[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



                    U.S. GOVERNMENT PRINTING OFFICE
92-436                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

       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

                              ----------                              
                                                                   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

                              ----------                              


                       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.
---------------------------------------------------------------------------
    \1\ Commercial Aviation: A Framework for Considering Federal 
Financial Assistance (GAO-01-1163T), September 20, 2001.
    \2\ Pub.L. 107-42.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ See list of related GAO products attached to this statement.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.

                                  
