FAA considers new funding mechanisms to pay its bills

 - October 19, 2006, 7:00 AM

As the FAA wrestles with how to generate a stable and predictable revenue stream to fund its operations, the head of the Air Transport Association (ATA) went before a Senate panel to request a one-year reprieve from the 4.3-cent federal tax on jet fuel.

Although the reprieve would save the airlines only $600 million, ATA president James May told the Senate aviation subcommittee that it would be a help. The air transport industry has lost more than $32 billion (net) since 9/11. That includes federal reimbursements for the shutdown and a portion of the industry’s security costs.

May noted that Hurricane Katrina and high fuel costs, as well as taxes and fees imposed after 9/11, were driving some of the oldest carriers into bankruptcy. The next day Northwest and Delta filed for bankruptcy.

Although FAA Administrator Marion Blakey has insisted that the Bush Administration is not seeking a user-fee system, the agency filed a notice in the Federal Register on September 13 calling for aviation financing reauthorization.

“The new financing structure should generate stable and predictable revenue, maintain the appropriate levels of service, and enable the FAA to make long-term investments and tie revenues raised for the system to the infrastructure and operational costs of the system,” the notice said. “The FAA has developed a series of data packages in examining FAA costs, paid through the [Aviation] Trust Fund, from a managerial reporting standpoint.”

The notice emphasized that the current taxes and fees paid into the trust fund are authorized only through Sept. 30, 2007, the end of Fiscal Year 2007. “Since there is only a small and declining balance in the trust fund, it is critical that the financing not be allowed to lapse,” the FAA said.

Last April, the FAA hosted a Trust Fund forum with major aviation stakeholders, during which a number of options for FAA funding were discussed. Any new financing structure should allow the FAA to maintain appropriate levels of service and make long-term investments, not only modernization but also in the next-generation air transportation system.

Stakeholder Contributions

“The funding mechanism chosen should tie revenues raised for the system to the infrastructure and operational costs of the system,” the FAA said. “It should also create incentives for the FAA to become increasingly productive.”

The FAA spent the past several months analyzing both cost and activity data and funding options. This work is expected to continue through the fall.

The FAA is examining the contributions of various stakeholder groups to the trust fund under the current tax structure, as well as the effect of different funding mechanisms on the agency, the flying public and the stakeholder groups.

“One major component of this work is an ongoing study that would allocate the FAA’s ATC costs to users of the system,” the FAA notice said. A set of allocation rules would be required to determine the most viable proposal to fund the system.

“In developing these allocation rules, the FAA seeks stakeholder input to fully consider principles such as marginal system use, use of congested space and scarce resources, aircraft weight, distance and other criteria,” the agency said.

On September 6, Blakey sent to stakeholders a package that contains questions for the recipients and data packages that the FAA is using to examine its costs.

Because the funding issues largely pertain to “first-line stakeholders” such as aircraft and aircraft part manufacturers, airlines, general/business aviation and airports, the FAA expects they will have a primary interest in responding to the questions.

For example, the questionnaire asks the users if there are specific ATC services or programs that they should pay for directly. It also asks if there are ATC services that they currently use that could be eliminated safely.

The package solicits comments on revising the current tax system and finding other funding alternatives for cost recovery of ATC services.

Similarly, it alludes to the possibility of charging fees to pilots to recover the costs associated with medical certification and the airmen medical examiners programs. Also suggested is charging certification fees to designees to recover the costs of interviewing, training and appointing designees, and an aircraft certification fee charged to manufacturers for design, certification, production approvals, parts manufacturing authority and airworthiness certifications.

The package includes “lessons learned from other countries,” a section that enumerates other nations’ charging practices, such as calculating user fees for ATC services based on weight and distance flown.

The Onerous Cost of Jet Fuel

Meanwhile, the ATA’s May told the senators on the aviation subcommittee that in January 2002 the price of jet fuel on the spot markets averaged nearly 56 cents per gallon. Shortly before Hurricane Katrina, the price stood at $1.87 per gallon, and after the storm it peaked at $2.36 a gallon. As of September 14, it was $1.92 per gallon, a 243-percent increase in nearly four years.

“It is clear that if not for the prices we must pay for jet fuel, the airline industry would be profitable,” he said. “Indeed, we remain at the mercy of oil markets and the federal government.”

While some lawmakers said they would consider ways to give the industry some relief, Rep. John Mica (R-Fla.), chairman of the House aviation subcommittee, said, “My policy has been not to have the government get involved with any kind of [subsidy].”

Speaking to a group of aviation writers and aviation industry representatives, Mica reminded that Congress has assisted the airlines with security costs and government-imposed mandates. “My position on the current proposal that has been put forth by some of the airlines…to waive the fuel tax for a year, I don’t think it would be fair to do that just for the airline industry,” he said.

Mica added that the public pays 18.4 cents tax per gallon of gas, civil aviation pays about 21 cents tax per gallon and truckers pay about 24 cents tax for a gallon of diesel. “We have a crisis in funding aviation that would be exacerbated by even dipping into the fuel tax revenues,” he said.

Working Group Studies Fuel Tax Change

NBAA and the National Air Transportation Association (NATA) are huddling with tax experts, FBOs, air charter operators and private aircraft owner-operators to mitigate or reverse a new law that taxes aviation jet fuel the same as highway diesel fuel.

The change is part of the recently enacted Highway Bill, which requires jet-A to be taxed at the highway rate of 24.4 cents per gallon instead of the 21.8 cents per gallon that now helps to replenish the Airport and Airways Trust Fund.

The authors of the provision believed that a significant amount of aviation fuel is being diverted to highway truck use, although both aviation associations say there is little evidence to support that claim. The change is intended to cut down on the alleged fraud by taxing all kerosene fuels at the same rate.

There is an application process for the refund of the difference between the 24.4 cents paid and the amount actually owed when the fuel is used as an aircraft fuel, but it is not yet clear who–fuel wholesalers, FBOs or end users–will be eligible to apply for that refund.

The NBAA/NATA working group wants to have guidance available in time for operators to review and implement any new procedures before the October 1 change. Early last month the group learned that officials from the IRS and the Treasury Department were meeting to discuss the taxation process and identify where in the fuel delivery chain special IRS registration would be available or required and which parties in the transaction would be eligible to apply for a refund of excess taxes.

Mike Nichols, NBAA manager of tax and finance, said it appears that FBOs will have to become registered ultimate vendors and apply for the refund. But he cautioned there is still danger that substantial tax dollars–for fuel used in aviation operations–will not make it to the trust fund.