STATEMENT OF

CAPTAIN JOHN PRATER

PRESIDENT

AIR LINE PILOTS ASSOCIATION, INTERNATIONAL

BEFORE THE

COMMITTEE ON AGRICULTURE

UNITED STATES HOUSE OF REPRESENTATIVES

## WASHINGTON, DC

July 11, 2008

**IMPACT OF EXCESSIVE SPECULATION ON COMMODITY TRADING**

Air Line Pilots Association, International

1625 Massachusetts Avenue, NW

Washington, DC 20036

\(202\) 797-4033

**STATEMENT OF**

**CAPTAIN JOHN PRATER**

**PRESIDENT**

**AIR LINE PILOTS ASSOCIATION, INTERNATIONAL**

**BEFORE THE**

**COMMITTEE ON AGRICULTURE**

**UNITED STATES HOUSE OF REPRESENTATIVES**

**ON THE**

**IMPACT OF EXCESSIVE SPECULATION ON COMMODITY TRADING**

**July 11, 2008**

Good morning, Mr. Chairman, Ranking Member Goodlatte, and members of the
Committee. I am Captain John Prater, President of the Air Line Pilots
Association, International (ALPA). ALPA represents nearly 55,000
professional pilots who fly for 40 passenger and all-cargo airlines in
the United States and Canada. On behalf of our members, I want to thank
you for the opportunity to testify today about the urgent need to
address speculation in the fuel commodities market which we believe has
contributed to the sharp jump in fuel prices that is greatly impacting
our industry.

The rising cost of oil is of concern to everyone in this country today.
Many are worried that they will be forced to choose between filling
their automobile gas tanks and purchasing groceries, and we are already
seeing the negative impact that the escalating price of oil is having on
the economy. Our members -- the working men and women safely flying our
nation's airliners -- have another, more dire concern: will they lose
their jobs -- again -- because their airline is forced to park airplanes
or even go out of business?

After the horrific terrorist attacks of 9/11, pilots and other employees
in the airline business suffered through thousands of job furloughs and
pay cuts. In fact, between 2002 and 2011, workers at the seven largest
U.S. airlines have given back \$75 billion in concessions. Almost \$30
billion has come from pilots in the form of reduced wages, revised work
rules, and reduced or eliminated benefits. Terminated pensions totaled
another \$5+ billion. A brief period of airline profits in 2007 promised
some hope that these massive concessions which helped save the industry
could be returned to workers and their families.

Instead, the recent rise in energy costs has caused a flood of red ink
and analysts now forecast an industry operating loss of as much as \$7
billion or more in 2008, one of the largest losses in the industry's
history and rivaling that experienced shortly after the events of 9/11.
The magnitude of this impact can already be seen in the recent
bankruptcies and/or discontinued operations of ATA, Aloha, Champion,
Skybus, Eos, Frontier, Skyway and Air Midwest. Other airlines have
parked airplanes and either furloughed employees, or plan to do so in
the near future.[^1] This industry contraction is leading to the loss of
thousands of skilled jobs and puts U.S. carriers at a disadvantage in
the world marketplace. Ironically, the current industry fuel crisis also
stifles progress to reduce fuel burn and emissions - at this time an
unstable airline industry cannot afford to invest in new more fuel
efficient aircraft[^2] or invest in alternative fuel research.

A few salient facts about the current state of jet fuel expense, and
industry reactions to that expense, help explain the airlines'
predicament. Unlike many other industries which have a choice of
electricity, natural gas, coal, heating oil or other sources of
requisite energy, airlines have just one energy option for aircraft
operations -- petroleum-based jet fuel which must meet an exacting
specification. Despite great technology-driven reductions in jet engine
fuel consumption and airline pilot fuel conservation practices, jet fuel
expenses have recently become the airlines' largest operating cost, now
consuming as much as 40% of every airline revenue dollar, up from 15% in
2000. Jet fuel prices are expected to remain at extremely high levels;
already increasing 67% from approximately \$90.90 per barrel in 2007 to
\$151.72 per barrel in 2008. Every \$1 increase in crude oil prices
increases the industry's fuel expense by approximately \$465 million,
before considering the impact of any hedging. Because our carriers
compete globally and fuel is priced in the weak U.S. dollar, our
European counterparts have not experienced as dramatic of an increase in
fuel costs, giving them a competitive advantage over the U.S. industry.

Airline pilots are working every day to conserve precious fuel during
both ground and flight operations. Within the constraints of safety and
hamstrung by an antiquated air traffic control system, pilots routinely
shut down engines while taxiing and select optimal fuel-conservation
altitudes and speeds. Further, pilots are working with the industry to
help develop the NextGen air traffic management system that will further
increase fuel efficiency. But all of those fuel-saving measures combined
are incapable of compensating for the exorbitant fuel prices that we
have experienced over the past year. No airline business plan can be
successful with fuel topping \$145 per barrel, and many will not survive
in their present form at significantly less per barrel. Every day brings
news of more airline worker layoffs, airplanes being grounded and air
service to communities being cut. The U.S. aviation industry is a
critical part of our national economy generating approximately 11% of
Gross Domestic Product through airline travel and all related
industries. Absent decisive and effective leadership on this issue, the
airline industry's fortunes will continue to plummet and harm the
national economy, in general, and airline workers, in particular, in the
process.

Experts agree that today's surging oil prices are beyond those warranted
by supply-demand fundamentals. In fact, just yesterday the International
Energy Agency announced that annual demand is projected to increase at
an annual rate of only 1.6% and that demand will be actually lower this
year, growing only 1%, given declining economic conditions. Instead,
surging oil prices are due, in some measure, to rampant investor
speculation. In early June, speculators traded more than 1.9 billion
barrels of crude oil -- 22 times the size of the physical oil market,
including \$150 billion traded on the New York Mercantile Exchange
alone. Sophisticated "paper" speculators, including large pension fund
managers, who never intend to use oil are driving up costs for consumers
and making huge profits. This high amount of activity by "paper"
speculators is having a grossly perverse impact on oil prices. Recently,
ALPA and a broad coalition of consumer, labor, and business
organizations joined to advocate immediate reforms in the
widely-speculative energy commodity futures markets. While a long-term,
rational energy policy including increased domestic supply and energy
independence is our ultimate goal, bipartisan, near-term solutions to
the market frenzy are absolutely critical.

With your leadership, we see an end to the current unwarranted
escalation in oil prices which market speculation is helping to drive.
ALPA has endorsed and pledged our support for the prompt enactment of
Congressman Stupak's H.R. 6330, the "Prevent Unfair Manipulation of
Prices Act of 2008." The PUMP Act will apply a much needed brake on
rampant energy commodity speculation to help drive down unprecedented,
surging oil prices that are crippling the economy. We are aware of
several other proposed bills in both the House and Senate that share the
same goal and we believe that they all have merit as a means of reducing
the fuel speculation that is harming our industry.

The heart of the PUMP Act is Section 2 that extends CFTC jurisdiction
over energy commodities that now enjoy a host of trading loopholes. The
bill will open up the market to greater transparency and fairness to
level the playing field for all traders by:

1.  • bringing over-the-counter energy commodities within CFTC's
    oversight responsibilities;

    • closing the "swaps loophole" by extending CFTC regulatory
    authority to swaps involving energy transactions, another important
    step towards needed transparency;

    • extending CFTC regulatory authority to energy transactions on
    foreign boards of trade that provide for delivery points in the
    United States, a common sense measure as other products delivered in
    the United States are subject to the full panoply of United States
    regulation, save energy commodities; and

    • requiring CFTC to set aggregate position limits on energy
    contracts for a trader over all markets, ensuring that traders do
    not corner markets by amassing huge positions and playing one
    exchange off another.

Unregulated swaps trades and the so-called "Enron loophole," among other
weaknesses in the system, allow our most important energy supplies to be
traded up to 20 times for each barrel of oil consumed. Why should oil
future traders not have oversight similar to that of other security
markets? Can we, as a nation, continue to stand idly by while
speculators wreak havoc on our economy with the potential to destroy the
air transportation links to many of our small and medium sized
communities?

We strongly urge Congress to pass legislation to address the mostly
unregulated futures trading of fuel before the August recess.

I thank you for the opportunity to testify today and look forward to
your questions.

\# \# \#

[^1]: **American** **Airlines** is reducing 4^th^ qtr. 2008 mainline
    domestic capacity by 11-12% year-over-year. **Continental** is
    cutting 4^th^ qtr. 2008 domestic capacity by 11.4% and reducing its
    workforce by 3,000. **Delta** is reducing its workforce by 3,000 and
    cutting 4^th^ qtr. 2008 domestic capacity by 11%. **United** is
    cutting 4^th^ qtr. 2008 domestic capacity by 14% and reducing the
    number of salaried employees by 1,400 to 1,600. Nearly 30 cities
    have lost scheduled airline service in the past year and more
    service cuts are on the horizon. **USAirways** is reducing mainline
    capacity 6-8% and reducing its workforce approximately 1,700. **Air
    Tran** cut employee salaries by 10% and many airlines are delaying
    starting new service because of fuel prices. This week,
    **Northwest** announced 2,500 job cuts.

[^2]: There are currently no major aircraft manufacturer plans to
    produce a next generation narrow body aircraft. We are at least a
    decade away from aircraft capable of significantly less fuel burn
    than our current fleet.