by Susan J. Aluise | May 23, 2011 1:49 pm
Pricey jet fuel and environmental problems ranging from severe storms to last week’s new eruption of volcanic ash over Europe have given airline stocks their share of fits and starts this year. After all, as major carriers like Delta (NYSE:DAL), United Continental (NYSE:UAL), AMR Corp.’s (NYSE:AMR) American Airlines, US Airways (NYSE:LLC) and Southwest (NYSE:LUV) can attest, higher costs are the bane of airlines’ existence.
But if the Federal Aviation Administration gets its way, airlines will face yet another headwind: the rising cost of air safety. In the biggest change to flight crew training requirements in 20 years, the FAA is proposing a new safety rule that would send pilots back to school. The plan, which will be out for comment until July 19, would require airlines to put their pilots through “real-world” emergency training scenarios in flight simulators.
In addition to this enhanced individual training, flight crews also would have to train together, learn to coordinate their actions tand fly scenarios based on actual events. The new rules would require remedial training for pilots who have failed proficiency checks or tests or whose performance has been unsatisfactory.
This new rule represents the FAA’s second stab at beefing up flight training requirements in the wake of the February 2009 crash of Colgan Air Flight 3407. That flight, marketed as Continental Connection under a code-share with Continental, crashed on landing approach, killing all 49 aboard and one person on the ground. The crash was blamed on flight crew fatigue and inadequate training in how to recognize and respond to an aerodynamic stall.
No one argues that air safety isn’t a paramount consideration for all industry stakeholders: passengers, lawmakers, regulators – and airlines. So what’s the problem? In an industry already under siege from high operating costs and the whims of oil prices and travel demand, significant new costs can weigh heavily on margins.
The new FAA rule not only would force airlines to revamp their entire crew training programs, they would also have to dramatically expand the use of full-motion flight simulators. In its first draft of the rule in late 2009, FAA estimated the cost of more frequent training and greater use of simulators to be $230 million over 10 years. The Air Transport Association insisted FAA had seriously low-balled the cost, estimating the true cost to U.S. airlines at $3.3 billion.
The FAA contends that the new rule, which covers pilots, flight attendants and dispatchers will cost U.S. airlines $391 million over the next decade. The ATA is reviewing the nearly 700-page rule and will issue its comments soon.
The industry received another setback last Friday when House Republicans dropped an amendment that would have made it more difficult for the FAA to issue new safety rules such as those proposed above. The amendment was stripped from a FAA funding bill because it faced opposition in the Senate.
Bottom Line: No one can argue against the importance of air safety. The rub lies in the cost of air safety – or perhaps more accurately, the balance of cost with actual value. The airline industry, whose high fixed costs and slim margins have been characterized as looking more like a charity than a business, must pick and choose between important expenditures and essential expenditures. So investors are well served to keep one eye on fuel prices and environmental problems, and the other on the high cost of new regulations.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
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