Mr. Chairman and members of the Subcommittee, thank you for inviting me to appear before you today to discuss the Reauthorization of the Federal Aviation Administration and the Aviation Programs. I appear before you representing the twenty-seven members of the Air Transport Association*, who carry 95 percent of the nation’s passenger and cargo moving on U.S. flag carriers.
The State of the Airline Industry
It is against a very bleak economic picture that I offer our views. The airline industry is in grave condition. Two major airlines, representing more than twenty percent of the industry, are in bankruptcy. Passenger carriers have reported over $10 billion in 2002 net losses. Industry debt now exceeds $100 billion, while the industry’s $15 billion total market capitalization continues to decline. Our ability to borrow is evaporating. The few airlines that have been able to achieve a profit are doing so under tremendous adversity – and with the prospect of war on the horizon, the picture is particularly grim.
The reasons for the imperiled condition of the industry are clear. This industry has always struggled with high costs. Stubbornly high fuel prices, escalating security and insurance costs and spiraling labor expenses, among other things, have combined with a particular vengeance in an underperforming economy exacerbated by the aftermath of 9/11.
The airlines’ Chief Executive Officers recognize that “self-help” is imperative – and they are making the tough calls. For the top six network airlines in 2002, operating expenses have already been cut by $4.5 billion, with more to come. Capital spending has been slashed by almost 50 percent – some $5.6 billion from 2000 levels. Regrettably, to reduce operating expenses, staffing has been cut by over 90,000 positions across the industry. It is well known that wage reductions and/or productivity increases are the order of the day.
Despite these measures, many analysts are looking to an industry loss of between $6 and $7 billion in 2003 (and that’s without a war!) – meaning, the airline industry will have incurred losses totaling nearly $25 billion over a three-year period – and it could well get worse. In fact, we expect that if the nation does go to war, the airlines will lose an additional $3 billion.
It is with these numbers in mind that I offer our recommendations on the Reauthorization of the Federal Aviation Administration – the very agency upon which the airlines depend to move their product. As we have testified before, our livelihood – our fundamental ability to conduct our business, depends on a healthy, functioning air traffic control system and healthy, functioning airports. Without either of these, we simply cannot conduct business.
Even with the onset of recession in early 2001, FAA was projecting to hit the legendary one billion-passenger mark by FY2010. In the aftermath of 9/11, FAA shifted its forecast by three years, predicting the carriage of one billion passengers instead in FY2013. Later this month, FAA is expected to release its newest annual aviation forecast, postponing its prediction by at least one more year. In fact, though a year ago the agency had expected to reach pre-9/11 passenger levels by FY2004, it reportedly will defer that projection by two years, projecting those levels in FY2006 instead.
Our own estimates support this conclusion. Despite sharply lower fares, particularly in the domestic arena, volumes remain well below 2000 levels. In 2002, domestic enplanements fell 12.0 percent below 2000; international enplanements missed the mark by 6.5 percent. Coupled with fares (excluding taxes) running 10-20 percent below 2000 levels for 18 straight months, these traffic declines undermine the traditional relationship between passenger demand and the U.S. economy. Avoidance of air travel in this magnitude suggests that classical forecast models must be recalibrated and that a robust return to record-breaking traffic levels should not be expected within the near future.
But we must move forward. To achieve full recovery we must continue to invest in ATC modernization programs, and we must invest in airport infrastructure improvements.
Moreover, given these economic constraints facing the industry and the fact that our aviation system operates in a “closed-loop” financing system, it is impossible to move full-steam ahead in financing the FAA, the Air Traffic Control System, and airport improvements at this time. Accordingly, we urge Congress to encourage “smart growth” – focusing on those safety and capacity requirements that are most urgently needed now, and leave the other enhancements for the post-recovery period.
In the normal course of a FAA reauthorization effort, there are many issues that must be worked through; many proposed by others, and a number interjected by airlines. However, given the pressures on the Nation, the Congress, and the industry as we approach a possible war with Iraq and continue the war on terrorism, we recommend that the Committee renew AIR-21 with as few amendments as possible and move on to other, more pressing matters. After we obtain some breathing room, perhaps as a result of a brief one- or two-year extension, we recommend that a longer-term debate be undertaken. It is only after we regain our bearings that we can predict, with even the most modest measure of confidence, what the level and rate of growth will be and how it is to be financed.
Security Requirements should be paid in Full By The General Fund
Before delving into the Aviation Programs, I must address one of the most pressing issues currently facing the airlines and airports. Following 9/11 Congress removed from airline responsibility the performance of most aviation-related security functions. We applaud that move, and for the most part TSA has performed admirably. However, in one very important area, TSA and Congress have failed. That is in the area of unfunded government mandates.
Just as the Federal Government pays for ATC-related facilities and equipment improvements, so too should the Federal Government pay for the facilities and equipment needs of the Transportation Security Administration – with one obvious, but important difference. The Aviation Trust Fund, from which ATC and airport improvements are derived, was established to finance aviation system capital needs – which for many years included airport operators’ security functions. However, when Congress recognized that security matters – including aviation security – were matters of national defense and thus a Federal Government responsibility, it did not provide a means to pay for those responsibilities. The financial burden for airport and airline security was placed on the backs of the airports, the airlines, and their customers, despite the fact that no other industry is so burdened. Airports and airlines are being asked to use ever-more-precious financial resources – dollars that could be used to finance safety as well as capacity improvements in anticipation of the industry’s recovery – to pay for TSA equipment and related building modifications. Moreover, airports and airlines are being asked to pay for much of the maintenance, if not some of the operations expenses associated with these functions.
By way of illustration, ACI-NA and ATA recently conducted a survey of airport operators in an attempt to determine the real costs of compliance with TSA mandates. That survey revealed some interesting information. The total cost of compliance with current TSA/Federal Government security mandates – at only 11 airports -- is expected to cost well over $850 million – solely for the capital investment needed. And that is at just 11 of the more than 450 commercial service airports! ACI-NA expects that the total across the airport community will run into the five- to six billion dollar range.
Faced with these funding shortfalls, and with no Federal Government relief in sight, airports are forced to turn to the already-struggling airlines to pay these costs. Airlines have reported increases in landing fees and terminal rents ranging from 15 to 40 percent nationwide, directly attributable to these unfunded security mandates. While the FAA has agreed with TSA to continue providing Airport Improvement Program grants for security, with the transfer of TSA from the Department of Transportation to the Department of Homeland Security, we feel strongly that the use of Trust Fund revenues for security improvements must stop at once.
Mt. Chairman, during consideration of the Omnibus Appropriations bill earlier this year, TSA was provided $265 million in funds to be made available to airports for the “government share” of baggage security requirements. However, that legislation also identified the “government share” as 75 percent of the project costs at large and medium hub airports, and 90 percent of the project costs at small and non-hub airports. That formula is based on the Airport Improvement Program, which recognizes that airport capital improvements are a shared responsibility between the Federal Government and the users. However, in 2001 when Congress declared aviation security to be a function of the Federal government, not a shared responsibility, there was no financial recognition of that fact. Considering that these costs are directly related to government mandates resulting from government activities, the government must step up and assume 100 percent of the costs.
We understand that TSA is entering into “memoranda of understanding” with some airports to make them whole for both capital and operations and maintenance (O&M) expenses if and when funds become available. In the interim, though, TSA and the Federal Government seem content to rely on airports to finance these improvements, and for airports to pass along these costs to the already struggling airlines. The airline industry is struggling to pay its own bills, let alone cover the government’s IOUs. It is time for Congress to right this wrong, remove airports and airlines from any TSA/OHS financial responsibility, and fund security programs from the General Fund.
Airport Capital Needs
The Committee has heard testimony from GAO, FAA and the Airports Council International – North America regarding the future capital needs of airports and a purported shortfall in available funding to finance these projects. We agree that there are significant needs at airports across this country. We also agree that there is a need to fund the Airport Improvement Program (AIP) at the levels established under AIR-21 -- as a baseline. However, just as the airlines have undertaken “self-help” remedies to move toward economic stability, airports need to do the same. We have airports in this country that do not take full advantage of the financing mechanisms currently available to them, yet as an industry they suggest that another increase in Passenger Facility Charges might be in order.
As ATA has testified in previous reauthorization debates, and I must point out again today, airports notoriously overstate their capital needs, and understate their ability to pay. There are scant few examples of projects that are truly needed at airports that do not receive financial backing from the airlines (through PFC agreements and rates and charges—landing fees and terminal rents -- increases), the bond markets, or the FAA (through AIP grants and PFC approvals). The airport financing system has found a sort of equilibrium where approximately $12 billion in new projects are started each year. Those projects that do go unsupported (and unfunded) are most likely projects that could be labeled “nice to have” as opposed to “needed”.
AIP Funding Levels
Recognizing that the Committee has no formal Reauthorization legislative proposals before it at this time, our recommendations with respect to airport finances are quite simple. Changes to Federal Law should be directed at the preservation of airport revenue for meaningful airport (i.e., airfield capacity) projects; restrictions on airport-generated revenues to on-airport uses should be continued and strengthened; and efforts to impose additional costs on airports and airlines should be avoided or deterred.
Mr. Chairman, through the legislation known as AIR-21, this committee ensured that FAA, airports and airlines would be able to move forward on airport capital improvements with the assurance that Federal funds would be available at record, guaranteed levels. You ensured that revenues derived from the aviation system would remain in the system, and we commend you for that. We join the airport community in support of the continued budget protections for the Airport Improvement Program, as defined in AIR-21. As stated earlier, however, we are united with the airports in our insistence that TSA costs be borne exclusively by the Federal Government from non-aviation sources.
Revenue Diversion and Airport Fees
Looking deeper into airport revenue issues, the “firewalls” and reporting requirements on airport revenues should be strengthened. Under current law, certain airport owners may lawfully divert some airport revenue to support financial obligations that existed prior to September 1982. These so-called “grandfathered” airports provide scant detail to FAA concerning their revenue use. Congress should instruct FAA to require more detailed information and direct FAA to audit the information received to ensure that revenue is not being diverted unlawfully.
We also encourage Congress to instruct the FAA to finalize the Policy Regarding Airport Rates and Charges required by the 1994 Authorization Act. Here we are, ten years later, and the FAA has failed to complete this important policy. To make matters worse, in an action that may exceed its authority, FAA recently withdrew the four-year-old rulemaking intended to finalize the policy. Regardless of FAA’s reasons, it should not be permitted to ignore Congress’ clear instruction to promulgate this policy.
Finally, under the category of justice delayed is justice denied, we ask for your help in bringing to a close the so-called Century Freeway case, which began in March 1995 when ATA filed an FAA complaint to force the City of Los Angeles to return $54 million diverted from the airport. In June 2000, FAA ordered the return of more than $20 million. However, since October 2000, the FAA has been pondering our request to order the return of the full amount plus interest. Today, nearly three years later, we are still waiting for a final decision, and LAX has not received a penny of this money – money that it clearly needs to cope with security and modernization demands.
Passenger Facility Charges
Insofar as the PFC program goes, we are steadfast in our opposition to any increase in the PFC levels. Moreover, we cannot support any efforts to weaken the application, consultation and eligibility requirements currently in place for the Passenger Facility Charge program. FAA has indicated that some streamlining might be in order for smaller airports wishing to impose a PFC; however, we need to see a formal proposal before passing judgement on such a concept.
There are three ideological concepts that undoubtedly will rise again during this reauthorization debate: intermodalism, privatization, and “demand management”.
Intermodalism
Given the fiscal pressures on airports and airlines, we cannot fathom how anyone could seriously consider using scarce dollars needed for airport capacity improvements for non-aviation programs. We are not opposed to the concept of intermodalism. We currently support a variety of initiatives to enhance airport access through alternative means of transportation. However, more often than not the term “intermodalism” is a euphemism for revenue diversion. Intermodalism proponents support taking aviation revenues (which are currently in very short supply) to fix rail systems, which have been proven worldwide to be incapable of covering the capital expenses associated with their construction, much less their operating expenses, without massive government subsidies. We find it ironic that they never seem to advocate taking rail funds to support more efficient aviation objectives.
Airport Privatization
We continue to remain skeptical about efforts to privatize existing commercial service airports in this country. While we welcome innovation, we must adamantly oppose efforts to diminish air carriers’ statutory rights to be involved in such efforts. We have yet to see a single privatization proposal in which revenues are removed from the closed-loop financing system – for an existing commercial service airport – that would not increase the cost of doing business at an airport for the passengers, concessionaires, or the airlines. Every proposal we have seen to date would increase costs with little visible benefit to the traveling and shipping public.
Demand Management
The Department of Transportation is currently engaged in evaluating various "demand management" schemes. In August 2001 DOT opened a public docket to consider so-called “market-based” approaches to reduce congestion and delays. The FAA initiated a similar, but separate, review concerning just LaGuardia Airport. The approaches being considered include auctions, congestion pricing, peak pricing, and flat fees. The driving force behind these initiatives was the unusual number of delays experienced in the summer of 2000.
ATA opposes efforts to make statutory changes to accommodate these activities by DOT and FAA. There is not now, nor was there in 2000, a systemic congestion problem. The 2000 delays were an abnormality that resulted directly from the confluence of two events: (1) labor unrest at United Airlines; and (2) lifting of the slot rule in AIR-21 with regard to certain types of operations. United and the FAA have solved these underlying causes, respectively, and the percentage of system delays quickly returned to its historically consistent level. Of course, the post 9/11 operating environment is dramatically different than it was in the summer of 2000, and it is clear that ATC congestion is not an issue now, and will not become one for some time.
Moving Forward with ATC Modernization
I would now like to turn to the FAA’s main capital account, the Facilities and Equipment program. We applaud FAA for continuing its efforts on the OEP, or Operational Evolution Plan.
The Operational Evolution Plan is an important step in increasing capacity in the ATC system. However, the OEP as currently drafted will increase system capacity by only 30% by 2012, although the number of flights is predicted to increase by 50%. The greatest proportion of these improvements will be at new runways at key airports, with little capacity being added to en route airspace. Both the industry and FAA recognize that a great deal of work must be done to improve the en route segment of the ATC Operation beyond current plans.
Research, Engineering and Development
The U.S. ATC system is human-centered and human-constrained. FAA has been augmenting controller tasks with new tools, but that provide only incremental improvement. These tools are NOT enough to cope with predicted traffic.
Therefore, we believe FAA and NASA need to begin work now on the next BIG idea – a broad-based, government funded initiative beyond the OEP to deal with predicted traffic increases beyond 2010. In early 2001, the Boeing Company announced its Air Traffic Management (Boeing ATM) Initiative. This effort was launched to help bring attention to the current modernization efforts, and also to design a system looking at the future of the U.S. ATC system far beyond 2010. Boeing brought many stakeholders to the table to discuss how the system should be shaped. Congress should encourage FAA to embrace these kinds of innovative efforts so that the system will be ready for the challenges of the coming decades.
What we believe must be done is to develop a system that is HIGHLY automated where routes are assigned that: are as close to direct trajectory as possible, avoid weather, automatically separate aircraft, and seldom require intervention from the ground.
A human intensive ATC system, coping with increasing traffic demands, that relies on a continuing subdivision of airspace (as we do today), requiring additional controllers, will, or may have already reached a point of diminishing returns.
Equally important is equipage, such as data link additions, which will be necessary by airlines to gain certain capacity benefits. As you can imagine, having airlines spend enormous amounts of money for avionics, given our current plight, is not likely to happen.
The President’s Commission on the Future of the U.S. Aerospace Industry recently made a recommendation that addresses this problem. They said that the airborne equipment needed for safe, secure, and efficient system-wide operations should be deemed part of the national aviation infrastructure. Further, the Commission recommended that FAA should be encouraged to support and motivate operator equipage by any of the following: full federal funding for system-critical airborne equipment, partial funding (through some form of voucher or tax incentives), or auctioned investment credits.
We suggest that the FAA fully examine these alternatives with airspace users to determine viable methods to achieve needed airborne equipage.
Summary
To sum up, our recommendations for this Reauthorization effort are few. We recommend a short-term renewal of AIR-21 with no amendments to the underlying statute. We strongly urge that financial responsibility for security functions be transferred completely to the TSA. Finally, we recommend the continuation of maximum funding of the Airport Improvement Program and Facilities and Equipment accounts from the Aviation Trust Fund.
Mr. Chairman, I again thank you for the opportunity to appear today and I look forward to working with the Committee on the continuing efforts on this matter.
* - The members of the Air Transport Association are: Airborne Express, Alaska Airlines, Aloha Airlines, America West Airlines, American Airlines, American Trans Air, Atlas Air, Continental Airlines, Delta Air Lines, DHL Airways, Emery Forwarding, Evergreen International Airlines, FedEx, Hawaiian Airlines, JetBlue Airways, Midwest Airlines, Northwest Airlines, Polar Air Cargo, Southwest Airlines, United Airlines, United Parcel Service, and USAirways. Aeromexico, Air Canada, Air Jamaica, KLM Royal Dutch Airlines and Mexicana are Associate Members.