Should Our Government Subsidize Jet Fuel For Airlines?

By Edgar Ambart - May 7, 2012 | Tickers: DAL, JBLU, LUV, UAL, LCC | 0 Comments

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Watching Robert Crandle, former president and chairman of American Airlines, speak on the CNBC original Inside American Airlines about the staggering costs of the airline industry was truly dismal.  What was even more disheartening is to hear him urge his own employees never to invest in airlines.  Here is a 25-year veteran of air transportation telling his own workforce to park their money somewhere else.  He further added, “American Airlines is a great company that does important work, but it is not an appropriate investment.  This industry will never be profitable”. 

The famous transcontinental American Airline flight from LAX to JFK only makes $200 net profit on average per flight.  Just to put things into perspective, an average summer transcontinental flight brings in $53,100 from ticket sales and has $52,900 of wage and other expenses, which includes the $18,000 for jet fuel.  If it sells one less seat than its norm or carries less mail for USPS, it may take a loss instantly for that flight.  For a superpower that is already behind in bullet train advancement, it is sad to hear that soon we might fall short in air travel as well, and it's embarrassing.  What is the proposed solution?

I think our government should step in and subsidize 50% of the jet fuel costs or offer tax incentives to turn the industry away from continuous acquisitions.  It can at least pay for the hedging derivatives that are used to secure a fixed price for fuel, which aims to decrease the chances of earnings surprises during short-term crude price increases.  Take a look at how much Southwest Airlines (NYSE: LUV), Delta Air Lines (NYSE: DAL), United Continental (NYSE: UAL), U.S. Airways Group (NYSE: LCC), and JetBlue Airways (NASDAQ: JBLU) spend yearly on fuel and interest expenses. 

Now imagine how much it would ease the pain if Uncle Sam began picking up half the tab for the largest burden expense – jet fuel.  I’m not implying that we should charge the U.S. tax payer during a recession for the airline’s misfortune, but maybe we could cut back on some of that counterproductive DEA spending on raiding marijuana dispensaries in California that are going to multiply like rabbits anyway.  I'm not alone in believing that airline safety is a bit more important to an average citizen than keeping cancer patients from receiving their medicine on time. Not to sway or sound too political, but the general public still doesn’t feel safe traveling on 30-year-old MD-80 planes that get re-assembled by Boeing every 4-7 years.  Airline companies are doing all they can with what they have in order to stay afloat: eliminating subscription magazines to save on fuel, decreasing the number of peanuts, re-assembling planes instead of replacing old models, etc.   

Besides Southwest Airlines, I can’t think of any other name that hasn’t filed for a Chapter 11 bankruptcy or came very close to filing one.  Observing the 12-month price performance chart from above, it’s clear that we need some outside assistance to revive the air transportation sector.  Inflationary costs have been a problem to the airline industry since 1930s and it is a problem that is not going away.  

I’m not sure how an average reader feels, but in my opinion more government subsidies and intervention is needed.  Airline companies pass on their increasing costs by passing landing and extra baggage fees on to the consumer anyhow, so why not pay those costs with taxes up front rather than puzzle ourselves later in attempting to understand what a "landing fee" is. 

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