competing on a global landscape. Their route structure is unique and vast, but also a large challenge because it is somewhat inefficient. Furthermore, U.S. airlines are highly taxed, prohibiting them from competing with large international airlines like Emirates and Singapore Airlines. Lastly, the lack of a national airline policy in the United States is keeping U.S. airlines from taking advantage of new infrastructure, practical regulations, and other benefits that governments of rapidly growing countries are currently developing.