Aviation Subsidies: Obvious and Otherwise

Federal Subsidies for Aviation

Many claim that our aviation system is self-sustaining.  That could not be further from the truth.  There are, of course, also substantial subsidies for other levels of government, but this document refutes this specific argument.

FAA Operations get general funds as well as funding from the aviation trust fund. The general fund level was $3.01 billion in FY 2004. The FY 2007 enacted level is $2.703 billion, or 32.4% of the FAA Operations total of $8.331 billion. DOD and other government aircraft are often assumed to be responsible for just 15% of FAA Operations costs—that would be $1.25 billion in FY 2007, implying for this year a subsidy of $1.453 billion to private sector aviation (2.703 less 1.25). More than half of all control tower take offs and landings are general aviation (including business aircraft) and almost half of en route control center traffic is general aviation.

Airports benefit from tax-free financing. Robert J. Aaronson, then Director of Aviation at the Port Authority of New York and New Jersey, said “It is inconceivable that a modern airport, which under the existing tax code includes such public service accommodations as terminals and their related retail stores, runways, hangars, loading facilities, cargo buildings, parking areas and maintenance bases, as well as appropriately sized in-flight meal facilities, hotels and meeting facilities, could be provided on any adequate scale by taxable financing” (Aviation Week & Space Technology, Sept. 16, 1985).

The FAA’s Airport Improvement Program includes noise mitigation funds given directly to homeowners who live within certain footprints near airports where noise exceeds a designated decibel level.  These funds are used to improve the sound-proofing of homes through window replacements and other noise mitigation procedures – basically a program to allow noisier jets and more frequent flights.

The Essential Air Services program, funded through the Office of the Secretary, provides about $110 million a year to subsidize scheduled air service to small communities that otherwise would go without.

As a consequence of 9/11, the FAA Aviation Insurance Program offers below-market rates for airlines’ war risk, hull loss and passenger, crew, and third-party liability insurance. The sunset date for this program has been postponed several times, most recently to December 31, 2013.

The federal Air Transportation Stabilization Board was formed after the Sept. 11, 2001, attacks “to oversee $10 billion in assistance [loan guarantees] earmarked by Congress to help the struggling [airline] industry” (NYT, Mar. 2, 2004). The largest loan, $900 million, went to US Airways, Inc., in March 2003, enabling the airline to close on a $1 billion loan.  ATSB’s last news release (May 31, 2006) states that it “still holds warrants in World Airways. The ATSB currently has no outstanding loan guarantees, but the Board has a direct loan of $86 million to ATA Airlines as a result of the airline’s bankruptcy.”

Federal airline security takes about $3 billion a year in general funds:

  1. TSA spends about $5 billion (out of its $6.4 billion budget) on aviation, of which general funds cover about $2.3 billion, and passenger and airline fees the remaining $2.7 billion.
  2. Federal Air Marshal Service’s budget is $722 million.

Federal subsidies for airline pensions have taken at least two forms—federal takeover of some airlines’ plans, and special breaks for most of the other airlines.

  1. The federal Pension Benefit Guaranty Corporation in recent years absorbed terminated pension plans from UAL Corp., parent of United Airlines, and US Airways Group Inc. (WSJ, July 31, 2006). The US Airways pension takeover involved PBGC taking over $2.3 billion in unfunded pension liabilities (WSJ, Nov. 3, 2005). As for UAL, “by the time the airline turned over its plan to the pension agency, the shortfall was $10.2 billion” (NYT, July 31, 2005). This was “the largest corporate pension default in history” (Washington Post, May 11, 2005). Even before these two takeovers, “claims by airlines accounted for 20% of [PBGC’s] total claims, according to the agency, and five of the 10 largest claims have come from struggling airlines” (San Francisco Chronicle, Dec. 31, 2004).
  2. The 2006 pension reform law gave special breaks to airlines. “Northwest and Delta are getting an astonishing 17 years in which to fund their pension promises, and they are allowed to assume that the investment returns on their pension assets will be 8.85%—about a third higher than other companies are permitted to assume. American and Continental are being treated less generously, though they still get away with looser provisions than companies in other industries” (Washington Post editorial, August 2, 2006).
  3. In 2007, “a pension measure tucked into last month’s Iraq war spending bill is causing some leading members of Congress to complain that American Airlines got a break worth almost $2 billion without proper scrutiny. The measure will allow American to greatly reduce its payments into its pension fund over next 10 years; at end of 2006, fund had assets of $8.5 billion and needed additional $2.5 billion to cover all obligations; new provision will allow American to recalculate those numbers, so that shortfall disappears and plan looks fully funded; Continental, along with small number of regional airlines, will also be able to take advantage of provision” (New York Times, June 21, 2007).

The FAA issues aircraft registrations, pilot medical and airline certifications, and pilot licenses for free or well below cost, a subsidy of at least $5 million a year for commercial and general aviation. [Source: CBO & GAO]

Federal law provides many tax breaks for general aviation, such as allowing companies who purchase small aircraft to immediately expense 30% of the purchase price during the first year of ownership and to depreciate an additional 50% of their new equipment in the first year of ownership for tax purposes. Also, businesses can deduct the operating expenses of their aircraft, including their aviation fuel costs, from their income taxes, garnering a further subsidy.

National Weather Service reports are public record, available to the airlines at no cost.

Among all forms of transportation, aviation enjoys disproportionate benefits from military research and development. Also, the National Aeronautics and Space Administration (NASA) spends $700 million to $1 billion each year on aviation-related research. Much of the work is related to making passenger jets more energy efficient. “NASA is flying a DC-8 ‘flying laboratory’ out of its Dryden facility [in southern California] to conduct biofuel tests that aim to collect data on emissions, engine performance and contrails with biofuels, the agency announced Friday….According to NASA, ‘We believe this study will improve understanding of contrails formation and quantify potential benefits of renewable alternate fuels in terms of aviation's impact on the environment’” (AVweb, March 1, 2013).

Arguably, aviation also receives huge indirect subsidies from the Highway Trust Fund and general funds in the form of highway and transit projects at airports. Most such projects are smaller—local access road or bus projects—but still big in the aggregate. Some projects are huge, for example, the Dulles Access Road, a 14-mile freeway exclusively for highway access to the airport in Northern Virginia, and the proposed $5 billion WMATA rail extension to Dulles.

Historically, “Airport and airway development costs incurred prior to the assessment of user charges in 1971 have been treated as sunk costs, none of which have been or will be paid for by air carriers and other system users…these sunk costs total $15.8 billion” (U.S. Department of Transportation, Study of Federal Aid to Rail Transportation, January, 1977 [Secretary Coleman under President Ford]).

Air passengers paid no ticket tax at all from 1963 to 1970. Prior to 1963, they did pay the federal passenger ticket tax imposed during World War II, but the federal government was investing in air facilities at almost five times the rate at which air ticket tax revenues were collected. Meanwhile, rail passengers’ wartime ticket tax—along with many other taxes railroads paid to all levels of government—went into general funds and sometimes into investing in air and road facilities.