[Senate Hearing 107-1124]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1124
AIRLINES VIABILITY IN THE CURRENT ECONOMIC CLIMATE
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
OCTOBER 2, 2002
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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0SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
C O N T E N T S
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Page
Hearing held October 2, 2002..................................... 1
Statement of Senator Brownback................................... 4
Statement of Senator Burns....................................... 3
Statement of Senator Carnahan.................................... 67
Statement of Senator Cleland..................................... 5
Statement of Senator Dorgan...................................... 7
Statement of Senator Fitzgerald.................................. 6
Statement of Senator Rockefeller................................. 1
Prepared statement........................................... 2
Statement of Senator Smith....................................... 9
Prepared statement........................................... 10
Letter dated April 26, 2002, from John W. Handy to Hon.
Walter B. Jones............................................ 9
Statement of Senator Wyden....................................... 5
Witnesses
Donofrio, Susan, Senior U.S. Airline Analyst, Deutsche Bank
Securities, accompanied by Allison Poliniak.................... 38
Prepared statement........................................... 41
Hecker, JayEtta, Director of Physical Infrastructure Group,
General Accounting Office...................................... 10
Prepared statement........................................... 13
Mullin, Leo F., Chairman and CEO, Delta Air Lines................ 23
Prepared statement........................................... 26
Wytkind, Edward, Executive Director, Transportation Trades
Department, AFL-CIO............................................ 48
Prepared statement........................................... 51
Appendix
Hollings, Hon. Ernest F., U.S. Senator from South Carolina,
prepared statement............................................. 77
Snowe, Hon. Olympia J., U.S. Senator from Maine, prepared
statement...................................................... 78
AIRLINES VIABILITY IN THE CURRENT ECONOMIC CLIMATE
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WEDNESDAY, OCTOBER 2, 2002
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. Good morning, everyone. I welcome the
witnesses, and I also offer apology, a very sincere apology,
because this is a profoundly serious subject, and that is that
we have a special briefing on Iraq in the Intelligence
Committee at 9:30 and I cannot miss that. I do not want to miss
this. I have to miss one, and so I apologize to you. We have
plenty of people who are here who can do this, and my people
are here, and I will be informed of everything that went on.
A couple of points, and that is, after September 11th this
Congress, really in the first action we took passed a $15
billion direct Federal aid and loan guarantee package, and many
people have wanted that and not many have gotten it. You did.
It has cost about $5.8 billion to fund the Transportation
Security Administration this year, more than even the highest
estimates of what the airlines will spend. This represents for
us overwhelming deficits, and a massive amount of expenditure.
A year later, the airline situation remains very, very
bleak. I fully understand that. Some predict airline losses as
high as $7 billion this year. I am going to be meeting with
another airline CEO, not present here, later this afternoon.
Almost 100,000 airline employees are out of work. That
parallels what has happened very recently in the steel
industry.
There have been several high profile bankruptcies. Some of
you who are usually more optimistic in your expressions have
not been so in recent months, and there is a reason for that.
There are rumors of other bankruptcies. This is felt very
strongly in communities like West Virginia and Montana and
other places where recent cutbacks threaten our vitality and
our growth, so we feel it and all States are suffering
tremendously. We understand that the airlines are in trouble.
That is not in dispute, and we recognize their importance
throughout the country.
We simply cannot help every troubled industry,
nevertheless. I do not believe we can do that even if we want
to. Steel and telecommunications are in trouble. State
governments, as I indicated, are in severe trouble. The Federal
budget is in trouble. In this environment, it is very difficult
to justify picking out one industry which is also in trouble
and say we are going to do you, but we cannot do the rest of
you, and all of this less than 1 year after the last relief
package, which others did not receive, was passed.
We can look for ways to help, however, but we need to
separate security issues like war risk insurance, mail and
security costs, from the basic systemic problems that predate
the attacks. Those problems cannot be solved by Congress. Last
week, before the House Aviation Subcommittee, the airlines
acknowledged that fact, but it bears repeating here.
On security costs, I think the mix between Federal and
airline responsibility has been pretty good, from my point of
view, at least. Last year, airlines were responsible for all
aviation security costs. Now, with increases in aviation
security, the Federal Government pays more than half. I
certainly would not support eliminating the airlines' share, or
getting rid of security fees, nor would I favor reducing the
Federal participation. If the airlines want to discuss specific
areas in which the interplay between Federal and airline
responsibilities needs to be reexamined, I am more than willing
to listen and to act.
The Committee has already addressed war risk insurance and
mail, you know that. We have done that in a way which I think
is favorable to you. There may be other areas where we can
help, and I am eager to hear the witnesses' testimony today.
I had not planned on doing a lot of opening statements, but
I understand that there are some who do not like my plan, so if
you have a short opening statement you want to make, please do
so.
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
The last two years have been trying ones for our nation's aviation
industry. On September 10th, 2001, it was already clear that our
airlines were in trouble. But no one could have imagined what the
nation and the aviation industry were about to face.
After September 11th and the unprecedented decision to bring air
traffic to a halt, there was a real danger that, without our help, the
attacks would force the industry into bankruptcy. This Congress--and
this Committee--acted quickly.
A mere 11 days after the attacks, the Air Transportation Safety and
System Stabilization Act was signed into law, providing up to $5
billion in direct federal aid and an additional $10 billion in loan
guarantees to compensate the airlines for losses directly related to
the terrorist attacks.
At the same time, we were crafting the Aviation and Transportation
Security Act, federalizing airport security, and assuming roughly half
the financial burden of screening passengers and bags. This year we
will spend $5.8 billion to fund the Transportation Security
Administration. This represents a massive federal investment.
A year later, however, the airlines' situation remains bleak. A
slow economy is driving passenger airline losses that may reach $7
billion this year. Almost 100,000 airline employees are out of work.
There have been several high-profile bankruptcies, and there are rumors
of others on the horizon.
As a Senator from West Virginia, I am sensitive not only to the
impact of continued losses on shareholders and employees, but their
impact on the many smaller and rural communities whose vitality and
growth depend heavily on service by one or two carriers. Sometimes,
only a handful of flights a day separate these communities from
economic and social isolation. When airlines cut back, these flights
are often the first to go.
The number of small communities served by only a single airline
increased from 83 in October 2000 to 98 by October 2001. By August
2002, however, carriers had notified DOT that they intend to
discontinue service to 30 communities, despite last year's
stabilization package.
This is especially disappointing for me, because I see federal aid
to the airlines as part of a compact between carriers and communities
to ensure truly national service, and I believe that airlines are
obligated to ensure that rural Americans have the same opportunity that
urban citizens do. Airlines should not ask rural Americans to shoulder
the burden of their economic difficulties.
The airlines' trouble poses a great dilemma for us. Although we
understand that the airlines are truly in financial trouble and we
recognize their importance to communities throughout the country, we
simply cannot help every troubled industry, even if we wanted to.
The airlines are not alone. Thirty-five steel companies have filed
for bankruptcy, and more than 100,000 steelworkers are out of work. The
telecom sector is in a virtual free-fall, having lost trillions in
market capitalization and laid off half a million workers. The Nasdaq
is near a six-year low. Similar stories can be found in almost every
sector. In this environment, and with the federal budget deficit
exploding, it is difficult to justify singling out the airlines for
additional aid less than one year after the last package was approved.
This doesn't mean that we can't look at ways to help. But, just as
we did last year, we need to be careful to separate security issues
raised by the airlines--like war risk insurance, mail, and the proper
mix of federal and industry assumption of security costs--from the
basic, systemic problems that pre-date the attacks. Those problems
cannot be solved by Congress. Last week before the House Aviation
Subcommittee, the airlines acknowledged this fact--but it bears
repeating here.
On security costs, I think the mix between federal and airline
responsibilities has been pretty good. Before September 11, airlines
were responsible for all aviation security costs. Now, with increases
in aviation security requirements, the federal government pays more
than half of aviation security costs, and that percentage appears to be
increasing. This strikes me as about the right balance; government and
industry both have responsibilities for aviation security. I would not
support federal assumption of all security-related costs, or the
elimination of security fees.
If, however, the airlines want to discuss specific areas in which
the interplay between federal and airline responsibilities need to be
reexamined, we are willing to listen--and to act. Already, this
Committee has reported legislation directing the FAA to extend the
federal war risk insurance program for nine months, and to extend it to
hull, passenger, and crew insurance. We have also addressed items
related to carrying mail. There may be other areas where we can help,
and I am eager to hear the witnesses' testimony today.
We all want to see the airline industry rebound from its current
crisis--we want to see the economy expand, and we need to see laid-off
workers recalled. I feel a particular urgency in this matter, as my
home state of West Virginia depends heavily on air transportation. If a
different, more accurate, allocation of security cost and
responsibilities will help revitalize passenger aviation, I'm willing
to take a closer look.
The Senator from Montana.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Mr. Chairman, thank you for holding this
hearing, and thank you for being here on time.
I had to throw that back at him.
Mr. Chairman, we are talking about something that is very
serious today, and we have some excellent witnesses to bring us
up to date on what is happening in their industry and maybe
give us a better picture. I do not think it will help our
putting together a road map of solving all the problems that
aviation faces today. And when we look at what we did last year
after 9/11, and we have done nothing for general aviation, and
we have created a TSA that I would submit went in the wrong
direction, and I will forever remember the conference on that.
We have put rules and regulations on the airlines, and we
have not lived up to our share of paying the bill on those. We
have passed along a lot of expense to airport authorities, and
we have not taken a look to just see what is the problem here
of people not climbing back on the airplanes, and I would
imagine that we will probably hear some of that today.
We have not done a very good job of telling the American
public that it is safe to fly, everything is OK, but on the
other hand, we find out that people are not afraid to fly. They
are afraid to go through the hassle at the airport. I have told
this story a hundred times, I lost a lot of pairs of socks in
this thing. Us guys that wear boots most of the time, socks
have to match now and you cannot have any holes in them, and it
just becomes a hassle. In fact I think in some cases it becomes
a harassment factor, because we have found in some cases that
the Peter principle really works.
So I think we are going to hear a lot today. I am troubled
by the fix that we are in, and I really am at odds with coming
up with much of an answer, but I think it is a culmination of
things that is happening in the industry that we should take a
look at, and start chipping away at the situation, and trying
to alleviate some of the problems we had before the passenger
ever gets on the airplane.
We are blessed in this country to have a competitive
airline industry. We have an industry that operates with
greater, probably, efficiency than any other airlines in the
world, but nonetheless we find ourselves in the fix of
sometimes the Government underdoing and sometimes Government
overdoing, and not shouldering its part of the responsibility
and passing that along to the airlines, and they have not been
able to pass those expenses along to the flying public.
So thank you for holding these hearings.
Senator Rockefeller. Thank you, Senator. Senator Brownback.
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. If I could, or if you want to bounce to
the other side, I just have a brief opening statement. I want
to share a couple of charts. You have rightly identified the
financial plight of the airline industry, and that is
important, and it is something we really do need to focus on.
We need to get these airlines up and going and stronger.
I want to draw your attention, if I could, quickly to the
aviation manufacturing industry that is centered in my State.
Kansas is known as the aviation manufacturing capital of the
world, and we have had a huge fall-off in numbers of employment
since September 11th. If I could get those charts, I just want
to show those to you quickly. We have the main manufacturers of
Boeing, Raytheon, Cessna, and Bombardier in my State. They have
all had major layoffs. Each manufacturing job that is laid
results in nearly two losses in the rest of the Wichita
economy. So when you lose one, you lose two other jobs. You can
see the percentage loss of several of these manufacturers: 27
percent for Boeing, 33 percent for Bombardier, 13 percent for
Cessna, 2 percent for Raytheon.
And the next chart shows what cumulative that is of
aviation manufacturing jobs in my State; a loss of 23 percent
of aviation manufacturing jobs. And I know your focus is
primarily on the airlines, and that is important, because if
they are not healthy they are not going to be buying planes.
That is certainly true of Boeing manufacturing. But the other
area, general aviation, is important as well. As I mentioned at
a hearing last week, we need to be focused on not hurting these
groups unduly, because it continues to hurt more manufacturing,
and these are key jobs.
Now, we have taken a big hit, 23 percent loss in aviation
manufacturing jobs since September 11th. I hope we can also
look at that end of the spectrum and make sure that we are
looking at what is happening to the manufacturing side of this,
because it is directly related to what takes place in the
airline industry with any rules we make which make it tougher
for people to fly--we have got to be concerned about safety and
security. That is paramount. That is the top order, but we also
should not unduly harass people, whether it is in general
aviation, in flying, or if it is with the airlines to make sure
we can get people back up in the air. I just would ask you and
other Members of the Committee to also think about the aviation
manufacturing jobs, because they have really been hit hard and
direct since September 11th.
Mr. Chairman, thanks for holding the hearing.
Senator Rockefeller. Thank you. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. I will be very
brief. Mr. Chairman, I am anxious to hear from our witnesses,
but it just seems to me that the way out of the airlines'
predicament does not lie primarily with the Congress giving the
airlines more breaks and more advantages that other companies
do not get. It seems to me the best way to address this is to
promote competition, improve airline industry productivity, and
improve passenger service.
Those are the issues that I am most interested in, and it
seems to me Congress has shoveled an awful lot of money at the
airline industry. A lot of the problems the industry had before
September 11th are more pronounced today, and I just do not
think the way out of this lies primarily with the Congress
giving the industry more breaks that nobody else in the country
seems to get.
Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, Senator Wyden.
Senator Cleland, did you have a statement?
STATEMENT OF HON. MAX CLELAND,
U.S. SENATOR FROM GEORGIA
Senator Cleland. Thank you, Mr. Chairman. It is wonderful
to have all of our panelists here today, especially the
distinguished head of Delta Airlines from my home State of
Georgia.
Mr. Chairman, on September 20 of last year this Committee
held a hearing on the financial state of the airline industry.
At that point in time, just 9 days after the worst terrorist
attack ever on the Nation, the entire industry was reeling. I
was particularly stunned when executives at Morgan Stanley sent
a letter to Treasury Secretary O'Neill which stated, and I
quote, ``today there are virtually no markets''--this is last
year now--``today there are virtually no markets open to these
carriers.'' This is 9 days after 9/11. ``The major U.S. credit
rating agencies have downgraded the debt securities of U.S.
carriers dramatically, and have signaled that there are likely
to be more downgradings. Trading in even the most highly
secured debt securities has virtually shut down.''
That was an absolute shock, a very scary thing to hear. One
year later, with the one exception of Southwest Airlines, the
bonds of the major carriers are still rated as junk bonds.
The industry is in unprecedented financial crisis. Some
major airlines are running out of cash. US Airways has filed
for bankruptcy protection. United has said it may file in the
coming months, a very scary thought. U.S. air carriers have
already reduced flight schedules by about 20 percent. They have
cut 16 percent of their work force, which has resulted in more
than 100,000 people losing their jobs. In the past few weeks,
American and Northwest Airlines have said they plan to slash
another 8,000 jobs collectively, and Delta just announced a
$350-million loss in the third quarter and said it will lay off
1,500 flight attendants, one tenth of its force.
Issues that impact our airlines have a ripple effect across
the country. Just let me say up front that Delta is Georgia's
largest corporate employer. Its economic impact on the State
exceeds $10 billion annually. This equals 5 percent of
Georgia's estimated Gross State Product.
Just as Delta is vital to the economy of Georgia, the
health of the airline industry is critical to America's
economic security. Clearly, the industry is suffering, and
prospects for a quick turn-around today appear grim.
Mr. Chairman, I thank you for holding today's hearing. We
are looking at an industry that has lost over $7 billion 2
years in a row. I am told that up to 40 percent of this
unprecedented loss is due to terrorism-related security costs.
Mr. Mullin, the very capable CEO and chairman of Delta, is one
of our witnesses--and I understand he will testify on
recommendations by the industry on how the Government can help
relieve some of the burden from heavy security-related costs
and lost revenue.
Let me just say that this Committee has already acted on
extending Government-backed war risk insurance for 9 months.
The aviation security bill we reported out of Committee less
than 2 weeks ago should make it possible for carriers to carry
mail again. I look forward to hearing from Mr. Mullin and our
other panelists. We need to act on this national crisis
immediately.
Thank you, Mr. Chairman.
Senator Rockefeller. Thank you. Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD,
U.S. SENATOR FROM ILLINOIS
Senator Fitzgerald. Thank you, Mr. Chairman.
Mr. Chairman, last year, in the immediate aftermath of
September 11th, Congress hastily approved a $15 billion bail-
out package for our Nation's airlines with little examination
of the numbers. In an atmosphere of near-panic, and with almost
no debate, Congress gave the airlines $5 billion in up-front
cash and made available an additional $10 billion for an
airline loan guarantee program.
I voted against the package for several reasons. First, it
was not an industry bailout per se, but more precisely, a
bailout for airline investors. There was, in fact, no bailout
for sky caps, baggage handlers, flight attendants, or
mechanics. Only airline shareholders got bailed. Airline
industry employees were left twisting in the wind, and tens of
thousands of them were promptly fired.
Second, while it might have been acceptable to compensate
the airlines for their losses during the 4-day Government-
imposed air traffic shutdown, there was nonetheless no
justification for paying the airlines many times what they lost
during that period. The combined total revenue of all the
airlines in the country prior to September 11th was $340
million a day. If you bother to do the calculation, 4 days
multiplied by $340 million per day adds up to $1.36 billion,
not $5 billion, and certainly not $15 billion. It seems that in
its eagerness to shovel money at the airlines Congress never
did bother to do the calculation.
Other industries, such as hotels, car rental companies, and
travel agencies, indeed, the entire hospitality industry,
suffered as well after 9/11 but none of them got a Federal
handout. The inequity here is striking.
Now, just 1 year later, the airlines are back asking for
more money but this time, in light of the public outrage that
resulted from last year's bailout, they are packaging their
request in a different way. Instead of openly asking the
Government to write them a check, like they did last year, the
airlines are suddenly seeking to shift unspecified billions of
their own operating costs to the taxpayers.
Mr. Chairman--and I will wrap up. Mr. Chairman, as
excessive as last year's airline bailout was, at least it was
straightforward. The airlines were at least being upfront in
asking for money to be forked over to them. This year, they are
being deliberately obscure. By asking the Government to absorb
a multifaceted menu of their own variable expenses, the
airlines are seeking to prevent the public from quantifying
their take. They are making themselves harder to pin down and
harder to criticize.
Finally, Mr. Chairman, this bailout is certain to be many
times last year's bailout. As big as last year's bailout was,
it was at least a one-time bailout. The cash assistance was
limited to $5 billion. This year's bailout will be a bailout
that recurs annually, every year, forever. It will go in
perpetuity, so the size of this year's bailout is many, many
times, it is infinitely greater than last year's bailout.
Thank you, Mr. Chairman.
Senator Rockefeller. Thank you, Senator. Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, I just came from a meeting on
the economy, and that is always a depressing thing these days,
because part of the point of the meeting was to hear the
expressions of Mr. Lindsey from the White House saying
everything is really going very well, the economy is doing
quite well. In fact, we are here today to talk about an
industry that is not doing well at all.
One piece of important evidence that our economy is in some
great difficulty, and we would be better off paying attention
to it and working together, the White House and the Congress,
to address it--I am just sick and tired of people saying, well,
let us talk about something else. There is nothing wrong with
this economy. The fundamentals are sound. That is nonsense.
This industry is an industry that is critical to this
country. Our economy will not work without a strong airline
industry. Now, the airline industry is not a perfect object of
sympathy, let me be the first to agree. They are not a very
sympathetic figure, as a matter of fact, and I agree with my
colleague from Oregon, competition is important. No one has
fought harder for competition than I have, but I think it is
also important to understand that there are fewer people
flying, we have a soft and troubled economy, fuel costs are up,
the hassle factor of people flying these days because of the
security issues post 9/11 has affected the number of people who
fly. This affects not just this industry, as Senator Brownback
said, it also affects the equipment manufacturers and many
others, and I think that we ignore this at our own peril.
We talk about bailouts and so on, but the fact is, we have
to find solid footing not just for this industry, but for
others as well, and that means we have to try to fix what is
wrong with this economy.
The airline industry talks to us about substantially
increased security costs. Well, that is not crying wolf. Go to
an airport at some point. Take a look at the added costs that
have been affixed to this point, and what it means in terms of
the hassle of people flying, and what it means in terms of
fewer passengers in these seats. Flying into that kind of a
situation with added security costs at the same time that you
have a soft economy has put this industry in significant peril,
and I think we ignore that, and we do this country no service.
I do not know exactly what the answer is, but I am not
someone who believes that we ought to just blithely suggest
things are just fine, let it all happen; if we have carriers
who go bankrupt, somebody will pick up a plane and fly it some
place. I will tell you, this economy is in some very serious
trouble, and the quicker the President and Larry Lindsey begin
to understand that, and the quicker we begin to understand it
and begin to address these questions day after day, industry
after industry, the better off this country will be. And today,
this hearing is the start of one piece of a very important
public policy. What do we do to address the serious problems
that exist with the airline industry?
Senator Rockefeller. Thank you, Senator Dorgan. I totally
agree with you about the use of the word bailout. The first $5
billion was simply an addition of the Federal Government
shutting down the passenger service, and the second $5 billion
was the cargo.
Senator Smith, do you have any comment?
STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. I do, Mr. Chairman. Thank you for holding
this very important hearing on the state of this vital
industry. I have a few comments. I am going to put in the
record my more lengthy statement. Let me speak for a second as
a resident of the State of Oregon. Oregon has two members of
this Committee on it. We both voted for the airline support
after 9/11. I think everyone understands that it was not the
fault of the airline industry or anyone else. It was a
dastardly attack, and so I felt like interfering in the private
sector in an emergency like that was appropriate for this
Government to do.
But I am concerned that as we contemplate doing more, our
State is having airline schedules cut, prices increased, and a
major airline, or at least cargo carrier, Evergreen, is being
jerked around in trying to get any relief as it relates to what
we already passed. In the normal times, they would be able to
roll over debt without any difficulty, but they are not getting
the kind of support that they ought to get from the effort we
already have made on this Committee. So in fact I would like to
put in the record, Mr. Chairman, a statement from four-star
General John Handy that he wrote to Capitol Hill regarding the
fact that Evergreen is critical to U.S. Transcom's wartime
effort, and I ask that his letter be placed in this record as
well.
Senator Rockefeller. So it will.
[The information referred to follows:]
United States Transportation Command
Scott Air Force Base, IL, April 26 2002
Hon. Walter B. Jones,
United States House of Representatives,
Cannon House Office Building,
Washington DC.
Dear Mr. Jones:
I enjoyed talking with you this morning and greatly appreciate your
commitment to our nation's airlift capability. As we discussed,
Evergreen International Airlines has a long history of excellent
service as a member of our nation's Civil Reserve Air Fleet. In the
first two quarters of this year Evergreen flew almost three times the
amount of missions they flew all of last year in support of
USTRANSCOM's Air Mobility Command--a nearly 600 percent mission tempo
increase for the same period. This of course is a result of the air
intensive nature of Operation ENDURING FREEDOM and the heavy demands
placed upon our country's airlift force. Lift, such as that provided by
Evergreen is indeed a national resource and suffice it to say, we could
not execute the Global War on Terrorism without the enormous
contribution of our civil fleet. Evergreen is critical to USTRANSCOM's
wartime effort.
Since the beginning of Operation ENDURING FREEDOM, Evergreen
International Airlines has been awarded 44 percent (760 out of 172E) of
all the widebody cargo missions and 51 percent of all the B-747
missions contracted by Air Mobility Command. To put that in
perspective, Evergreen has shouldered approximately 50 percent of the
heavy commercial lift with only 25 percent of the assets. Perhaps even
more significant is the extremely responsive nature of Evergreen's
support, typically filling very short-notice requirements. Since 1 Oct.
Evergreen has flown 305 missions as direct channel backfill, meaning
that they came in and picked up the shortfall in our scheduled missions
when organic C-17s or C-5s were unavailable. This was 48 percent of all
the backfill we have needed and made it possible for our organic fleet.
the C-17 in particular, to be released for duties in direct support of
operations in Afghanistan--a mission only the C-17 could perform. This
was vital to sustain the war effort.
Simply, operations to date would have been impossible without the
contribution of Evergreen and our Civil Reserve Air Fleet partners--we
cannot do it without them, I hope this information is useful. I thank
you again for your interest in this vital issue and for all you do in
support of our great nation.
Sincerely
John W. Handy
General, USAF Commander in Chief
Senator Smith. Mr. Chairman, as we contemplate doing more--
Senator Wyden and I represent the State of Oregon. Oregon is
getting reamed right now, and I am interested in how our State
gets treated going forward, because we have not been treated
well to this point.
Thank you, sir.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith, U.S. Senator from Oregon
Mr. Chairman, thank you for holding this hearing today on the
financial state of the airline industry.
I am very concerned about the state of this industry, and
particularly, the continued frustration the airlines experience when
applying for loan guarantees from the Air Transportation Stabilization
Board.
Ten months ago, Oregon-based Evergreen International Airlines
applied for a federal loan guarantee under the Air Transportation
Safety and System Stabilization Act.
Shortly thereafter, the Commander in Chief of the United States
Transportation Command, Four Star General John W. Handy, wrote the
following in a letter to Capitol Hill stating, ``Evergreen is critical
to USTRANSCOM's wartime effort.'' (I ask that Gen. Handy's letter be
placed in the record)
According to General Handy, Evergreen has conducted over 50 percent
of the Boeing 747 missions in the current Operation Enduring Freedom
and ``Perhaps even more significant is the extremely responsive nature
of Evergreen's support, typically filling very short-notice
requirements.''
Chairman Hollings, I know you and several others on this Committee
have been very supportive of Evergreen's loan application and thank you
for that. Quite frankly, in light of this unequivocal statement from
the Pentagon, it is amazing to me that the ATSB has seen fit to give
others more expeditious consideration in the granting of a loan
guarantee.
My understanding is that Evergreen is faced with a rollover of its
debt that in normal times would not be a problem.
As this hearing today makes crystal clear, these are not normal
times in the airline industry. As such, Evergreen's service to this
country and to the war on terrorism is being put in jeopardy.
This is precisely why the Congress passed the Air Transportation
Safety and System Stabilization Act--so that otherwise self-sufficient
air carriers such as Evergreen, that do not present a risk to the U.S.
taxpayer, can address the unique challenges confronting them in the
wake of September 11th.
I understand that the ATSB has recently begun to finally focus on
Evergreen's situation and I urge the ATSB to move quickly to bring this
application to a favorable resolution.
Thank you Mr. Chairman.
Senator Rockefeller. Thank you very much, Senator Smith. We
now go to--and I apologize for the statements which some of us
gave, and now we turn to Ms. JayEtta Hecker, who is Director of
Physical Infrastructure at the indisputably always correct
General Accounting Office.
STATEMENT OF JayEtta HECKER, DIRECTOR OF PHYSICAL
INFRASTRUCTURE GROUP, GENERAL ACCOUNTING OFFICE
Ms. Hecker. Thank you, Mr. Chairman. I am very pleased to
be here. Mr. Chairman and Members of the Committee, like you, I
was recalling that a year ago today GAO provided support for
you and addressed some guidelines for providing financial
assistance to the industry. Of course, the Congress found the
importance of a strong and vibrant industry, acted in creating
the Stabilization Act, and also included important protections
for taxpayers, competition, and consumers. So it is fitting
that we return today to look at the state of the industry's
health.
Drawing on the work that we have done, actually, for many
of you, on mergers, on alliances, on the use of regional jets,
and on changes in small community service over the past year,
my statement today will focus on three major points: the
financial condition of the industry, steps taken by the
industry to improve its financial health, and finally, some
broad public policy issues confronting the Congress.
To begin with, I think it is important to remember the
backdrop of the promise and the performance of the Airline
Deregulation Act. It has led to lower fares and better service
for most travelers attributable to increased competition, new
entry, and new initiatives and innovation by existing carriers.
In our recent small community work, we reported that nearly 97
percent of total U.S. domestic enplanements at not only large
and medium hubs but also small hubs had experienced competition
from an average of five carriers in 1999.
The first topic I wanted to cover is the industry's
financial performance. It goes without saying, the airline
industry is experiencing a second consecutive year of record
losses. There is a notable exception, though, and it is
important in this environment, to note: the low cost carriers,
not only Southwest, which is really among the majors in its
share, but also the newer entrants, such as JetBlue and
Airtran. All of them have positive net income. Of course, we
know that they have very different business structures than
most major U.S. airlines, and substantially lower operating
costs. All those innovations by those carriers are in existence
only because of deregulation. It is precisely the flexibility
that they were given to enter markets and to innovate in
pricing that is behind the success of those carriers.
Another context about the financial condition of the
industry to remember is that it is inherently a cyclical
industry. It historically has had many ups and downs, and has
established some significant record of recovery.
Another important matter that several of you mentioned
concerns the potential for bankruptcies. Some have already
occurred, and some that are expected or anticipated to occur.
Bankruptcies are in many ways an important way of looking at
the other side of free entry. If you do not have free exit,
then you cannot have free entry, because you are freezing in
the assets and contributing to overcapitalization and
inefficiency in the industry.
The key concerns about the financial condition of the
industry are that underlying needs exist for reducing high
operating costs and reforming carrier pricing models which are
no longer working to attract and maximize the revenue gain from
business travelers.
The second issue is carrier actions to improve their
financial health. I will skip over this one quickly. The
carriers have taken many actions to lower their costs in
restructuring, and as many of you have also noted, in some
cases eliminating all service to some small communities. Our
recent report on this to many of you indicated that since
September 2001 carriers have notified DOT of their intention to
discontinue service at 30 small communities. This is
eliminating service to those locations.
Another move that airlines are taking to increase revenues,
and I know it is of interest to the Committee, is their
proposals to create new marketing alliances.
The bottom line of the carrier action issue is that further
restructuring and consolidation is underway, and it is
affecting and will continue to affect the competitive landscape
of the industry.
I recognize another issue is on the table, and the more
immediate issue that the Congress is now deliberating, and that
is the appropriate Federal/industry share of greatly increased
security costs.
Finally, and these are really the key points that I want to
leave with you today. There are three key public policy issues
confronting the Congress, in our view. The first one is
focusing on maintaining a competitive environment. The benefits
of competition are real. Moreover, re-regulation would not
forestall some of the problems we have now. There is not a
simple answer here that somehow you could re-regulate and stop
all of these problems with costs or service.
The second point is monitoring travel options for small
communities. Clearly, it is an area of interest to a lot of
members, and a lot of communities. We have some work ongoing as
well as completed that I will tell you a little bit about.
The third area is different than the major focus today on
the domestic industry, and it is the importance of the
globalized community. The point is the importance of moving
forward with global liberalization and ensuring competition in
global markets.
I do not have a lot of time. I wanted to add a few points
on each of those. The main thing about the competitive
environment is that restructuring is occurring. These alliances
raise competitive issues. In fact, the existence of the ATSB,
as well as these consolidations and alliances, all have the
potential to substantially impede entry. Moreover, security
costs can have a differential impact on low cost carriers and
short hauls. The effectiveness, as many of you have mentioned,
of the security role of TSA and its performance is important
clearly not only to the American public but to the industry as
well.
The small community issue I know you care a lot about.
Basically, the concern that we have about the DOT Small
Community Air Service Pilot Program and the EAS program is that
there are excessive pressures on them. There is no way, with
current levels of funding and criteria, that all of the
communities now eligible and becoming eligible can be served,
so fundamental issues are facing the Congress about the
performance, effectiveness, and cost of these two programs, and
what kind of options might exist if the Congress determines
that providing stability of service to small communities is in
the national interest.
The third issue is globalization. There are important
developments underway in the European Union which could alter
the legal basis of many of our important bilaterals with
European partners. There are very clear, significant benefits
that flow to both consumers and carriers for liberalizing
aviation trade, and therefore continued focus on liberalization
and competition in the international market is important to
remember at this time as well.
That concludes my remarks. I apologize for going over and
look forward to questions.
Thank you.
[The prepared statement of Ms. Hecker follows:]
Prepared Statement of JayEtta Hecker, Director of Physical
Infrastructure Group, General Accounting Office
Mr. Chairman and Members of the Committee:
Thank you for inviting us to testify today on the economic state of
the airline industry. Just over a year ago, we testified before this
Committee on guidelines for providing financial assistance to the
industry. \1\ The Congress has long recognized that the continuation of
a strong, vibrant, and competitive commercial airline industry is in
the national interest. A financially strong air transport system is
critical not only for the basic movement of people and goods, but also
because of the broader effects this sector exerts throughout the
economy. In response to the industry's financial crisis generated by
the events of last September, the Congress passed the Air
Transportation Safety and System Stabilization Act. \2\ Thus, it is
fitting that we now return to this Committee to review the state of the
industry's financial health and competitiveness.
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\1\ Commercial Aviation: A Framework for Considering Federal
Financial Assistance (GAO-01-1163T), September 20, 2001.
\2\ Pub.L. 107-42.
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Over the past several years, we have issued a number of reports
that focus on changes within the airline industry. They include
analyses of the potential impacts on consumers of airline mergers and
alliances, carriers' use of regional jets, and changes in service to
the nation's smaller communities. \3\ Our statement today builds on
that body of work and provides a current overview of (1) the financial
condition of major U.S. commercial passenger airlines; (2) steps taken
by airlines to improve their financial condition; and (3) some public
policy issues related to current conditions and changes in the aviation
industry's competitive landscape.
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\3\ See list of related GAO products attached to this statement.
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In summary:
Many, but not all, major U.S. passenger airlines are
experiencing their second consecutive year of record financial
losses. In 2001, the U.S. commercial passenger airline industry
reported losses in excess of $6 billion. For 2002, some Wall
Street analysts recently projected that U.S. airline industry
losses will approach $7 billion, and noted that the prospects
for recovery during 2003 are diminishing. Such projections
could worsen dramatically in the event of additional armed
conflict, if travel demand drops and fuel prices rise. Several
carriers have entered Chapter 11 bankruptcy proceedings. Yet
Southwest Airlines, JetBlue, and AirTran continue to generate
positive net income. These low-fare carriers have fundamentally
different business structures than most major U.S. airlines,
including different route structures and lower operating costs.
However, federal security requirements have altered the cost of
doing business for all carriers.
Carriers have taken many actions to lower their costs and
restructure their operations. Since September 2001, carriers
have furloughed an estimated 100,000 staff, renegotiated labor
contracts, and streamlined their fleets by retiring older,
costlier aircraft. Carriers have reduced capacity by operating
fewer flights or smaller aircraft, such as substituting
``regional jets'' for large ``mainline'' jet aircraft. In some
cases, carriers eliminated all service to communities. For
example, since September 2001, carriers have notified the
Department of Transportation (DOT) that they intend to
discontinue service to 30 small communities. At least two
carriers are modifying their hub operations to use resources
more efficiently by spreading flights out more evenly
throughout the day. Finally, to increase revenues, some
carriers have proposed creating marketing alliances under which
the carriers would operate as code-sharing partners. \4\ United
Airlines and US Airways announced plans to form such an
alliance on July 24, 2002, as did Continental Airlines, Delta
Air Lines, and Northwest Airlines one month later.
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\4\ In general, ``code sharing'' refers to the practice of airlines
applying their names--and selling tickets via reservation systems--to
flights operated by other carriers.
As the aviation industry continues its attempts to recover, the
Congress will be confronted with a need for increased oversight of a
number of public policy issues. First, airlines' reactions to financial
pressures will affect the domestic industry's competitive landscape.
Some changes, such as extending airline networks to new markets through
code sharing alliances, may increase competition and benefit consumers.
Others, such as carriers' discontinuing service to smaller communities,
may decrease competition and reduce consumers' options, particularly
over the long term. Second, airlines' reductions in service will likely
place additional pressure on federal programs supporting air service to
small communities, where travel options are already limited. Finally,
while domestic travel has been the focus of our concern today, there
are numerous international developments--especially regarding the
European Union (EU)--that may affect established international ``open
skies'' agreements between the United States and EU member states.
Various studies have illustrated the benefits to both consumers and
carriers that flow from liberalizing aviation trade through such
agreements. As international alliances are key components of major
domestic airlines' networks, international aviation issues will affect
the overall condition of the industry.
Background
The Airline Deregulation Act of 1978 has led to lower fares and
better service for most air travelers, largely because of increased
competition. The experiences of millions of Americans underscore the
benefits that have flowed to most consumers from the deregulation of
the airline industry, benefits that include dramatic reductions in
fares and expansion of service. These benefits are largely attributable
to increased competition, which has been spurred by the entry of new
airlines into the industry and established airlines into new markets.
At the same time, however, airline deregulation has not benefited
everyone; some communities have suffered from relatively high airfares
and a loss of service.
The airline industry is a complex one that has experienced years of
sizable profits and great losses. The industry's difficulties since
September 11, 2001, do not represent the first time that airlines have
faced a significant financial downturn. In the early 1990s, a
combination of factors (e.g., high jet fuel prices due to Iraq's
invasion of Kuwait and the global recession) placed the industry in
turmoil. Between 1990 and 1992, U.S. airlines reported losses of about
$10 billion. All major U.S. airlines \5\ except Southwest reported
losses during those years. In addition, several airlines--most notably
Braniff, Eastern, and Pan Am--went out of business, and Trans World
Airlines, Northwest Airlines, and Continental Airlines entered
bankruptcy proceedings. By the start of 1993, the industry had turned
the corner and entered a period during which nearly all major U.S.
airlines were profitable. The industry rebounded without massive
federal financial assistance.
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\5\ For the purpose of this report, major airlines include Alaska
Airlines, America West Airlines, American Airlines, American Trans Air,
Continental Airlines, Delta Air Lines, Northwest Airlines, Southwest
Airlines, United Airlines, and US Airways.
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The events of September 11th accelerated and aggravated negative
financial trends that had begun earlier in 2001. Congress responded
quickly to address potential instability in the airline industry by
enacting the Air Transportation Safety and System Stabilization Act.
Among other things, that act authorized payments of $5 billion in
direct compensation (grants) to reimburse air carriers for losses
sustained as a direct result of government actions beginning on
September 11, 2001, and for incremental losses incurred between
September 11 and December 31, 2001 as a direct result of the terrorist
attacks. The act provided $10 billion in loan guarantees to provide
airlines with emergency access to capital and established the Air
Transportation Stabilization Board (the Board) to administer the loan
program. \6\ The Board is tasked not only with providing financial
assistance to airlines but also with protecting the interests of the
federal government and American taxpayer. The act requires the Board to
ensure that airlines are compensating the government for the financial
risk in assuming guarantees. This requirement defines the loan
guarantee as a mechanism for supporting airlines with reasonable
assurances of financial recovery. In addition to the grants and loan
guarantees, the federal government has also established other ways to
ease the airlines' financial condition. \7\
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\6\ The Air Transportation Stabilization Board is composed of the
Chairman of the Federal Reserve, the Secretary of Transportation, the
Secretary of Treasury, and the Comptroller General. The Comptroller
General is a non-voting member.
\7\ The Air Transportation Safety and System Stabilization Act
(Title III) authorized the Secretary of the Treasury to change the due
date for any tax payment due between September 10 and November 15 to
some time after November 15 (with January 15, 2002 as the maximum
extension). The act specifies taxes that may be postponed to include
excise and payroll taxes. Under Title II, (Aviation Insurance), the act
also authorized DOT to reimburse qualifying air carriers for insurance
increases experienced after the events of September 11th for up to 180
days. Funding constraints effectively limited the program to
reimbursing carriers their excess war risk insurance premiums for only
30 days.
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Many Carriers Face Deep Financial Losses
Many major U.S. passenger airlines are experiencing their second
consecutive year of record financial losses. In 2001, the industry
reported a net loss of over $6 billion, even after having received $4.6
billion from the federal government in response to September 11th. \8\
For 2002, some Wall Street analysts have projected that U.S. airline
industry losses will total about $7 billion, but this projection may
worsen in the event of additional armed conflict, particularly if this
results in decreasing travel demand and rising fuel prices. According
to industry data, airlines' revenues have declined 24 percent since
2000, while costs have remained relatively constant. US Airways and
Vanguard Airlines filed for Chapter 11 bankruptcy during this summer.
United Airlines officials stated that they are preparing for a
potential Chapter 11 bankruptcy filing this fall. Furthermore, some
Wall Street analysts predict that it will likely take until 2005 for
the industry to return to profitability. Attachment I summarizes the
financial condition of major network and low-fare carriers. \9\
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\8\ The federal government has provided significant amounts of
financial assistance under the Stabilization Act. First, according to
data from DOT, as of September 18, 2002, 396 passenger and cargo
carriers had received payments totaling $4.6 billion. Second, 16
carriers submitted applications for loan guarantees. The Board approved
a loan of $429 million to America West Airlines, and conditionally
approved the applications of US Airways, Inc. for a federal guarantee
of $900 million and American Trans Air for a federal guarantee of
$148.5 million. The Board has denied the applications of four airlines.
Third, various airlines have taken advantage of the tax deferment. For
example, Southwest stated that it deferred approximately $186 million
in tax payments until January 2002. Finally, the Federal Aviation
Administration provided reimbursements to air carriers for up to 30
days of increased war risk insurance expense. To date, 188 air carriers
have received $56.9 million in reimbursements. We are completing
reviews of the $5 billion financial assistance program and the War Risk
Insurance Reimbursement program to ensure that payments made were in
compliance with the act.
\9\ Network carries are defined as carriers using a hub and spoke
system. Under this system, airlines bring passengers from a large
number of ``spoke'' cities to one central location (the hub) and
redistribute these passengers to connecting flights headed to
passengers' final destinations. We adopted DOT's definition of low-fare
carriers, which includes AirTran, American Trans Air, Frontier,
JetBlue, Southwest, Spirit, and Vanguard.
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Major airline carriers' revenues have fallen because of a
combination of a decline in passenger enplanements \10\ and a
significant decrease in average fares. As figure 1 shows, major
carriers' enplanements increased for every quarter of 2000 compared to
the same quarter of the previous year, but flattened in the first
quarter of 2001 and then dropped, with the steepest drop occurring in
the quarter following September 11, 2001.
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\10\ ``Enplanements'' represents the total number of passengers
boarding an aircraft. Thus, for example, a passenger that must make a
single connection between his or her origin and destination counts as
two enplaned passengers because he or she boarded two separate flights.
Over the same period, major airlines have also received lower
average fares. Data from the Air Transport Association indicate that
the average fare for a 1,000-mile trip dropped from $145 in June 2000
to $118 in June 2002, a decrease of about 19 percent (see fig. 2).
Average fares started dropping noticeably in mid-2001 and have not
risen significantly since. Industry data suggest that the decline is
due to the changing mix of business and leisure passenger traffic, and
particularly to the drop in high-fare business passengers.
Through June 2002, all major network carriers generated negative
net income, while low-fare carriers Southwest Airlines, JetBlue, and
AirTran returned positive net income. Like the major carriers, these
low-fare carriers' passenger enplanements dropped in the months
immediately following September 2001. Attachment II summarizes
passenger enplanements for individual major and low-fare carriers for
2000, 2001, and the first 5 months of 2002.
Why have some low-fare carriers been able to earn positive net
income in current market conditions, while network carriers have not?
The answer seems to rest at least in part with their fundamentally
different business models. Low-fare carriers and major network carriers
generally have different route and cost structures. In general, low-
fare carriers fly ``point-to-point'' to and from airports in or near
major metropolitan areas, such as Los Angeles, Chicago, and Baltimore-
Washington. In comparison, major network carriers use the ``hub and
spoke'' model, which allows them to serve a large number of
destinations, including not just large cities, but small communities
and international destinations as well. American Airlines, for example,
can carry a passenger from Dubuque, Iowa, through Chicago, to Paris,
France.
Low-fare carriers have also been able to keep costs lower than
those of major airline carriers. For example, 2002 data reported by the
carriers to DOT indicate that Southwest's costs per available seat mile
(a common measure of industry unit costs) for one type of Boeing 737 is
3.79 cents. For the same aircraft type, United Airlines reported a cost
of 8.39 cents--more than twice the cost at Southwest.
All airlines are now entering an environment in which some of the
costs of doing business have increased. The federal Transportation
Security Administration has taken over responsibility for many security
functions for which airlines previously had been responsible. The Air
Transport Association (ATA) estimated that the airline industry spent
about $1 billion for security in 2000. \11\ Despite the shift in
functional responsibilities, airlines have stated that they continue to
bear the costs of other new federal security requirements. In August
2002, Delta Air Lines estimated the cost of new federal security
requirements that it must bear to be about $205 million for 2002. This
includes the cost of reinforcing cockpit doors, lost revenues from
postal and cargo restrictions, and lost revenues from carrying federal
air marshals.
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\11\ The amount that the industry paid for security in 2000 is in
question. ATA's $1 billion estimate, made in August 2001, included $462
million annually for direct costs, $50 million for security technology
and training costs, and $110 for acquisition of security equipment.
Since then, ATA certified that the industry incurred only about $300
million in security-related costs. The amount is important, because the
airlines are required to remit an amount equal to the security costs
incurred by the airlines in calendar year 2000 to the U.S. government,
which assumed certain civil aviation security functions through the
Transportation Security Administration. DOT's Inspector General is
examining the discrepancy between the $1 billion and the $300 million
estimates.
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Airlines Have Taken Numerous Actions to Address Changing Market
Conditions
To address mounting financial losses and changing market
conditions, carriers have begun taking a multitude of actions to cut
costs and boost revenues. First, many carriers have trimmed costs
through staff furloughs. According to the Congressional Research
Service, carriers have reduced their workforces by at least 100,000
employees since last September. Further, some carriers, including
United Airlines and US Airways, have taken steps to renegotiate
contracts in order to decrease labor and other costs. A US Airways
official stated that its renegotiated labor agreements would save an
estimated $840 million annually.
Carriers have also grounded unneeded aircraft and accelerated the
retirement of older aircraft to streamline fleets and improve the
efficiency of maintenance, crew training, and scheduling. Carriers
accelerated the retirement of both turboprops and a variety of larger
aircraft, including Boeing 737s and 727s. For example, United and US
Airways retired the Boeing 737s used by United's Shuttle service and US
Airways' MetroJet system, and the carriers discontinued those
divisions' operations. Industry data indicate that the airlines have
parked over 1,400 aircraft in storage, with more than 600 having been
parked since September 2001.
Although carriers had begun reducing capacity earlier in 2001,
those reductions accelerated after the terrorist attacks. Between
August 2001 and August 2002, major carriers reduced capacity by 10
percent. Carriers can decrease capacity by reducing the number of
flights or by using smaller aircraft, such as replacing mainline
service with regional jets, which are often operated by the network
carrier's regional affiliate and normally have lower operating costs.
For example, American Airlines serves the markets between Boston, New
York (LaGuardia), and Washington, DC (Reagan National) only with
regional jet service provided by its affiliate, American Eagle. Another
way carriers have reduced capacity is to discontinue service to some
markets, primarily those less profitable, often smaller communities.
Our previous work showed that the number of small communities that were
served by only one airline increased from 83 in October 2000 to 95 by
October 2001. Between September 2001 and August 2002, carriers had
notified DOT \12\ that they intend to discontinue service to 30
additional communities, at least 15 of which were served by only one
carrier and are now receiving federally-subsidized service under the
Essential Air Service (EAS) program. \13\
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\12\ Under 49 U.SC. 41734, carriers must file a notice with DOT of
their intent to suspend service, and DOT is compelled by statute to
require those carriers to continue serving those communities for a 90-
day period.
\13\ The EAS program, established as part of the Airline
Deregulation Act of 1978, guaranteed that communities served by air
carriers before deregulation would continue to receive a certain level
of scheduled air service, with special provisions for Alaskan
communities. As of July 1, 2002, the EAS program provided subsidies to
air carriers to serve 114 communities.
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Some carriers are modifying their ``hub and spoke'' systems.
American is spreading flights out more evenly throughout the day
instead operating many flights during peak periods. American began this
effort in Chicago and has announced that it would expand its ``de-
peaking'' efforts to its largest hub at Dallas/Fort Worth beginning
November 2002. American officials stated that these changes would
increase the productivity of labor and improve the efficiency of gate
and aircraft use. Delta officials said they are also taking steps to
spread flights more evenly throughout the day.
Beyond the steps individual carriers are taking to restructure and
cut costs, some carriers are proposing to join forces through marketing
and codesharing alliances in order to increase revenues. Under these
proposed alliances, carriers would sell seats on each other's flights,
and passengers would accrue frequent flyer miles. Company officials
stated that the carriers would remain independent competitors with
separate schedules, pricing, and sales functions. On July 24, 2002,
United and US Airways announced a proposed codesharing alliance to
broaden the scope of their networks and potentially stimulate demand
for travel. United and US Airways estimated that the alliance would
provide more than $200 million in annual revenue for each carrier. One
month later, Northwest announced that it had signed a similar agreement
with Continental and Delta. According to Northwest, this agreement
builds on the alliance between Northwest and Continental that had been
in existence since January 1999. These alliances would expand both
their domestic and international networks. The Department of
Transportation is currently reviewing these proposals. \14\
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\14\ DOT is authorized under 49 U.S.C. 41712 to block the airlines
from implementing their agreements, if it determines that the
agreements' implementation would be an unfair or deceptive practice or
unfair method of competition. Such a determination is analogous to the
review of major mergers and acquisitions conducted by the Justice
Department and the Federal Trade Commission under the Hart-Scott-Rodino
Act, 15 U.S.C. 18a.
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Critical Public Policy Issues Are Associated With the Industry's
Changing Competitive Landscape
Because a financially healthy and competitive aviation industry is
in the national interest, and because carriers' and the federal
government's efforts to address the current situation may affect
consumers both positively and negatively, Congress will be confronted
with several major public policy issues. These policy issues underscore
the difficulties this industry will encounter as it adapts to a new
market environment. We are highlighting three of these issues: the
effect of airlines' current financial situation, including new business
costs, on industry health and competition; the impact of reductions in
service on federal programs designed to protect service to small
communities, and international developments that may further affect the
domestic industry.
How will the carriers' reactions to current financial
pressures affect the industry's competitive landscape? There is
a new aviation business reality that has increased the
airlines' financial pressures and which ultimately will be felt
by U.S. consumers. Increased federal security requirements,
which are part of this new reality, are adding to the cost of
competing in the industry. The cost of these policies will most
likely be borne both by industry, through higher operational
costs, and the consumer, through higher fares. In the current
pricing environment, carriers may not be able to pass on these
costs to consumers, and thus may be bearing their full impact
during the short run. On the other hand, these same security
requirements may be helping the airlines maintain some of its
passenger revenue; some portion of the airlines' current
passengers may be flying only as a result of knowing that these
heightened security requirements are in place. Thus, the
question arises about the net impact of the new market
environment and new security requirements on the carriers and
their passengers while the industry restructures.
While understandable from the perspective of an individual
airline's bottom line, the restructuring activities of individual
carriers will significantly change the competitive landscape. When
carriers decrease available capacity in a market by reducing the number
of flights, decreasing the size of aircraft used to meet reduced
demand, or dropping markets altogether, the net result is that
consumers have fewer options. In doing so, airlines reduce the amount
of competition in those markets. As has been shown repeatedly, less
competition generally leads to higher fares in the long run.
A related issue concerns the industry's consolidation, whether
through marketing alliances among or mergers between carriers. Because
of the potential that consolidation presents for competition, federal
oversight has been critical. As we have noted before, while alliances
may offer potential consumer benefits associated with expanded route
networks, more frequency options, improved connections, and frequent
flyer benefits, consolidation within the industry raises a number of
critical public policy issues. \15\ These include increasing potential
barriers to market entry, the loss of competition in key markets, and a
greater risk of travel disruptions as a result of labor disputes. \16\
Since these alliances and mergers have a direct impact on the level of
competition within the airline industry and would therefore influence
the affordability of air travel to many consumers, these issues are
still relevant.
---------------------------------------------------------------------------
\15\ Airline Competition: Issues Raised by Consolidation Proposals
(GAO-01-402T), February 7, 2001.
\16\ GAO has recently initiated an analysis of issues relating to
airline industry labor-management
How will the Federal Government's support of small community
air service be affected? The Congress has long recognized that
many small communities have difficulty attracting and
maintaining scheduled air service. Now, as airlines continue to
reduce capacity, small communities will potentially see even
further reductions in service. This will increase the pressure
on the federal government to preserve and enhance air service
to these communities. There are two main programs that provide
federal assistance to small communities: the Essential Air
Service (EAS) program, which provides subsidies to commercial
air carriers to serve the nation's smallest communities, and
the Small Community Air Service Development Pilot Program,
which provides grants to small communities to enhance their air
service. \17\
---------------------------------------------------------------------------
\17\ Congress created the Small Community Air Service Development
Pilot Program under the Wendell H. Ford Aviation Investment and Reform
Act for the 21st Century (Pub.L. 106-181). That act authorized $75
million over 3 years. DOT made no awards under the act in fiscal year
2001, because the Congress did not appropriate any funds for the first
year of the program but $20 million was appropriated for fiscal year
2002.
---------------------------------------------------------------------------
As we reported in August, the number of communities that qualify
for EAS-subsidized service has grown over the last year, and there are
clear indications that that number will continue to grow. Federal
awards under the program have increased from just over $40 million in
1999 to an estimated $97 million in fiscal year 2002. \18\ As carriers
continue to drop service in some markets, more communities will become
eligible for subsidized EAS service.
---------------------------------------------------------------------------
\18\ Figures in constant 2002 dollars.
---------------------------------------------------------------------------
In 2002, nearly 180 communities requested over $142.5 million in
grants under the Small Community Air Service Development Pilot Program.
DOT awarded the total $20 million available to 40 communities in 38
states to assist them in developing or enhancing their air service. The
grants will be used for a variety of programs, including financial
incentives to carriers to encourage either new or expanded air service,
marketing campaigns to educate travelers about local air service, and
support of alternative transportation. We are currently studying
efforts to enhance air service in small communities, and expect to
report on these programs early next year.
How will future international developments affect
established agreements between the U.S. and EU member states?
There are a number of international issues that will influence
the domestic aviation industry's attempts to recover from
financial losses. The European Court of Justice is expected to
reach a decision in the near future on the authority of
individual European Union nations to negotiate bilateral
agreements. This could raise uncertainties over the status of
``open skies'' agreements \19\ that the United States has
signed with individual European Union nations. This is
especially critical with regard to negotiating an open skies
agreement with the United Kingdom, our largest aviation trading
partner overseas. Because almost all of the major U.S. carriers
partner with European airlines in worldwide alliances, this
decision could potentially impact the status of antitrust
immunity for these alliances, which could in turn affect
alliances established with airlines serving the Pacific Rim or
Latin America. These alliances are key components of several
major airlines' networks and as such significantly affect their
overall financial status. Various studies have illustrated the
benefits to both consumers and carriers that flow from
liberalizing aviation trade through ``open skies'' agreements
between the United States and other countries.
---------------------------------------------------------------------------
\19\ ``Open skies'' agreements are bilateral air service agreements
that remove the vast majority of restrictions on how the airlines of
the two countries signing the agreement may operate between, behind,
and beyond gateways in their respective territories. DOT has
successfully negotiated open skies agreements with 56 governments,
including many in Europe.
This concludes my statement. I would be pleased to answer any
questions you or other Members of the Committee might have.
Related GAO Products
Options to Enhance the Long-term Viability of the Essential Air
Service Program. GAO-02-997R. Washington, DC: August 30, 2002.
Commercial Aviation: Air Service Trends At Small Communities Since
October 2000. GAO-02-432. Washington, DC: March 29, 2002.
Proposed Alliance Between American Airlines and British Airways
Raises Competition Concerns and Public Interest Issues. GAO-02-293R.
Washington, DC: December 21, 2001
``State of the U.S. Commercial Airlines Industry and Possible
Issues for Congressional Consideration'', Speech by Comptroller General
of the United States David Walker. The International Aviation Club of
Washington: November 28, 2001.
Financial Management: Assessment of the Airline Industry's
Estimated Losses Arising From the Events of September 11. GAO-02-133R.
Washington, DC: October 5, 2001.
Commercial Aviation: A Framework for Considering Federal Financial
Assistance. GAO-01-1163T. Washington, DC: September 20, 2001.
Aviation Competition: Restricting Airline Ticketing Rules Unlikely
to Help Consumers. GAO-01-831. Washington, DC: July 31, 2001.
Aviation Competition: Challenges in Enhancing Competition in
Dominated Markets. GAO-01-518T. Washington, DC: March 13, 2001.
Aviation Competition: Regional Jet Service Yet to Reach Many Small
Communities. GAO-01-344. Washington, DC: February 14, 2001.
Airline Competition: Issues Raised by Consolidation Proposals. GAO-
01-402T. Washington, DC: February 7, 2001.
Aviation Competition: Issues Related to the Proposed United
Airlines-US Airways Merger. GAO-01-212. Washington, DC: December 15,
2000.
Essential Air Service: Changes in Subsidy Levels, Air Carrier
Costs, and Passenger Traffic. RCED-00-34. Washington, DC: April 14,
2000.
Aviation Competition: Effects on Consumers from Domestic Airline
Alliances Vary RCED-99-37. Washington, DC: January 15, 1999.
Senator Dorgan. (presiding) Ms. Hecker, thank you very
much.
Mr. Mullin, why don't you proceed, and your entire
statement will be made a part of the permanent record.
STATEMENT OF LEO F. MULLIN, CHAIRMAN AND CEO,
DELTA AIR LINES
Mr. Mullin. Thank you very much, Senator Dorgan. I am
extremely grateful to be able to appear before this Committee,
and thank you for the opportunity to be before you today on
behalf of the Air Transportation Association just 1 year after
the brutal terrorist assault on September 11th which rocked our
Nation. As is so well-known, because terrorists used commercial
aircraft as weapons of the new war, aviation security suddenly
became an essential component in the larger national effort to
combat terrorism. In recognition of that sea change, Congress
quickly passed the Aviation and Transportation Security Act,
creating a new Federal aviation security system as part of the
larger restructuring of national security.
Much has been done, as a result, to make the whole aviation
system more secure to the benefit of many, but 1 year later a
review of the financial impact of the Government-policy-based,
post 9/11 changes in aviation security shows that U.S. airlines
are bearing an estimated $4 billion of the security burden that
was totally unanticipated, all stemming from our Nation's war
on terrorism.
Four billion dollars is a staggering amount for any
industry to absorb and, indeed, no other private sector
organization or industry has been asked to finance national
security costs to this extent. The burden falls with particular
weight on U.S. airlines, in light of our current unprecedented
financial crisis.
Mr. Chairman, it is the belief of the airline industry that
the Government had every intention of paying for the new
security requirements when it passed the security act last
year, and certainly the purpose was not to worsen airlines'
plight by the actions. Today, in keeping with that intent, we
are asking for relief for the airlines from the cost of
fighting the war on terrorism and providing national security
for our citizens, responsibilities that are fundamentally
governmental functions appropriately paid for by the U.S.
Government.
However, Mr. Chairman, while the industry's crisis makes
swift and decisive action essential, we want to be clear that
we are not asking Congress for special treatment, or for what
has often been termed a bailout. Specifically, we are not here
to request any aid related to any portion of our industry's
losses, which are the result of economic and competitive
challenges, that would constitute a bailout. Those marketplace
factors are the responsibility of airlines themselves to be
solved, using the tools of the free market, and we accept that
responsibility.
Now, to provide context for why speedy action on this
matter is required for the stability of the air transportation
system, I would like to begin with a brief industry overview.
As Exhibit 1--and I hope you do have those exhibits at your
table--of my testimony shows, analysts' estimates for the
industry losses in 2002 have now reached $7 billion. This
result is especially disappointing, because 2002 had been
expected to improve considerably from the $7 billion loss of
2001. The picture is not improving.
The next page, Exhibit 2, illustrates that as of June 2002
airline debt has grown by $18 billion, a 21 percent jump since
January 1 of 2001. The industry in effect has funded growing
losses with huge increases in debt, weakening substantially
airline balance sheets that were already weak prior to
September 11th.
Airlines have been taking dramatic self-help actions to
cope with the difficult challenges we face. The 6 major hub-
and-spoke carriers alone have trimmed costs since 9/11 by $14
billion in a series of difficult steps illustrated by Exhibit
3. We have cut operating expenses by $8.7 billion, or 13
percent. We have removed 15 percent of available seat miles
from the system, and 267 aircraft from the fleet that are
essentially sitting in the desert in California, and cut
capital expenditures by $5 billion, or 49 percent.
Commensurate with these reductions, we have taken the most
difficult step of all, eliminating fully 70,700 airline jobs at
the larger aircraft, 100,000 throughout all of aviation, 16
percent of the hub-and-spoke carrier employees.
Even as the industry has struggled to trim losses, the
falling value of financial investments has led to yet another
challenge, underfunded pension plans, as shown in Exhibit 4. At
the end of 2000, airline pension plan assets totaled $34.8
billion, which was slightly below the projected benefit
obligation, but within a normal fluctuation range. But by 2001,
reflecting the drop in the stock market and the changes in
interest rate, that gap had grown to $12 billion. Consequently,
substantial expense and cash contributions to pension plans
will be required in the upcoming year by many airlines at a
time when the industry can least afford it.
Now, though costs have been cut, the most obvious reasons
for the industry's continued losses is that revenue remains
depressed, running as a sorrowful point of context at levels
last seen in 1996. As Exhibit 5 indicates, the degree and
pattern of this drop off reveals a deeply troubling trend. For
20 or more years prior to 9/11, the first quarter of 1981 on
the chart, 20 years, airline fares correlated reasonably
closely with the Gross Domestic Product. Following September
11th, however, this connection appears to have become unhinged.
The change is huge, as this exhibit portrays, and there is no
indication that the correlation will improve in the near term.
Mr. Chairman, let me note at this point that our industry
has fully supported the Aviation Security Act and the important
improvements that have followed, even as we may have issues
with some specific techniques, yet as time passed following 9/
11, we began to observe that the upward trends in passenger
traffic were not yielding any bottom line improvement, cost
reductions notwithstanding.
This led us, starting in the second quarter, to begin
scrutinizing a new source of spiraling financial pain, security
cost. When we at Delta analyzed the cost, or lost revenue for
our airline related to the Government-related items shown in
Exhibit 6, we found the magnitude of the post 9/11 financial
impact to be extraordinarily surprising.
Let me review these briefly. A new security tax of $2.50
per segment is costing Delta $265 million. This security tax on
airline tickets was intended to be passed on to passengers, but
high supply and low demand for airline seats means carriers do
not have the pricing power to increase ticket prices, so the
taxes become a direct hit to our bottom line.
Increased terrorism insurance costs $150 million. Terrorism
insurance premiums, which cost Delta only $2 million in 2001,
have increased by more than $150 million in 2002, $2 million to
$150 million. Revenue losses due to new restrictions imposed on
air carriage of U.S. mail as well as on freight shippers, $90
million. Following 9/11, the Government suspended the airlines'
right to carry mail over 16 ounces, and restricted the number
of shippers we could serve.
Unreimbursed costs for cockpit door fortification, $20
million. The Government has paid a portion of the initial
cockpit door modification, but $20 million remains unfunded.
The loss in potential seat revenue as part of the Federal Air
Marshal program, $35 million. Federal air marshals occupy space
in the cabin closest to the cockpit, generally high-premium,
first class seats which the airlines can no longer sell.
Other mandated but unreimbursed security costs, $60
million, which includes costs to meet new requirements for ramp
security, document verification, screening and catering
supplies, and many others.
And finally, a DOT-imposed fee for passenger screening
costs of $40 million, given that the DOT has chosen to exercise
discretionary authority to impose monthly fees for additional
screening cost reimbursements.
Added together, the total estimated 2002 impact of these
items on Delta is $660 million, and extrapolating that estimate
to the rest of the industry, the impact for 2002 approximates
$4 billion for the industry, as I mentioned earlier.
Now, based on current estimates, this $4 billion
Government-imposed impact could account for up to 35 percent of
the industry's pre-tax operating losses for 2002, but Mr.
Chairman, the numbers presented so far do not account for
another security consequence which has received much criticism
and done major damage to airline revenues, referred to in the
opening statement by you, the so-called security hassle factor.
Delta has conducted market research to determine the revenue
loss resulting from the hassle factor, and we believe it
accounts for roughly 20 percent of our revenue drop from 2001
to 2002. This amounts to almost $410 million of annual revenue
loss for Delta, or, extrapolated to the other airlines, about
$2.5 billion for the industry as a whole, and this is shown in
Exhibit 7, the last exhibit.
Adding the hassle factor to the items I listed earlier, the
extrapolated security-related impact of the airline industry
could be on the order of $6.5 billion, providing a key
explanation for the extreme degree of financial trouble the
industry is experiencing.
Now, as I noted earlier, it is the airlines' responsibility
to deal with the marketplace factors of the current industry
crisis The major reductions in fleet capacity, capital
expenditures, expenses and, most regrettably, personnel, give
evidence of the hard steps already taken. However, as I have
described, the industry's ability to address the current crisis
has been seriously limited by the high and unanticipated cost
of well-intended post 9/11 actions by the Government.
We recognize that the Committee has already provided
flexibility for airports unable to meet the explosive detection
system screening requirement at the end of this year, and we
applaud this step. We are also pleased that the Committee bill,
S. 2949, would provide Government terrorism or risk reinsurance
through next year.
In addition to supporting enactment of these provisions, we
are also here today to ask you to consider a five-step
legislative agenda:
1. Eliminate the $2.50 ticket segment security tax.
2. Immediately authorize airlines to carry U.S. priority
mail.
3. Obtain reimbursement to the airlines for unfunded
security mandates.
4. Eliminate the monthly security fee the airlines are
currently paying to the DOT.
5. For any armed pilots program or cabin crew self-defense
training, make sure that associated costs are not levied on the
airlines.
Removing the national security burden from the airlines as
outlined in these five steps is crucial not only to my
industry, but to the millions of people, businesses, and
organizations that depend on a secure, healthy, and efficient
air transportation system, as Senator Brownback earlier alluded
to for Kansas.
Mr. Chairman, I want to end on one very important
conceptual point. we are not asking the Government through this
hearing for special treatment. We are asking for an end to
special treatment, for relief from the Government-imposed
consequences of the war on terrorism, now uniquely being borne
by the airline industry.
Thank you very much.
[The prepared statement of Mr. Mullin follows:]
Prepared Statement of Leo F. Mullin, Chairman and CEO, Delta Air Lines
Mr. Chairman and Members of the Committee:
Thank you for this opportunity to testify before you today on
behalf of the Air Transportation Association airlines, just over one
year after the brutal terrorist assault of September 11 which rocked
our nation.
As is so well known, because terrorists used commercial aircraft as
weapons of the new war, aviation security suddenly became an essential
component in the larger national effort to combat terrorism.
In recognition of that sea change, Congress quickly passed the
Aviation and Transportation Security Act, creating a new federal
aviation security system as part of the larger restructuring of
national security.
Much has been done as a result to make the whole aviation system
more secure--to the benefit of many.
But one year later, a review of the financial impact of government-
policy-based, post-9/11 changes in aviation security shows that U.S.
airlines are bearing an estimated $4 billion of the security burden
that was totally unanticipated--all stemming from our nation's war on
terrorism.
Four billion dollars is a staggering amount for any industry to
absorb--and, indeed, no other private sector has been asked to finance
national security costs.
The burden falls with particular weight on U.S. airlines in light
of our current, unprecedented financial crisis.
Mr. Chairman, it is the belief of the airline industry that the
government had every intention of paying for the new security
requirements when it passed the Security Act last year--and, certainly,
the purpose was not to worsen airlines' plight by these actions.
Today, in keeping with that original intent, we are asking for
relief for the airlines from the costs of fighting the war on terrorism
and providing national security for our citizens--responsibilities that
are fundamentally governmental functions, appropriately paid for by the
U.S. Government.
However, Mr. Chairman, while the industry's crisis makes swift and
decisive action essential, we want to be clear that we are not asking
Congress for special treatment, or for what has sometimes been termed a
``bail out.''
Specifically, we are not here today to request aid related to any
portion of our industry's losses which are the result of economic and
competitive challenges--that would constitute a bail out.
Those marketplace factors are the responsibility of airlines
themselves, to be solved using the tools of the free market--and we
accept that responsibility.
Now, to provide context for why speedy action on this matter is
required for the stability of the air transportation system, I'd like
to begin with a brief industry overview.
Referencing Exhibit 1 in the charts attached to my statement today,
you can see that in 2001, industry losses for the nine major airlines
totaled $7.4 billion.
As the footnote indicates, these losses would have reached nearly
$10 billion without the aid provided by this Congress as part of the
Air Transportation Safety and System Stabilization Act of 2001.
You can see also that airline stock analysts' estimates for 2002
currently reach as high as $7 billion.
This is one of the most discouraging numbers in this presentation,
since the expectation had been that losses would be substantially
reduced for 2002 as the industry fought its way to recovery.
The next page, Exhibit 2, illustrates that, as of June 2002,
airline debt has grown by $18 billion, a 21 percent jump since January
1, 2001.
The industry, in effect, has funded growing losses with huge
increases in debt, weakening substantially airline balance sheets that
were already weak prior to September 11.
The average carrier now has a debt to capitalization ratio in
excess of 90 percent--far higher than the average ratio for all
publicly held corporations.
Except for Southwest, the bonds of all other carriers are now rated
as ``junk bonds'' by Standard and Poor's.
In the face of such challenges, airlines have acted quickly to cut
losses by adjusting operations to meet the new demand environment.
Since September 11, the major U.S. carriers \1\ alone have trimmed
costs by $14 billion in a series of difficult steps with far-reaching
consequences:
---------------------------------------------------------------------------
\1\ Source: SEC filings of American, Continental, Delta, Northwest,
United and US Airways
---------------------------------------------------------------------------
These self-help measures are illustrated on the chart marked
Exhibit 3:
The six major hub-and-spoke carriers have cut operating
expenses by $8.7 billion or 13 percent, and many airlines are
also working through the painful process of renegotiating labor
contracts to further lower costs.
We've removed 86.8 billion available seat miles, or ASMs,
from the system, a 15 percent reduction, and 267 aircraft from
the fleet.
These cuts have resulted in unfortunate service reductions for
many cities and towns and, for the international carriers, even
the elimination of service to some countries.
And we've also cut capital expenditures by $5 billion, or 49
percent, affecting the economic health of the industries that
supply goods and services to airlines and putting important
technology-based customer service improvements on hold.
Commensurate with this reduced capacity and fleet, in a step
that has been most difficult for all of us, 70,700 airline
employees have lost their jobs--representing fully 16 percent
of the people working for the hub-and-spoke carriers.
Even as the industry has struggled with its unique challenges,
another source of financial stress has occurred as a result of the fall
in the value of financial investments--namely the increasing need to
deal with underfunded pension plans.
This is shown on Exhibit 4.
At the end of year 2000, assets in airline pension plans amounted
to $34.8 billion, which was slightly below the projected benefit
obligation.
This year 2000 gap indicated normal fluctuations that occur in
pension assets and liabilities.
But by 2001, reflecting heavily the drop in the stock market and
changes in interest rates used for asset and liability estimates, the
gap had grown to $12 billion.
Now, and in the upcoming year at least, substantial expense and
cash contributions to pension plans will be required by many airlines
during a time when the industry can least afford such contributions.
We can all hope that the financial markets improve soon, since that
recovery would clearly help in relieving this problem.
But in the near term, it will cost the industry a lot to deal with
the pension funding issues.
Now, though costs have been cut, the most obvious reason for the
industry's continued losses is that revenue remains depressed--running,
as a sorrowful point of context, at levels last seen in 1996.
This reflects the development of a deeply troubling trend, which is
indicated on the chart marked Exhibit 5.
For 20 or more years prior to 9/11, airline fares correlated
closely with the GDP--fluctuating near .95 percent of GDP.
But following September 11, this connection appears to have become
unhinged, with revenue amounting to only .7 percent of GDP.
This is a huge change and, at the moment, there is no indication
that the correlation will improve in the near-term.
While economic factors may play some role, this clear and dramatic
de-linking also suggests strongly that the airlines' revenue shortfall
is closely associated with the events of 9/11 and its aftermath.
Mr. Chairman, let me note at this point, that our industry has
fully supported the Aviation Security Act and the important
improvements that have followed, even as we may have issues with some
specific techniques.
Yet as time passed following 9/11, we began to observe that the
upward trends in passenger traffic were not yielding any bottom line
improvement--cost reductions notwithstanding.
This led us, starting in the second quarter, to begin scrutinizing
a new source of spiraling financial pain--security costs.
When we at Delta analyzed the cost or lost revenue for our airline
related to the government-related items shown in Exhibit 6, we found
the magnitude of the post-9/11 financial impact to be extraordinarily
surprising.
Let me review those with you now:
New security tax of $2.50 per segment--$265 million
This security tax was imposed on airline tickets to help offset
the federal cost of security and was intended to be passed on
to passengers.
But airlines have no current pricing power, simply because our
supply of seats so far exceeds passenger demand.
In this high-capacity, low-demand environment, airline
customers do not have to accept price increases--and they
don't.
They shop on the Internet for the lowest possible price, for
example, so airlines by necessity end up absorbing the new tax.
This converts what was intended to be a price add-on to an
expense, so the tax has become a direct hit to our bottom line.
Increased terrorism insurance costs--$150 million
Terrorism insurance was essentially a throw-in item for our
airline insurance program prior to September 11, costing Delta
only $2 million in 2001.
Following September 11, premiums rose by an incredible $150
million for 2002.
Revenue losses due to new restrictions imposed on air
carriage of U.S. mail as well as on freight shippers--$90
million
This loss is due to the elimination of airlines' right to carry
mail over 16 ounces in the cargo holds of our planes, as well
as restrictions on the number of shippers we can serve.
The cargo carriers have been a major beneficiary of these
rulings.
Unreimbursed costs for cockpit door fortification--$20
million
The government has paid a portion of the initial cockpit door
modifications, but $20 million remains unfunded--and additional
fortification costs are still ahead.
Loss in potential seat revenue as part of the Federal Air
Marshal program--$35 million
Federal air marshals occupy space in the cabin closest to the
cockpit, generally high-premium first class seats which the
airlines can no longer sell.
Other mandated but unreimbursed security costs--$60 million
This category includes the costs to meet new requirements for
increased ramp security, document verification, and screening
of catering supplies.
DOT-imposed fee for passenger screening costs--$40 million
The DOT has chosen to exercise discretionary authority to
impose monthly fees for additional screening cost
reimbursement.
Adding the financial impact of all these categories together--the
new security tax, increased insurance costs, new restrictions on U.S.
mail and freight, mandated cockpit door fortification, other
unreimbursed security costs, and the monthly fee to the DOT--the 2002
estimated impact on Delta is $660 million.
In addition to these items, pending legislation to arm pilots and
provide self-defense training to flight crews could create large new
unfunded mandates.
Also, the current TSA plan to implement new screening requirements
for checked baggage by the end of 2002 has enormous potential to impact
the industry with new costs, including increased staffing demands and
reduced efficiencies.
Now, the numbers just presented are Delta numbers--airlines have
not yet made a full survey to judge the industry wide impact.
However, given that Delta represents just over one-sixth of the
industry, we can roughly extrapolate to the rest of the industry by
multiplying Delta's numbers by slightly more than six.
The resulting rough estimate for the total post 9/11 security-
related impact on the U.S. airline industry would be about $4 billion.
Now, based on current estimates, this $4 billion government-imposed
impact could account for up to 35 percent of the industry's pretax
operating losses for 2002.
But, Mr. Chairman, the numbers presented so far do not account for
another security consequence which has received much criticism and done
major damage to airline revenues--the so-called security ``hassle
factor.''
Delta has conducted market research to determine the revenue loss
resulting from the hassle factor--and we believe it accounts for
roughly 20 percent of our revenue drop from 2001 to 2002.
That amounts to almost $410 million of the annual revenue loss for
Delta--or, extrapolated to the other airlines, about $2.5 billion for
the industry as a whole, as you can see in Exhibit 7.
Adding the hassle factor to the items I listed earlier, the
extrapolated security-related impact on the airline industry could be
on the order of $6.5 billion--providing a key explanation for the
extreme degree of financial trouble the industry is experiencing.
Now, as I noted earlier, it is the airline's responsibility to deal
with the marketplace factors of the current industry crisis.
The major reductions in fleet capacity, capital expenditures,
expenses, and--most regrettably--personnel, give evidence of the hard
steps already taken.
However, as I have described, the industry's ability to address the
current crisis has been seriously limited by the high and unanticipated
costs of well-intended post-9/11 actions by the government.
We recognize that the Committee has already provided flexibility
for airports unable to meet the Explosive Detection System screening
requirement at the end of the year, and we applaud this step.
We are also pleased that the Committee's bill, S. 2949, would
provide government terrorism/war risk reinsurance through next year.
Therefore, in addition to supporting enactment of these provisions,
we are also here today to ask you to consider a five step legislative
agenda:
1. Eliminate the $2.50 security ticket segment tax.
2. Immediately authorize airlines to carry U.S. priority mail.
3. Obtain reimbursements to the airlines for unfunded security
mandates.
4. Eliminate the monthly security fees airlines are currently
paying to the Department of Transportation.
5. For any armed-pilots program or cabin crew self-defense
training, ensure that associated costs are not levied on the
airlines.
We ask you for your support in the rapid implementation of these
initiatives for two important reasons.
First, as I noted earlier, we believe the government generally has
expressed through legislative intent--that increased aviation security
should be viewed as an appropriate national security response to the
September 11 national attacks which used airlines as the instruments of
destruction.
As a result, these costs should be funded through the national
security funding mechanisms, not as taxes or costs imposed
specifically on airlines.
Secondly, as the final point for today, we ask for that help
because aviation is key to our nation's economic health.
The statistics are well known:
Airlines are a vital infrastructure for U.S. commerce, carrying
620 million passengers and 22 billion ton miles of cargo each
year.
Air travel makes a significant contribution to the $700 billion
travel and tourism industry, which employs approximately 1 of
every 7 people in the U.S. civilian labor force. \2\
\2\ Source: Travel Industry Association of America
---------------------------------------------------------------------------
Airlines' directly provide approximately 1 million jobs.
We pay $17.7 billion in taxes--$10 billion of those at the
federal and state level.
And airlines provide an essential social and business link between
America's cities and its smaller communities.
Removing the national security burden from the airlines as outlined
in these five steps is crucial not only to my industry, but to the
millions of people, businesses, and organizations that depend on a
secure, healthy, and efficient air transportation system.
Mr. Chairman, I want to end on one important conceptual point.
We are not asking the government, through this hearing, for special
treatment.
We are asking for an end to special treatment--for relief from the
government-imposed consequences of the war on terrorism now uniquely
borne by the airline industry.
Thank you.
Senator Dorgan. Mr. Mullin, thank you very much.
Next, we will hear from Ms. Susan Donofrio, accompanied by
Allison Poliniak, Deutsche Bank Securities, New York City.
STATEMENT OF SUSAN DONOFRIO, SENIOR U.S. AIRLINE
ANALYST, DEUTSCHE BANK SECURITIES, ACCOMPANIED
BY ALLISON POLINIAK
Ms. Donofrio. Yes, I will be speaking--I am an airline
analyst for Deutsche Bank Securities, and I just cover the
major----
Senator Fitzgerald. Can you bring the microphone closer?
Ms. Donofrio. Mr. Dorgan, Members of the Committee, I do
appreciate the chance to address the Committee on the current
state of the U.S. airline industry. What I would like to focus
upon today is the current financial state of the airline
industry and how it has been impacted since September 11th's
tragic events a year ago.
With respect to our expectations prior to September 11th,
going into 2001, we actually thought it would be another banner
year for the airlines, and this was due to robust demand.
However, revenue quickly turned sour as demand faltered due to
the softening economy. This was evident in business demand for
the industry, which dropped 41 percent year over year from
January to July.
Acting responsibly, as opposed to the 1980's, most U.S.
airlines have shown a very quick response with respect to
reining in capacity growth. There was also a move by the
industry to scale back whatever costs they could. Even in the
face of this, it was still going to be a year of substantial
losses going into the tragic events of September 11th. Much of
this is due to unavoidable costs such as wages, fuel,
maintenance, as well as the soft demand. Our net loss estimate
prior to September 11th last year was a decline in net income
for the majors of roughly $4 billion for 2001. This was getting
close to the $4.8 billion loss that the industry sustained in
1992, the worst year during the past airline downturn.
With respect to the airline industry post 9/11, certainly
the $5 billion grant, along with $10 billion in loan
guarantees, certainly stemmed what could have been even more of
a disastrous financial year. In sum, the 9 U.S. majors
sustained over $7 billion in losses, sharply eclipsing the
level of losses in any 1 year of the early 1990's.
As we started to move further away from September 11th, it
did appear that there were some signs of a revenue recovery,
and we began to become a little more optimistic. This proved to
be short-lived, however, as rebounding demand began to falter.
This is evident in pricing and revenue data.
With respect to demand, not only did overall traffic growth
falter, but we have statistics that show that short haul
traffic has declined disproportionately more than longer haul
traffic. We think it is due to the increased hassle factor,
taxes, and overall economic sluggishness that have caused
passengers to either drive or stay at home altogether.
The industry also continues to grapple with increased fees
and taxes that now have grown to represent 26 percent of the
price of an airline fare versus 15 percent in 1992, and 7
percent in 1972. This is even greater for the low fare
airlines, representing over 30 percent of the price of their
airline fares.
Last, the recent surge in fuel prices has also become quite
burdensome from a cost standpoint, since every $1 change in the
price of crude oil results in an additional $140 million in
annual operating costs for the 9 majors.
From a leverage standpoint, long term outstanding debt,
including the capitalization of off-balance-sheet operations
for the 9 majors, stands at approximately $94 billion, versus
$88 billion at year-end 2001. The net debt, the cap ratio for
most of the majors, is currently well over 80 percent.
What this tells us is that just renewing the loan guarantee
program to the industry may not be such a good idea, since the
industry is already burdened with a very heavy debt load. Many
of these companies therefore become even more highly leveraged.
What may, in fact, happen is that very weak carriers may be
forced to cut fares to cover the loans from the Government,
weakening the stronger airlines. We therefore believe that the
solution is likely to be some type of tax relief for the
airlines, especially if an Iraqi conflict further exacerbates
the airlines' already tenuous financial position.
Why is this downturn different from the one in the early
Nineties? From a revenue standpoint, the duration of the
revenue weakness has already been more prolonged, and much more
precipitous. Based on a weak economy, the lack of any pricing
power, airport hassle factor, fears of terrorism, continued
oversupply and the possible upcoming Iraqi conflict, we
anticipate that we are not likely to see a meaningful revenue
rebound until 2004 at the earliest.
From a cost perspective, while it appears that the airlines
have been reining in what they can, taxes and fees, as well as
labor costs, have been increasing at rapid rate, far outpacing
inflation and yields. This is putting further pressure on an
already financially challenged industry, further exacerbating
the cost side of the equation, and certainly a sizable increase
in post 9/11 security insurance-related costs. Our estimate is
that these costs have put an additional cost burden to the
industry of $3.5 to $4 billion.
Our expectation going forward is a net loss of $5.7 billion
for the 9 U.S. majors in 2002, and $2 billion loss in 2003.
Given higher than expected oil prices and what appears to be an
imminent Iraqi invasion, we think that this amount is likely to
be a best case scenario.
So what do we think should be done? With respect to
Government intervention, we think that immediate tax relief
should help stem industry losses, since the U.S. airlines have
been hit so much harder than their international counterparts.
In addition, there needs to be some cost relief with respect to
post 9/11 security-related costs, which we again estimate
roughly $3.5 to $4 billion.
Now, turning to the airline managements, and more
specifically the big six--American, Continental, Delta,
Northwest, United, and US Air--what do we think they should do?
We think they need to figure out how to adapt to what appears
to be a new operating environment. On the revenue side, this
means figuring out how to adjust to a more competitive revenue
environment as well as the weak economy.
In addition, we think that many airline managements need to
do a much better job in pricing their product. It is evident in
the average business fare that we believe is now over seven
times the average leisure fare, causing many business
passengers to very easily justify trading down to lower fare
levels with even more fare restrictions. In addition, while we
have been very impressed with capacity scale backs, they have
not been enough to stem the tide of weak demand.
On the cost side, these airlines have to continue to attack
their overall cost structures that have not been able to
support the drop off in demand and pricing.
I hope you will look at my testimony. I have got a lot of
graphs and exhibits in there. Thank you so much for your time
and the opportunity to speak before this Committee.
[The prepared statement of Ms. Donofrio follows:]
Prepared Statement of Susan Donofrio, Senior U.S. Airline Analyst,
Deutsche Bank Securities, Accompanied by Allison Poliniak
Mr. Chairman and Members of the Committee:
I appreciate the chance to address the Committee on the current
state of the U.S. airline industry. What I would like to focus upon
today is the current financial state of the airline industry and how it
has been impacted since September 11th's tragic events a year ago.
Our Expectations Prior to September 11th
Going into 2001, we thought that this would be another banner year
for the airlines due to robust demand. However, revenue quickly turned
sour, as demand faltered due to a softening economy. This was evident
in business demand for the industry, which dropped 41 percent year-
over-year from January to July.
Acting responsibly (as opposed to the 1980s), most U.S. airlines
have shown a very quick response with respect to reining in capacity
growth. There was also a move by the industry to scale back whatever
costs they could. Even in the face of this, it was still going to be a
year of substantial losses going into the tragic events of September
11th. Much of this is due to unavoidable costs such as wages, fuel, and
maintenance, and soft demand. Our net loss estimate prior to September
11th was a decline in net income for the majors of roughly $4 billion
for 2001. This was getting close to the $4.8 billion loss that the
industry sustained in 1992, the worst year during the past airline
downturn.
The Airline Industry Post 9/11
No Sign of a Revenue Recovery
The $5 billion cash grant along with $10 billion in loan guarantees
certainly stemmed what could have been even more of a disastrous
financial year. In sum, the 9 U.S. majors sustained over $7 billion in
losses, sharply eclipsing its level of losses in any one year of the
early 1990s.
As we started to move further away from September 11th, it appeared
that there were some signs of a revenue recovery and we began to become
more optimistic. This proved to be short-lived, however, as rebounding
demand began to falter. This is evident in pricing data, which we have
charted against the average of historical (monthly from 1990-2000, a
full business cycle) pricing data in order to get a better view as to
what is really occurring in overall pricing.
Senator Dorgan. Ms. Donofrio, thank you.
Last, we will hear from Mr. Edward Wytkind. Mr. Wytkind is
executive director of the Transportation Trades Department at
AFL-CIO. Mr. Wytkind.
STATEMENT OF EDWARD WYTKIND, EXECUTIVE DIRECTOR, TRANSPORTATION
TRADES DEPARTMENT, AFL-CIO
Mr. Wytkind. Mr. Dorgan, Members of the Committee, thank
you for having me here. I am pleased to appear on behalf of our
35 member unions in the AFL-CIO transportation labor movement.
You know, the events of 9/11 will forever remind airline
workers that this industry has changed forever. If you are a
pilot, a mechanic, a flight attendant, a fleet or customer
service or other employee of this industry, the events that
unfolded on that day were especially horrendous. For the first
time in America's aviation history, as everyone knows, a U.S.
airliner was in our skies and used as a weapon of destruction
against the United States.
Not a day passes for a worker in this industry when he or
she is not confronted with that horror, and not a day since 9/
11 has passed without the airline unions and the AFL-CIO
reaffirming their collective pledge to never, and we mean
never, allow the Nation's transportation system to be a venue
for acts of terror against the United States.
Obviously, air travel in America will never be the same. As
we build a multilayered system of security, this system we
believe is now part of our national security. In other words,
business as usual has changed forever and, indeed, our members
after 9/11 were the first to bear the brunt of the economic
consequences of this act.
A year later, this industry has not rebounded. You have
already heard all the data. I do not need to restate it. And
despite the good intentions of Congress with the airline rescue
legislation, tens of thousands of workers in our industry are
either laid off or face the uncertain future of downsized and
possibly bankrupt carriers.
As we evaluate the state of the industry, we also have to
look at the weakness of the overall economy. More than 8
million Americans are out of work. 2.8 million of those workers
have been jobless for 15 weeks or more. Senator Dorgan is
right, despite Larry Lindsey's rosy analysis, this is a lousy
economy and our Government has not done enough about it.
430,000 workers ran out of unemployment insurance in July. That
is an increase of 67 percent since last year. Unemployed
workers today have the dubious distinction today of making the
top 10 list of worst months of unemployment insurance
exhaustion since the Labor Department began monitoring that
data.
As the airlines have racked up their record losses that
again will approach $7 billion this year, workers have suffered
immensely, and they brace for the additional economic hit they
will take if, as it appears likely, we go to war in Iraq.
Aviation industry workers, including employees of airlines,
Boeing and aerospace suppliers and airports, have suffered
unprecedented job loss. 100,000 airline workers out of work,
another 30,000 Boeing workers out of work, 51,000 additional
aerospace workers jobless, but the multiplier effect is what is
most startling. If you look at the total data and the total
numbers of all the sectors of this industry, every airline
worker translates into 18 jobs in the U.S. economy.
As Congress and this Committee responded to the economic
crisis facing the airlines last fall, it enacted a package of
assistance supported by our organization that included $5
billion in direct assistance and $10 billion in loan
guarantees. While the legislation failed to provide relief to
jobless airline workers that we had fought for, the bill did
create a framework designed to give air carriers a chance to
recover from the staggering losses of 9/11.
Unfortunately, the loan guarantee program administered by
the so-called ATSB has not lived up to the expectations of this
Committee and of Congress. Nothing in the emergency relief
legislation was intended to saddle applicants with such onerous
requirements that would actually deter them from applying for
assistance, and Congress hardly intended for the ATSB to
exercise such broad powers to directly intervene in the
collective bargaining process, as it has on so many occasions.
To correct the record, to this day only one applicant,
America West, has secured a loan guarantee. American Transair
ATA last week received conditional approval. That is a fancy
word for ``you don't get the money yet,'' and US Airways'
attempt to get the loan guarantee never really happened,
because they submerged into bankruptcy protection after trying
to jump over every hurdle erected by the ATSB.
What is clear is that these applicants and many others were
subjected to a bureaucratic and unwieldy process, as well as
grossly unrealistic demands for wage concessions and other
concessions that did not reflect the will nor the intent of
Congress.
Mr. Chairman, I would like to submit for the record a
policy resolution that was adopted by our 35-member executive
Committee yesterday calling for Congress to curb the ATSB
overreach into the collective bargaining process and to
expedite the loan guarantee process and to extend the arbitrary
deadline for submitting applications to the board.
Senator Wyden. (presiding) Without objection, we will put
that in the record.
Mr. Wytkind. Thank you. Regarding the need to address the
industry's massive costs associated with national security, let
me offer a couple of observations. The airlines have offered a
number of legislative solutions intended to relieve them of
what they term as excessive costs relating to the war on
terrorism. We believe, frankly, and in short, that this
assistance is warranted, but it must also include something for
laid-off workers in this industry.
We must come to grips with the fact that workers are
suffering. We must also come to grips with the fact that the
airline security regime we now have in place really has become
a part of our national responsibility, and an important element
of national defense and homeland security. We agree that things
like assistance on war risk insurance and helping reimbursement
of costs that are currently being borne by this industry ought
to be considered by Congress, and ought to be considered
quickly, and we agree that a war with Iraq would have very
dramatic consequences for this industry, its workers, and
thousands of communities Nation-wide.
The fact is that aviation security is now a major objective
of our homeland security in this country. With the war on
terrorism growing in size and intensity, the importance of U.S.
airlines and their workers will grow as well. We are urging
Congress and the President to insulate the airlines, their
employees and passengers and communities, from paying an
astronomical piece for national security. The costs are
unsustainable unless Congress funds them through the national
security and defense funding mechanism, not as expenses imposed
on airlines; but the needs of airline workers must be a part of
that effort.
One of our most bitter disappointments was the inaction,
following 9/11, of our Government to provide laid-off workers
with relief. Last fall, as many of you know, we mobilized
behind Senator Carnahan's efforts to provide worker relief, to
provide extended unemployment training or retraining and health
care for workers who were laid off.
Although a filibuster killed the Carnahan bill, we received
56 votes. Airline workers and their families owe a debt of
gratitude to Senator Carnahan and many of you on this Committee
who supported this effort to try to help the working men and
women of this country. We intend to keep fighting for laid-off
workers, and we will not stop until they receive what they
deserve, which is assistance at their most darkest hour.
We have a four point plan: 26 weeks of extended
unemployment compensation, a 75 percent health care subsidy,
training and retraining, and a new provision is to try to
provide enforceable hiring preference for laid-off airline
workers to apply for these thousands and thousands of unfilled
TSA security jobs.
To wrap up, let me just say that we must work together to
find the measures needed to instill confidence in the American
traveler. Until the American traveler comes back to the safest
airline industry in the world and demonstrates that he or she
is confident that we are doing everything we can to make air
transportation safe, this industry's finances will continue to
suffer. More resources will be needed to ensure the proper
deployment of security measures, and Congress must finance more
of the extraordinary costs associated with meeting these
important security needs.
We will not, however, support the unwarranted rollback of
aviation security requirements simply because of cost. Indeed,
we will join in making the case for the Federal resources, but
we cannot support actions that will ultimately contribute to
air travelers' already shaken confidence, and as you and the
Bush administration consider ways to expedite the movement of
passengers through security checkpoints, perhaps with some type
of trusted traveler program, we urge you to come up with a
trusted employee program, and help the workers become
credentialed so that they can also move in and out of airports,
get to their jobs, and not cause more delay and contribute
further to the so-called hassle factor.
In the weeks and months ahead, we will advocate for
policies that will reverse the shaken confidence of air
travelers. We will insist on resources to cover the industry's
national security costs. We will join the debate over the
unfunded security costs being borne by the airlines, and
whether they are intrinsically linked with defending our
homeland security. We will defend the collective bargaining
rights of aviation employees and oppose attempts by certain
parts of the airline industry to take away the basic bargaining
rights of our members.
Senator Wyden. I am sorry, at this point if you could just
summarize.
Mr. Wytkind. In summary, we are going to work very hard to
represent our members, to secure this industry from the costs
that are being imposed, and we look forward to working with
this Committee to accomplish that goal.
Thank you.
[The prepared statement of Mr. Wytkind follows:]
Prepared Statement of Edward Wytkind, Executive Director,
Transportation Trades Department, AFL-CIO
My name is Edward Wytkind. I am the Executive Director of the
Transportation Trades Department, AFL-CIO (TTD). I am pleased to appear
before you on behalf of the 35 affiliates including the member unions
of our Aviation Coordinating Committee. \1\ Mr. Chairman and Members of
the Committee; thank you for allowing us the opportunity to share our
views on the state of America's airline industry.
---------------------------------------------------------------------------
\1\ Attachment 1 is a list of TTD's 35 member unions.
---------------------------------------------------------------------------
While I know you will hear a great deal about the many economic and
policy issues that are contributing to this industry's severely
depressed state, I would like to offer the perspective of
transportation labor and specifically the hundreds of thousands of men
and women employed in the aviation industry who form the backbone of
air transportation in this country.
America watched with disbelief and horror as the events of
September 11 played out before our eyes. For the dedicated workers in
this industry, the attacks were especially horrendous--for the first
time in America's aviation history a domestic air carrier, our members'
workplace, was used to carry out an act of terrorism in the United
States. As you know, 33 pilots and cabin crew members died on-board the
aircraft used as weapons of destruction. Several hundred more union
members, from firefighters and police whose courageous acts still
inspire us, to those who simply went to work that day, perished as
well.
Obviously, in the days, weeks and months that followed, the
nation's airline workers--our members--knew that air travel in America
would never be the same. We recognized immediately that security would
take on significantly greater importance and that business as usual was
going to change. And indeed, immediately after September 11 our members
were the first to bear the brunt of the economic consequences of this
horrendous act of terror. A year later, this industry has not rebounded
and tens of thousands of airline employees are either laid-off or face
the uncertain future of downsized and possibly bankrupt airlines. In
addition, unless Congress extends unemployment benefits before it
adjourns, these laid-off employees will exhaust their benefits and will
face a future with no hope of receiving even the most basic government
assistance.
State of Economy and Aviation Industry
At the outset, let me state that no one cares more about the safety
and the economic health of the aviation industry than the employees
whose livelihoods depend on strong airlines. We agree that something
must be done to stabilize this vital sector of our economy. We cannot
lose sight of a simple fact: for airline workers and their families,
the survival of this industry means the ability to pay the mortgage,
send the kids to college and protect retirement security. In this
slumping economy, when a worker gets a pink slip, the economic security
that he or she fought so hard to obtain can disappear without warning
and with little recourse. And for the millions of Americans who rely on
air service, we must stop this industry's financial tailspin and do
everything we can to ensure their safety and security.
As we evaluate the state of the airline industry, we must also look
to the continuing weakness of the overall U.S. economy. There are
currently more than 8 million Americans out of work, with 2.8 million
workers being jobless for 15 weeks or more. Nearly 430,000 workers ran
out of unemployment benefits in July--an increase of 67 percent over
last year. Unemployed workers today have the dubious distinction of
making the Top 10 list of ``worst months'' of unemployment insurance
exhaustion since the Department of Labor began tracking this data three
decades ago. There is still no sign of turnaround in the manufacturing
sector--including aircraft producers such as Boeing--where almost 1
million workers have lost their jobs in the last year.
This desperate situation facing working families is what inspires
the labor movement to demand action by Congress and the President to
extend unemployment benefits and to provide assistance to the millions
of men and women who face a future with little hope of obtaining long-
term employment and with the very real prospect of losing health care
insurance. It seems to us that the greatest economic power in the world
should be able to find the political will and the resources to stop the
hemorrhage in our economy and protect the livelihoods of so many
Americans who are suffering.
With that backdrop, one of the hardest hit segments of the economy
is the airline industry. We have all seen the data and it paints a
bleak picture for airlines, their workers, air travelers and the
economy. According to the Air Transport Association, airline industry
losses in 2001 were $7.7 billion. Projected losses in 2002 may again
exceed $7 billion and in 2003 the situation may improve slightly, but
in the process service and jobs will be slashed, aircraft purchases
will be deferred and canceled, and travelers will pay the price with
diminished choice, lost frequency and a lower quality of service. The
forecast will surely worsen however if, as it appears likely, we go to
war with Iraq. A hike in fuel prices alone will have an immediate and
devastating impact.
Aviation industry workers, including employees of airlines, Boeing
and aerospace suppliers, and airports, have suffered unprecedented job
loss and economic uncertainty. Some 100,000 airline employees are out
of work or facing imminent lay-off. Another 30,000 Boeing workers are
laid-off along with 51,000 additional aerospace employees. But it is
the multiplier effect of airline lay-offs that is most startling.
Airline industry data show a combined workforce exceeding 600,000.
However, the total workforce, if related job sectors such as airports,
aircraft manufacturing and suppliers are included, totals 10.9 million.
In other words, one airline worker translates into 18 additional jobs
in our economy. And with bankruptcies looming large, it is easy to
conclude that the staggering job losses will only grow.
Proposed ``Fixes''
Unfortunately, at a time when this industry needs to collaborate
with its employees to reverse this severe financial downturn, it
appears some want to direct attention at ``scapegoat'' issues that
attach blame for these problems to airline employees and their
collective bargaining rights. As we have demonstrated time and again,
aviation labor is dedicated to preserving the future of this industry
but will oppose those who would have Congress believe that the latest
financial crisis can be ``solved'' on the backs of airline workers.
As Congress and this Committee responded to the economic crisis
facing the industry last fall, it enacted a package of economic
assistance, supported by TTD, that included $5 billion in direct
assistance and $10 billion in federal loan guarantees. While the
legislation failed to provide relief to jobless airline and other
industry workers as we had insisted, the bill did create a framework
that was expected to give air carriers the chance to recover from the
staggering losses associated with 9/11. Unfortunately, the loan
guarantee program, administered by the newly created Air Transportation
Stabilization Board (ATSB), has not lived up to the expectations of
Congress.
The fact is that nothing in the emergency relief legislation was
intended to saddle applicants with such onerous requirements that would
actually deter air carriers from taking advantage of this important
assistance. Moreover, it was not the intent of Congress to allow the
ATSB to exercise such broad powers to directly intervene in the
collective bargaining process in carrying out its responsibilities.
To this day, one applicant, America West, has secured a loan
guarantee. American Trans Air (ATA) last week received conditional
approval for a $150 million loan guarantee. And US Airways' attempts to
seek a loan package met with such resistance from the ATSB that the
airline eventually filed for bankruptcy protection. What is clear is
that these applicants and many others were subjected to a bureaucratic
and unwieldy process as well as grossly unrealistic demands for
employee wage concessions that did not reflect the will nor the intent
of Congress. A bipartisan Congress moved quickly to shore up a vital
industry and its workforce and clearly intended to build a bridge from
9/11 to a day when the industry's financial fortunes would stabilize.
That underlying principle has hardly defined the ATSB's work to date in
processing applications for federal assistance. Mr. Chairman, I would
like to submit for the record a policy resolution that was adopted
yesterday by our Executive Committee which calls on Congress to curb
the ATSB's overreach into the collective bargaining process, to
expedite the loan guarantee process and to extend the arbitrary
deadline for submitting applications to the Board. \2\
---------------------------------------------------------------------------
\2\ Attachment 2 is TTD's policy resolution ``The Air
Transportation Stabilization Board Must Comply with Congressional
Intent''
---------------------------------------------------------------------------
There are some policy proposals that should be debated. The major
airlines have offered a number of legislative solutions intended to
relieve them of what they term as ``excessive'' federal fees and costs.
It is certainly understandable why the industry's attempts to gain
additional economic relief from the government have drawn criticism
from some in Congress, especially since we continue to witness air
carrier inspired legislative attacks on the rights of airline workers.
Our members have grown accustomed to the airlines' tactic of ``blaming
someone else'' when economic trouble strikes.
Nevertheless, although the dedicated employees of this industry are
weary of these tactics, Congress should consider the industry's
economic relief proposals in the context of finding ways to stabilize
the deteriorating finances of airlines and halt the alarming rate of
lay-offs and furloughs. Overall, our government must come to grips with
the fact that airline security is a national responsibility and has
become an important element of our national defense and homeland
security. We agree with the contention that certain costs, such as the
deployment of new security technologies and the staggering price for
``war risk'' insurance, cannot be financed entirely by the airline
industry and its employees. Furthermore, a war with Iraq could have
consequences from which the industry, in its current fiscal state, may
not recover. The fact is that aviation security has become one of
America's top homeland security objectives. Congress will, of course,
have to ensure that whatever temporary or long-term relief is afforded
to the airlines does not come at the expense of funding needed for our
air traffic control system and airports.
The airline industry is far too important to our economy and our
national security to allow the current fiscal tailspin to continue.
With the war on terrorism growing in size and intensity, the importance
of U.S. airlines--and its workforce--will grow as well. We are urging
Congress and the President to insulate the airlines, their employees
and passengers from paying the astronomical price for national security
responsibilities that should be part of our national defense and
homeland security. Clearly, this industry is being saddled with
expenses related to the war on terrorism, which is a federal
responsibility. These costs are unsustainable unless Congress funds
them through the national security and defense mechanisms, not as
expenses imposed on the airlines.
Transportation labor will work with the carriers to urge Congress
to take action before it adjourns but we cannot push for a package of
airline assistance related to the war on terrorism if it fails to
include relief for jobless aviation industry workers.
Relief for Workers
Even as Congress and the President consider providing additional
assistance to the airlines, we remain committed to securing federal
assistance for the skyrocketing number of laid-off workers. \3\ One of
our most bitter disappointments is the inaction of our government to
help the thousands of aviation industry workers who, through no fault
of their own, lost their jobs following the 9/11 attacks. Last fall, we
mobilized behind Senator Carnahan and her worker relief bill to provide
extended unemployment benefits, training and retraining assistance and
a health care safety net for laid off airline industry workers.
Although the bill was killed by Republicans who waged a filibuster,
airline workers and their families owe a debt of gratitude to Senator
Carnahan for her dedication, hard work and unwavering support to this
day. Senator Carnahan, transportation labor intends to continue this
fight with you. We will not again allow hollow promises to put off what
is the right thing to do for airline workers.
---------------------------------------------------------------------------
\3\ Attachment 3 find a policy resolution unanimously adopted on
October 1, 2002 by TTD's Executive Committee, ``The Aviation Industry
and the War on Terrorism.''
---------------------------------------------------------------------------
We propose a four point plan that would provide laid off airline
industry workers with (1) 26 weeks of extended unemployment
compensation, (2) a 75 percent federal subsidy for health care
coverage, (3) training and retraining assistance, and (4) hiring
preference for laid off airline workers to fill the thousands of
remaining federal security positions at the TSA.
The same rationale that led Congress to enact emergency legislation
providing $15 billion in relief for air carriers should have inspired
lawmakers to do the right thing for workers who endured economic
hardship of unprecedented proportions. This is especially disturbing
since it appears that the turnaround we had hoped for will not
materialize anytime soon and at the same time laid-off workers are
bracing for pending bankruptcy reform legislation that would force them
to carry their debts for the rest of their lives.
We will not rest in our effort to convince Congress to pass an
extension in unemployment insurance and to finally address the fact
that too many Americans face a future without health insurance. To this
day, our members wonder why Congress and the President failed to
address the desperate needs of airline workers in their darkest days--
as the labor movement had advocated when the airline bail-out bill was
pending last fall--and why now Congress appears poised to leave for the
fall elections without finishing the job. Let it be stated today that
thousands of airline and other workers will exhaust their jobless
benefits and will lose their health insurance in the months between
congressional adjournment and when the 108th Congress convenes.
Security and Confidence in Air Travel
For airline workers nothing is more important than the security and
safety of the air transportation system--their workplace. For current
employees and future generations of workers in this industry, the
September 11 attacks will serve as a painful reminder of the many
unexpected dangers they face on the job. Both during and following
these brutal attacks, airline workers, air traffic controllers and
other government employees such as FAA technicians and inspectors
demonstrated their commitment, courage and skill. I urge you to
consider the contributions of employees, especially the thousands of
workers who reported to work just a few days after 9/11--when the
nationwide ground stop was lifted by our government, and to this day
staff the front lines of this nation's dedicated aviation workforce. I
also urge you to ensure that our government and the air carriers listen
to the workers in this industry who can offer hands-on experience in
developing and implementing aviation security measures. That was not
the case in the weeks following 9/11, as a number of proposals,
including those geared towards addressing passenger and cargo security
risks in the nation's airports, were developed without the input of
airline employees.
These issues are especially important because until we answer the
typical weary air traveler's questions about the safety and security of
air transportation, the economic state of this industry will continue
to erode. Airline workers know all too well that for our industry and
our nation to rebound and thrive, we must restore faith in the safety
and ease of air transportation in America. In other words, we must not
allow other issues to distract us from our mission: to bring the
American traveler back to the safest airline industry in the world and
to demonstrate our resolve to never again allow acts of terror to be
carried out in our air transportation system.
Congress has a large responsibility to play as well. We will
continue to push for more resources to ensure the proper deployment of
security measures and will join the airlines and the airports in
calling on you to fund more of the extraordinary costs associated with
meeting the nation's airline security needs. We will not, however,
support the unwarranted roll-back of aviation security requirements
simply because of costs; indeed, we will join in making the case for
more federal resources, but we cannot support actions that will
ultimately contribute to air travelers' already shaken confidence.
Worker training is especially important in these times, as training
under existing practices and federal mandates is not and never was
geared towards situations such as the 9/11 attacks. We are pleased to
see progress in this area but much more can be done that will
contribute greatly to the preparedness of our aviation workforce and,
by extension, to the security of air travel. We also hope this
Committee will urge the TSA to act promptly on the credentialing of
airline and airport employees and to develop and implement a new
security screening process for these employees.
We must also assert our strongly held view that aviation security
and workers' rights are compatible and not conflicting propositions.
Federal workers' rights to collectively bargain and whistleblower
protections have unfortunately become one of the core subjects of
disagreement in pending legislation to create a new cabinet level
Department of Homeland Security. This unfair assault on workers' rights
is especially disturbing to transportation labor as no one questioned
the important role in our homeland defense that air traffic controllers
and other FAA employees--essential members of our federal workforce--
played in carrying out orders to land almost 5,000 planes in about two
hours without serious incident or mishap. Their dedication and
commitment to defending the security of America was never questioned
and we urge Congress to move on with Homeland Security legislation,
leaving the collective bargaining rights of the new agency's employees
intact. Completion of this important legislation will contribute a
great deal to making Americans feel safer and more secure about flying.
Looking Ahead
Unfortunately, the future of the aviation industry is uncertain at
best. There is no uncertainty, however, about the importance of air
transportation to America. In the weeks and months ahead we will
advocate for policies that reverse the shaken confidence of air
travelers. We will insist on ample federal resources to cover the cost
of security. We will join the debate over the fees and taxes paid by
the airlines and consider what costs are intrinsically linked with
defending America's homeland security and thus should be borne by our
government. We will defend the collective bargaining rights of aviation
employees and oppose industry attempts to vilify our members who
struggle to manage through these difficult times. We will urge you to
ensure that all the benefits of the emergency relief legislation
enacted last fall are realized. And we will continue to push Congress
and the President to further extend unemployment benefit for laid-off
workers and to consider the millions of American workers who face the
loss of health care coverage in this reeling economy.
The labor movement is dedicated to stabilizing the finances of the
nation's airlines and securing our airways for the nation's air
travelers and our members. This industry is extremely crucial to our
economy, to every community in America and to millions of working men
and women.
We look forward to working with this Committee and thank you for
allowing us the opportunity to share our views.
______
Attachment I
TTD Affiliates
The following labor organizations are members of and represented by the
TTD:
Air Line Pilots Association
Amalgamated Transit Union
American Federation of State, County and Municipal Employees
American Federation of Teachers
Association of Flight Attendants
American Train Dispatchers Department
Brotherhood of Locomotive Engineers
Brotherhood of Maintenance of Way Employes
Brotherhood of Railroad Signalmen
Communications Workers of America
Hotel Employees and Restaurant Employees Union
International Association of Fire Fighters
International Association of Machinists and Aerospace Workers
International Brotherhood of Boilermakers, Blacksmiths, Forgers and
Helpers
International Brotherhood of Electrical Workers
International Brotherhood of Teamsters
International Federation of Professional and Technical Engineers
International Longshoremen's Association
International Longshore and Warehouse Union
International Organization of Masters, Mates & Pilots, ILA
International Union of Operating Engineers
Laborers' International Union of North America
Marine Engineers Beneficial Association
National Air Traffic Controllers Association
National Association of Letter Carriers
National Federation of Public and Private Employees
Office and Professional Employees International Union
Professional Airways Systems Specialists
Retail, Wholesale and Department Store Union
Service Employees International Union
Sheet Metal Workers International Association
Transportation Communications International Union
Transport Workers Union of America
United Mine Workers of America
United Steelworkers of America
______
Attachment 2
The Air Transportation Stabilization Board Must Comply With
Congressional Intent
In response to the government ordered ``ground stop'' on all
airline operations following the 9/11 terrorist attacks, Congress moved
quickly to pass and the President signed an emergency legislative
package of airline financial assistance. While the legislation ignored
the needs of laid-off workers, it provided $5 billion in direct cash
assistance and $10 billion in federal loan guarantees to offset the
massive losses incurred by the airlines due to 9/11. Unfortunately, the
loan guarantee program, administered by the newly created Air
Transportation Stabilization Board (ATSB), has not lived up to the
expectations of Congress.
Nothing in the emergency relief legislation was intended to saddle
applicants with such onerous requirements that would actually deter air
carriers from taking advantage of this important assistance. Moreover,
it was not Congress' intent to permit the ATSB to exercise such broad
powers to directly intervene in the collective bargaining process as it
has on several occasions. For example, right out of the box the ATSB
tried to impose a 7-year wage freeze on the employees of American West
as a condition for granting that carrier a loan guarantee.
To this day, America West is the only air carrier that has secured
a loan guarantee. USAirways' attempt to seek assistance from the ATSB
was met with such resistance that the airline eventually filed for
bankruptcy protection. What is clear is that these two applicants and
many others were subjected to a bureaucratic and unwieldy process as
well as grossly unrealistic demands for employee wage and other
concessions. Congress intended for this emergency relief assistance to
stem the airlines' record losses until the industry's deteriorating
finances could turn around. Instead, only a fraction of the loan
guarantee benefits has been doled out. Meanwhile, air carriers are
expected to lose close to $7 billion this year and at least 150,000
airline, Boeing and other industry workers are already jobless.
Congress must act to ensure the airline assistance benefits are fully
realized and that the ATSB exercises its broad powers consistent with
congressional intent; otherwise, the airline rescue package passed with
such fanfare last fall is doomed to failure and several airlines may
not survive the current financial tailspin.
Therefore, be it Resolved, That TTD Affiliated Unions Will:
Urge Congress to modify the legislation that created the airline
assistance program by:
compelling the ATSB to expedite processing of applications
and halt the use of its broad powers to intervene in the
collective bargaining process and to unfairly deny benefits to
ailing air carriers that otherwise qualify for assistance under
the statute; and
re-opening the deadline for air carriers to submit
applications for assistance beyond the arbitrary date set in
regulation by the ATSB.
______
Attachment 3
The Aviation Industry and the War on Terrorism
America watched with disbelief and horror as the events of
September 11 played out before our eyes. For air carriers and their
workers, these terrorist acts were especially horrendous--for the first
time in American aviation history, a domestic airline was used to carry
out an attack against the United States. The results of the terrorist
assaults were unthinkable and they left behind an airline industry that
has changed forever as our nation grapples with the myriad challenges
arising out of 9/11 including the escalating war on terrorism and the
impending military conflict in Iraq.
One of those challenges is to find a solution to the airline
industry's deteriorating finances and massive layoffs in the wake of 9/
11. Another challenge is to ensure the airlines and their employees,
already reeling from the crushing economic effects of 9/11, are not
further ravaged by the certain economic hit--such as a substantial hike
in fuel prices--they will take from a war in Iraq. Overall, our
government must come to grips with the fact that airline security is a
national responsibility and has become an important element of our
national defense and homeland security.
Airlines are slated to lose almost $7 billion this year, following
last year's losses of $7.7 billion. And the projections for 2003 are
not much better as announcements of service and jobs cuts and declining
revenues continue to dominate industry headlines. As a result, aviation
industry workers have suffered unprecedented job losses. An estimated
90,000 airline employees are laid-off or furloughed. Another 30,000
Boeing workers are laid-off, along with 51,000 additional aerospace
employees. Several thousand of these workers have exhausted their
unemployment insurance benefits and lost health care. Last fall, we
mobilized behind the Carnahan worker relief bill to provide assistance
to the thousands of airline employees who were bracing for the enormous
toll of 9/11. Although the bill was killed by a minority bloc of
unsympathetic Republicans who waged a filibuster, airline workers and
their families owe a debt of gratitude to Missouri Senator Jean
Carnahan for her tenacity and passion and her unwavering support to
this day.
Now with predictions for air travel and aircraft purchases becoming
more and more pessimistic, we conclude that laid-off workers in the
various aviation industry sectors have no short- or intermediate-term
hope of being rehired or re-employed. Transportation labor will
mobilize to urge Congress to take action before it adjourns in October,
but we cannot push for a package of airline assistance related to the
war on terrorism if it fails to include relief for jobless aviation
industry workers.
In calling for action, we are not relieving the air carriers of
their obligation to operate safe and secure airlines. In fact, quite
the contrary: few have fought harder for improved airline safety and
security than aviation unions and their members. And we are outraged
that a few major airlines continue to direct attention at ``scapegoat''
issues in an attempt to somehow attach blame for the industry's severe
financial downturn to the collective bargaining rights of airline
workers. We condemn these blatantly hostile attacks on workers' rights
and will work to defeat them. Nevertheless, we are urging Congress and
the President to insulate the airlines, their employees and passengers
from paying the astronomical price for national security
responsibilities that should be part of our national defense and
homeland security. Clearly, this industry is being saddled with
expenses related to the war on terrorism, which is a federal
responsibility. These costs are unsustainable unless Congress funds
them through the national security and defense funding mechanisms, not
as expenses imposed on the airlines.
Transportation labor will push Congress and the President to enact
legislation that provides laid-off employees of airlines, Boeing and
related aerospace suppliers, and airports six months extended
unemployment insurance; 75 percent health care subsidies; training and
re-training assistance; and mandated and enforceable preferential
hiring rights to apply for the thousands of unfilled federal security
jobs at the Transportation Security Administration (TSA).
In support of airlines' skyrocketing national security related
costs, we will support no less than one year of terrorism/war risk
reinsurance coverage; reimbursement for several terrorism-related
security expenses including unreimbursed items such as cockpit
fortification; lifting of restrictions on airlines carrying U.S.
priority mail and other freight; resources for updated anti-terrorism
worker training; and other assistance related to the cost of post-9/11
security mandates and the war on terrorism.
The airline industry is far too important to our economy and our
national security to allow the current financial tailspin to continue.
With the war on terrorism growing in size and intensity, the importance
of U.S. airlines will grow as well. Almost 11 million workers earn a
living in the overall aviation industry; one airline worker translates
into 18 additional jobs in our economy. Congress must step in before it
adjourns for the fall elections and pass legislation that covers the
soaring security costs that are borne by this industry in connection
with the war on terrorism. Most importantly, lawmakers must finally
provide relief to the almost 150,000 airline industry workers who have
suffered through a year of massive layoffs, security threats on the job
and a growing sense that government leaders are indifferent to their
needs in the aftermath of the brutal terrorist attacks on this country.
Therefore, be it Resolved, That TTD Affiliated Unions Will:
Call on Congress and the President to enact a package of
assistance that provides six months extended unemployment,
health care subsidies, training and retraining assistance, and
mandated and enforceable preferential hiring rights for
unfilled TSA security positions; and
Urge Congress and the President to cover the soaring airline
security costs associated with the war on terrorism and to
protect the airlines and their employees and passengers from
the severe economic effects of a military conflict in Iraq.
Senator Wyden. Thank you. In order of appearance, Senator
Burns is first.
Senator Burns. Thank you very much, Mr. Chairman. I am
disturbed this morning, Mr. Wytkind. What would you submit if
you think the economy is so bad--you know, the other day, just
yesterday, the passage of the 1996 act, telco act--now, this is
getting into another area. The telecommunications industry's
income was around $160 billion a year. Today, is over $220
billion. Now, that is not the case with the airlines here. They
have stayed static. So we know there are growth factors in this
economy.
Now, the New York Stock Exchange is not the real measure of
what the economy is doing. That measures the emotion of the
investor. Now, you come here, and you are critical of everybody
but yourself. What would you suggest that we do?
Mr. Wytkind. We have put forth--I am not being critical.
Senator Burns. I mean, you identified all the problems. We
have identified all the problems. Everybody is looking for some
answers.
Mr. Wytkind. We understand that, and we are not being
critical of anyone here. We worked very hard on the airline
legislation.
Senator Burns. What would you want the Government to do
right now?
Mr. Wytkind. Well, my testimony spells it out in detail.
Senator Burns. I mean, for the economy.
Mr. Wytkind. For the economy or for the airline industry?
Senator Burns. The economy. That was your lead-off here.
Mr. Wytkind. What I said was, the state of the U.S. economy
from a worker's perspective is not very good.
Senator Burns. It ain't from a farmer's, either.
Mr. Wytkind. We understand that, and we think something
should be done for the farmers, too. We have been very
supportive of all efforts to find Government policy and private
sector solutions to figure out what to do about this economy.
What we are seeing in this industry is an industry that (1)
is being strangled with cost, and (2) has not found a way to
recover from the effects of 9/11 and the effects since then,
and we still have 150,000 industry employees who are laid off,
and we still have a bunch of those workers, thousands of them
who have exhausted all of their basic unemployment and health
care benefits. All we are asking for is some consideration for
those employees.
We agree with Senator Brownback, who said this airline
industry's crisis is not just about the airlines. It is about
airline manufacturing, it is about aerospace, it is about the
absolute rippling effect that, as I said in my testimony,
depending upon whose numbers you use, it is as high as 18 to 1,
the impact that one airline job has on this economy, just like
you see in the auto industry. They have multiplier effects that
are very similar.
So we are not being critical of this Committee. We are
being critical of the fact that we do not think enough is being
done to deal with some of these issues.
Senator Burns. Well, I would say, what else--I do not know
what else we can do. You offered no suggestions on picking up
the economy. The answer, some of it, is a problem besetting the
young lady to your right, and she is in the financial industry.
We have got to get the airlines in some kind of position to
where they can go into the markets for venture capital or
operating capital, and we know that.
We did overdo on TSA, I would agree with you 100 percent,
and we went 180 degrees the wrong way on what we should have
done there, but that was one of those June bug issues that was
coming down the track, and I lost that debate in conference. We
did extend unemployment. We did do some things that were
pointed toward the employees, that their jobs were impacted,
and we have done that.
The recovery, however, has not been as fast as it should
have been, but to come before this Committee and identify the
problem, yet offer no suggestions on what we should do is not
the reason for this hearing.
Mr. Wytkind. I did offer a number of solutions.
Senator Burns. Well, some of those I agree with, but you
cannot paint with a broad brush, because I am not talking about
this Committee or this industry, and you were not either, at
your opening.
Mr. Wytkind. All I tried to provide was an employee
snapshot of the state of this economy and it is not doing very
well. That is all I tried to do.
Senator Burns. It is not a pretty picture on that snapshot.
Mr. Wytkind. I wish I was smart enough to give you every
solution.
Senator Burns. I wish I was, too.
Mr. Wytkind. All we can do is our best job to represent
workers, and I think Congress can do a lot to deal with the
jobless in this economy, including health care, which is
something we have been fighting for as well.
Senator Burns. Who is going to pay for it?
Mr. Wytkind. Well, in the trade adjustment assistance
legislation on a bipartisan basis that you finished, you
provided a health care subsidy of 65 percent.
Senator Burns. Somebody has got to pay.
Mr. Wytkind. Sometimes when workers are out of work and
they have no health care they need a safety net, and in our
case we are going to fight for that safety net, and if the
Government has to pay for it, so be it.
Senator Burns. Somebody has got to pay for it. Are you
willing to raise taxes on the citizens?
Mr. Wytkind. I am not calling for a tax increase. I am
saying we have too many workers in the U.S. economy and the
airline industry with no health care, and something needs to be
done about that.
Senator Burns. Tell us who is going to pay for it. We will
be happy to work with you.
Senator Wyden. This is going to be a spirited morning, I
can tell.
Mr. Mullin, let me begin with you, and sort of offer up
that my sense is that the industry has a legitimate point on
the national security question, the question of paying for the
security functions that benefit everybody, but I will tell
you--and we have talked about this before, that much of the
industry's problem is self-inflicted. Many of these wounds are
self-inflicted, and I want to ask you about those, because I
think that the most important part of what we are trying to do
now is to sort of sort out what the Government ought to be
doing? What are the Government's responsibilities, and what are
the industry's responsibilities?
Now, let me give you two examples of areas that I think are
self-inflicted and see if we can get your sense of whether the
industry is willing to turn it around. Professor Richard
Gritta, who I admire very much, is a professor at the
University of Portland, and he has written at some length about
how the industry's problems to a great extent stem from the
massive debts that it is taking on, that it is taking on high
debt, high risk financial structure, so that every time the
economy turns down and we have bankruptcies and the like, this
will be of special importance as it relates to the airline
sector.
I think you also know that I am very concerned about
passenger rights, and how consumers are treated, and it seems
to me that the industry just in recent weeks has inflicted a
couple more wounds on itself with respect to passengers at a
time when we want to get more people flying.
At a time when we want to get more people flying we have
got the industry putting together new fees for flying standby,
we have got the industry talking about denying customers
credits if flights are missed, and this kind of thing, and it
would seem to me that if the industry is hoping to have help
from the Government yet again, and it is not as if--with the
original bailout legislation, and even just a couple of weeks
ago with respect to insurance questions the Committee was there
again, that the Government has a right to expect the industry
to deal with some of these problems that are self-inflicted,
some new accountability.
I mean, people ask me all the time, they say, the industry
is willing to cut this and cut that, but the things that are
important to them they are not willing to cut, and I think what
we are looking for is some sense that the industry is going to
make some changes that reflect these tough times as well.
Mr. Mullin. Thank you very much, Senator Wyden, for your
comments. I will respond to both of your points, dealing first
with the point made by the professor from Portland that the
industry has too much debt. I could not agree more. Some of you
may know I spent 15 years in the banking industry before I came
to the airline industry. This is the most debt-laden industry
in America, and when I came to the industry 5 years ago I
certainly felt that the industry had too much debt at that
point, and now we find that situation worsening considerably.
As I indicated in my testimony, the industry has been
having unprecedented losses and we have, in fact, been using
debt, private capital debt in order to fund those losses. That
is the worst possible use that anybody could make for debt.
Debt should be used for capital purposes, buying airplanes,
investing in technology and the like, and so it is a very
sorrowful kind of a situation, so I would readily agree with
the professor that the industry is too leveraged.
Unfortunately, what is going to happen is these losses
continue is that that situation is likely to get worse, so we
have no illusions that with respect to that situation, that it
is going to continue.
On your second point, I want to pay credit to you, because
you are the first person in 1 year who has raised issues of
customer service as it relates to the kinds of questions in the
customer service plan that occupied so much of our dialog prior
to September 11th. In fact, the improvements through the
customer service plan were our top priority prior to September
11th, and you and I have talked about that personally many
times.
Since that time, I can honestly say nobody has raised
questions of customer service plan. It has all been security,
security, security, and we need to get back to the point where
we are worried about the customer orientation. Everything you
have said with respect to improving the customer's orientation
toward wanting to deal with the airlines as a positive travel
experience is what we have to be about.
Now, you have raised a couple of questions about changes in
prices that have been made within the last couple of weeks, and
you are correct, those changes have, in fact, been made. The
reason those changes in pricing have been made is because our
capacity in this industry to charge a price that would make us
viable has disappeared since September 11th. We have no pricing
power in this industry as I speak, none. We have attempted to
put forward about 30 price increases acting independently as
airlines, but hoping that perhaps we would be matched by some
of our competitors.
Zero have succeeded, so every single airline in this
country is looking now for ways to improve the pricing in this
industry, and during a time period where we have 250 airplanes
stored in the desert, when our load factors are far lower than
they need to be in order to make us viable as an industry, you
will see that struggle continue.
We long for the day when we have enough revenue where we
can return some of those customer service amenities and have a
pricing structure that takes out some of this nuisance factor
type items to which you just referred.
Senator Wyden. I will tell you, I do not think they are
amenities at this point, and I have not raised this issue for a
year for a reason as well. For the last year people have been
concerned about one thing, and that is getting there. That is
all that they have been concerned about. But now it seems to me
that you are in a position that if you want to make this
industry healthy again you are going to have to take some steps
to meet Government and these passengers halfway.
I mean, for example, services are being cut everywhere, and
I think when I look at the next set of requests from the
airline industry I am going to ask, what are you going to do
for rural communities? Now, I am sure the answer is going to
be, there is nothing we can do, we cannot do it and the like.
The reality is, as you know, there are a bunch of low cost
industries--excuse me, low cost airlines that are making it
through this difficult time. They are doing some things right
that somehow some other airlines are not able to do, so I hope
that the lesson gets through here that there is going to have
to be some new accountability on the part of the industry.
You have a legitimate case with respect to this national
security question. I am prepared to support assistance in this
area, but I do not think that the route out of this, as I
suggested earlier, is primarily the Government shoveling more
money. I mean, we have done that again and again on this
Committee, and I think there is going to have to be more of an
effort on the part of the airlines to deal with that, to deal
with passenger service, to deal with rural communities, some
showing that for this extra money there is going to be an
effort to address some of these problems.
Otherwise we will just have the same old cycle that we had
through the Nineties. When times were good, the air industry
did good. When times were bad, the industry somehow seemed to
say Government had to step in and deal with it, and I think we
have to do better.
My time has expired, and I think next in order of
appearance is Senator Cleland.
Senator Cleland. Thank you, Mr. Chairman, and Mr. Mullin,
good morning to you and to our panelists. I am just sitting
here thinking about your last appearance before our Committee
about a year ago, where you spoke eloquently as a
representative of the American airline industry about the need
to act quickly to help this vital industry. What Mr. Wytkind
has pointed out, the multiplying factor of the airline industry
on the American economy is awesome. I can testify to that, that
when we did not fly our airlines for just 4 days, and when
Delta did not fly for just 4 days, I can remember painfully
restaurants shutting down, hotels going empty and the like.
That was an indication to me that the airlines are vital to our
entire economy.
Having said that, I was sitting here thinking that maybe
one of the ways to support passenger rights and to rescue the
airlines and get more people to fly is to bring back peanuts,
because I really believe that the absence of Georgia peanuts in
particular has been an assault on passenger rights, for those
of us who fly all the time.
But, seriously, we are not talking about peanuts, are we,
Mr. Mullin, in terms of dollars. We are talking about $4
billion. You mentioned the security cost impact or the overlay
on an already troubled industry in a sinking economy. What if
we tacked another war onto that? Do you see a war with Iraq--in
addition to the war on terrorism and the $4 billion it is
already costing American airlines, or is going to cost
somebody. Do you think a war in Iraq would make matters better
for you, or worse for you, or it would not matter one way or
the other?
Mr. Mullin. Well, first of all, Senator, I want to begin
with just a general statement that I think the questions of war
and peace and life and death, frankly, that you all are
grappling with are far larger than any topic on aviation that
we have here today, and I just extend all of my best wishes to
all of you in dealing with this. I am just expressing this as
an American citizen, so you should just make those decisions
even without respect to what we are talking about here today.
But taking your question, which is a business oriented
question, I guess I would refer back to the Persian Gulf
situation as offering the best possible consequence in recent
experience, and what happened in that circumstance is that for
a period of two quarters there was a 10 percent or so drop in
the international traffic, and for one quarter there was a 5
percent immediate drop in traffic domestically throughout our
country and, of course, oil prices spiked and doubled in a very
short period of time, which created an enormous difficulty for
us in terms of dealing with that economic crisis.
So what happens here is clearly associated with a what-if
question. If a war is conducted, and it is of short duration, I
suspect that the consequences would be small. If it goes
longer, then we will have to talk to the Government about some
of these kinds of consequences that would emerge.
Senator Cleland. Thank you very much. Both The Wall Street
Journal and The Atlanta Journal-Constitution published
editorials last week supporting your request for congressional
relief from post 9/11 governmental security costs. Of the 5
items you pointed out and identified in your testimony, what do
you think, in your opinion, is the most critical, and what do
you believe are the consequences if the Congress does not act?
Mr. Mullin. Well, if I could, just for reference's sake,
look at the Exhibit 6 which was associated with my testimony, I
think that the two most significant leverage items are to the
left-hand side of the page, which are the security tax which
has been levied on us, the $2.50 cent segment tax that
increased insurance cost, where I mentioned that terrorism
insurance went from $2 million last year to over $150 million
this year. Those would clearly be the ones that would have the
most dramatic impact on us.
In terms of immediate relief, I believe firmly that this
Committee and the Senate and, in fact, the U.S. Congress
intended that the cost of security would be borne by the
Federal Government, and so the unreimbursed security costs
shown as $60 million here, the Federal Air Marshals cockpit
door fortifications and the like are clearly ones that I think
that you should just reinforce, particularly to the TSA, that
they should be, in fact, paying the airlines for security costs
that we are bearing, and that this Committee and this Senate
intended that that be so, so I think that those are things that
could be done quickly.
I think quite clearly there has been a reference to the
fact of not eliminating the security tax, but the security tax,
the theory was it was going to be tacked onto the ticket. It
cannot be tacked onto the ticket. The airlines are paying it
right out as a direct cost, and consistent with what I think
all of us have said here, including my panel colleague from
Labor, to view airline security as a national security
imperative would say that that security tax burden should be
alleviated here, and that we should not be paying that.
There is no other industry--I come from the nuclear power
industry before I came here, the banking industry and so forth.
Those kind of charges for security are not being imposed. It
has to do with the fact that airlines were used as guided
missiles during the crisis that we had that somehow this cost
was imposed on us. We asked for relief and to be treated like
every other industry in America in that respect.
Senator Cleland. One reason I supported the $15 billion
Stabilization Act when the airlines first went to the junk bond
status a year ago, and one reason I became an original
cosponsor of the aviation security legislation that passed this
Senate 100 to nothing, in my view, is that aviation security
should now be a governmental responsibility. At that time I
equated the security of the airlines with national security. I
made that equation, that it was not just a private sector
McDonald's or Burger King out there, and if one fell, no big
deal.
I equated the security, the economic security of the
American airline industry with national security, and wanted
the Federal Government to take over that security role and bear
its cost. So conceptually I agree with you, and thank you very
much for being here.
Thank you, Mr. Chairman.
Senator Wyden. Senator Fitzgerald.
Senator Fitzgerald. Mr. Chairman, I would just like
unanimous consent to put in the record the disclosures page of
Ms. Donofrio's testimony that shows all the airlines that she
and Deutsche Bank work for. I think it is important in this
Committee, where we had hearings on the conflicts that analysts
have, and we had all the Enron analysts, and we had all the
employees who lost all their money and were buying stock
because analysts were telling them to right up to the end, that
we be very careful about assuming that there is complete
independence on the part of research analysts.
Senator Wyden. Without objection, it will be entered into
the record at this point.
[The information referred to follows:]
Ms. Donofrio. May I make a comment on that? I do not own
any airline stock personally.
Senator Fitzgerald. But you list almost every airline in
the country. Do you work for Deutsche Bank?
Ms. Donofrio. I work for the investors of airlines, and I
am actually quite negative on the sector, so I have actually
been telling my investors not to own airline stocks.
Senator Fitzgerald. But your company owns airline stock,
and they will benefit if they get this taxpayer cash, OK? And
that is your own disclosure in your testimony, so we are
entering that. Thank you.
Mr. Mullin, in this week's Newsweek Alan Sloan wrote an
article in which he suggested, using statistics from the Air
Transportation Association, that the airlines from 1938 through
the end of this year, the total combined income of the airline
industry cumulatively over those last 65 years would only be $3
billion, which means that if you subtract out last year's $5
billion bailout, the industry would have lost a cumulative $2
billion. Do you believe your industry will be profitable if
this request that you have before us is enacted?
Mr. Mullin. No, sir, I do not. I believe that consistent
with the $7 billion estimate, which is an after-tax estimate,
converting that to a pretax, roughly, say, $9 billion, and if
we got everything in here in terms of aid with respect to the
reimbursement of the security charges, that would be $4
billion, so it would have only \4/9\ths, or 44 percent, and the
other 56 percent, if we got everything, and frankly I do not
expect that will happen, we would still have an enormous burden
to take care of in terms of making ourselves profitable, using
the kinds of techniques that Mrs. Donofrio offered in her
testimony.
Senator Fitzgerald. As has been pointed out repeatedly
during this hearing, Southwest and maybe a few other no-frills
carriers are the only ones that are profitable, and they have a
different business model than the big six carriers. You are all
hub and spoke operators. You do not make money, but the point
to point carriers, some of them, like Southwest, do.
In fact, I would like to have a chart put up. This shows
that Southwest's balance sheet has continued to improve even in
the aftermath of 9/11. Their debt as a percentage of their
revenue has continued to stay low throughout 2001. The six
largest hub and spoke carriers, their debt has skyrocketed. It
started to skyrocket at the start of 2001. Maybe it went up
faster before 9/11 than after 9/11, but by enacting another aid
package, are we not locking into law, or trying to help a
failed business model?
Mr. Mullin. I do not think so, and I would always hesitate
to quote Herb Kelleher, but I do honestly believe that if Herb
Kelleher were here, having testified with him in various
forums, he would absolutely agree with the thrust on security
that has been advanced here today. I think he would endorse
that, although he will have to speak for himself. He is the
most successful airline in the country.
In fact, he is a man I admire. I admire what Southwest
Airlines has done over this time period, but Southwest
Airlines' net income is dropping dramatically this year.
Southwest Airlines will be profitable, but their profits by
various analysts' estimates are going to drop between 50 and 70
percent for this year, so the impacts of the kinds of issues we
are talking about right here----
Senator Fitzgerald. So you are still a believer in the hub
and spoke model, that is the way to go, even though they do not
make money?
Mr. Mullin. I think in Delta's case we are blessed with
having the greatest hub in the world, if I may add, O'Hare
notwithstanding, and I am a former Chicago resident, as you
know, for 15 years, and that is a magnificent asset to the
people of Atlanta, the State of Georgia and, frankly, to Delta
Airlines.
Senator Fitzgerald. Well, you bring up O'Hare. Clearly
somebody is not telling the truth here. United and American
would seem on one hand to be saying they need more Government
assistance, but on the other hand, in the other chamber, they
are pushing to have a bill that will require the expansion of
O'Hare Airport, requires the FAA to approve their plans to
expand O'Hare, and that will cost $6 billion, which United and
American largely have to pay for, so they have $6 billion to
burn in tearing up all the existing runways at O'Hare. One of
them is 14,000 feet. They are going to tear it up and move it
like, 400 feet, and reposition it. They have got money to burn.
So who is telling the truth? Did they have the money to
build the six new runways at O'Hare, tear up and rebuild the
whole airport, or do they need the bailout? They cannot both be
true.
Mr. Mullin. Relative to their financial status, I think it
is well disclosed that United is struggling, and their
potential bankruptcy has been referred to by United. American,
I could not comment on that.
Senator Fitzgerald. They keep publicly reaffirming they
want to go forward with the tearing up and rebuilding of
O'Hare.
Mr. Mullin. I hesitate to get into this, but I would
endorse the expansion of O'Hare, having lived there for 15
years.
Senator Fitzgerald. Now, Delta actually terminated one of
their construction projects after 9/11, didn't you?
Mr. Mullin. Yes, we have.
Senator Fitzgerald. Which project was that?
Mr. Mullin. We have stopped our progress at JFK.
Senator Fitzgerald. That seems prudent. That was $1.4
billion, was it not?
Mr. Mullin. Yes.
Senator Fitzgerald. And you are cutting back. United and
American are going forward. They have got a bill now, dozens of
lobbyists working on it, ready to spend $6 billion. They cannot
need new Government money if they have the $6 billion to tear
up and rebuild O'Hare.
I would like to come back if we could give Senator
Carnahan--I just want to say, and let the record reflect that
the Committee asked United and American's CEOs to testify. They
declined. I personally wrote them. They declined. I think that
is too bad, because it is not fair to have you answer for the
other airlines. Delta is one of the best-managed airlines in
the country, and I think United American, the two biggest
airlines who are going forward with the $6 billion expansion at
O'Hare, should have had the courage to come and testify, but
thank you, Mr. Mullin.
Senator Wyden. I thank my colleague.
Senator Carnahan.
STATEMENT OF HON. JEAN CARNAHAN,
U.S. SENATOR FROM MISSOURI
Senator Carnahan. Thank you, Mr. Chairman. In this ailing
economy I think two things are very apparent, and that is that
the airline industry continues to suffer and that airline
employees are experiencing unprecedented job losses and
economic uncertainty. It is estimated that approximately
100,000 airline employees are currently out of work, and
thousands of other layoffs have been announced. Tens of
thousands of additional Americans have been laid off from
airline manufacturing jobs.
I was hopeful that the assistance that we provided to the
airlines last year would stabilize the industry and prevent
other job losses, but that has not been the case. It is my
understanding that our colleagues in the House are poised to
consider a new expanded relief package for the airlines
industry, and we must act with them, because ensuring the long
term health of the airline industry is absolutely imperative. I
supported expanding the war risk insurance program in this
Committee recently. I think that it is appropriate to consider
additional assistance to the airlines as well. It would be
unfair to do so, however, without addressing the plight of
laid-off workers.
Last year, I proposed providing health care and job
training and other assistance to airline industry employees who
lost their jobs as a result of 9/11. That assistance was
blocked by a minority here in the Senate, but it is time, I
feel, to revisit this issue. Part of that task is seeing to it
that airline industry workers who have lost their jobs do not
have to become the latest economic victims of the 9/11 fallout.
I would like to address my first question to Mr. Wytkind.
As you know, I have been committed for some time, and continue
to be, to including assistance to laid-off workers in any
airline assistance package. First of all, do you anticipate any
additional layoffs in the industry, and if so, what type of
benefits would you find to be most useful, health care, job
training, or what sort of things?
Mr. Wytkind. Thank you for that question, Senator. First,
let me say that the labor movement, but especially the Nation's
airline workers, owe a debt of gratitude for what you have done
to fight for them in their darkest hour. We fought with you to
try to pass the Carnahan relief bill and unfortunately, despite
our best efforts, we did not get it through, but the
anticipation, it was announced already in the last couple of
days, is that there will be more layoffs, and we have already
heard that there will be thousands more at the major carriers.
Delta Airlines unfortunately had to announce another 1,500
flight attendants being laid off, and the issue for us is, how
do we deal with that, how do we provide some stop gap kind of
safety net protection. And our plan is fairly simple, and it
reflects the Carnahan bill model but adds one more twist to it.
The first is, we are seeking 26 weeks of unemployment insurance
extension, because thousands of workers have exhausted those
benefits, too. With the strangling cost of health care, our
members cannot afford the very expensive COBRA charges that
they will face, so we are looking for a subsidy that at a
minimum reflects what the Congress did for victims of trade
policy when you adopted trade adjustment assistance benefits.
That includes health care. We think the model should be a
little better. We think that the subsidy should be a little
higher, maybe 75 percent, but we are looking for that.
Training and retraining is obvious. If the industry does
not come back soon, workers will have to find gainful
employment in another industry, so we need to help them do
that.
And last, there has been a lot of discussion about whether
the TSA is structured right, funded right, or doing the right
thing, but one thing they are doing is, they are hiring massive
numbers of security personnel, and there is not a better pool
of trained and skilled workers who could fill those Federal
security jobs than our laid-off members, and we think we should
give them preferential hiring treatment.
Senator Carnahan. Thank you very much.
Mr. Mullin, a question for you. I certainly am in sympathy
with the financial difficulties being experienced by the
industry right now. As I said, I think it is important for us
to strongly consider providing additional assistance to air
carriers in one form or another. I know laying off employees
has got to be one of the most difficult things that a CEO has
to do, but in light of all of the jobs that have been lost in
the industry, don't you think that it is only fair and
reasonable for us to include a provision to address the needs
of laid-off workers in any airline assistance package we put
forward?
Mr. Mullin. I am very much in favor of assistance to laid-
off workers. I testified to that point in hearings last year,
and I continue to hold that view. I think from the standpoint
of the way that it has gone at Delta, I would just echo what
you just said.
I think the most difficult task I have ever had to do was
to lay off employees. The Delta employees are Delta Airlines,
and they represent and they are what we are, and as we look
forward here at Delta, we have attempted to do the best we
could through a series of voluntary leave programs when we laid
off about 10,000 employees last September to provide the kinds
of assistance on our own to which you are referring.
Those voluntary programs carried some medical benefits for
some time, included some flight privileges for some time, and I
would echo that I think anything that we can do to help workers
in this time of duress is a good thing.
Senator Carnahan. Thank you, Mr. Chairman.
Senator Wyden. I thank my colleagues. We will begin another
set of questions for each of the Senators.
Mr. Mullin, your model for business travelers does not seem
to be working very well, and I am interested in knowing whether
you think it is time for the industry to rethink its approach
there. I mean, clearly business people are coming to us and
saying we are being gouged, we are getting less service, we are
unhappy. They are not flying the way they used to, and going
other routes. Do you think this is something the industry needs
to rethink?
Mr. Mullin. I do, Senator. I think that we have to
constantly think about how we are going to have a much greater
appeal to the business traveler, and the business traveler is
the core of the revenue problem we have and will be the core of
the revenue recovery eventually, and so we have to find the
mechanisms to appeal to them in the immediate term, your
comment on so-called gouging notwithstanding.
Senator Wyden. That is what they tell us. I am very mild in
my comments about the airline industry, but that is what they
tell us, that they feel that they are being gouged.
Mr. Mullin. I think the evidence statistically is to the
contrary. As I mentioned in my testimony there has been a huge
drop in revenue, a huge drop in the average ticket price.
Certainly it is running about 15 to 17 percent below last year
for Delta. It is the best time in the world for anybody to want
to travel on an airline, and that includes for the business
traveler, but we do need to rethink it and develop mechanisms
for greater appeal, and that is going on as we sit.
Senator Wyden. If there is war with Iraq, do you think--or
in the case of your company, do you think that you should get a
break from the jet fuel tax?
Mr. Mullin. I would withhold on that recommendation. This
is a classic, it depends type answer. I think we have to wait
and see what happens in Iraq and, as I mentioned earlier, those
are questions that are far larger than aviation. If the
military action is of relatively short duration I would not
anticipate that we would have to discuss that. If it is of a
longer duration, and it really begins to effect a tremendous
drop in passengers and, say, fuel spikes, then we will have to
come back and talk about it at that time, but I have no
preconceived notion on what ought to be done in relation to
these scenarios that might unfold.
Senator Wyden. Well, let us stay with that, then. How long
would it take before you would favor a break on the jet fuel
tax--a conflict of 2 weeks, a month? Because my understanding
is that there are some in the industry who are already saying
that they should get a break on jet fuel taxes.
Now, this raises a fundamental fairness question, because
if there is war with Iraq, there is going to be a lot of people
that are going to be concerned about their fuel costs, and
given the fact that there are some in the industry already
talking about it, I think it would be helpful to get your sense
of when, if ever, you think you would need this.
Mr. Mullin. Well, I think first of all I would note that we
are already bearing what I would consider to be a very
substantial increase in the fuel problem that I think heavily
derives from the potential situation in Iraq.
If you look, for example, at the average cost per barrel of
oil, that is running about $31 right now. At this time last
year it was running at $23. That is a huge, huge increase in
fuel prices that has taken place in this country since last
year, and so in effect, the effects of a potential Iraq crisis
I think are already somewhat embedded in the fuel price, and we
are absorbing that now and have been for some time, and it has
not, in fact, brought us to the point where we felt that that
kind of conversation on relief as it relates to that is
appropriate.
I do not at this point have a recommendation to conduct
those discussions. I know you have heard it from some of the
colleagues who asked me the question directly. I do not feel it
is appropriate to ask you about that at this point.
Senator Wyden. Let me return for my final question to this
question of the debate now about what it is Government ought to
do and what people in the private sector ought to do, and I
have told you that I am sympathetic with this argument that
Government ought to be dealing with national security, and
clearly the industry has been asked to do that, but supposing
the Congress said--this is a recommendation that I have seen in
the pages of The Wall Street Journal and elsewhere, that if the
Government clearly picks up the bills for national security the
industry should walk away from some of these other steps that
the Government has offered, particularly the insurance breaks
and the $10 billion bailout package. Is that something that you
think would be reasonable?
Mr. Mullin. You mentioned several things quickly, and I
will comment----
Senator Wyden. I am just saying that I think the industry
has got a legitimate claim on national security. What I am
asking you is, this Committee constantly is shoveling out money
and assistance for a variety of other things, so supposing we
said, to really look to the long term and sort of break some of
these cycles that the industry has, that we will deal with
national security. That is something the taxpayers would see as
a legitimate concern for the Government.
But in return, the airline industry would say, we are not
going to come up there all the time asking for this other
stuff, and we saw that with the assistance after 9/11, we saw
that with the legislation. And I am wondering whether you think
something like that ought to be discussed, and whether that is
something that strikes you as the kind of approach that would
make sense for the long term.
Mr. Mullin. I would bluntly not favor it, and my reasons
are extremely straightforward. I think that national security
is something that ought to be supplied for all industries in
this country. I do not think one should single out and say, if,
in fact, the Government agrees to pick up its legitimate role
in national security for aviation, that somehow some other
governmental program should be imposed on the industry as a
quid pro quo. That is not going on for nuclear power plants.
That is not going on for chemical plants, or ports, or bridges,
all of the industries in our country.
My final point was, we are not asking for special
treatment. We are asking to be treated like everybody else--
like everybody else--and Senator Wyden, I have appreciated your
help last year, but I want to be very, very clear, this
industry, all of the words notwithstanding that are printed in
the newspapers, does not regard what happened last year as a
bailout, as Senator Fitzgerald indicated in his arithmetic that
he did, in the 4 days, which basically I agree with your
numbers in terms of the impact of the 4 days.
What was not included was the tremendous revenue cost that
we took. You do not get back your revenue after a crisis like
that, and so in effect the $5 billion took care of about 8 to
10 weeks of the pain of September 11th after that. That was all
the $5 billion did, and of course so far on the loan guarantee
program one significant loan has been made, and that is the
loan to America West. United and US Airways are still
outstanding, and even if they were done, that would be $3
billion.
I do not favor the extension of the loan guarantee program
further, Senator. I do not. I think that it did its job. I
commend the Committee for having passed it. It has expired, and
I think at this point the better attempt is to deal with these
security issues directly, face up to them, and that that would
be a tremendous help to the industry that is consistent with
Government policy in this regard.
Senator Wyden. I am not sure I understand your position.
You are saying that the insurance, or the Government assistance
bailout is not needed any more. You do not favor renewing it?
Mr. Mullin. I personally do not. I think that when one
looks at the program that was established to stabilize the
financial capital markets and provide emergency financial
assistance to the industry--and I am speaking personally, not
as a member of the Air Transport Association as I say this,
this is my view--I think that were we to extend the program
which expired on June 28, according to the rules of the Air
Stabilization Board, that that in effect could be viewed as
consistent with supporting a further, quote, ``bailout'' of the
industry. It would deal with the economic problems of the
industry that, through this testimony, I am saying are our
responsibility.
I think the focus of this Committee and the Federal
Government should be on the relief of the security burdens
associated with what is a national security imperative.
Senator Wyden. I do not think it sounds like you are ruling
out the concept, and that makes some sense. I have told you, I
am supportive of the national security function. Let me repeat
that. I am supportive of the national security function, but I
will tell you that businesses in Coos Bay, Oregon and
Pendleton, Oregon do not get a lot of the assistance that we
have offered the airline industry over the years, and I am just
hopeful that as we try to sort this out, that people in the
industry will say, look, we are going to be serious about
dealing with our long term problems, and I have outlined a
number of them, including the debt, including the passenger
service, including the rural communities.
And also you will walk away with the impression, at least
from my standpoint, that when we are going to deal with
national security, then we are doing something that makes sense
to the public. When we continually pass out assistance, as this
Committee does again and again and again for matters that my
constituents do not get, and they do not see as national
security measures, that does not pass the smell test.
Mr. Mullin. You know something, Senator, I could almost
endorse everything you have said. We are not asking here for
help with those. We are on board together in talking about the
reimbursements, and help should be related to national
security.
Senator Wyden. Senator Fitzgerald.
Senator Fitzgerald. Thank you, Mr. Chairman. I just want to
say that I think the airlines would like the loan guarantee
program to continue but for one factor. The loan guarantee
legislation that we passed requires the airlines to give an
equity stake up to the Government in return for the loan
guarantees, and I do not think they want to do that, and that
was a requirement Senator Corzine and I put in there, and that
is why I think a lot of airlines did not apply for it. They did
not want to give up an equity stake in the airlines that would
dilute the holdings of the senior management.
Mr. Mullin. May I respond to that briefly, Senator?
Senator Fitzgerald. OK.
Mr. Mullin. Just real briefly, as you know, the ATSB
established three criteria, (1) the airline could not have
access to the private capital markets, (2) that it had a
business plan that was bankable, that it would pay back the
loan, and (3) that the loan guarantee was consistent with the
national aviation priorities. Those are the three criteria that
governed it.
Delta, for example, has had access to private capital
markets during this whole time period, and so we would in a
sense flunk that first criteria. I think we would fulfill it in
the other ones, and that is the reason. It did not have to do
with that.
But I think, you know, as you know from your background and
my background, taking an equity participation at a time when
there is a high risk loan being put forward is a common
practice in the banking industry, and so I think at times it is
appropriate, but it reflects the risk that is associated.
Senator Fitzgerald. I got that idea from Bob Aboud, who you
may remember at First Bank of Chicago. He worked on the
Chrysler bailout.
But in any case, I do want to ask if you could please be
specific on how much your proposal would cost. I noted that, I
believe for public relations reasons this year, you are not
asking for a specific amount, that instead you have been
deliberately obscure. You have asked to shift a variety, a
whole menu of your costs over to the taxpayers.
Extrapolating from your testimony, I see that you cite
about $660 million worth of Delta's cost that would be shifted
over to the taxpayers, roughly speaking extrapolating out over
the whole industry. That means it would cost the taxpayers
about $4 billion a year, and so can you put that $4 billion
price tag on this bailout?
Mr. Mullin. Yes, sir. In responding to your question on
specificity, first of all, Exhibit 6 lays out the specific
elements, and behind Exhibit 6 is detail at Delta Airlines
which I would be very willing to share with any governmental
authority that would want to come back down and discuss that.
Senator Fitzgerald. Would you allow the GAO to audit your
books to verify all these costs?
Mr. Mullin. Absolutely.
Senator Fitzgerald. And all the other airlines, would that
be part of your package?
Mr. Mullin. I think any time we deal with the Government we
have to be prepared to open our books, and we have been doing
that.
Senator Fitzgerald. I am pleased to hear that. So this
would cost $4 billion a year. You agree that it would not just
be this year, that it would be in perpetuity, isn't that
correct?
Mr. Mullin. Right. In fact, that is a very important point
you are making. If you go back even to the $5 billion of the
program of last year and recollect what I have just said in
response to Senator Wyden's comments, the debt was associated
with the immediate term consequences of September 11th, a one-
time shot, a term you used I think in your own statement. This
$4 billion is an ongoing burden on our industry, frankly.
Senator Fitzgerald. And that burden would be shifted to
taxpayers.
Mr. Mullin. The burden is on us right now.
Senator Fitzgerald. But it would be shifted to taxpayers,
right?
Mr. Mullin. Correct, but if you were to ask me would I
rather have the shifting of this $4 billion, the appropriate
taking of the responsibility on the part of the Federal
Government for security, versus not having the $5 billion of
last year, I would take that trade.
Senator Fitzgerald. But the bottom line, because it goes on
year after year, it is really a much bigger cost to the
taxpayer than last year's one-time bailout, OK? We had
established that.
Now, 9/11 hurt airlines, we all know that, but it hurt lots
of other industries, too. Didn't hotels, some of them, in big
cities suffer, car rental agencies, travel agencies? A lot of
them got hurt. A major car rental company in suburban Chicago
filed bankruptcy. They did not get a Federal handout, did they,
those other industries?
Mr. Mullin. They did not, and the reasons why, which were
discussed in this Committee, why the assistance was rendered to
the airlines is derived from two key points. One is, airlines
were used as the instruments of destruction directly during
this horrible terrorist act which was conducted. Our industry
is absolutely unique in that respect.
Second, we are the underpinning factor for the second most
important industry in America, which is travel and tourism,
just exactly the kinds of organizations you mentioned. If you
do not have an effective aviation system, you do not have an
effective car rental, you do not have effective hotel occupancy
rates, you do not have the theme parks of America filled with
traveling tourists. That is the reason why the aviation
industry got the help that it did post September 11th.
Senator Fitzgerald. Well, that is your perspective. My
perspective is, you had the most formidable lobby on Capitol
Hill. I think you had 63 lobbyists meet maybe the afternoon of
September 11th to figure out how to get your assistance
package. All those other industries came in and asked for
bailouts, but the fact of the matter is, they do not have the
raw political clout that the airlines have. That is my
perspective on why you got the bailout and they did not.
Now, Delta continues to pay a stock dividend, is that
correct?
Mr. Mullin. Yes, a very small one.
Senator Fitzgerald. Ten cents a share?
Mr. Mullin. Yes.
Senator Fitzgerald. And you paid it 35 days after September
11th, isn't that correct? In October of last year, you
continued to pay a dividend. I mean, couldn't a taxpayer
reasonably say, hey, we gave that $5 billion and you turned
around and funneled it out the door to your shareholders? You
also did a stock buy-back in the late 1990's that ate up almost
$2 billion worth of your capital.
Now, when you buy Treasury stock like that, and that is
very expensive, that puts you in a vulnerable position if there
is a downturn. When you bought back as much stock as you did,
$2 billion--you would have $2 billion more of equity almost if
you had not done that stock buyback, and a lot of the other
airlines did stock buybacks, too, and they left themselves
vulnerable to a downturn. Now, do you think the taxpayers
should reward the investors in those companies who made out
well when you were doing that stock buyback to drive up their
stock prices? Isn't that a problem?
Mr. Mullin. I think in retrospect that doing stock buybacks
to the extent that they were done was unfortunate under the
existing financial circumstance, but we had a target of
maintaining a debt to capitalization ratio at Delta of 65
percent to 70 percent, and we were doing that, and so under
that circumstance--and serving our shareholder interests, and
we do intend to serve shareholder interest. The stock buyback
program in 1999 made some sense under that existing
circumstance. None of us anticipated September 11th.
Senator Fitzgerald. Well, I just do not feel that the
taxpayers should now have to pay because the airlines made what
in retrospect were improvident management decisions back then.
Then you have United Airlines. They went out and spent an
awful lot of money trying to set up a private corporate jet
subsidiary called Avila, where they contracted for billions of
dollars of private jets. They just had to terminate that
program this year, but it still cost them a lot of money.
United Airlines had their failed merger with US Air. That cost
them a lot of money. All of these management decisions have put
them in a bad way.
One other alternative to help you deal with your security
costs is, we could take away all those security requirements.
We could take away the requirement of an air marshal, of all
the added screenings. How would you feel about that?
Mr. Mullin. I would not advocate that at all.
Senator Fitzgerald. That is because you benefit from the
enhanced security, is that not correct?
Mr. Mullin. I think that America as a country benefits from
the enhanced security.
Senator Fitzgerald. You do not think your airlines benefit
from it?
Mr. Mullin. I think we do as part of the American economy.
We clearly do.
Senator Fitzgerald. So why should the taxpayers pay for all
of this that is benefiting your companies?
Mr. Mullin. I think we are going to a fundamental question
of the role of Government versus private industry, and I think
in the United States it has been accepted that the protection
of the country to provide national security is, in fact, a
Federal Government responsibility. It has been accepted since
the time of the Constitution, and therefore for the Federal
Government to pick up this responsibility----
Senator Fitzgerald. But not to pay for security costs for
private businesses. We do not pick up security costs at any
other private business in America, even if they are required.
Mr. Mullin. For national security you do. For security as
it relates to, say, internal to the company, hiring policemen,
for example, at banks, banks used to have their own security
forces.
Senator Fitzgerald. They paid for those.
Mr. Mullin. Right, and I agree with that, and we have in
any security that is unique to Delta, but when you are talking
about national security as it involves a war on terrorism, that
is a national Government responsibility.
Senator Fitzgerald. If you owned the John Hancock Building
in Chicago, it could be a terrorist target. Whoever owns that
building, they are paying for their own security, aren't they?
Mr. Mullin. The National Government is protecting the John
Hancock Building and all other tall buildings in the United
States.
Senator Fitzgerald. They are paying for the security there?
Mr. Mullin. Certainly, through our military forces and the
CIA.
Senator Fitzgerald. Now, come on. In that sense, they are
paying for your security, too.
Mr. Mullin. That is correct.
Senator Fitzgerald. But we are not paying for the security
checks as you enter that building. That is a cost borne by the
private sector. We are about to pass a bill that is floating
around here, we may pass it, on enhanced security requirements
for chemical plants. Chemical plants would have to pay for
that. The nuclear power plants, the security that Commonwealth
Edison has at their power plants they pay for, and that is a
cost of their doing business, and if you did not have this
security no one would want to fly your planes, so you are
benefiting from it.
Mr. Mullin. I am making the distinction, Senator
Fitzgerald, between national security and other forms of
security, and this whole discussion here relates to the war on
terrorism as it emanated from September 11th and the
unfortunate role that airlines played in that heinous act, and
so that is where our conversation is. Other forms of security
should be borne by the companies themselves.
Senator Fitzgerald. All right. Well, we could go around and
around on that.
On the fuel cost, you hedge yourself on fuel. Don't you
have derivatives contracts that would prevent you, and that
would pay you in the event that fuel prices go up?
Mr. Mullin. We do. We are about 50 percent hedged through
the remainder of this year, and then after that our hedging
contracts drop off. As again you would know from your financial
background, that it is very difficult to put hedges on in a
market where the fuel prices are clearly going up, and nobody
can hedge against that.
Senator Fitzgerald. But you cannot have a perfect hedge,
but you can have somewhat of a hedge so that the whole rising
fuel cost, that is something that you have been contending with
for years in your risk management department.
Mr. Mullin. We have.
Senator Wyden. I know this is a subject my colleague cares
passionately about, as do I, and if it would be acceptable to
you, if you could submit additional questions in writing.
Senator Fitzgerald. Could we get United and American to
answer, to explain how they could afford the $6 billion
expansion at O'Hare in writing?
Senator Wyden. We can certainly ask.
Mr. Mullin. We can certainly ask.
Senator Fitzgerald. Don Carty wrote me a letter and said
you could speak for him, but I thought that would be a stretch.
I would appreciate it if they could explain that. That is a
conundrum to me.
Senator Wyden. We will allow for any member to submit
questions in writing. We appreciate the patience of all the
witnesses. Do any of you have anything you would like to add
further before we adjourn?
Mr. Mullin. Thank you very much, sir, for having the
hearing.
Senator Wyden. The Committee is adjourned.
[Whereupon, at 11:30 a.m., the Committee adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Good Morning. By most accounts the airline industry in the U.S. is
in its worst economic condition possibly since commercial service
began. Air carriers have slashed some 100,000 jobs, schedules have been
cut by roughly 20 percent, and a thousand airplanes have been moved
into storage.
The downward spiral of the nation's economy has ravaged airlines in
the U.S. The air carriers were anticipating industry-wide losses of up
to $2 billion in 2001, before the devastating effects of the September
11. The terror attacks in conjunction with the increasingly poor
performance of our economy has made it even harder for the industry to
recover.
The stock market has lost $17 trillion in value from its peak in
2000 and the Dow Jones Industrial has dropped more than 3,000 points
over the past 18 months. The gross domestic product (GDP) of the U.S.
has grown by just 1 percent over this same period. This slow economic
growth and a steadily falling stock market, coupled with rising
unemployment have led to reductions in corporate travel budgets and a
dramatic decrease in business and leisure travel.
The loss of domestic business passenger enplanements, which have
dropped by nearly 12 percent over the past year, are especially hard on
the major carriers which count on business and repeat travelers for as
much as half of their yearly revenue. When times are good corporate
travelers are the most dependable and attractive income source, but if
these travelers cannot be counted on the industry suffers--as it is
doing today.
It has been just about a year since Congress acted to help the
airline industry through the aftermath of September 11. As you know, we
quickly passed the Air Transportation Safety and System Stabilization
Act (Pub.L. 107-42) to provide the carriers with needed financial
support by giving them access to $5 billion in direct compensation and
$10 billion in federally guaranteed loans.
Now, the airlines are here to seek further support from Congress in
the form of insurance extensions, reduced taxes and fees, and other
beneficial regulatory changes. This raises many questions, some which
we hope to answer today, as to what the return on such an investment
will be for the taxpayers. Yes--the airlines are hurting, but so are
many, many other businesses across the country. They did not get a
``bailout'' after the terror attacks, and some have not survived the
aftermath. In this current economic climate the airlines must still
convince many Members of this body that there is a compelling need to
provide additional relief.
Some people have begun to question the profitability of the airline
industry, and question whether Congressional action will produce
worthwhile results. It is my understanding that, according to ATA
statistics and projected losses for the coming year, the airline
industry's total profit over the past 65 years will basically be a
wash--that's zero dollars! No profit, and things will not improve until
the economy does.
The market capitalization for the major air carriers is somewhere
in the neighborhood of $5 billion, while Southwest Airlines is worth
double that alone. Congress could have purchased the major airlines
with the $10 billion in funds that have been provided for loan
guarantees. Some of this money is still available and will be
distributed, but many wonder if we are throwing good money after bad,
and should take a different approach.
We need the airlines to come forward and show us how things are
going to change, and for the better. Air fares are down on average
according to GAO, but will that be a short term dip or is there some
way to work towards affordable prices for the majority of the traveling
public? The industry is taking steps to cut costs, but will airlines
work towards a better business model that will improve their financial
outlook while benefitting the traveling public?
This hearing will provide the industry an opportunity to tell your
side of the story. I am hopeful that we can work together for solutions
that will be useful to both the airline industry and the American
public, as we search for bigger answers to the linering bad effect of
the U.S. economy.
______
Prepared Statement of Hon. Olympia J. Snowe,
U.S. Senator from Maine
Thank you, Mr. Chairman, for holding this hearing on the financial
state of the airline industry. I think today is especially important,
because while we have held numerous hearings on the state of aviation
security since 9/11, we have not heard much from our airline industry.
First, I wanted to express my gratitude to Delta CEO Leo Mullin,
with whom I met yesterday, for his decision to introduce new 70-seat
jet service between Bangor International Airport and Cincinnati. I know
this is a tough time for Delta to be expanding service, and I thank
you.
Mr. Chairman, there is no question as to the significance of
airline service not only to our quality of life, but also our national
economy. According to the Air Transport Association, airlines generate
three percent of the gross domestic product, almost $273 billion.
Moreover, the Maine Department of Transportation reports that over
56,000 jobs, $1.29 billion in payroll, and $3.73 billion in sales are
tied to the availability of scheduled commercial air service.
Nationwide, the airline industry was certainly suffering before 9/
11--due to a sluggish economy and runaway labor costs--the attacks
transformed an industry downturn into a life-or-death industry crisis.
Congress responded by enacting the Air Transportation Safety and System
Stabilization Act, which provided a total of $5 billion in compensation
to various air carriers, and provided for up to $10 billion in airline
loan guarantees.
Over a year after the enactment of the Stabilization Act, the
industry has not recovered, and may even be in a worse financial state.
There is no doubt that the airlines are in deep financial trouble--with
losses projected to exceed $7 billion for Fiscal Year 2002. Also, I
understand that up to 40 percent of the industry's expected losses this
year can be attributed to post-9/11 security costs. Today, our
witnesses will lay out the options Congress has to mitigate the impact
of these increased security costs.
As a member of the Conference Committee on the aviation and
transportation security legislation, I am proud of the work we did last
year to revamp the aviation security infrastructure. We all fought for
the strongest possible enhancements to the status quo at the time, and
I believe we set a strong foundation for reform.
At the same time that we provide for the safest possible commercial
aviation system, and reassure the American people that it is indeed
safe to fly, we must be mindful of the financial impact our security
mandates have on the air carriers. We can all agree that the goal is to
have an air transportation system that is both safe from attack and
financially stable.
This Committee has taken some action to help offset the burden of
post-9/11 security costs. Last month we unanimously passed legislation
that included a provision to extend ``war risk'' insurance to the
airlines for an additional nine months. I understand that, in Delta's
case, annual war risk premiums jumped from $2 million pre-9/11 to $150
million post 9/11. And for some carriers who don't fly internationally,
war risk premiums have jumped as much as 14,000 percent!
The Committee bill also would institutes a new air cargo security
regime, and would allow Postal Service employees to be considered
federal screeners using procedures set by the TSA. This provision would
eliminate the biggest obstacle to a lifting of the ban on airlines
transporting mail of more than 16 ounces--the fact that under the
aviation security law all screeners must be federalized according to
TSA standards. In the case of American Airlines, this restriction cost
them almost $300 million in FY 2002.
Again, Mr. Chairman, thank you for scheduling this hearing. I
believe this is an important opportunity to discuss ways that we can
assist our beleaguered airlines, whose health is so vital to the U.S.
economy.