[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
  DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND 
          RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2004

                              ----------                              


                        WEDNESDAY, APRIL 2, 2003

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:33 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Richard C. Shelby (chairman) 
presiding.
    Present: Senators Shelby, Bennett, Murray, and Dorgan.

                      DEPARTMENT OF TRANSPORTATION

                    Federal Aviation Administration

STATEMENT OF MARION C. BLAKEY, ADMINISTRATOR


             opening statement of senator richard c. shelby


    Senator Shelby. Good morning. The hearing is called to 
order.
    Every year when it comes time to hold hearings on the 
upcoming fiscal year's budget request, it is likely that we 
will cover some of the same old ground. But, unlike other 
agencies or departments, the nature of the industry and 
facilities that the FAA regulates seem to be in a constant 
state of change.
    A few years ago we were concerned about hub concentration 
and the anti-competitive behavior. More recently, we turned our 
concern to airline treatment of passengers and system-wide 
delays. Now, we wonder where all the passengers have gone, 
whether the hubs will survive, and if the traditional airline 
structure will remain intact or if we will see something 
substantially different emerge as a result of all the upheaval.
    This is a very difficult time for virtually everyone 
involved in aviation: the passengers, communities, airports, 
airlines, aircraft manufacturers and the FAA. Passengers are 
anxious about flying in the aftermath of the September 11th 
attacks. The terrorist threat alerts exacerbate people's fears 
about the vulnerability of our air transportation system to 
terrorism attack, and military operations to free Iraq have 
further increased the public's concern about the safety of 
flying.
    In addition, passengers are facing fewer choices in flight 
options as the air transportation market undergoes the first 
significant service contraction since deregulation.
    Airports face increased operational and capital costs as 
they respond to increased security requirements at the same 
time that their revenues are declining because of reductions in 
flights, reduced revenues from concessionaires, and fewer 
passengers.
    Communities that were struggling to maintain service levels 
are finding that challenge even more daunting as the fixed 
costs of initiating or maintaining a marginally justified 
service continue to rise.
    Airlines not already in bankruptcy or headed into 
bankruptcy have little to be optimistic about. As an industry, 
air carriers did not have time to recover after the September 
11th attacks and the sluggish economy that we have experienced 
for the past 3 years has compounded an already difficult 
financial situation.
    Most carriers are not predicting meaningful growth in 
traffic or bookings for several months after the Iraq war is 
favorably concluded, and many more are not anticipating a 
firming in the yields for more than a year. Clearly, this is an 
industry on the ropes.
    Aircraft manufacturers, for their part, are typically the 
first to feel the slowdown and the last to recover from it. 
Neither Boeing nor Airbus anticipates an upturn in the demand 
for aircraft until the middle of 2004 at the earliest. Airbus 
is struggling with the challenges of keeping the new A-380 
within their revised cost and weight estimates, and Boeing is 
undertaking an aggressive new aircraft program with the 7E7 and 
is marshalling $10 billion to develop it. Clearly, both 
manufacturers are feeling the pressure of the industry 
downturn, but both are looking to the future.
    This brings us to the FAA. Administrator Blakey, you have 
now been at the FAA just long enough to start putting your 
imprint on that organization and begin shaping your vision of 
what you want that agency to achieve under your stewardship.
    I feel certain that you have begun turning the programs, 
budgets, policy, and regulatory processes and directed the 
career personnel to your vision of where the agency should head 
to support a safe and efficient air transportation system.
    I know that this budget was largely completed before you 
became administrator, and I know that the budget constraints 
that we face make your job even more difficult. But I would 
like to explore with you where we are going to take the FAA in 
the next several years. The budget request for FAA operations 
anticipates an 8.1 percent growth, but it seems to me to be a 
current services budget with few new initiatives.
    That kind of growth to deliver the same services, I 
believe, will be hard to justify or secure in the current 
environment.
    I believe it is important to show what the FAA is doing to 
foster a safe and efficient system as we move forward. We need 
to show how the FAA is responding to the evolving air 
transportation system. We need to show what works in the FAA. 
We need to know where we need to reinvigorate our efforts. And 
we need to show where we can save and redirect sources to 
higher priorities.
    More importantly, we need to show how the FAA program is 
changing in the aftermath of the 9/11 terrorist attacks. I am 
told that the agency's Operational Evolution Plan (OEP) has not 
evolved since that time and that troubles me. None of these 
things can be done if we sit passively by and expect that 
things will just work themselves out. It is imperative that the 
FAA, that our government, implement innovative and aggressive 
approaches to dealing with our rapidly changing world.
    I want to work with you to help make the FAA responsive to 
the needs of the public and the industry it regulates.
    Today we are pleased to have Marion Blakey, the 
Administrator of the Federal Aviation Administration; Ken Mead, 
the Department of Transportation Inspector General; and Jeff 
Shane, the Under Secretary for Policy at the Department of 
Transportation as our witnesses.
    Senator Murray?


                   STATEMENT OF SENATOR PATTY MURRAY


    Senator Murray. Thank you, Mr. Chairman, and I want to 
thank you for calling this hearing on the aviation industry.
    Our airlines, our airports, and our employees are facing an 
immediate crisis and they need our help. Thousands of hard-
working Americans are being put out on the streets every week 
by the airlines or their suppliers. At home, tens of thousands 
of my constituents have lost their jobs because of the downturn 
in air travel. Together, these companies and their employees 
have faced the triple whammy of September 11th, a deteriorating 
economy, and now the war with Iraq. It is difficult to 
overstate the seriousness of the crisis facing this vital part 
of our Nation's transportation infrastructure.
    Some carriers are emerging from bankruptcy. Others are 
entering it. And still others are desperately trying to avoid 
it. Some retired airline employees are seeing their monthly 
pension checks cut dramatically. And one of our Nation's 
largest carriers is facing the very real possibility of 
liquidation.
    In just a half an hour from now the Senate will begin 
debating the war supplemental that we marked up in the 
Appropriations Committee yesterday. Yesterday, during markup, I 
offered an amendment to increase the size of the aviation 
relief package from $2.8 billion to $3.5 billion dollars. I am 
pleased that that amendment was adopted and that the full bill 
passed the committee on a unanimous and bipartisan basis. My 
amendment expanded the amount of relief provided to our 
airlines and addressed two gaping holes in the original 
proposal, the absence of assistance for our airports and the 
absence of help for the workers who have suffered the most 
during this crisis.
    While our committee was reporting the war supplemental with 
$3.5 billion dollars in overall aviation relief, the House 
Appropriations Committee reported its version of the 
supplemental with roughly $3.2 billion in assistance. The House 
Committee version, however, did not include any help for 
workers.
    The Administration's supplemental budget request included 
absolutely nothing for our airlines, our airports, or our 
aviation workers. Since then we have heard from the OMB 
Director and others that the Administration would not close the 
door on some form of aviation relief.
    Unfortunately, it has not been clear what, if anything, the 
Bush Administration wants to do to address the crisis in our 
aviation industry.
    That was until today. Today, we read that senior Bush 
Administration officials think that the packages approved by 
the House and Senate committees were too large and wrong-
headed. Transportation Secretary Norm Mineta is quoted in the 
New York Times this morning saying that our committee's actions 
yesterday--and I quote--``show that a considerable gulf remains 
between Congress and the Administration regarding the amount 
and structure of this assistance.''
    Commerce Secretary Don Evans was quoted in an Associated 
Press (AP) story today saying we will work with the Congress to 
ensure that the airlines receive more reasonable assistance.
    I fear that the Administration is long on rhetoric but 
short on detail. Time and again we hear that the Administration 
has a position, but they just do not tell Congress or the 
American people what it is.
    Workers have lost their jobs. They are trying to figure out 
how to pay the mortgage this month. But instead of offering 
support, the Administration is failing them.
    Mr. Chairman, this morning we are joined by President 
Bush's Under Secretary for Transportation Policy. I hope that 
this morning we will find out what the Bush Administration 
finds unreasonable in the committees' assistance package.
    I have carefully reviewed the Under Secretary's formal 
testimony and I did not find any answers to those questions. I 
did find some nice multicolored charts documenting the problem, 
and a commitment by the Administration to continue to monitor 
the situation.
    I hope the President does not object to helping thousands 
of workers who have lost their jobs through no fault of their 
own.
    I want to put this in context. At a time when the President 
has proposed $700 billion more in tax cuts, I would hope he 
could find it in his heart to support less than \1/20\ of 1 
percent of that amount for our laid off workers.
    And I would remind the Administration that 10,000 aviation 
industry workers have gotten pink slips since the start of the 
Iraq war.
    I hope during our questions this morning we will finally 
get some clear answers on precisely where the Bush 
Administration stands on Congressional efforts to help this 
industry and its workers.
    Let me close, Mr. Chairman, with another area where the 
Administration can do more, and that is carefully monitoring 
aviation safety. Many years ago, as we all know, during the 
bankruptcy and liquidation of Eastern Airlines, we learned that 
air carriers in difficult financial condition could be tempted 
to cut corners in the critical areas of maintenance and safety 
compliance.
    It is the job of Administrator Blakey, who is here with us, 
to see that does not happen again. And it is the job of the 
Inspector General to make sure that Mrs. Blakey is doing her 
job.
    So I look forward to asking both of them whether we should 
be concerned that the financial downturn in this industry could 
impact the overall safety of our aviation system.
    Thank you, Mr. Chairman. I look forward to the questions.
    Senator Shelby. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman. I do not have an 
opening statement and I look forward to hearing the witnesses 
and I will have some questions.
    Senator Shelby. Ms. Blakey, you will be first. Your written 
statement will be made part of the record, all of your written 
statement in its entirety. You can proceed as you wish. We 
welcome you to the committee.


                     STATEMENT OF MARION C. BLAKEY


    Ms. Blakey. Thank you very much, Chairman Shelby, Senator 
Murray, Senator Bennett.
    I very much appreciate the opportunity to testify before 
you today. And it is a pleasure because this is my first 
opportunity as the Administrator of the Federal Aviation 
Administration.
    Before I begin, I have to acknowledge the new Chairman of 
this committee, Senator Shelby, who hails from the great State 
of Alabama. Since that is where I got this accent, you can 
appreciate the fact that I am really looking forward to working 
with you.
    Senator Shelby. I was enjoying your speech.
    Ms. Blakey. I hope so. I also would like to thank Ken Mead 
and our Under Secretary for Policy, Jeff Shane for the enormous 
amount of work they put into working with us at the FAA to 
ensure that we are doing the right thing for the aviation 
system.


                        REAUTHORIZATION PROPOSAL


    On March 25th, Secretary Mineta sent to Congress the 
Administration's new reauthorization proposal. The Centennial 
of Flight Aviation Authorization Act or Flight 100, as we like 
to call it. Secretary Mineta has challenged the Department and 
the FAA to be safer, simpler, and smarter, as he puts it. And I 
think these guiding principles, you will find, do form the 
basis for Flight 100, as we move to provide better performance, 
more flexibility, and increased accountability.
    To that end, we believe the Administration's proposal will 
serve as a strong foundation for the development of the 
reauthorization legislation because it builds on AIR-21, which 
I know you all worked very hard on. It also provides the kind 
of funding levels that will support important infrastructure 
improvements, safety initiatives, system efficiencies, and 
important research in the safety area. Most importantly, I 
would stress to you that Flight 100 adds no additional taxes, 
no economic demands on the ailing industry, and no new 
financial burdens for the American flying public.


                    FISCAL YEAR 2004 BUDGET REQUEST


    Now, let me turn my attention to the purpose of today's 
hearing, or at least in part the purpose, and that is the 
President's 2004 budget for the FAA. The President has proposed 
a budget of $14 billion for the FAA, a lean budget but I 
believe a generous one, given these challenging times.
    Specifically, his budget requests $7.6 billion for 
Operations, $2.9 billion for Facilities and Equipment, $3.4 
billion for Airport Improvement Grants, and $100 million for 
Research, Engineering and Development. This represents a 3.7 
percent increase from the 2003 enacted budget and provides 
funding for the 49,745 employees that work for the FAA.


                                 SAFETY


    Let me turn initially and most importantly to not only my 
number one priority, but I firmly believe the number one 
priority of this committee, and that is safety. The United 
States has a remarkable safety record in aviation. Almost 100 
years after the Wright brothers first took to the skies, I am 
pleased to report that 2002 was one of the safest years in 
aviation history. Not a single fatality occurred on a U.S. 
commercial airline.
    We are all proud of this achievement, but I know that none 
of us think we can rest on our laurels on this, either. Every 
day at the FAA we help to ensure the safety of an airline 
industry that is in serious economic peril. I know we all agree 
that safety cannot be shortchanged. No matter how tough the 
economic circumstances become, we have got to keep it in front 
of us.
    For this reason, out of a total budget request of $14 
billion, $8.7 billion will be used to support the FAA's safety 
goals. Full funding of the President's budget will provide 
needed funds for inspecting aircraft, operating and maintaining 
the air traffic control system, including hiring 302 additional 
air traffic controllers in anticipation of the retirements that 
we expect in that workforce.
    Funds are also provided for inspecting hazardous materials, 
making additional AIP grants for airport safety, capacity, and 
security investments, noise mitigation, safety research, and I 
could go on.
    But the point here is that specifically in the area of 
commercial aviation, we have a number of programs and 
initiatives that have been particularly responsible for the 
remarkable safety record I was alluding to. The FAA's Runway 
Safety Program has helped significantly reduce the number of 
high risk runway incursions, which of course lowers the risk of 
collisions. Runway incursions declined from 407 in 2001 to 339 
in fiscal year 2002. The number of high risk incursions fell 
from 58 to 37.
    The Airport Movement Area Safety System, AMASS, is now 
operational in 31 airports. And I am happy to say it has 
occasioned saves in San Francisco, Boston, and Detroit.
    The Safer Skies Initiative is a joint Government and 
industry effort to reduce commercial fatal accidents by 80 
percent by 2007. We have made significant progress on this very 
aggressive goal, and we are on track to meet it.
    Now, I know no one here can forget the tragedy of TWA 800. 
This accident focused national attention on the critical need 
to improve fuel tank safety. For a number of years my old 
agency, the National Transportation Safety Board (NTSB), and 
others have been calling for a way to remove flammable oxygen 
from fuel tanks and substitute inert gas which would, of 
course, eliminate the explosion potential. But the designs were 
always deemed too heavy, too complicated, and too expensive to 
be viable.
    Building on previous research on ground-based inerting, the 
FAA's researchers recently developed a relatively simple but 
effective way to generate nitrogen enriched air in flight. That 
is why I have this in front of me. It is a very, very simple 
solution, one that involves no moving parts, one that is not 
heavy. Even at full scale, the inerting system that the FAA's 
research has developed will be less than a single passenger on 
board a flight, in terms of weight.
    We are going to flight test the system next month. If it 
goes as we expect, it is going to be a major improvement in 
terms of aviation safety. So it is just one example of the kind 
of things that the funds that you all appropriate, make a real 
difference.


                                CAPACITY


    Let me turn to capacity for a moment. I am very fond of the 
saying that the Aircraft Owner and Pilots Association likes, 
which is that a mile of road will get you a mile. A mile of 
runway will get you anywhere. It is something I think we have 
to remember as we are looking at capacity issues.
    Given the current downturn, we do have a unique opportunity 
right now to increase capacity before we return to the pre-9/11 
traffic levels. Increasing capacity, as you well know, can be 
accomplished in basically three ways: new technology, new 
operations, new pavement. That is what it really comes down to. 
We have to have all three. If we invest in them wisely, I am 
convinced that we are going to have the capacity we need.
    Our Operational Evolution Plan calls for a 31 percent 
increase in capacity by 2010, and it is yielding results. We 
have a brand new version of the plan that I would love an 
opportunity to brief you all on, because it has identified 
choke points in the system and developed a much more intensive, 
dynamic communication system with the airlines that is really 
yielding a lot of results. We are seeing real changes in terms 
of bottom line efficiencies for the airlines in a way we never 
did before.
    From the standpoint of new technology, and new procedures, 
the User Request Evaluation Tool gives controllers the ability 
to approve direct routes and is saving time and saving fuel.
    We are also seeing terrific results from our new Traffic 
Management Advisor which gives us a way to control traffic at 
our busiest airports, in a way again that is promoting great 
efficiency.
    What about the tough one, which is new pavement? The FAA's 
Operational Evolution Plan is tracking now on 12 airport 
projects that are scheduled for completion in the next 10 
years. And the terrific news is four of them are going to come 
online this year--Houston, Denver, Miami and Orlando. They are 
all still on track to open this year. So that is really a major 
improvement for the system.
    Additionally, the President's Executive Order on 
Environmental Streamlining, and the $3.4 billion investment 
included in the budget for AIP program funding, demonstrates 
the Administration's commitment to expanding capacity. With 
this level of funding and with some structural changes in the 
AIP formulas, the Administration is going to be better able to 
target projects of national significance while at the same time 
helping our smaller airports.


                 FINANCIAL MANAGEMENT AND COSTS CONTROL


    Finally, it is clear to all of us at the FAA, that we have 
to do a better job managing our finances and controlling our 
costs. Certainly, the Inspector General has called this to our 
attention and, as they say, we get it. I am pleased to report 
that the FAA has recently received another unqualified or clean 
audit opinion on our 2002 consolidated financial statements. I 
am also proud to say it is the second year in a row that this 
has happened. It gives us a firm foundation that we need to 
implement a new financial system that is coming online this 
fall, DELPHI, which will continue to help us implement a cost 
accounting system that means something.
    Just as our safety decisions have to be driven by data, so 
must our management decisions as well. We now track 80 percent 
of our costs on a monthly basis at the FAA. But we have got to 
do a better job of using the data to manage those costs. As 
part of the cost accounting system, we are implementing a labor 
distribution system as well in the Air Traffic Services line of 
business. It is called Cru-X.
    It is our commitment to also track, control, and look at 
the issue of how we are distributing our labor costs. Our air 
traffic controller workforce will use this data to assess 
controllers' workload and figure out whether we are hitting the 
performance measures we want to.
    Recently, the Inspector General noted that the system needs 
to be improved. We agree. I am committed to making the changes 
we need to ensure the integrity of the cost information. With 
budget shortfalls and depleting trust fund revenues, we have to 
be diligent stewards of the public funds.


                      PERFORMANCE-BASED PAY SYSTEM


    Furthermore, the FAA has worked hard to implement a 
performance-based pay system. You all gave us personnel reform 
and we are working very hard to take advantage of the 
flexibility it provides. But we have got a ways to go. 
Approximately 36 percent of our workforce right now is 
currently under the performance-based system. It is intended 
and will link the organizational goals that we are developing 
in the strategic planning process we are undertaking right now, 
so that every single individual has a clear line of sight from 
their job to what the organization sets out to do. I pledge you 
my commitment to implementing this system across the entire 
FAA.


                           PREPARED STATEMENT


    With that, I will conclude the prepared statement and look 
forward to questions. Thank you.
    [The statement follows:]

                 Prepared Statement of Marion C. Blakey

    Chairman Shelby, Senator Murray, Members of the Subcommittee: Thank 
you for the opportunity to appear before you today to discuss the 
Federal Aviation Administration (FAA) and our budget request for fiscal 
year 2004. Before we begin, I would like to acknowledge the new 
Chairman of this Subcommittee, Senator Shelby from the great State of 
Alabama. I look forward to working closely with you as well as the 
other Members of this Subcommittee during my tenure as FAA 
Administrator. Finally, I would also like to recognize Kenneth Mead, 
Inspector General for the Department of Transportation. Thank you, Ken, 
for your commitment to work jointly with us to tackle our most pressing 
financial and performance challenges.
    In the seven months I have served as Administrator, I have had the 
privilege to lead an agency whose mission is second to none--the safety 
of our Nation's aviation system. Our mission is carried out by 
thousands of talented, energetic, and dedicated employees who care 
about the safety of the American people and our mission. It is an honor 
to represent them here today.
    We at the FAA operate and maintain the Nation's complex air traffic 
control system and the facilities and equipment that enable its optimal 
operation. Our controllers control and monitor more than half of the 
world's air traffic--up to 5,000 aircraft in U.S. airspace at any given 
moment. FAA conducts state-of-the art research to continually improve 
safety and efficiency. We help improve the safety and capacity of more 
than 5,000 public-use airports in the United States. Our inspectors 
oversee more than 7,000 operators, including 139 major air carriers. 
Our maintenance technicians perform the maintenance, repair and 
engineering of over 62,000 facilities and pieces of equipment.

                            REAUTHORIZATION

    I am pleased to say that on March 25, Secretary Mineta sent to 
Congress the Administration's reauthorization proposal--the Centennial 
of Flight Aviation Authorization Act, or Flight-100. I would like to 
thank Secretary Mineta and Deputy Secretary Jackson for their 
commitment and dedication to developing and supporting Flight-100.
    I also want to thank them for their tremendous efforts in 
challenging the Agency to be Safer, Simpler, and Smarter. These three 
principles form the basis of Flight-100, but they also form the 
cornerstone of the entire Agency's mission--better performance, more 
flexibility, and increased accountability. Later in my remarks, I will 
address several of the Agency initiatives designed to meet these 
challenges.
    To that end, we believe that the Administration's proposal will 
serve as a strong foundation for the development of reauthorization 
legislation. It builds upon AIR-21 in that it maintains our commitment 
to safety, capacity, and system efficiency. The funding levels in 
Flight-100 continue to support important infrastructure improvements, 
safety initiatives, system efficiencies and safety research. It adds no 
additional taxes, no economic demands on an economically troubled 
industry, and it provides no new financial burdens on the American 
people. I thank you for your consideration of Flight-100, and I look 
forward to continuing the dialogue on this, our blueprint for aviation 
in the future.

                                 BUDGET

    Let me now turn my attention to the purpose of our meeting today--
the 2004 President's Budget. Our budget supports Flight-100 in that it 
contributes to our efforts to be Safer, Simpler, and Smarter.
    To support our operations and capital investments, the President 
has proposed a fiscal year 2004 budget of $14 billion--a lean budget, 
but generous given these challenging times. Specifically, his budget 
requests $7.6 billion for operations, $2.9 billion for facilities and 
equipment, $3.4 billion for airport grants, and $100 million for 
research and development.
    This represents a 3.7 percent increase from the 2003 enacted 
budget. Funding will support 49,748 employees.
    I want to thank all the members of this Subcommittee for your 
tireless efforts and continued dedication to supporting the FAA's 
funding needs. Fully enacting the President's budget will permit the 
FAA to hire more controllers to prepare for an expected surge in 
retirements, make needed improvements in the National Airspace System 
(NAS), and fund safety, capacity, and security improvements at our 
Nation's airports. Your support for these investments will reap 
benefits for years to come, as FAA provides a safe and efficient 
aviation system that contributes to national security, promotes 
economic growth, and encourages the recovery of civil aviation.

                        SAFER, SIMPLER, SMARTER

Safety
    First, let me address my number one priority, and that of every FAA 
employee--safety, both in the skies and on the ground. Under the superb 
leadership of Secretary Mineta, the Department's emphasis on safety has 
never been greater. The United States has a remarkable safety record. 
Almost 100 years after the Wright Brothers first took to the skies, FAA 
is proud to report that calendar year 2002 was one of the safest years 
in the history of the U.S. airlines, not a single fatal air carrier 
accident, and we continue to make progress in reducing the number of 
general aviation fatal accidents. We are proud of this achievement, but 
we will not rest on our laurels.
    Safety must always be our top priority, especially with the airline 
industry in serious economic trouble. As a carrier reduces its 
schedule, its fleet and its personnel, we must evaluate the impacts of 
these reductions and amend our surveillance plans as necessary. I 
recently met with the FAA managers overseeing USAirways and United 
Airlines to ensure that we have appropriately expanded our review of 
these carriers. The approach we are taking with these carriers is to 
focus our safety oversight on areas that may be more at risk during a 
financial crisis.
    We will support the resurgence of the airline industry with some of 
our most effective mechanisms--continuing our investments in building 
capacity at our Nation's airports and putting safety first.
    Out of a total budget request of $14 billion, $8.7 billion will be 
used to support FAA safety goals. Full funding of the President's 
Budget will provide needed funds for inspecting aircraft, expanding 
safety programs and hiring an additional 20 safety staff; operating and 
maintaining the air traffic control system; hiring 302 additional air 
traffic controllers (in anticipation of the first wave of controller 
retirements); returning the Hazardous Materials Program from TSA; 
purchasing airport surface movement detection equipment; making AIP 
grants for airport safety, capacity and security investments, as well 
as for noise mitigation and research on aviation safety.
    In commercial aviation safety, several programs and initiatives 
were instrumental in reaching last year's high level of aviation 
safety. The Runway Safety Program helped reduce the number of high-risk 
runway incursions significantly, which in turn lessened the risk of 
collisions. Runway incursions declined from 407 in fiscal year 2001 to 
339 in fiscal year 2002 due to our aggressive actions to reduce these 
incidents, and the number of high risk incursions fell from 53 in 
fiscal year 2001 to 37. The Airport Movement Area Safety System 
(AMASS), now operational at 31 major airports, has been officially 
credited with saves at San Francisco, Boston, and Detroit.
    Our Safer Skies initiative, a joint government and industry effort 
to reduce commercial fatal accidents by 80 percent by 2007, made 
significant progress in addressing a number of factors that cause air 
carrier accidents. I am pleased to say that we are on track to 
accomplish this goal.
    The Air Transportation Oversight System (ATOS) is another tool to 
increase air travel safety and, like Safer Skies, is targeted for 
increased funding in the President's Budget. Under ATOS, in addition to 
comparing carriers' performance to all the requirements of our 
regulations, aviation safety inspectors evaluate air carrier systems 
that impact safety. Using ATOS, we have identified weaknesses in air 
carrier programs and made sure that the carrier took corrective 
actions.
    In fiscal year 2002, the FAA research program focused on key areas 
to reduce the size, weight and complexity of fuel tank inerting system 
designs. We developed a simple system to inert the critical fuel tanks 
(heated center tanks) in transport airplanes. The system has virtually 
no moving parts, resulting in high reliability, low installation 
weight, and low operating costs. The FAA's R&D program and the sharing 
of the data and system design have helped the industry, including the 
Boeing Company pursue inerting systems for the transport airplane 
fleet. The availability of a practical inerting system provides for a 
balanced approach of ignition prevention and flammability reduction. In 
fiscal year 2004, the research program will focus on high priority 
safety projects.
    We have also strengthened our international safety focus. We are 
working with the International Civil Aviation Organization (ICAO), as 
well as other members of the international aviation community, to 
strengthen and further aviation safety. For example, ICAO and the Joint 
Aviation Authorities are both involved in the Commercial Aviation 
Safety Team (CAST), the commercial aviation side of Safer Skies. FAA 
also initiated the Global Aviation Information Network (GAIN), a 
program that promotes the global collection and sharing of safety 
information.
    Though progress has been made, we agree with the Inspector General 
that more can be accomplished. We will continue to build upon our 2002 
successes.

Security
    Since the events of September 11, the focus of Congress and the 
American people has been on security, and understandably so. You and 
your colleagues should be applauded, along with TSA, on your joint 
efforts to improve aviation security. By federalizing baggage 
screeners, ensuring that all checked baggage is screened, and expanding 
the Federal air marshal program, your efforts have made air travel much 
more secure.
    The FAA has played an important role by providing resources and in 
successfully transitioning our former security programs to TSA. And we 
continue to work closely with TSA to assure that our safety programs 
are interrelated and coordinated with their security programs--without 
redundancy and complications. We look forward to the healthy 
continuation of our partnership to restore the faith of the American 
people in aviation.
    The President's Budget requests $198 million to secure FAA 
facilities and electronic systems. This includes $145 million in 
Operations to fund internal FAA security, including securing our many 
information systems and background checks of staff. Internal security 
is not a new activity, but was temporarily transferred to TSA in the 
fiscal year 2003 budget. Fully funding the President's Budget request 
would also provide 26 new controllers to support the North American Air 
Defense command and its expanded airspace security programs.

Capacity Building
    While safety remains our first concern, we must also remain 
committed to expanding capacity throughout the aviation system--in the 
air and on the ground. While demand for passenger travel is down, it 
will return. The FAA must be ready for this recovery. Now is the time 
to focus on increasing airport capacity, while air traffic is 
temporarily reduced. Both the President's Executive Order on 
environmental streamlining and the $3.4 billion investment included in 
the budget for the AIP program demonstrate the Administration's 
commitment to expanding capacity. With this level of funding, coupled 
with some structural changes in AIP formulas, the Administration will 
be able to better target projects of national significance that provide 
the greatest system benefit and, at the same time, provide additional 
funding to airports that rely most on Federal assistance.
    Even after September 11, FAA's Operational Evolution Plan (OEP) 
remains fundamentally sound--with a planned 31 percent increase in 
capacity by 2010. In response to the costly, frustrating, and 
unacceptable delays that plagued the system in the summers of 1999 and 
2000, FAA made needed changes, such as identifying and addressing choke 
points in the system and developing and refining regular communications 
between the airlines and the FAA Command Center to deal with daily 
problems in the system.
    The User Request Evaluation Tool (URET) gives controllers the 
ability to approve more direct routes and is saving airlines time and 
fuel. With this tool everyone wins. We're also seeing terrific results 
from the Traffic Management Adviser (TMA), which makes more efficient 
use of our busiest airports.
    We believe that new runways added at the right airports are the 
single most effective way to increase capacity. Thus, FAA's OEP tracks 
12 runways scheduled for completion in the next 10 years. During 
calendar years 2003 and 2004, Denver, Houston, Miami, and Orlando 
airports are expected to complete runway projects.
    The importance of investing in airport infrastructure cannot be 
discussed only in terms of alleviating a congestion problem at a 
specific location. These investments provide relief to the entire air 
system. The economy relies on aviation to move people and products, and 
aviation relies on an efficient NAS to accommodate the capacity demands 
placed upon it. We must all work together--Congress, Federal, State and 
local governments, and industry stakeholders--to ensure that the future 
does not catch us unprepared for the return of air traffic to pre-
September 11 levels and higher. Future generations depend upon us.

          A SAFER, SIMPLER, SMARTER AND MORE BUSINESS-LIKE FAA

    In my tenure as Administrator, it has become apparent that FAA's 
operational costs must be brought under control. Since any future 
growth must be manageable, our decisions must be made in an informed 
manner. Just as our safety decisions should be driven by data, so 
should all our management decisions. Consequently, we must accelerate 
our efforts to set up our new financial system, DELPHI, and complete 
the implementation of our Cost Accounting System (CAS) and Labor 
Distribution Reporting (LDR) initiative, and use these tools to drive 
analysis toward better decisions.
    We will improve our cost accounting and acquisition processes, and 
we will become a performance-based organization. Currently, FAA has 
implemented cost accounting in two lines of business and several 
support organizations. And while we track 80 percent of our costs on a 
monthly basis, we still have a lot of work to do.
    As part of our cost accounting system, we are implementing a labor 
distribution system in air traffic services called Cru-X, to account 
for and distribute labor costs. Our air traffic controller workforce 
will use this data to better assess their workload and performance. 
Recently, the Inspector General noted that we have additional work to 
do on internal controls related to this system. I am committed to 
making this change, and to assuring the integrity of our cost 
information. With budget shortfalls and depleting trust fund revenues, 
we must be diligent stewards of the public's funds.
    Though we have made great strides, there is still much to be done. 
FAA received another unqualified or ``clean'' audit opinion on our 
fiscal year 2002 Consolidated Financial Systems. I am proud to say that 
this is the second year in a row that the Agency has received such an 
opinion. This gives us the firm foundation that we need to implement 
DELPHI effectively and to continue to build our cost accounting system.
    The Agency has worked hard to implement a performance based pay 
system. Approximately 36 percent of our employees are currently under 
the system--a system that links organizational goals with individual 
performance goals at every level. We must fully embrace a new way of 
thinking: pay equals performance. I pledge to you my full commitment to 
implementing such a system FAA-wide.

                               CONCLUSION

    To ensure that FAA moves forward in all these areas, one of my top 
priorities is to provide consistency and predictability in the way FAA 
works with industry. I do not want any variations in FAA policy or 
practice in the regions or field offices. I want our industry partners 
in the United States and around the world to know what they can expect 
and count on when dealing with the FAA. The future of aviation is 
dependent upon all of us leveraging our reduced resources in support of 
the common goal: a safe and efficient aviation system for our children 
and generations to follow.
    This year marks the centennial of the Wright Brothers' historic 
flight at Kitty Hawk. When you look back on those early days of 
aviation and compare how dangerous air travel was to its safety record 
of today, it is easy to congratulate ourselves and feel content with 
how far we've come. Yet, our pride should not give way to complacency. 
We must continue to set and work to achieve goals on safety, capacity 
and efficiency. Though we will face countless obstacles and difficult 
decisions, we must draw upon the strength and courage of great aviation 
pioneers, such as Lindbergh and Earhart, who set difficult goals and 
attained them. I am proud to take part in the future of aviation, and I 
stand ready to work with you, as together we enter the second century 
of flight. Thank you.
    This concludes my prepared statement. I am happy to answer your 
questions at this time.

                                 ______
                                 
                Biographical Sketch of Marion C. Blakey

    Marion Clifton Blakey was sworn in September 13, 2002 as the 15th 
Administrator of the Federal Aviation Administration. As Administrator, 
Blakey is responsible for regulating and advancing the safety of the 
Nation's airways as well as operating the world's largest air traffic 
control system. Prior to being named FAA Administrator, Blakey served 
as Chairman of the National Transportation Safety Board.
    During her tenure as Chairman, Blakey managed a number of accident 
investigations including the crash of American Airlines flight 587. 
Blakey worked to improve the Board's accident reporting process and 
increased industry and regulatory responsiveness to NTSB safety 
recommendations. Additionally, Blakey strengthened the Board's advocacy 
and outreach programs to promote safer travel throughout all modes of 
transportation. She also furthered development of the NTSB Academy as a 
national and international resource to enhance aviation safety and 
accident investigations.
    At the FAA, Ms. Blakey, continues a long career of public service. 
In addition to NTSB Chairman, Blakey has held four previous 
Presidential appointments, two of which required Senate confirmation. 
From 1992 to 1993, Blakey served as Administrator of the Department of 
Transportation's National Highway Traffic Safety Administration 
(NHTSA). As the Nation's leading highway safety official, she was 
charged with reducing deaths, injuries, and economic losses resulting 
from motor vehicle crashes. Prior to her service at NHTSA, she held key 
positions at the Department of Commerce, the Department of Education, 
and the National Endowment for the Humanities, the White House, and the 
Department of Transportation.
    From 1993 to 2001, Blakey was the principal of Blakey & Associates, 
a Washington, DC public affairs consulting firm with a particular focus 
on transportation issues and traffic safety.
    Ms. Blakey, born in Gadsden, Alabama, received her bachelor's 
degree with honors in international studies from Mary Washington 
College of the University of Virginia. She also attended Johns Hopkins 
University, School of Advanced International Studies for graduate work 
in Middle East Affairs.

    Senator Shelby. Mr. Mead?

                    Office of the Inspector General

STATEMENT OF KENNETH M. MEAD, INSPECTOR GENERAL

    Mr. Mead. Thank you, Mr. Chairman, Senator Murray, Senator 
Dorgan, Senator Bennett.
    It is good to be here with Administrator Blakey and Under 
Secretary Shane, very good people and great to work with.
    In your packages you have some slides. It has a blue wheel 
on the front. I will refer to those a couple of times.
    This hearing is occurring, of course, against the backdrop 
of an industry in financial distress. As I was writing my 
statement, I had to change it by the hour because it is hard to 
know who is in bankruptcy and who is out. But as Senator Murray 
was pointing out, they are either in or right on the brink of 
bankruptcy, or just coming out of it.
    I think it is important, though, for us all to recognize 
that this is due to a confluence of factors that include an 
unsustainable cost and fare structures that predate 9/11 by a 
long time. That pattern persisted and became more pronounced 
after 9/11 and now, with the war in Iraq, we are experiencing 
an even greater precipitous decline in bookings, particularly 
in the international area.
    Of course, the airlines also point to increased security 
related expenditures.
    This first chart, I tried to map out on this first chart 
the yellow and blue, what has happened with respect to business 
travel both before and after 9/11. You can see the steep drop 
in September, 2001.
    But look to the left of that axis and you will note that 
business travel was down 20 percent just before 9/11. And in 
November 2002 compared to November 2000, leisure travel was 
down 19 percent and business was down 32 percent. What we are 
seeing, to some degree, is a continuation of some problems that 
existed before 9/11.
    Even before the war with Iraq, major carriers were 
projecting losses of about $6 or 7 billion for 2003. With the 
war, and their assumption is a 90-day war, major carrier 
projections are about $10 to $11 billion. And the end is not in 
sight. We do not think you are going to see a recovery to the 
2000 levels until 2005, 2006, which is consistent with FAA's 
aviation forecast.
    Here are some other interesting metrics. In February 2003 
actual flight operations were down 10 percent compared to 
February 2000. And an interesting dimension to that is there 
has been a huge increase in the use of regional jets, a 156 
percent increase compared to a 17 percent decline in larger 
aircraft and a 46 percent decline in the use of turboprop 
aircraft.
    Domestic emplanements are down nearly 8 percent in 2003 
compared to January 2000. Much of the reduced demand represents 
what had been the highest fare business travelers. An 
interesting statistic here relates to the network carrier cost 
structure. About 10 to 20 percent of their passengers, the 
business travelers, were providing between 40 and 50 percent of 
the revenues. So when the business travel part of the market 
began to fall out, you can see why the airlines were hurting so 
much.
    Another interesting statistic, last year break-even load 
factors, that is the average percentage of paying passengers on 
all flights that are needed to cover an airline's costs. For 
the industry as a whole it was 87 percent. In other words, 87 
percent of that plane had to be full before an airline would 
start talking about turning a profit.
    Actual load factors, though, were only averaging about 74 
percent. One airline had a break-even load factor of over 100 
percent. And you might say well, how can an airline fill more 
than 100 percent of its seats? The answer is it cannot. And 
that is why that airline is teetering on the edge of 
bankruptcy.
    I know you are considering some relief packages and you and 
your staffs must be exhausted from the last few days. I would 
say that great care has got to be taken in framing a relief 
package. I think a relief package is warranted. But take care 
to not provide a cash subsidy that is going to simply allow the 
airlines to avoid making hard calls that many of them are 
already in the process of making. We do not want it to be a 
bailout.
    And I might add, I think it has been pretty unseemly for 
airlines to come up here to Congress and ask for financial aid 
from the taxpayers for not the first, but the second time when 
the senior executives are getting very large bonuses. I think 
the American taxpayer would wonder what is wrong with this 
picture.
    The second factor is that you require any airline security 
costs that Congress judges are eligible be documented. And that 
the airlines have some evidence of that $4 billion that they 
are claiming is justifiable. I do not think we want a repeat of 
what happened last year when Congress thought it was going to 
be $1 billion and it eventually ended up being about $300 
million.
    Third. That it be a limited duration. This is an important 
issue, a limited duration package will allow you to come back 
to revisit it if it is necessary.
    And finally, I am not sure that the packages consider how 
we are going to treat the foreign carriers that come here and 
pay these fees. We want to make sure that we do not develop an 
equity argument whereof they pay a fee and we reimburse 
domestic carriers. I would expect that there would be some 
expectation that they be reimbursed as well.
    I would like to move to a word on small communities. You 
hear a lot of anecdotal evidence that service to small 
communities is declining. It is not just anecdotal. I have a 
chart, chart 2 cuts up the United States into quadrants. And 
you can see that on the average you have lost about 19 percent 
of service to your small, medium non-hub communities. The 
Northeast is particularly hard hit--about 33 percent of their 
service has been lost. I know an important matter on your 
agenda is the essential air service program.
    I now would like to turn to FAA. I think it is very 
important to recognize that this agency oversees the largest 
and safest air transportation system in the world. FAA deserves 
a lot of credit for that. I think Ms. Blakey's safety 
background is going to serve the Nation extremely well in that 
regard.
    But this agency urgently needs to get its costs under 
control. Why? Well, projected tax receipts to the Aviation 
Trust Fund for 2004 have dropped from approximately $12.5 
billion to around $10 billion. Over the next 4 years the 
projected trust fund tax revenues are down and you are going to 
have about $10 billion less than you were counting on.
    While these projections have dropped precipitously, FAA's 
spending has not. Budgets increased from about $8 billion in 
1996 to $14 billion in 2004. That is about 70 percent. Over 
half of that, though, is for increased operations cost, which 
are mostly payroll costs.
    The committee should know that personnel reform was a key 
element of the move to make FAA performance-based. But to date, 
the reality has been increasing workforce costs and 
significantly higher salaries.
    The new compensation system for controllers, FAA's largest 
workforce, was a big cost driver. They have a very good pay 
package. The average base salary for fully certified 
controllers, exclusive of overtime, is now about $106,000. In 
1998 it was about $72,000. That is a 47 or 48 percent increase.
    Even though FAA is supposed to be a performance-based 
organization, only 36 percent of the employees actually get 
paid based on individual performance. The rest is largely 
automatic.
    In terms of acquisitions, for air traffic control, five 
major acquisitions out of 20 that we tracked have experienced 
cost growth of over $3 billion and that cost growth alone is 
equivalent to 100 percent of a full year's appropriation for 
acquisitions. I do not think continued cost growth of that 
magnitude is sustainable, especially given the decline in 
revenues.
    In some ways, it is the same picture the airlines were 
facing. I think FAA, under Ms. Blakey's leadership, needs to 
redouble its efforts to be a performance-based organization.
    On the safety front, there are a couple of areas I would 
like to mention. One is FAA has had some progress in reducing 
operational errors and runway incursions, but they are still 
much too high. They are experiencing one involving a commercial 
airliner every 10 days. That means that once every 10 days a 
commercial airliner is coming very close to just barely 
avoiding a collision, either on the ground or in the air. And 
so more progress is needed there.
    Close attention also is needed with respect to the level of 
oversight being provided to repair stations. Some metrics, in 
1996, 36 percent of airline maintenance costs went to repair 
stations. Now it is 47 percent, and you can expect it to grow. 
For some airlines, 64 to 77 percent of their maintenance is 
being outsourced. So we should expect a corresponding shift in 
the FAA's vigilance and attention to that area.
    And finally, a pending wave of controller retirements. 
There is some debate about how many controllers will retire and 
when. And that is one reason we need this Cru-X cost accounting 
system or labor distribution system so we can find out where 
the controllers are that are going to retire and how to plan 
accordingly.
    But the number that some are using is that by 2010 you 
could lose about 7,000 controllers. This is about half the 
controller workforce. It takes about 5 years right now to train 
a controller to full proficiency.

                           PREPARED STATEMENT

    And finally, a security related matter on the airports that 
I would encourage the Congress to resolve. Nobody knows who 
will pay for the installation of these SUV-sized explosive 
detection machines at airports. The airports, I am sure, have 
visited you. And when they say this is of concern to them, they 
have a legitimate point. This is not an inconsequential cost 
item, Mr. Chairman. We peg it at about $3 to $4 billion. So 
some resolution is needed on that point.
    That concludes my statement, sir.
    [The statement follows:]

                 Prepared Statement of Kenneth M. Mead

    Mr. Chairman and Members of the Subcommittee, we appreciate the 
opportunity to testify today as the Subcommittee begins deliberations 
on the fiscal year 2004 appropriation for the Federal Aviation 
Administration (FAA).
    This hearing is occurring against the backdrop of an industry in 
financial distress--two airlines representing more than 20 percent of 
the industry are in bankruptcy, and several others are teetering on the 
brink. This is due to a confluence of factors that include 
unsustainable cost and fare structures that clearly predate 9/11 and, 
with the advent of the war in Iraq, precipitous declines in travel 
bookings. The airlines also point to increased security-related 
expenditures for passenger screening, insurance, and Federal security 
taxes as contributing factors to their financial condition.
    Great care must be taken to ensure that any relief package provided 
by Congress (1) does not provide a cash subsidy that allows a way for 
airlines to avoid making the hard calls necessary to become 
sustainable, including lowering labor costs (including management 
salaries and bonuses) and increasing productivity of capital; (2) 
require that any airline security-related costs that Congress judges 
are eligible for reimbursement be supported by documentary evidence 
that clearly demonstrates that claimed costs were actually incurred; 
and (3) be of limited duration.
    The issue of service to small- and medium-sized communities is 
related to the financial condition of the airline industry. In an 
effort to stem losses, airlines have reduced service in the smallest 
communities by 19 percent in the past 5 years. Funding levels for the 
Essential Air Service Program (EAS), which is one vehicle for restoring 
access to air service in small communities, will be an important issue 
for the Committee's consideration this year. It should be noted, 
however, that maintenance of service in small communities will be most 
successful where restructuring of the cost structures of the network 
carriers is most successful.
    As for FAA, it is important to recognize that the agency oversees 
the largest and safest air transport system in the world, but FAA 
urgently needs to do considerably more to bring its costs under 
control. FAA's budget has increased from $8.2 billion in 1996 to $14 
billion in fiscal year 2004--an increase of $5.8 billion, or over 70 
percent. Over half of this increase is attributable to sharply rising 
costs in FAA's operations, which are made up primarily of salaries 
(about 74 percent of FAA's fiscal year 2004 Operations budget). From 
1998 (when FAA began implementing new pay systems), salaries within the 
agency have increased 41 percent whereas the overall increase for the 
Federal workforce in Washington, DC, for example, was about 30 percent.
    In terms of acquisitions, 5 major acquisitions out of 20 that we 
track have experienced substantial cost growth totaling more than $3 
billion, which is equivalent to an entire year's budget for FAA's 
modernization account. These same 5 acquisitions have also experienced 
schedule slips of 3 to 5 years.
    Continued cost growth of this magnitude is unsustainable given the 
financial state of the airline industry, multi-billion dollar declines 
in projected Aviation Trust Fund receipts, and greater dependence on 
the General Fund to pay for FAA's operations. We do not believe the 
answer to cost growth at FAA lies in an increase in taxes, fees, or 
other charges, which are already significant. Given the weak demand 
environment, any further increases are likely to reduce airline 
revenues and further threaten the financial health of the industry. 
Just as the airlines have had to rethink the basics of their business, 
FAA also must re-examine how it does business and redouble its efforts 
to become performance based in deed as well as in word. Administrator 
Blakey is taking steps to move the agency in that direction.
    In terms of safety, we feel the imperatives for FAA are: (1) 
further reducing operational errors (when planes come too close 
together in the air) and runway incursions (potential collisions on the 
ground)--in 2002, a commercial aircraft was involved in at least one 
serious runway incursion or operational error every 10 days; (2) 
providing adequate oversight of air carrier maintenance in view of 
shifts in carrier practices from in-house to outsourced (from 1996 to 
2001, outsourcing maintenance by major air carriers increased from 37 
percent of total maintenance costs to 47 percent); and (3) addressing 
pending controller retirements.
    On the security front, an important issue will be resolving who 
will pay for the next phase of explosives detection systems integration 
into airport baggage systems. This is a multi-billion dollar item.

                     STATE OF THE AIRLINE INDUSTRY

    Most of the major domestic airlines are in a precarious financial 
condition. Several airlines are in bankruptcy and others are teetering 
on the brink. \1\ As a group, the major carriers reported net losses 
totaling over $11 billion in 2002, which followed a year where their 
combined losses totaled $7.5 billion. For 2003, even before the United 
States went to war with Iraq, major carriers were projecting losses of 
between $6 billion and $7 billion. Now that the United States is at 
war, the airlines have increased their estimated losses to between $10 
billion and $11 billion, based on a 90-day war. And the end is not yet 
in sight, as current forecasts now extend the timeframe for recovery 
from 2004 to 2005 or 2006.
---------------------------------------------------------------------------
    \1\ As of April 1, 2003, the two carriers in bankruptcy were United 
Airlines and Hawaiian Airlines. USAirways emerged from bankruptcy 
protection on March 31, 2003.
---------------------------------------------------------------------------
    In February 2003, actual flight operations were down 10 percent 
compared to February 2000. Overall, domestic enplanements were down 
nearly 8 percent in January 2003 compared to January 2000. Much of the 
reduced demand represents what had once been the higher fare business 
travelers. By some estimates, business travelers account for 50 percent 
of airline revenues although they typically represent only 20 percent 
of airline travel. As the following figure illustrates, business travel 
in November 2002 was nearly one-third less than it was in November 
2000.



    In the third quarter 2002, breakeven load factors \2\ for the 
industry as a whole were 87 percent, while actual load factors averaged 
only 74 percent. One airline in that period experienced breakeven load 
factors of over 100 percent. How can an airline fill more than 100 
percent of its seats? The answer is it cannot, which is why that 
carrier is on the brink of bankruptcy.
---------------------------------------------------------------------------
    \2\ The average percentage of paying passengers on all flights 
needed to cover airline costs.
---------------------------------------------------------------------------
    In response to the economic downturn and increased costs following 
9/11, airlines have reduced their workforces, modified schedules, 
eliminated flights, closed offices and facilities, and retired 
aircraft. Negotiations are underway to reduce employment expenses 
throughout the industry by an additional $10 billion. Several airlines 
have used the bankruptcy process to restructure their costs, including 
renegotiating their labor contracts and their debt instruments. Still, 
financial conditions continue to be weak, exacerbated now by the 
ongoing war in Iraq.
    Based on a scenario of a 90-day war, the airlines project that 
their losses will be $4 billion higher in 2003 than the $6.7 billion 
they had originally projected. The losses would be driven by decreased 
passenger demand, higher fuel prices, and lower airfares. The airlines 
attest that they have already incurred over $4 billion in additional 
security costs since 9/11, including passenger screening fees, new 
security taxes, increased insurance costs, freight restrictions, 
cockpit door fortification, and the Federal Air Marshall program.
    A case could be made for providing some form of financial relief to 
assist airlines in the short term; such as extending the Federal war 
risk insurance program and extending the Air Transportation 
Stabilization Board loan guarantee program. Loan guarantees, if 
prudently incurred, can help to stabilize the financial condition of 
the industry. They may also prove a prudent, short-term market 
intervention if used to finance a realistically restructured airline's 
exit from bankruptcy.
    Other forms of potential relief, including reimbursing the airlines 
for security improvements, eliminating or reducing the Passenger 
Security Tax and Air Carrier Security Fee, and drawing down the 
Strategic Petroleum Reserve, should be considered in the following 
context.
    The airlines are requesting a very large sum of money from the 
American taxpayers. In that regard, we are concerned, as are American 
taxpayers, about the appearance of large executive pay packages that 
are still in place for top executives at some of the airlines with 
large operating losses. Financial aid is not a substitute for self-
help. This must come in the form of restructuring labor costs and 
management salaries, as well as increasing productivity of capital.
    Policy decisions are being made that could affect the competitive 
balance of the airline industry, and the implications of providing 
financial assistance for any reason need to be carefully considered. 
The airline industry is important to the economy of the United States 
and certainly financial assistance at this juncture would help preserve 
the industry in the short term. But it should be noted that while all 
airlines have had to incur the increased financial burden of operating 
in a post 9/11 environment, not all airlines are suffering equally. In 
fact, two airlines. Southwest and JetBlue, earned profits last year. 
These airlines were successful because their cost structures represent 
a more realistic picture of a post-deregulation competitive airline 
industry. Care should be taken not to penalize carriers who have 
adapted or revised their cost structures to forms that are sustainable, 
even during an economic crisis.
    Consideration should also be given to how financial assistance to 
the airline industry will be viewed by our international counterparts. 
To the extent possible, any relief package should be structured to 
limit the possibility of being criticized as an unfair airline subsidy.
    The airlines are especially vulnerable to the effects of this war 
and the terrorist attacks that may accompany it. But it should not be 
forgotten that during wartime, many industries suffer financial losses-
travel agents, retail outlets, cruise lines, and hotels--to name a few. 
Therefore, it is essential that a financial aid package designed to 
assist just one affected industry--the airlines--include narrowly 
defined relief terms and be of limited duration.
    If the decision is made to provide some sort of assistance to the 
airlines, the following guidelines should apply.
  --The effects of 9/11 and the war in Iraq have no doubt affected the 
        airlines' costs and revenues, but the fact is that many 
        airlines had unsustainable cost structures long before these 
        events took place. Any financial assistance that is forthcoming 
        should not result in a bail-out for failures in the competitive 
        marketplace that occurred prior to 9/11. Funding that is not 
        tied specifically and demonstrably to direct security-related 
        costs simply postpones the restructuring that will be necessary 
        in order for the major network carriers to remain viable. Most 
        of the current financial woes of the industry should be solved 
        by the marketplace.
  --Documentation of which costs are being claimed and in what amount 
        must be provided by the airlines and verified to ensure that 
        funds provided under a security relief package are not 
        subsidizing financial losses unrelated to security. Clarity is 
        needed concerning whether financial assistance will be 
        restricted to future war-related costs or security-related 
        costs already incurred by the industry. Whichever costs are 
        deemed eligible, the airlines must be held absolutely 
        accountable for documenting the costs the aid is applied 
        towards.
  --Financial assistance aimed at providing short-term war relief 
        should be just that: short term. Aid, if provided, should be of 
        limited duration and should not come to be expected by the 
        industry on a recurring basis. Given the uncertainty of what 
        could happen over the course of the coming year, an aid program 
        should terminate at the end of a firmly fixed time period with 
        the option to revisit the terms of the program if conditions 
        warrant.

             SERVICE TO SMALL AND MEDIUM SIZED COMMUNITIES

    Financial problems for major airlines may ultimately affect the air 
service to small- and medium-sized communities. The major network 
carriers serve these communities through their mainline service and 
regional affiliates by connecting passengers from these communities to 
the major airlines' hubs. At the current time, low-cost carriers are 
not a solution for many small- and medium-sized communities if their 
service declines. The low-cost carrier business models focus on serving 
dense markets that make it economical to fly multiple frequencies in 
large-volume jets. That model would not be sustainable in these small- 
or medium-sized communities. Maintenance of service in these markets 
will be most successful where the restructuring of the network carriers 
is most successful.
    In the smallest communities--those served by non-hub airports--
service has been declining for the past 5 years. Between March 1998 and 
March 2003, non-hub airports nationwide lost 19 percent of their 
commercial air service as measured by available seat miles. Between 
March 2000 and March 2003, non-hub airports in the Northeast and 
Midwest lost approximately one-third of their service.



    The Essential Air Service Program is a tool that these small 
communities rely on for attracting air service to their communities. 
The funding levels for this program will be an important matter for the 
Committee's consideration this year.

                          GENERAL STATE OF FAA

    As a result of the slow economy and the decline in air travel, 
there has been a significant decrease in tax revenues coming into the 
Aviation Trust Fund. Projected tax receipts to the Aviation Trust Fund 
for fiscal year 2004 have dropped from approximately $12.6 billion 
estimated in April 2001 to about $10.2 billion estimated in February 
2003. Over the next 4 years, Aviation Trust Fund tax revenues are 
expected to be about $10 billion less than projections made in April 
2001. Although Trust Fund projections are down for next year, FAA's 
spending request is not; increasing from $13.6 billion this year to 
$14.0 billion next year. If this $3.8 billion gap between Trust Fund 
revenues and FAA's budget ($10.2 billion to $14.0 billion) is financed 
by the General Fund, it would represent a rough doubling of such 
spending compared to recent years. 



    While there have been suggestions that this gap could be closed by 
increasing taxes or fees on airlines and air passengers, we urge 
extreme caution in this area. Taxes and fees are already high. For 
example, a non-stop round-trip ticket costing $200 may consist of 
nearly $33 in taxes, fees, and airport passenger facility charges or 16 
percent of the fare. On a connecting flight, the taxes on a $200 ticket 
could be up to $51, or nearly 26 percent of the fare. Any further 
increases are likely to reduce airline revenues, given the weak demand 
environment and will further threaten the financial health of the 
industry.
    Over the past 5 years, FAA has had some notable accomplishments--
successfully managing the Y2K computer problem, obtaining a clean 
opinion on agency-wide financial statements, bringing new Free Flight 
controller tools on-line, deploying the Display System Replacement on 
time and within budget, and expeditiously shutting the system down 
safely on 9/11. However, a key focus for FAA now must be effective cost 
control. This, in our opinion, is a primary challenge facing FAA for 
the next several years.
    Operating as a Performance Based Organization.--In 1996, Congress 
acted to make FAA a performance-based organization by giving the agency 
two powerful tools-personnel reform and acquisition reform. The 
expectation was that FAA would operate more like a business--that is, 
services would be provided to users cost effectively and major 
acquisitions would be delivered on time and within budget. FAA was also 
directed to establish a cost accounting system so that FAA and others 
would know where funds were being spent and on what. It is now over 6 
years later and we do not see sufficient progress toward FAA's becoming 
performance-based or toward achieving the outcomes that Congress 
envisioned.
  --Personnel Reform.--Personnel reform was a key element of the move 
        to make FAA performance-based. But to date, the reality has 
        been increasing workforce costs and significantly higher 
        salaries. From 1998 (when FAA began implementing new pay 
        systems), salaries within the agency have increased 41 percent 
        whereas the overall increase for the Federal workforce in 
        Washington, D.C., for example, was about 30 percent.

          The new pay system for controllers (FAA's largest workforce) 
        was a significant cost driver. The average base salary for 
        fully certified controllers is now over $106,000, which is 
        exclusive of premium pay and overtime. That figure represents a 
        47 percent increase over the 1998 average of $72,000, and 
        compares to an average salary increase of about 32 percent for 
        all other FAA employees during the same period. Although 
        linking pay and performance was a key tenet of personnel 
        reform, only about 36 percent of FAA employees receive pay 
        increases based on individual performance. The remaining FAA 
        employees receive largely automatic pay increases.

          In our work, we also found there are between 1,000 and 1,500 
        side bar agreements or Memorandums of Understanding (MOUs) that 
        are outside the national collective bargaining agreement with 
        controllers. Many serve very legitimate purposes, but some can 
        add millions to personnel costs. For example, one MOU we 
        reviewed allows controllers transferring to larger consolidated 
        facilities to begin earning the higher salaries associated with 
        their new positions substantially in advance of their transfer 
        or taking on new duties. At one location, controllers received 
        their full salary increases 1 year in advance of their transfer 
        (in some cases going from an annual salary of around $54,000 to 
        over $99,000). During that time, they remained in their old 
        location, controlling the same air space, and performing the 
        same duties.

          We found that controls over MOUs are inadequate. FAA 
        management does not know the exact number or nature of these 
        agreements, there are no established procedures for approving 
        MOUs, and their cost impact on the budget has not been 
        analyzed. It is important for FAA to get a handle on this 
        process because many MOUs involve issues pertaining to 
        deploying new equipment. We briefed Administrator Blakey on our 
        concerns regarding MOUs; FAA is now in the process of 
        identifying those MOUs that are problematic or costly and has 
        begun a dialogue with the controller's union to address them.
  --Acquisition Reform.--FAA has learned from past mistakes and its 
        ``build a little, test a little'' approach has clearly avoided 
        failures on the scale of the multi-billion dollar Advanced 
        Automation System acquisition. But the bottom line is that 
        significant schedule slips and substantial cost growth for 
        major air traffic control acquisitions are all too common. The 
        following chart provides cost and schedule information on 5 of 
        20 projects we track that were largely managed since FAA was 
        granted acquisition reform.

----------------------------------------------------------------------------------------------------------------
                                              Estimated program                    Implementation  schedule
                                             costs  (dollars in     Percent ------------------------------------
                Program                           millions)          cost
                                          ------------------------  growth    Original           Current
                                            Original     Current
----------------------------------------------------------------------------------------------------------------
Wide Area Augmentation System............      $892.4  \1\ $2,922       227   1998-2001  2003-\2\ \3\
                                                               .4
Standard Terminal Automation Replacement        940.2  \2\ 1,690.        80   1998-2005  2002-\2\ \3\
 System.                                                        2
Airport Surveillance Radar-11............       752.9       916.2        22   2000-2005  2003-2008
Weather and Radar Processor..............       126.4       152.7        21   1999-2000  2002-2003
Operational and Supportability                  174.7       251.0        44   1998-2001  2002-2005
 Implementation System.
----------------------------------------------------------------------------------------------------------------
\1\ This includes the cost to acquire geostationary satellites and costs are under review.
\2\ Costs and schedules are under review by FAA.
\3\ To be determined.

          These five acquisitions have experienced substantial cost 
        growth totaling more than $3 billion, which is equivalent to an 
        entire year's budget for FAA's modernization account 
        (Facilities and Equipment). These same five acquisitions have 
        also experienced schedule slips of 3 to 5 years. Problems with 
        cost growth, schedule slips, and performance shortfalls have 
        serious consequences. They result in costly interim systems, a 
        reduction in units procured, postponed benefits (in terms of 
        safety and efficiency), or ``crowding out'' other projects. For 
        example, in fiscal year 2002 alone, FAA reprogrammed over $40 
        million from other modernization efforts to pay for cost 
        increases in the Standard Terminal Automation Replacement 
        System (new controller displays for FAA's terminal facilities).

          FAA needs to set priorities and link the Operational 
        Evolution Plan (OEP) (FAA's blue-print for enhancing capacity), 
        with the agency's budget and address uncertainties with how 
        quickly airspace users will equip with new technologies in the 
        Plan (estimated at $11 billion). FAA is retooling the OEP, and 
        both FAA and industry officials told us that considerable 
        benefits may be obtained through airspace changes, new 
        procedures, and taking advantage of systems currently onboard 
        aircraft--all of which do not require major investments by 
        airlines. According to senior FAA officials, hard decisions 
        about funding OEP initiatives and related major acquisitions 
        will need to be made. In addition, FAA needs to develop metrics 
        to assess progress with major acquisitions.

  --Cost Accounting System.--To effectively operate as a performance-
        based organization, FAA needs an accurate cost accounting 
        system to track agency costs and provide managers with needed 
        cost data by location. Without a reliable cost accounting 
        system, FAA cannot credibly claim to be, nor can it function 
        as, a performance-based organization.

          At the direction of Congress, FAA began developing its cost 
        accounting system in 1996, which was estimated at that time to 
        cost about $12 million and be completed in October 1998. Now, 
        after nearly 7 years of development and over $38 million, FAA 
        still does not have an adequate cost accounting system, and it 
        expects to spend at least another $7 million to deploy the cost 
        accounting system throughout FAA. Although FAA's cost 
        accounting system is producing cost data for two of its lines 
        of business, it still does not report costs for each facility 
        location. For example, for the Terminal Service in fiscal year 
        2001, about $1.3 billion of $2.4 billion was reported in lump-
        sum totals and not by individual facility locations.

          FAA also needs an accurate labor distribution system to track 
        the costs and productivity of its workforces. Cru-X is the 
        labor distribution system FAA chose to track hours worked by 
        air traffic employees. As designed, Cru-X could have provided 
        credible workforce data for addressing controller concerns 
        about staffing shortages, related overtime expenditures, and to 
        help determine how many controllers are needed and where. That 
        information in turn is especially important given projections 
        of pending controller retirements. Unfortunately, Cru-X has not 
        been implemented as designed. We hope it will be in the coming 
        year.

    Aviation Safety.--After several years of continuous increases in 
operational errors and runway incursions, FAA has made progress in 
reducing these incidents. In fiscal year 2002, operational errors 
decreased 11 percent to 1,061 and runway incursions decreased 17 
percent to 339 from fiscal year 2001 levels. Despite FAA's progress, 
the number of these incidents is still too high considering the 
potential catastrophic results of a midair collision or a runway 
accident. On average, in fiscal year 2002, at least one commercial 
aircraft was involved in a serious runway incursion or operational 
error (in which a collision was barely avoided) every 10 days. We will 
be issuing our report on operational error and runway incursions 
shortly.
    FAA also needs to pay close attention to the level of oversight it 
provides for repair stations. Since 1996, there has been a significant 
increase in air carriers' use of these facilities. In 1996, major air 
carriers spent $1.6 billion for outsourced maintenance (37 percent of 
total maintenance costs), whereas in 2001, the major air carriers 
outsourced $2.9 billion (47 percent of total maintenance costs). As of 
September 2002, four major carriers were outsourcing between 64 and 77 
percent of their maintenance.
    In spite of this increase in the use of repair stations, FAA's 
surveillance continues to target more resources on air carriers' in-
house maintenance facilities than repair stations. In fact, repair 
stations are required to be inspected by FAA only once annually. In 
addition, some FAA-certified foreign repair stations are not inspected 
by FAA inspectors at all because foreign civil aviation authorities 
review repair stations on FAA's behalf.
    This trend in outsourcing maintenance is likely to continue, and 
FAA needs to consider the shift in maintenance practices when planning 
its safety surveillance work. We will be issuing our report on FAA's 
oversight of repair stations shortly.
    Another significant issue is the pending wave of controller 
retirements. In May 2001, FAA estimated almost 7,200 controllers could 
leave the agency by the end of fiscal year 2010. In general, the 
training process to become a certified professional controller can take 
up to 5 years. Given that time lag, FAA needs to take actions now to 
address when and where new controllers will be needed. The pending 
retirements underscore the need for an accurate labor distribution 
system. We will be starting an audit of controller training in the next 
several weeks.
    Mr. Chairman, let me conclude by discussing a major issue for 
airports--funding the next phase of explosives detection systems (EDS) 
integration. Thus far, nearly all EDS equipment has been lobby-
installed. The planned next step (integrating the EDS equipment into 
airport baggage systems) is by far the most costly aspect of full 
implementation. We have seen estimates that put the costs of those 
efforts between $3 and $5 billion. A key question is who will pay for 
those costs as well as other costs still to be determined, such as 
improving access controls and acquiring new screening technologies.

 MAKING FAA A PERFORMANCE-BASED ORGANIZATION THROUGH CONTROLLING COSTS 
                  IN OPERATIONS AND MAJOR ACQUISITIONS

    Controlling Operating Cost Increases.--Although Congress envisioned 
that personnel reform would result in more cost-effective operations, 
this has not occurred. Since 1996, FAA's operating costs have increased 
substantially. As shown in the following graph, FAA's operations budget 
has increased from $4.6 billion in fiscal year 1996 to $7.6 billion in 
fiscal year 2004. Given the decline in Aviation Trust Fund revenues and 
the financial situation of the airlines, a continuation of this growth 
can no longer be sustained.



    Much of the increase in operations costs has been a result of 
salary increases from collective bargaining agreements negotiated under 
FAA's personnel reform authority. The 1998 collective bargaining 
agreement with the National Air Traffic Controllers Association 
(NATCA), which created a new pay system for controllers, was a 
significant cost driver. Under the agreement, most controllers' 
salaries increased substantially. For example,
  --The average base salary for fully certified controllers has now 
        risen to over $106,000--a 47 percent increase over the 1998 
        average of about $72,000 (as shown in the table below). This 
        compares to an average salary increase for all other FAA 
        employees during the same period of about 32 percent, and for 
        all Government employees in the Washington, D.C. area of about 
        30 percent.

                 AVERAGE BASE SALARIES FOR FAA EMPLOYEES
------------------------------------------------------------------------
                                               Fully
                                           certified air  Non-controller
Average base salary (including locality)      traffic      FAA employees
                                            controllers
------------------------------------------------------------------------
2003....................................    \1\ $106,580         $78,080
1998....................................         $72,580         $59,200
Percentage Increase From 1998 to 2003...            46.8            31.9
------------------------------------------------------------------------
\1\ After 4.9 percent increase.

    Following the NATCA agreement, other FAA workforces began 
organizing into collective bargaining units as well. Today, FAA has 48 
collective bargaining units as compared to 19 collective bargaining 
units in 1996.
    The increase in bargaining units has complicated FAA's plans for 
fielding its agency-wide compensation system (created in April 2000), 
because FAA's 1996 reauthorization requires that FAA negotiate 
compensation with each of its unions. This has also complicated FAA's 
plans to create a link between pay and performance. Although linking 
pay and performance was a key tenet of personnel reform, only about 36 
percent of FAA employees receive pay increases based on individual 
performance. The remaining FAA employees receive largely automatic pay 
increases.
    We also found, that outside the national collective bargaining 
agreement with NATCA, FAA and the union have entered into hundreds of 
side bar agreements or MOUs. These agreements can cover a wide range of 
issues such as implementing new technology, changes in working 
conditions and, as a result of personnel reform bonuses and awards, all 
of which are in addition to base pay. We found that FAA's controls over 
MOUs are inadequate. For example, there is:
  --no standard guidance for negotiating, implementing, or signing 
        MOUs;
  --broad authority among managers to negotiate MOUs and commit the 
        agency;
  --no requirement for including labor relations specialists in 
        negotiations; and
  --no requirement for estimating potential cost impacts prior to 
        signing the agreement.
    In addition, FAA has no system for tracking MOUs, but estimates 
there may be between 1,000 and 1,500 MOUs agency-wide. While most MOUs 
serve very legitimate purposes, we reviewed a number of MOUs that had 
substantial cost implications. For example,
  --As part of the controller pay system, FAA and NATCA entered into a 
        national MOU providing controllers with an additional cost of 
        living adjustment. As a result, at 111 locations, controllers 
        receive between 1 and 10 percent in ``Controller Incentive 
        Pay,'' which is in addition to Government-wide locality pay. In 
        fiscal year 2002, the total cost for this additional pay was 
        about $27 million.
  --One MOU we reviewed allows controllers transferring to larger 
        consolidated facilities to begin earning the higher salaries 
        associated with their new positions substantially in advance of 
        their transfer or taking on new duties. At one location, 
        controllers received their full salary increases 1 year in 
        advance of their transfer (in some cases going from an annual 
        salary of around $54,000 to over $99,000). During that time, 
        they remained in their old location, controlling the same air 
        space, and performing the same duties.
    Administrator Blakey is aware of our concerns regarding MOUs and 
has begun a dialogue with NATCA to address this issue.
    Improving Management of Major Acquisitions.--FAA spends almost $3 
billion annually on a wide range of new radars, satellite-based 
navigation systems, and communication networks. Historically, FAA's 
modernization initiatives have experienced cost increases, schedule 
slips, and shortfalls in performance. While progress has been made with 
Free Flight Phase 1, problems persist with other major acquisitions. In 
1996, Congress exempted FAA from Federal procurement rules that the 
agency said hindered its ability to modernize the air traffic control 
system. Now, after nearly 7 years, FAA has made progress in reducing 
the time it takes to award contracts, but acquisition reform has had 
little measurable impact on bottom line results--bringing large-scale 
projects in on time and within budget. The following chart provides 
cost and schedule information on 5 of 20 projects we track that have 
been managed since FAA was granted acquisition reform.

----------------------------------------------------------------------------------------------------------------
                                              Estimated program                    Implementation  schedule
                                             costs  (dollars in     Percent ------------------------------------
                Program                           millions)          cost
                                          ------------------------  growth    Original           Current
                                            Original     Current
----------------------------------------------------------------------------------------------------------------
WAAS.....................................      $892.4   \1\ $2,92       227   1998-2001  2003-\2\ \3\
                                                              2.4
STARS....................................       940.2  \2\ 1,690.        80   1998-2005  2002-\2\ \3\
                                                                2
ASR-11...................................       752.9       916.2        22   2000-2005  2003-2008
WARP.....................................       126.4       152.7        21   1999-2000  2002-2003
OASIS....................................       174.7       251.0        44   1998-2001  2002-2005
----------------------------------------------------------------------------------------------------------------
\1\ This includes the cost to acquire geostationary satellites and costs are under review.
\2\ Costs and schedules are under review.
\3\ To be determined.

    These five acquisitions have experienced cost growth of over $3 
billion and schedule slips of 3 to 5 years. Problems with cost growth, 
schedule slips, and performance shortfalls have serious consequences--
they result in costly interim systems, a reduction in units procured, 
postponed benefits (in terms of safety and efficiency), or ``crowding 
out'' other projects.
    For example, STARS, which commenced operations at Philadelphia this 
past year, has cost FAA more than $1 billion since 1996. Most of these 
funds were spent on developing STARS, not delivering systems. When the 
STARS development schedule began slipping, FAA procured an interim 
system, the Common Automated Radar Terminal System (Common ARTS) for 
about $200 million. FAA is now operating Common ARTS (software and 
processors) at approximately 140 locations.
    Moreover, in fiscal year 2002 alone, FAA reprogrammed over $40 
million from other modernization efforts (data link communications, 
oceanic modernization, and instrument landing systems) to pay for cost 
increases with STARS. As a result of these cost and schedule problems, 
in March 2002, FAA officials proposed scaling back the program from 182 
systems for $1.69 billion to a revised estimate of 73 systems for $1.33 
billion. No final decision has been made, and FAA is currently 
reevaluating how many STARS systems it can afford.
    Cost growth of this magnitude must be avoided because only 60 
percent of FAA's fiscal year 2004 request for Facilities and Equipment 
is expected to be spent on new air traffic control systems, whereas the 
remaining funds are requested for FAA facilities, mission support 
(i.e., support contracts), and personnel expenses.



    There are large-scale acquisitions--both old and new--whose cost or 
schedule baselines need to be revised because the programs have changed 
considerably or benefits have shifted. For example, the Integrated 
Terminal Weather System (ITWS) provides air traffic managers with 
enhanced weather information. FAA planned to complete deployment of the 
new weather system in 2004 at a cost of $286 million. However, unit 
production costs have skyrocketed from $360,000 to over $1 million; FAA 
cannot execute the program as scheduled and may extend the deployment 
by 4 years.
    In addition, FAA intended to have the Local Area Augmentation 
System (Category I)--a new precision approach and landing system--in 
operation in 2004. It is now clear that this milestone cannot be met 
because of additional development work, evolving requirements, and 
unresolved issues regarding how the system will be certified as safe 
for pilots to use. Moreover, the more demanding Category II/III 
services (planned for 2005) are now a research and development effort 
with an uncertain end state. This means that benefits associated with 
the new precision approach and landing system will be postponed.
    Our work has also found that FAA has not followed sound business 
practices for administering contracts. We have consistently found a 
lack of basic contract administration at every stage of contract 
management from contract award to contract closeout.
    For example, we found that Government cost estimates were:
  --prepared by FAA engineers, then ignored;
  --prepared using unreliable resource and cost data;
  --prepared by the contractor (a direct conflict of interest); or
  --not prepared at all.
    FAA has stated that it will take actions to address these 
concerns--the key now is follow through.
    In addition to strengthening contract oversight, FAA needs to 
develop metrics to assess progress with major acquisitions, make 
greater use of Defense Contract Audit Agency audits, and institute cost 
control mechanisms for software-intensive contracts. FAA needs to 
obtain these audits from the Defense Contract Audit Agency for contract 
costs billed by private companies for research and development, 
production, and all costs related to system development. FAA should get 
these audits to ensure that the amounts billed are reasonable and that 
the government's interest is properly protected. By ensuring that only 
acceptable costs are paid to contractors, FAA will be able to stretch 
its procurement dollars further.
    With schedule slips and cost overruns in major acquisitions, it 
should be noted that FAA is not getting as much for its $3 billion 
annual investment as it originally expected.
    Tracking Costs.--An effective cost accounting system is fundamental 
to measuring the cost of FAA activities and provides the basis for 
setting benchmarks and measuring performance. Without a reliable cost 
accounting system, FAA cannot credibly claim to be, nor function as, a 
performance-based organization. It represents the underpinning for 
FAA's operation as a performance-based organization through the 
development of good cost information for effective decision-making. At 
the direction of Congress, FAA began developing its cost accounting 
system in 1996, which was estimated at that time to cost about $12 
million and be completed in October 1998. Now, after nearly 7 years of 
development and spending over $38 million, FAA still does not have an 
adequate cost accounting system, and expects to spend at least another 
$7 million to deploy the cost accounting system throughout FAA.
    Although FAA's cost accounting system is producing cost data for 
two of its lines of business, it still does not report costs for each 
facility location. For example, for the Terminal Service in fiscal year 
2001, about $1.3 billion of $2.4 billion was reported in lump-sum 
totals and not by individual facility locations.
    FAA also needs an accurate labor distribution system to track the 
costs and productivity of its workforces. Cru-X is the labor 
distribution system FAA chose to track hours worked by air traffic 
employees. As designed, Cru-X could have provided credible workforce 
data for addressing controller concerns about staffing shortages, 
related overtime expenditures, and to help determine how many 
controllers are needed and where. That information in turn is 
especially important given projections of pending controller 
retirements. Unfortunately, Cru-X as designed has not been implemented. 
We hope it will be in the coming year.
building aviation system capacity and more efficient use of airspace to 

                 PREVENT A REPEAT OF THE SUMMER OF 2000

    FAA needs to be strategically positioned for when demand returns 
through a combination of new runways, better air traffic management 
technology, airspace redesign, and greater use of non-hub airports. It 
would be shortsighted to do otherwise. FAA estimates that domestic 
passenger numbers are expected to return to 2000 levels by 2005, 
although the recovery in passenger traffic will lag by a year for major 
carriers. FAA also reports large increases in the use of regional jets 
(from 496 in 2000 to over 900 in 2002)--this bears careful watching 
because of their impact on FAA operations and modernization efforts.
    FAA's OEP is the general blueprint for increasing capacity. As 
currently structured, the plan includes over 100 different initiatives 
(including airspace redesign initiatives, new procedures, and new 
technology) and is expected to cost in the $11.5 to $13 billion range, 
excluding the costs to build new runways, but the true cost of 
implementing the plan is unknown. FAA estimates the plan will provide a 
30 percent increase in capacity over the next 10 years assuming all 
systems are delivered on time, planned new runways are completed, and 
airspace users equip with a wide range of new technologies.
    While airspace changes and new automated controller tools will 
enhance the flow of air traffic, it is generally accepted that building 
new runways provides the largest increases in capacity. The OEP now 
tracks 12 runways scheduled for completion in the next 10 years. Four 
of the runway projects are expected to be completed in 2003 at Denver, 
Houston, Miami, and Orlando airports. However, construction on several 
other airports has been delayed from 3 months to 2 years. There are 
other new runway projects not in the plan but important for increasing 
capacity, such as Chicago O'Hare. These runway projects are not in the 
plan because airport sponsors have not finalized plans or developed 
firm completion dates. FAA needs to continue to closely monitor all new 
runway projects.
    Progress has been made with OEP initiatives, but much uncertainty 
exists about how to move forward with systems that require airlines to 
make investment in new technologies. FAA and the Mitre Corporation 
estimate the OEP would cost airspace users $11 billion to equip with 
new technologies. For example, FAA and Mitre estimate the cost to equip 
a single aircraft with Automatic Dependent Surveillance-Broadcast 
ranges from $165,000 to almost $500,000, and the cost for Controller-
Pilot Data Link Communications ranges from $30,000 to $100,000 
excluding the cost to take the aircraft out of revenue service.
    FAA is working to retool the OEP. With the slow down in the demand 
for air travel, FAA has an opportunity to synchronize the OEP with 
FAA's budget and set priorities, and address uncertainties with respect 
to how quickly airspace users will equip with new technologies in the 
plan. Senior FAA officials noted that hard decisions will need to be 
made. Further, some large-scale, billion-dollar acquisitions are not in 
the Plan but critical for its success. For example, the Enroute 
Automation Replacement Modernization project (new software and hardware 
for facilities that manage high altitude traffic with an estimate cost 
of $1.9 billion) is not an OEP initiative but needs to be fully 
integrated with the Plan and considered when setting priorities.
    It is a good time to rethink what reasonably can be accomplished 
over the next 3 to 5 years, and what will be needed by FAA and industry 
given the decline in Trust Fund revenue and the financial condition of 
the airlines. According to the Associate Administrator for Research and 
Acquisition, it is likely that the OEP will shift from a plan that 
relied heavily on airspace users to equip their aircraft to one that 
places greater emphasis on airspace changes and procedural changes that 
take advantage of equipment already onboard aircraft.
striking a balance between how airport funds will pay for capacity and 

                          SECURITY INITIATIVES

    A major issue for airports is funding the next phase of EDS 
integration. Thus far, nearly all EDS equipment has been lobby-
installed. TSA's planned next step (integrating the EDS equipment into 
airport baggage systems) is by far the most costly aspect of full 
implementation. The task will not be to simply move the machines from 
lobbies to baggage handling facilities but will require major facility 
modifications. We have seen estimates that put the costs of those 
efforts at over $5 billion, and this is an almost immediate issue 
facing the airports.
    A key question is who will pay for those costs and how. While the 
current Airport Improvement Plan (AIP) has provided some funding in the 
past for aviation security, we urge caution in tapping this program 
until we have a firm handle on airport safety and capacity 
requirements.
    In fiscal year 2002, airports used over $561 million of AIP funds 
for security-related projects. In contrast, only about $56 million in 
AIP funds were used for security in fiscal year 2001. Continuing to use 
a significant portion of AIP funds on security projects will have an 
impact on airports' abilities to fund capacity projects. The following 
chart shows how AIP funds were used and for what type of project in 
fiscal year 2002.



    AIP funds as well as passenger facility charges (PFCs) are eligible 
sources for funding this work. However, according to FAA, PFCs are 
generally committed for many outlying years and it would be difficult, 
requiring considerable coordination among stakeholders (i.e. airports 
and airlines), to make adjustments for security modifications at this 
point. The following chart shows how PFC funds have been used since 
1992.



    There have also been proposals to raise the cap on PFCs; however, 
we urge caution before adding additional fees or taxes for air travel. 
Consumers already pay a significant amount in aviation taxes and fees. 
For example, a non-stop round-trip ticket costing $200 may consist of 
nearly $33 in taxes and fees, or 16 percent of the fare. On a 
connecting flight, the taxes on this ticket could be up to $51, or 
nearly 26 percent of the fare. Any further increases are likely to 
reduce airline revenues, given the weak demand environment and will 
further threaten the financial health of the industry.

                            AVIATION SAFETY

    The U.S. air transport system is the safest in the world and safety 
remains the number one priority for FAA. Until the recent Air Midwest 
crash in Charlotte, there had not been a fatal commercial aviation 
accident in the United States in 14 months.
    Progress has been made this past year in reducing the risk of 
aviation accidents due to operational errors and runway incursions. 
Operational errors (when planes come too close together in the air) and 
runway incursions (potential collisions on the ground) decreased by 11 
percent and 17 percent, respectively, in fiscal year 2002. 
Notwithstanding these improvements, operational errors and runway 
incursions should remain an area of emphasis for FAA because at least 
three serious operational errors and one serious runway incursion (in 
which collisions were narrowly averted) occur, on average, every 10 
days.
    In the current financially-strapped aviation environment, FAA must 
remain vigilant in its oversight to sustain a high level of aviation 
safety. FAA has recognized this need and has taken steps to heighten 
surveillance during times when airlines are in financial distress. For 
example, FAA has increased the number of inspections planned for 
distressed air carriers' internal aircraft maintenance operations. We 
are beginning an audit of this issue in the next several weeks.
    FAA also needs to pay close attention to the level of oversight it 
provides for repair stations. In the past 5 years, there has been a 
significant increase in air carriers' use of these facilities. In 1996, 
major air carriers spent $1.6 billion for outsourced maintenance (37 
percent of total maintenance costs), whereas in 2001, the major air 
carriers outsourced $2.9 billion (47 percent of total maintenance 
costs).



    Even as air carriers currently outsource close to half of their 
maintenance work, FAA has continued to focus its surveillance on air 
carriers' in-house maintenance operations with no comparable shift 
toward increased oversight of repair stations. For example, FAA assigns 
a team of as many as 27 inspectors to continuously monitor air 
carriers' internal maintenance operations, while typically, only one to 
two inspectors that have other collateral duties are assigned to 
monitor work performed at aircraft repair stations. Because use of 
repair stations represents a less costly way of getting maintenance 
work completed, the trend in outsourcing maintenance is likely to 
continue. FAA needs to consider this shift in maintenance practices 
when planning its safety surveillance work.
    Another significant issue is the pending wave of controller 
retirements. In May 2001, FAA estimated a total of 7,195 controllers 
could leave the agency by the end of fiscal year 2010. In general, the 
training process to become a certified professional controller can take 
up to 5 years. Given that time lag, FAA needs to take actions now to 
address when and where new controllers will be needed. The pending 
retirements underscore the need for an accurate labor distribution 
system. We will be starting an audit of controller training in the next 
several weeks.
    That concludes my statement, Mr. Chairman. I would be pleased to 
address any questions you or other members of the Subcommittee might 
have.

    Senator Shelby. Secretary Shane, welcome to the committee.

                        Office of the Secretary

STATEMENT OF JEFFREY N. SHANE, UNDER SECRETARY FOR 
            POLICY
    Mr. Shane. Thank you, Mr. Chairman, and ranking member 
Murray, Senators Bennett and Dorgan. It is always a pleasure to 
appear before you, and it is today. We appreciate very much 
your holding this hearing.
    I believe I can summarize my prepared remarks referred to 
by Senator Murray earlier, and do them fairly briefly. I will 
skip the part where I talk about how closely the Administration 
is monitoring industry developments. And I think Ken Mead has 
also covered a little bit of the ground, so I can be quick.
    Almost 3 months ago, in testimony before another Senate 
committee, I outlined the challenges facing the industry and 
pointed at the record losses that had occurred during calendar 
year 2001 and that were continuing into 2002.
    Wall Street analysts, even before the war in Iraq, were 
predicting about $6.5 billion dollars in additional industry 
losses for 2003. We now know that these losses could be even 
higher if the conflict results in an extended period of reduced 
demand for air travel.
    The airline industry has proven over the years to be 
remarkably resilient, however, and it is important to note that 
the news even now is not all bad. Despite heavy losses for the 
industry overall, for example a number of low fare airlines 
have remained profitable, and have been expanding their 
operations despite the downturn in demand.
    At the same time, our largest network airlines are making 
progress in controlling their costs. USAirways, as we all read 
the other day, emerged from bankruptcy 2 days ago. And 
American, despite a lot of concern in the market, has been able 
to avoid bankruptcy. That is because both carriers have found 
ways to reduce their cost structures dramatically and to retool 
their business plans. Other airlines are making similar 
progress.
    I have appended to my prepared statement some charts that 
illustrate the current state of the industry and the challenges 
that it is facing, particularly since the start of the war in 
Iraq. What I would like to do is summarize those charts very, 
very quickly.
    I apologize, I did not bring blow ups of the charts. I 
believe that we have made sufficient copies available so that 
everybody has copies. If that is not the case, please let us 
know and we will supply them right now.
    Chart 1 really covers ground that Inspector General Mead 
covered. It really just demonstrates how, in fact, the long 
period of record profits during the 1990s was transformed into 
a period that we now know to be record losses beginning in late 
2000 and early 2001.
    Chart 2 shows system operating profits or losses over the 
last 3 calendar years. But it is important because the airlines 
are divided, in that chart, into three different groups. The 
first group includes our largest network carriers. And the 
third group are low fare carriers.
    I apologize for the airline codes that we used to identify 
the airlines. We actually have a legend. They are not all self-
evident. So we can supply you that to make clear who the 
airlines are that we are talking about.
    The important message from this chart is that while the 
industry as a whole has sustained operating losses approaching 
$10 billion for each of the past 2 years, the low fare 
carriers, as I indicated earlier, have indeed continued to earn 
profits.
    Chart 3 shows system-wide operating margins. Note the 
contrast between the double-digit negative operating margins 
for the large network airlines and the low fare carriers' 
positive operating margins during this time.
    Our review of recent information suggests that the 
financial trends observed in the quarterly data throughout 2002 
are continuing into 2003.
    Chart 4 compares weekly traffic levels, beginning in mid-
December 2002, for those Air Transport Association member 
carriers that have international routes with traffic levels 
from a year earlier. It shows that from mid-December of last 
year to the end of January, traffic was up slightly over a year 
before. A pronounced downward trend begins in February, 
however, and accelerates after the start of the conflict in 
Iraq, especially for trans-Atlantic traffic.
    Finally, chart 5 compares daily traffic for the same 
carriers beginning March 12th of this year with traffic a year 
earlier. Initially the trend is up slightly but then declines 
sharply at the start of the hostilities. By March 26th, traffic 
was down about 20 to 25 percent for each of the regions shown 
on the chart.
    So where does this leave us? Many airlines have suffered 
large losses for more than 2 years, are heavily leveraged, and 
are now dealing with steep declines in demand. Does this mean 
that the airline industry is doomed to fail? Certainly not. But 
there will be change. Airlines are working hard to do what they 
must do to survive and to eventually return as viable 
competitors.
    We are going to get through this. My personal conviction is 
when we do, the industry will look a lot like the industry we 
have today except that it will be more cost-effective, more 
competitive, and more robust.
    Let me just say one thing particularly in response to 
Ranking Member Murray's comments about Secretary Mineta's 
statement for the press last night. Secretary Mineta, I hope 
everybody knows, has been a consistent champion of some limited 
temporary assistance to the airline industry. There has never 
been any question about that. My testimony was prepared at a 
time that productive negotiations were already underway between 
the Administration and Congressional leadership. Those 
negotiations, I hope, are continuing.
    There is, as the secretary said, a considerable gulf 
between where the Administration believes we should come out 
and where the House and the Senate votes yesterday set the 
numbers.
    We should continue to negotiate. I think the biggest 
difference, if I can just comment on this briefly, and I know 
we will have a colloquy about it afterwards, is that it is 
important to recognize that USAirways came out of bankruptcy on 
Monday. It is important to recognize that through heroic 
efforts American Airlines has been able to reduce its cost 
structure such that it did not have to go into bankruptcy. 
Other airlines are doing exactly the same thing.
    The question for the Congress and for the Administration 
must be what measure of assistance is appropriate given the 
absolute duress the industry is in without compromising or 
interfering with a process that this industry has to go 
through. Otherwise, if it does not go through this process now, 
if it does not retool itself, if it does not fix itself for the 
future, we will face this issue every time there is another 
crisis and it will be a perennial albatross for every 
administration and for every Congress that succeeds us.

                           PREPARED STATEMENT

    That is really the discussion that we should be having. We 
believe that some assistance is appropriate. The level of that 
assistance is the only thing that separates the Administration 
and Congress right now.
    Let me stop right there and I do look forward to any 
questions you may have. Thank you.
    [The statement follows:]

                 Prepared Statement of Jeffrey N. Shane

    Chairman Shelby, Ranking Member Murray, and Members of the 
Subcommittee, I appreciate the opportunity to appear here today to 
discuss the state of the airline industry.
    As you are well aware, these are extraordinary times for the 
airline industry. Significant challenges are occurring virtually every 
day. The Administration is working hard to keep up with these 
developments and to assess their near-term and longer-term 
implications.
    Almost three months ago, on January 9, in testimony before the 
Senate Committee on Commerce, Science, and Transportation about the 
future of the airline industry, I pointed to record losses during 
calendar year 2001, continuing heavy losses during 2002, and into 2003.
    We now know that the predictions for large losses during 2002 were 
correct, and Wall Street analysts, even before the war in Iraq, had 
changed their loss predictions for 2003 from the range of $2.5 to $3.0 
billion to about $6.5 billion. The large network airlines that today 
account for a major part of our domestic passenger air transportation 
system account for most of these losses. The war in Iraq may both 
reduce their revenue and increase their losses in 2003.
    In my testimony three months ago I also pointed to the fact that 
the airline industry has proven to be remarkably resilient over the 
years, and that not all news was bad. Despite the overall heavy losses 
for the industry, and in stark contrast to the experience of the large 
network airlines, a cadre of low-fare airlines had remained profitable 
and was rapidly expanding. This trend has continued as well.
    In addition, we now see individual large network airlines making 
progress in getting their costs under control. For example, USAirways 
has emerged from bankruptcy, and American has thus far avoided it, in 
part because they have been successful in reducing their costs by 
restructuring labor costs and overhauling their business plans. Other 
large network carriers have also progressed with their cost control 
efforts.
    Many issues are now at play--structural issues that emerged before 
September 11, the aftermath of the September 11 terrorist attacks, the 
sluggishness of the return of air travel demand, and the war in Iraq. 
How all of this is resolved will have major consequences for the 
airline industry and related industries, and, indeed, our economy for 
many years to come.
    To provide context, before getting into more specific details about 
what is driving the financial plight of much of the industry, an 
important deregulation development must be briefly discussed. 
Specifically, two very different types of carriers have evolved--large 
network carriers and low-cost carriers. Generally speaking the former 
are pre-deregulation carriers and the latter are new airlines that 
evolved after deregulation. To a certain extent these two types of 
airlines serve different types of markets, have different business 
strategies, and focus on different customers, even when they operate in 
the same geographic regions.
    A basic reason for the emergence of the low-fare airlines is that 
this was the only effective response to the powerful networks that were 
quickly built by the pre-deregulation airlines. Low costs allowed the 
new carriers to charge such low fares that they could profitably serve 
a demand sector that was mostly unserved by the large network airlines. 
While these airlines, other than Southwest, struggled for years to 
establish a competitive toehold, several have now done so. Almost 
ironically, while the low-cost strategy was initially pursued as a 
vehicle for coexisting with the larger, dominant network airlines, the 
success of this strategy now poses a challenge to the continuing 
viability of the larger airlines unless they too are successful in 
their own efforts to control costs.
    But both types of operation are vital components of our Nation's 
air transportation system. Low-cost airlines are an increasingly 
important element of our commercial air travel system. Their 
substantially lower costs enable them to provide capacity for price 
sensitive passengers, and to price compete for time sensitive 
passengers who are otherwise faced with substantially higher prices. 
But the traditional ``major'' airlines, through their feeder systems, 
serve an unmatched variety of markets--including a great many smaller 
communities that would not be on the aviation map without them. Over 
the course of many decades our largest airlines have established 
critical international franchises as well--links to foreign markets 
that are essential to trade and economic growth.
    The simple truth is that the markets for air travel are best served 
by airlines pursuing diverse strategies, and just one category or the 
other is unlikely to adequately and efficiently serve demand. That is 
why we cannot be cavalier about any part of the industry, and why the 
Administration is watching developments so closely.
    With this background I will now briefly address the various changes 
and events that have contributed to the situation facing our major 
airlines today by directing your attention to a series of charts. Chart 
1 shows why a long period of record profits for the airline industry 
abruptly came to an end well before the September 11 terrorist attacks. 
This chart shows trends both in unit revenues, or operating revenues 
per available seat mile, known as RASM, and in unit costs, or operating 
expenses per available seat mile, known CASM. Note that for several 
years CASM increased very slightly, compared with much larger increases 
in RASM. These trends portray a period of solid revenue growth and cost 
control underpinning continual profitable operations, indeed several 
years of record profits. But the combination of increasing costs 
beginning in 1999, and declining demand starting in early 2001, turned 
record profits into losses. Indeed, the decline in industry 
profitability for the year ended June 30, 2001, compared with a year 
earlier, was the largest year-over-year decline ever, before September 
11. The losses for the year ended June 30, 2001, were not record 
losses, but that too changed abruptly with the terrorist attacks.
    Chart 2 shows system operating profits or losses by quarter for the 
last 3 calendar years for the large network carriers, and a number of 
other airlines including a group of low-cost carriers. These carriers 
account for over 90 percent of the passenger industry. Note first, that 
these carriers collectively have sustained operating losses approaching 
$10 billion for each of the past 2 years.\1\ Observe, however, that the 
group of low-fare carriers has continued to earn profits during this 
same time, and that this is not just attributable to Southwest. Five of 
the six low-fare carriers earned profits in 2001, and half of them 
earned profits in 2002, while two of the other three were close to 
break even. Note next, that the last profitable quarter for the large 
network carriers was the third quarter of 2000, and also, these 
carriers continued to suffer sizeable losses throughout 2002. It is 
especially important to note that these carriers' losses have 
accelerated since the second quarter, including the third quarter, 
which is normally their best quarter of the year. Despite the 
disastrous losses during the last two quarters of 2001, total losses 
for calendar 2002 approach the same levels. Indeed, in reality 2002 
losses were even greater given that these six large network carriers' 
operations were considerably smaller.
---------------------------------------------------------------------------
    \1\ Fourth quarter 2002 data are preliminary and subject to change.
---------------------------------------------------------------------------
    Chart 3 shows systemwide operating margins (operating profit or 
loss divided by total revenues), and, as just indicated, the negative 
operating margins of the large network carriers were even greater in 
2002 than a year earlier. Note also that this varies greatly from 
carrier to carrier. During 2001, for every $5 collected by American and 
United in revenues, they had $6 of costs. You can also see that during 
the first three quarters in 2002 for which we have final results these 
tendencies do not change much for either carrier. Finally on this 
chart, note that in contrast to the double-digit negative operating 
margins for the large network airlines, the low fare carriers earned 
very respectable positive operating margins. Indeed, the margins for 
these carriers in 2001 exceeded those for the network carriers for 
2000.
    In addition to the financial information the airlines file with the 
Department every quarter, they also file preliminary data on a monthly 
basis. While this information is subject to change, we believe it can 
be relied upon to reveal general tendencies. Our review of this 
information suggests that the financial trends you have just observed 
in the quarterly data throughout 2002 are continuing into 2003. Indeed, 
the results for the large network carriers in January 2003, or 16 
months after the September 11 terrorist attacks, are no better than a 
year earlier, despite the fact that travel demand was still severely 
depressed.
    With this context, please look at Chart 4. This compares weekly 
traffic, in terms of revenue passenger miles, for Air Transport 
Association member carriers that provide international service, 
beginning for the week ended December 15, 2002 with traffic a year 
earlier. This shows that from mid December 2002, to the end of January 
2003, traffic was up slightly over a year earlier. Then note the rather 
marked downward trends beginning with early February. Next, note the 
increased rate of decline at the time of the first strikes in the war. 
This information is broken down into four major traffic categories, 
and, as would be expected, transatlantic traffic has suffered the 
greatest decline.
    Chart 5 compares daily traffic for the same carriers beginning 
March 12, 2003 with traffic a year earlier. Initially the trend is up 
slightly until the Azores Summit. Traffic then plummets after the 48-
hour ultimatum, and again as the war starts. Note that by March 26, 
traffic is down from about 20 to 25 percent for each category. 
Subsequently, the year-over-year declines eased up for several days 
before worsening again for all but the domestic category.
    So where does this leave us? Many airlines, including the large 
network airlines that now provide the bulk of airline service in the 
United States, have consistently suffered large losses for more than 2 
years, they are heavily leveraged, and now, once again, they see 
airline demand in steep decline for some unknown period. Does this mean 
that the airline industry as we know it today is doomed to fail? No, 
but there will be change. Airlines that are in trouble are all working 
hard at what they must do to survive and eventually return as viable 
competitors. How quickly and to what extent they recover will depend 
largely on three factors: how much they are able to reduce their costs, 
the recovery of travel demand, and the extent to which carriers reduce 
capacity in light of the now-diminished level of demand.
    While my focus here today is the financial state of the airline 
industry, this painful process affects everyone in the aviation 
industry: aircraft lessors and investors, aviation vendors, airports 
and their concessionaries, and--more than anyone else--airline 
employees. Since September 11, more than 100,000 airline employees have 
lost their jobs. Just in the past 2 weeks airlines have announced an 
additional 10,000 layoffs. The aircraft industry has also been hard 
hit. Of the 7,525 jet aircraft available for service today, 971 are 
either stored or temporarily inactive.
    We are going to get through this. My personal conviction is that 
when we do, the industry will look a lot like the industry we have 
today, except that it will be more cost-effective, more competitive, 
and more robust.
    As many of you know, the Administration has recently unveiled its 
proposal, Centennial of Flight Aviation Authorization Act as a 
successor of AIR-21, which expires at the end of this fiscal year. A 
lot of people at FAA and in the Office of the Secretary have spent a 
lot of time over the past several months developing those proposals, 
and we are proud of them. They would promote the industry's growth and 
vitality while retaining safety as our top priority. We plan to 
reinforce our commitment to safety by making substantial investments in 
National Airspace System infrastructure and ensuring that our highly 
trained controller workforce is fully capable of sustaining its high 
levels of performance over the course of the next reauthorization 
period and beyond.
    Our proposal will also ensure that we are prepared for the demand 
levels predicted in the FAA's recent industry forecast by continuing to 
fund airport capacity enhancements at record levels and restructuring 
Airport Improvement Program formulas and set-asides.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to testify here today. I look forward to responding to any 
questions you may have. 











                     RELIEF TO THE AIRLINE INDUSTRY

    Senator Shelby. Secretary Shane, as you know, the committee 
reported a Supplemental Appropriations Act yesterday that 
included provisions to provide some relief and assistance to 
the aviation industry for relief to the airlines. Do you 
believe it is better to lower carrier costs in the form of a 
temporary suspension of security fees prospectively for a 
period of time or to reimburse carriers for security fees that 
they have already paid to the government?
    Mr. Shane. Well, either formulation will deliver relief to 
the industry and I am not sure the industry itself is of a view 
about which is preferable. I would evaluate those two scenarios 
essentially in terms of ease of administration.
    The most important lesson we took from the compensation 
program that Congress enacted immediately after 9/11 was that 
the process of evaluating claims, if you are creating a system 
in which airlines are required to document costs, document 
claims in a complicated way, and then the Department of 
Transportation necessarily has to validate all of those claims, 
the amount of time that we simply have to expend in order to 
validate the claims is such that it is inconsistent with what 
we are trying to do with the program, which is deliver the 
relief in real-time.
    The reason we have to do it is that my friend, Ken Mead, 
right here will have something to say about it if we are not 
vigilant in the way we evaluate those claims.
    Senator Shelby. He should have something to say about it.
    Mr. Shane. That is right. That is why I think if we are 
looking at various forms of assistance to the industry right 
now, the Department of Transportation would strongly favor a 
system in which we simply either reimburse or forgive fees that 
the industry incurs. It does not require subjective evaluation 
of whether these are really the amounts that we should be 
paying. We know what those amounts are. They are written down 
someplace. We just write checks.

                     REIMBURSEMENT TO THE CARRIERS

    Senator Shelby. Let me follow up on that.
    One of my concerns with the reimbursement to the carriers 
is that the payment would include the fees that are paid by the 
passengers. I do not know why we would levy a fee first on the 
flying public and then pass that directly to the airlines.
    Mr. Shane. The airlines, in this environment, maintain that 
they are not able to pass that fee along to the carriers, in 
fact, that there is no market power whatsoever in this market, 
and that, in fact, they are absorbing that fee. It is supposed 
to be passed along and in a normal environment you would expect 
it to be passed along and tacked onto the ticket.
    The fact is the prices in the market right now are what the 
market sets and there is no incremental amount that you could 
say is, in fact, passing on a fee to the passengers.

                       OPERATIONAL EVOLUTION PLAN

    Senator Shelby. The FAA has a plan for enhancing capacity 
called the Operational Evolution Plan or the OEP. Since the OEP 
was first published, the aviation industry has been hard-hit by 
the economic downturn of 9/11, increased security costs, and 
rising fuel prices. I want to address this question to you, 
Madame Administrator.
    With the industry in such upheaval, what changes are being 
made to the OEP to adjust to the new realities in airline 
operations and the market environment?
    Ms. Blakey. It is a good question because certainly there 
is a dynamic there that I think we have to respond to in real-
time. For an organization like the FAA that depends 
tremendously on consultation with the industry and the research 
community to construct a solid plan, this is certainly calling 
us to really step up real-time on this.
    We just issued a new version of OEP, 5.0, which does stay 
the course for a 10-year period to get 31 percent additional 
capacity at the end of 10 years. It is a good plan. It is one 
that there is a remarkable degree of consensus in the industry 
and in the affected communities that it makes sense.
    That said, what I have asked that we do is develop a very 
intensive approach. We call it the skunk works, to look at the 
OEP and say okay, what could we put on the fast-track here that 
number one, will not burden the industry; number two, is 
develop technology; and number three, could be implemented in 
the next 1, 3, 5 years at the outside. Not the 10-year horizon. 
Let us see what we can do in terms of really fast-tracking some 
of this.
    So far the staff has come up with some very interesting, 
and I think productive, avenues. We are going to vet them in 
the next month or 2 with the industry and with others before 
taking this out. But I think this is going to yield some more 
immediate results, if you will, from that standpoint.
    Senator Shelby. Mr. Shane, the Aerospace Commission 
recommended making the transformation of the U.S. Air Traffic 
Management System a national priority. What confidence do you 
have that the FAA and the OST are making the necessary changes 
to the OEP, as warranted by the call to action by the Aerospace 
Commission?
    Mr. Shane. Thank you, Mr. Chairman.
    I have great confidence in that. The reason I have such 
confidence is that Administrator Blakey and I have talked about 
that issue dating back to before the Aerospace Commission 
actually issued that report. The Administrator is absolutely 
committed to giving life to some of the vision in the report. 
We have spoken to Secretary Mineta about it and the Deputy 
Secretary, Michael Jackson, as well.
    I think in the not-too-distant future we will probably have 
a more concrete announcement for you. But at this point, there 
is not any question that we are on a path to realizing that.

                         RISING OPERATING COSTS

    Senator Shelby. A major cost driver of FAA's rising 
operating costs has been salary increases from collective 
bargaining agreements negotiated under FAA's personnel reform 
authority. Mr. Mead's prepared statement indicates that 
controller salaries have increased by 47 percent--47 percent 
since 1998.
    Can you compare the increase in salary for air traffic 
controllers from 1998 through 2003 to other work forces inside 
FAA, as well as other Federal Agencies?
    Also, what can you tell us about overtime costs and other 
cost drivers that are due to memorandums and MOUs related to 
controller contracts?
    Ms. Blakey. The Inspector General has focused on this 
issue. And in fact, is undertaking an audit on just that issue 
right now. This goes to the issue of a contract that was 
negotiated in 1998 which did substantially increase the 
compensation for controllers.
    As time has gone on there have also been a number of 
additional, if you will, side agreements, these memoranda of 
understanding which, in some cases, do add on costs in terms of 
the way the system is running. There are about 1,500 of these, 
many of which are perfectly fine and address operational work 
rules et cetera.
    But there are some that without doubt add to the cost of 
this contract substantially, as well as ones that really do 
infringe on the rights of management to deal flexibly with the 
demands in traffic and in the kind of management that the 
system needs from an efficiency standpoint.
    We are very committed to working with NATCA to address 
those issues. This is something that we have already notified 
the union that we do have a number of those that have been 
pointed out by the Inspector General that fall under the 
category I just discussed, that we need to sit down at the 
table and review and come to a more efficient way of operating 
from the standpoint of the taxpayer's money.
    Senator Shelby. Mr. Mead, do you want to comment on that?
    Mr. Mead. I appreciate Administrator Blakey's movement to 
get their hands around this.
    One thing that was pretty alarming to us was that nobody 
knew how many of these deals or memoranda understanding 
existed. There was no inventory. In fact, as part of our audit 
effort we probably started developing the inventory. And they 
have very large financial impacts.
    As Administrator Blakey says, a lot of them are legitimate 
and are needed, but we really ought to know what the cost 
impact of them is.

                  RELIEF PACKAGE FOR AVIATION INDUSTRY

    Senator Shelby. Senator Murray.
    Senator Murray. Thank you, very much, Mr. Chairman. Mr. 
Shane, thank you for your testimony.
    I just want to go back to this again because we are trying 
to work through this. The Senate had a $3.5 billion aviation 
package. The House has $3.2 billion. And again, as we noted, 
Secretary Mineta said there is a huge gulf here.
    I just wanted to see if you would help us pin this down a 
little better and tell us precisely what the structure of a 
relief package the Administration will support and what amount? 
If you could tell us, we would really appreciate it.
    Mr. Shane. I really have not been involved personally in 
the negotiations that have been taking place. I am aware of 
them. And I would simply ask that I be excused from trying to 
give you an amount, because I really did not come authorized to 
talk amount, and it would be interfering with, I think, a 
conversation that is going on that I am not privy to.
    The structural issue is, as I said in response to the 
Chairman's questions, that we would emphasize the importance of 
ease of administration. Let us find a set of security fees that 
we can quantify easily and that we can either forgive or 
reimburse on day one, simply because those numbers are readily 
available. If we go beyond that and get into a variety of 
imponderables and airlines then begin putting claim documents 
together--first we have to figure out a form. They will have to 
fill out the form, and then we have to evaluate the form. Weeks 
and months can go by before they will see any money from a 
process like that. And that is inconsistent with what they need 
right now in our judgment.
    So we would urge whatever the amount, which is going to be 
the product of a negotiation, I expect, whatever the amount, it 
should be an amount that is delivered in a very transparent and 
easily administered form.
    Senator Murray. So you have not heard any specific number 
mentioned by the Administration whatsoever?
    Mr. Shane. I am not--well, I have heard a lot of numbers 
but I really do not know precisely, because honestly it is 
taking place way above my pay grade, where the Administration 
is at the moment.
    Senator Murray. Specifically let me ask you, as part of the 
amendment we passed yesterday, we put in funding for expanding 
unemployment insurance for laid-off workers. Do you find that 
to be a reasonable part of the package?
    Mr. Shane. Well, I am an undersecretary of transportation, 
not an undersecretary of labor and Department of Labor really 
would be the proper agency to comment on that.
    I would just say generally that typically we extend 
unemployment insurance benefits in times when unemployment 
across the country is 10 percent or more. There have been two 
extensions, as I understand it, of unemployment benefits thus 
far in an environment in which the unemployment rate was in the 
neighborhood of 5 to 6 percent.
    So my guess is the Administration will say it is 
inappropriate to extend those unemployment benefits yet again. 
It would be an extraordinary thing to do.
    Senator Murray. This is for aviation workers and I 
understand they have had the triple whammy. They had September 
11th, they have had the downturn in the economy. And now, with 
the Iraq war, we have had 10,000 lay-offs from aviation and 
related industries just since the war started. This is not 
something somebody did to make this happen. These are country-
wide, nationwide, worldwide issues that have impacted these 
employees. Certainly the Administration would have sympathy for 
that.
    Mr. Shane. I think the Administration has enormous sympathy 
and there is no question that the workers have taken it on the 
chin in a way that we have not seen before. There are a whole 
variety of programs that are available to the workers including 
national emergency grants and training programs and 
reemployment programs.
    Again, I am way out of my depth in talking about the Labor 
Department's programs and I really do not want to get much 
further into it. But I have no reason to think that the 
Administration is going to be supportive of yet another 
extension, even for a particular sector.
    There is a fairness element. Industries across the board 
are suffering as a result of the environment that we are living 
in today. A lot of it can be attributed to the same causes that 
the airline industry's problems are attributable to. It is just 
difficult to explain to people in another sector why it is that 
you have chosen this sector to provide special benefits to.

                 POST-9/11 IMPACT ON AVIATION INDUSTRY

    Senator Murray. They have had a huge impact over the past 
2\1/2\ years, or 1\1/2\ since September 11th.
    What about the airlines? We put incredible pressure on them 
in terms of safety and security since September 11th, and 
certainly our airports as well. Massive requirements that we 
have put on top of them. Do you not think that has some kind of 
impact on their ability to avoid bankruptcy?
    Mr. Shane. There is no question that the Government has 
picked up a tremendous amount of the cost of the security that 
we have laid on. We have taken over all of the airport 
security. Those are all Federal workers now. They used to be 
airline employees.
    There is a tremendous amount that has been done. There has 
been the $15 billion from 9/11. The question now is whether or 
not we are going to start finding ways of gifting the industry 
with so much more assistance that we take them off the track 
that they are on, leading to a perpetuation rather than a 
solution of the problem. And that is a genuine concern.
    Senator Murray. But would you not agree that we have 
required a lot of our airports and our airlines in terms of 
security that has added a burden at a time when they are still 
struggling because of the economy?
    Mr. Shane. Yes, and we are also requiring a lot of every 
other sector of the transportation industry and I am not aware 
that we have picked up any portion of the costs that other 
transportation sectors are being required to bear or will be 
required to bear.
    Senator Murray. I would just argue that the aviation 
industry has, in fact, really been hit because obviously 
September 11th had an impact on people's willingness to travel 
by air. And certainly that has not eased in the last months and 
certainly not since the war in Iraq started, would you not 
agree?
    Mr. Shane. It eased and then it went down again. Yes, the 
war in Iraq has been obviously a repeat in terms of the actual 
adverse impact on demand.
    But again, without trying to suggest that we are out of the 
woods in any way, or to suggest that it is inappropriate to 
think about some additional assistance. That is not the 
position of the Administration. What we are saying is that it 
is important that we calibrate that additional assistance in a 
way that does not compromise what the industry must do now if 
we are to have a viable air transportation system going 
forward.

                    SUPPLEMENTAL APPROPRIATIONS ACT

    Senator Murray. Let me just ask you, do you foresee a 
scenario where the President would veto the supplemental if we 
do add $3 plus billion for aviation?
    Mr. Shane. I have not had that conversation with anybody in 
the White House. I have no answer for that.
    Senator Murray. I know you are not going to let me pin you 
down, but there is a rumor swirling that the Administration has 
drawn a line in the sand at $900 million. That is about a 
quarter of the size that the House and Senate versions both 
have in them. Have you heard that figure and do you think that 
figure includes any help for workers?
    Mr. Shane. Somebody reported to me that that figure was in 
the press, but I had not heard it anywhere else. So I have no 
way of knowing whether that has any validity whatsoever as a 
negotiation position or an Administration position.
    Senator Murray. So you have heard nothing about what is in 
any kind of formal talks from the Administration, whether it 
includes work for employees, whether it includes airports, what 
kind of structure for the airlines? You have heard nothing?
    Mr. Shane. I have heard that we have circled around the 
idea of a very limited, targeted form of assistance, along the 
lines that I was suggesting which is related specifically to 
the security fees that are paid by passengers now and paid by 
the industry.
    That is as much as I have heard. I do not know more than 
that. I do not know what would be acceptable at the end of the 
day to the Administration. I do know that it would be 
substantially less than the amount voted in either house of 
Congress yesterday.
    Senator Murray. I am sorry, it will be substantially less 
than?
    Mr. Shane. An amount acceptable to the Administration would 
have to be substantially less than was voted in either house of 
Congress yesterday. That was what Secretary Mineta was saying 
last night.
    Senator Murray. Would it include anything for airports?
    Mr. Shane. No, I do not believe that we had anything in 
mind for airports. Again, I do not mean to be cute here. I am 
just getting a little bit beyond my depth because this 
negotiation has been taking place, I believe, between White 
House staff members and members of Congress. And I have not 
been privy to those personally. In recent days I am not even 
sure any of us at the Department have been privy to them.
    Senator Murray. I will hold on my other questions and let 
other members of the committee respond and then come back to 
Ms. Blakey. Senator Bennett?

                 STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you. This is an interesting picture 
that you have painted for us here this morning. And as I go 
through it, I ask myself how much can the Government do about 
it. Because many of the things that I see that ought to be done 
are things that probably ought to be done by the airlines 
themselves.
    First, let me just make a few comments and then I will 
engage in a dialogue here. You referred to Southwest and Jet 
Blue as the low-cost carriers. You are aware that Jet Blue's 
fares are higher than their competitions? Were you aware of 
that?
    To fly from New York City to Fort Lauderdale on Jet Blue is 
$36 more than to fly on their competitor. And the reason is 
that experience on Jet Blue is $36 better than the experience 
on their competitors. People who fly Jet Blue become 
tremendously loyal, almost fierce defenders of the Jet Blue 
experience and say we want to fly Jet Blue wherever you go.
    I think there is a lesson there that I do not know what 
Government can do about. But when I was in business I focused 
tremendously on consumer satisfaction.
    We now have a circumstance where consumers are almost 
driven away from air travel by the experience. Jet Blue goes 
out of their way to do everything they can to create a 
worthwhile experience and they can charge higher fares, thus 
saying to us that air travel is not a commodity. There are 
alternatives. We think of commodities, we think of competition 
and commodity, it is solely on the basis of price. There is 
competition on the basis of consumer satisfaction.
    Again, if you could think of something the Government could 
do to get airlines to try to make the experience more 
satisfactory, and thereby people would be willing to pay a 
little more to have the experience, instead of going there only 
when they have no other alternative.
    One thing we could do which probably does not fall in your 
department is to reduce the hassle factor around security. I am 
as concerned as anybody about security but if I were running 
the airline industry as a whole as a business, I would 
certainly do something about the experience you get with TSA.
    Now TSA, to its credit, is a better experience than it used 
to be following September 11th in that period when it was still 
contracted out to others. The TSA people are substantially more 
professional and handle that experience with a better sense of 
consumer satisfaction than you used to get.
    I remember when I was in the Department of Transportation 
when hijackings began, we talked about--forbidden word--
profiling as a way to deal with hijacking. Now it is not 
politically correct to even use the word unless you are using 
it in speech to denounce it.
    But airlines know their customers. Do a background check on 
a frequent-flier and discover that that frequent-flier is not, 
nor has ever been, nor ever will be connected with a terrorist 
organization. Cannot that frequent-flier, thus checked out, and 
not picked on the basis of so many miles, but checked out with 
an actual profile, be given a pass?
    We senators come into the Capitol without having to go 
through a security check because the Capitol Police knows who 
we are. I am not suggesting that we get to the point where 
everybody has to be carefully identified, but would it not help 
the business flier to want to get back on the airplane if he or 
she knew, properly profiled and in an identity bank and even 
with biometrics--you put your hand on a screen, so as you go 
through they know that is who you are you get to go by without 
having to strip all the way down to taking off all your shoes 
and the kinds of things we go through now?

                           BUSINESS TRAVELERS

    We have got to get the business traveler back on the 
airplane. If you are making a business decision and you are 
going to go downtown from Washington to New York City, you say 
well I have got to be at Reagan at least 1 hour before they 
takeoff. And it is going to take me 20 minutes to get from my 
office to Reagan. So this is 1 hour, then a little extra, 1\1/
2\ hours before I get on the airplane. And then it takes me 1 
hour to fly to LaGuardia, so that is 2\1/2\ hours. And then, 
depending on the time of day, it is going to take me a half 
hour in good times and 1 hour in bad times to get from 
LaGuardia to downtown New York. Very, very strong incentive to 
be on the Metroliner.
    I happen to think that is a good idea. I would like to see 
more people on the Metroliner. But that same phenomenon is what 
is driving people in other markets to the highways. That is the 
competition for the airline, not the train. It is the highway. 
Testimony shows the highway is less safe, more congested. We 
have to appropriate money for highways to deal with the 
increased traffic there.
    How do we get people back on the airplane? We make it a 
better experience and, aside from dealing with that TSA thing, 
I do not know quite what Government can do in this area.
    I just want you to think about that and see if you can come 
up with any.
    Now, moving quickly, and I apologize to my colleagues for 
taking so much time. But in this morning's Wall Street Journal, 
a new airline policy, kill United. Did any of you read that? If 
not, read it and I would be interested in your response.
    Again, when I was at the Department of Transportation, we 
had to deal with serious problems in the railroad industry, and 
that is referred to in this piece, where we dealt with the Penn 
Central bankruptcy. I remember all of the ins and outs about 
the Penn Central bankruptcy. It was an important part of my 
tenure there.
    Now we are going through bankruptcy in the airline industry 
and this is a suggestion based on a railroad experience. When 
Conrail was broken up and Conrail's routes were given to the 
two competitors, and they are saying United should be broken up 
and their facilities given to competitors to reduce capacity in 
a way that is rational.
    With that rant on those two areas, do you have any comments 
or suggestion as to what we can do, looking at it not from the 
standpoint of legislation or budget, but from the standpoint of 
overall approach to this tremendous problem that you have 
presented to us here this morning?
    Mr. Shane. First, Senator, let me just say I remember 
fondly your days as an Assistant Secretary of Transportation. 
You probably do not remember, but we were colleagues back then.
    Senator Bennett. You stayed in the industry.
    Mr. Shane. I have been in and out more times than I care to 
remind myself of but I am in at the moment.

                                  TSA

    Let me just say, in response to the hassle factor, the most 
important thing you said is that it is much reduced. That TSA, 
which is as you noted no longer part of the Department of 
Transportation but now part of the Department of Homeland 
Security, has performed heroically in the course of the last 
year.
    There is no question that there were enormous growing pains 
and that the hassle factor became a buzz in the business 
community. Nobody would fly because of all the reasons that you 
cited.
    I do not see that today. I am speaking anecdotally, I know, 
but the fact is that my impression is average waits are about 
what they were prior to 9/11. TSA and its very professional 
cadre of screeners have done an enormous job of bringing that 
wait time down, so that you really do not have to plan very 
differently now for an airplane ride than you did prior to 9/
11. And enormous credit goes to the folks at TSA who have made 
that happen.
    There is a profiling system that TSA is working on. It is 
called CAPPS-2. You have undoubtedly read about it and it does 
embrace much of the vision that you have for making the process 
easier to create greater confidence in our knowledge of who, in 
fact, is boarding an airplane. I have no doubt that, as time 
passes, we will have a much improved system for looking at 
passengers and not having to put everybody through the wringer 
on a random basis.

                            AIRLINE INDUSTRY

    As to how you get people back on the airplane, I think the 
Congress should be very proud of what it did in 1978 when it 
deregulated the industry. We have been to hell and back in this 
industry any number of times since that time but Congress has 
always stayed the course.
    I am old enough to remember in the early 1980s when the 
industry was here, in Congress, talking about worst ever losses 
in the industry since the beginning of time. The same claims 
were made in the beginning of the 1990s. And we had meetings 
with the industry about what form of assistance might be 
appropriate. Serious consideration was given to that. There 
never was any assistance back then.
    I do not pretend that any of that was anything like what we 
have going on today. This is a world apart from even those long 
dark nights of the soul that the industry went through.
    But we have never veered from the conviction that we have 
as a country that the best solution for this industry is to 
allow the market to work. When we are prepared to go forward 
and provide some assistance in the current environment--and I 
am repeating myself here, I realize--we have to be mindful of 
the importance of letting the industry make the changes it has 
to make if, in fact, it is going to be viable in the long-term.
    When you referred to an article in the Wall Street Journal 
about a putative policy of killing United and breaking it up, 
that to me is mindless. The first thing that would happen if 
you actually tried to kill United is that you would vitiate all 
the good work that is happening now. By taking that additional 
capacity out, you take the pressure off everybody else to 
continue to reduce costs the way they are doing right now.
    That is not a good position. United going away is not a 
good solution for this industry. And it would be a horrible 
solution, of course, for the thousands and thousands of people 
who work for United and who are served by United. So that has 
no place. I know you did not suggest that it would have any 
place, but it has no place in Government policy, as we sit here 
today.
    Senator Bennett. It gave you the opportunity to give you 
the speech you have just given.
    Mr. Shane. Those are some random comments that I would have 
on your remarks.
    Mr. Mead. I have two quick comments.
    On what you were referring to about doing a background 
check on people like the U.S. Senators, you can come in here 
and you do not have to go through a big hassle. And you said 
that was because they know who you are and know about you.
    TSA, which is now at Department of Homeland Security, is 
working on what they call a smart card that, I think, is 
probably about a year away. And one of the key questions is 
going to be how much information do we want to know about you 
before you get a smart card? Do we want to know about your 
income taxes? Do we want to know about your travel? Do we want 
to know who your friends are? And that is very controversial.
    As Jeff said, also, the profiling, I forget what they call 
it, but Lockheed Martin has a contract right now. It was issued 
just before TSA went over to DHS. So I expect there will be 
movement on that front.
    On the price issue. I would like to come back to that. 
Probably in late 2000, early 2001, the bottom was falling out 
of the business market on the airlines. And that was because 
the airlines had taken things too far in what they were 
charging the business traveler. And one of the reasons they had 
taken things too far was because people could afford it. 
Dotcoms out on the West Coast, I think if you spoke to UAL, 
they would tell you that dotcom travelers provided a lot of 
their business travel. But dotcoms, the bottom fell out of that 
market.
    So I think what is happening now in the industry is they 
are trying to reattract business travelers, but they are also 
trying to do so at a substantially lower fare. And I suspect, 
sir, in time that is going to work.

                           CAPACITY BUILDING

    Ms. Blakey. I would like to add one other point, too, 
because as Ken is referring to 2000 and what happened there. 
You asked what the Government can do. And I think very 
importantly we have to remember that part of the phenomena of 
2000 were incredible delays. The summer of 2000 was a horrific 
time as a business traveler or as a traveler period. And I 
think it did put a damper on things.
    What we can do is increase the capacity in the system. And 
as I say, staying the course on that right now, in terms of our 
investment in this, I think is critically important because it 
really is an appropriate role for Government.
    Senator Bennett. Thank you very much. Senator Dorgan?
    Senator Dorgan. Thank you very much.
    Let me make a couple of observations and then ask a couple 
of questions. First of all, Mr. Shane, you indicated that we 
should let the market work. Let me say I am not someone who 
looks at the airlines and thinks they have done nothing wrong. 
I am not a big fan of the pricing schemes. You can pay twice as 
much to go half as far if you want to go to North Dakota versus 
Los Angeles from D.C. So I have plenty of irritation about a 
number of things.
    But I must say that it is not a market system that works 
when an entire industry is shut down from a terrorist attack. 
Shut down, every asset ordered to be grounded immediately. And 
the airplanes themselves were used as the missiles, loaded with 
fuel, for the attack itself. And the picture is shown on 
television and all of those potential fliers are watching these 
hijacked airplanes being used to destroy the passengers, and 
being used to topple the skyscrapers.
    There is no market system with respect to how people and 
potential passengers react to that.
    In addition, as we went into that September 11th terrorist 
attack, we had a recession prior to it and a sputtering economy 
and the economy still sputters. There is really nothing market 
oriented about fuel prices and the airline industry has a heavy 
burden with fuel prices and fuel prices have spiked up because 
of the uncertainty of war over months and months and months and 
months. There is certainly nothing market oriented about war 
and what it does to people's interest in flying and concern 
about flying.
    There is a whole series of things that have converged at 
the same intersection at the same time. And we can simply say 
let us ignore this and let the market system work and behave in 
that manner. But the fact is our economy will pay a heavy, 
heavy price if those who counsel that while the tent collapses 
we should just be interested in watching and observe how 
interesting it is prevail. If they win, if that is the mindset, 
in my judgment this economy will pay a heavy price.
    Mr. Mead, you mentioned rural areas. We are pretty familiar 
with the price that is paid for dislocation and for 
discontinuance of service. We are pretty familiar with people 
that talk about the market system from their enclaves in big 
cities. But I must say, this is an industry that is essential 
to this country's economy. It is in bigger trouble than most 
anybody knows. We may see all of the major players being in 
bankruptcy, some of them never coming out. The question is do 
we do something or do we do nothing but observe and talk about 
how interesting it is?

                    ADMINISTRATION'S REPRESENTATIVE

    Mr. Shane, I voted for you and I said in the Commerce 
Committee when you appeared before us, I think you have great 
credentials. I am impressed with your background and was 
pleased to vote for your nomination.
    But frankly, I do not know why they sent you to this 
particular hearing which, I was told, was a hearing to talk 
about the financial challenges facing the aviation industry. My 
colleague, Senator Murray and certainly I, having been in the 
discussion yesterday in the Appropriations Committee about the 
issue of what we should do, what kind of financial package we 
might want to construct.
    And you say well, I am not involved in all of that. And I 
really cannot respond to it. I do not understand, maybe you 
were not the one to come to testify on behalf of the 
Administration, but somebody should be here to tell us what the 
Administration thinks. What are they prepared to accept? What 
are they prepared to reject? What do they think we ought to do?
    So with that as a prelude, let me just ask the question, 
Mr. Shane. And I do not mean this in a personal way to you. But 
you were responding repeatedly to Senator Murray, ``Look, I am 
not involved. I do not know.''
    Frankly, this hearing, it seems to me, needs to be 
represented by someone in the Administration that says here is 
what we think we ought to do at this point. And we might 
disagree with that and we can have a discussion about it, but 
we need somebody to say what the Administration's plan is and 
what they will accept? Can you respond to that?
    Mr. Shane. I think you do need somebody who can respond to 
those questions. Whether a hearing of this sort is the 
appropriate forum for having that discussion, or whether there 
is some more effective forum where you can have that discussion 
is an open question in my mind.
    I was invited to come here and testify and I showed up and 
the original billing was that we were going to be talking about 
the FAA budget.
    Senator Dorgan. Then we have a different understanding 
because my heading on this says it was to be a hearing on 
aviation safety and security and financial challenges facing 
the industry.
    Mr. Shane. That is correct, and we did learn that well in 
advance of the hearing. I am not faulting the committee for not 
telling us what the hearing was going to be about, far be it 
from me. But we did not know, when we began planning for the 
hearing, that there would be votes in both houses yesterday. We 
could not respond that quickly for purposes of this hearing 
with that sort of information.

                        GOVERNMENT INTERVENTION

    If I could only add one more point, Senator, what you said 
about the market not working when there was a terrorist attack 
on the United States, I do not disagree with anything you said. 
Of course, the market was not working then and we had a 
compensation program put in place and we created an Air 
Transportation Stabilization Board because of that. And we had 
a whole program of assistance to the airline industry at that 
time. And I agree with you that a war obviously compromises the 
effectiveness of market forces.
    No question about that. We are not arguing about whether 
there should or should not be assistance. We are just arguing 
about how much is consistent with the ideal of a restructuring 
of this industry for the future. That is the only issue.
    Senator Dorgan. But you know, what I observe is folks in 
the Administration just watching all of this. I do not see that 
the Administration has developed an aggressive, robust plan.
    And frankly, while Senator Murray is trying to apply a 
patch to this--and I support that, and I think she did a 
remarkable job yesterday in the Appropriations Committee--I 
frankly think it is not enough. I know what she is doing. She 
is trying to do the best she can to get something put in this 
supplemental bill, and she did that yesterday to add to what 
was in the bill.
    But frankly, I think if we do not think in a bit longer 
term here with respect to this industry about the consequences 
of having a substantial portion of it just completely collapse, 
I think we do this country a great disservice.
    And the question is, is that sort of thing going on in the 
Administration? If so, where? Who is involved? And who can we 
call up here to talk to about it?
    Mr. Shane. Yes, it is going on in the Administration. If 
you are talking about the in extremis situation where we are 
looking at what you might even consider to be a disorderly 
liquidation of a number of airlines, yes, we are considering 
the ramifications of that and attempting to plan for it.
    Senator Dorgan. What is the worst case that you see? You 
talk about the disorderly dissolution.
    Mr. Shane. Well, a worst case scenario is probably 
something we should not discuss in an open hearing, to be quite 
honest with you. We are talking about a variety of scenarios 
that I think none of us wants to think about out loud. And I 
would be happy to come and visit you in your office and talk 
about that at greater length.
    But to suggest that the Administration is not focused on 
those issues as a major priority would be a complete injustice. 
We do not go into all of that in great detail in public fora 
like this, but plenty is going on.
    The main point, however, is that there is a process 
happening within the industry that does appear to be producing 
some success. And the USAirways success story is a prime 
example. And the Congress can take credit for that. You set up 
the Air Transportation Stabilization Board (ATSB). They 
qualified for a $900 million loan guarantee but only if they 
made certain cost savings in the structure of their company, 
which they then did.
    So the ATSB created the incentive, and the Congress also 
created the incentive for USAirways to do what it did. And 
USAirways now has probably a very long lease on life. We can 
all be proud of that.
    Those are the kinds of things that we support. There was 
never any argument about whether we should do the ATSB program.
    Senator Dorgan. Let me just say, in response to my 
colleague Senator Bennett, who I have great regard for, I think 
there are some examples of successes. In fact, there are a 
couple of carriers that are, at the moment, profitable. But in 
most cases, those successes are point-to-point carriers that 
have picked certain explicit markets and said those are the 
markets that we are going to serve, and only those markets 
because those are the markets in which we think we can make 
some profit.
    Carriers that have a broader reach and serve some smaller 
areas react kind of viscerally to this question of the market 
system. I think the market system is really, really wonderful, 
I mean really terrific. The market system, however, needs a 
referee from time to time.
    And so, with respect to aviation and commercial airline 
service specifically, I am very concerned that we maintain a 
network of providers and that we not sit back and say let us 
allow dissolution to occur, despite the fact that we have had 
an intersection of the most unusual events perhaps in a 
century, the convergence of severe economic stress, a war, fuel 
prices ratcheting way up, and a terrorist attack using 
airplanes. We have not seen that since we began flying with a 
network of air carriers.
    That is what I think Senator Murray was talking about 
yesterday and it is my great concern. I do not think this 
industry is going to come out of this whole or in any way in a 
manner that serves all of our country, unless we develop a 
strategy. Some call it industrial policy. Well, maybe it is. 
But nonetheless, a strategy of some sort that says this is a 
very serious, unique problem and we need to address it.
    That is why I believe Senator Murray's amendment, and 
Senator Stevens' as well, is a start. But I think it is short 
of perhaps what we are going to need to do in a very aggressive 
way in the future.
    Let me just conclude by saying I had intended to ask 
questions of Administrator Blakey, and thanks for your service 
down there, and I will send some questions in writing, if you 
do not mind.
    Ms. Blakey. I would be delighted.
    Senator Dorgan. Mr. Mead, thanks for your continued work. 
You have appeared before not only this committee, but the 
Commerce Committee, and I think your work has been 
extraordinarily helpful to us.
    Mr. Shane, again, I did not mean it in a pejorative way. 
Thanks for coming down. But I really think we need to know a 
lot about what is being done and what is being considered in 
the Administration because there has to be a partnership in 
terms of how we address these issues.
    Mr. Shane. Senator, thank you for your vote.
    Senator Dorgan. For confirmation?
    Mr. Shane. Yes.
    Senator Dorgan. I would still vote that way.

                ADMINISTRATION'S POSITION ON AIRLINE AID

    Senator Murray. Mr. Chairman, can I just follow up on 
Senator Dorgan, just to ask Mr. Shane, and it is frustrating 
because we hear Secretary Mineta in the papers say that we are 
far apart. But unless you talk to us and tell us what your plan 
is and what you think is reasonable, it is hard for us to know 
where to go.
    My question, just following up on Senator Dorgan, is you 
had talked about the Administration negotiating. I just want to 
know who they are negotiating with. The Senate Democrats added 
$700 million yesterday. No one is talking to us. Are they 
talking to someone representing the unemployed workers? Are 
they talking to the airports? Are they just talking to the 
airlines? Or are they just talking to themselves?
    Mr. Shane. I thought they were talking to congressional 
leadership and I cannot be more specific than that. I thought 
it was being done in White House Legislative Affairs and in the 
normal way in which----
    Senator Murray. So you know, if you could pass it back to 
them, we are not hearing from anybody. And I do think they need 
to talk to the airports and to the unemployed workers, as well.
    Mr. Shane. Thank you.
    Senator Shelby. Some of these questions I am getting to may 
have been asked. I had to go to a press conference, and I 
apologize.
    I hope we will never pursue ``an industrial policy'' but I 
understand how important the airlines are to our travel, to our 
way of life, and to our commerce. We all do. It is a question 
of how we make it work for all of us.
    Industrial policy troubles a lot of people, including this 
senator.
    Madame Administrator, if you could focus----
    Senator Dorgan. Mr. Chairman, let me amend that. I did say 
industrial policy. Let me just say cogent policy.
    Senator Shelby. A well thought out policy.
    Senator Dorgan. Yes, well thought out policy.
    Senator Shelby. I am sure we will work on that.

              MOST IMPORTANT AIR TRAFFIC CONTROL PROJECTS

    Madame Administrator, if you could focus on only three air 
traffic control modernization projects, which three projects in 
your judgment are the most important to the future of the 
aviation system and why?
    Ms. Blakey. That is a good question. I think the first 
thing I would call your attention to, in terms--and we are 
talking technology here, rather than procedures; is that 
correct?
    In terms of technology, I would have to tell you that the 
most urgent thing is modernizing the Host computer system, if 
we will, that really is the heart and brains of the air traffic 
control system. This is the En Route System and there is a new 
procurement, a research and acquisition program on, called En 
Route Automation Modernization (ERAM), which we are at the 
beginning of. It is a very expensive one. I certainly would let 
the committee know that we understand that we are talking about 
something that is a major taxpayer's investment.
    Senator Shelby. Huge.
    Ms. Blakey. Yes, huge. The word huge is quite right.
    But what we have to realize is we have a 30-year-old system 
now--30 years. The language that that system is written in, the 
software for it, is called Jovial. Now how many among us know 
anyone who even knows what Jovial is, much less can write it? I 
am told there are six people in the country at the moment.
    So it is not hackable. That is the good news. But it is on 
life support. It is still safe, but we are at the very end of 
the life of this system. And we can, if we stay on track with 
this new research and procurement program. That is number one.
    The STARS program. I know again, this committee and others 
have had to sweat bullets over STARS because again it is a very 
expensive program. It had a lot of inflation in its cost, and 
was rebaselined.
    I had the best meeting I have had since I got to the FAA 
just the other day on STARS, because I will tell you what we 
are finding out. We have deployed the system in Philadelphia 
and not only is it working, it is working very well for air 
traffic controllers, the airlines, and our maintenance 
workforce. It is going beautifully.
    And we believe that what we are seeing is that rather than 
the heavy costs that we had expected, in terms of deploying 
system after system, a lot of those costs, I think, were 
absorbed in the early stages of development. As we roll it out 
it will not require as much customization. It will not require 
as many development dollars, if you will.
    Senator Shelby. Are you telling us it is going to be under 
budget?
    Ms. Blakey. No, I am not.
    Senator Shelby. As appropriators, we have been waiting to 
hear some very good news.
    Ms. Blakey. Well, listen, I will tell you, I am looking for 
some really good news in the area you are focusing on. Needless 
to say, it is one of the areas that keeps me awake at night. 
But the fact of the matter is, I think we are going to have, 
and I would be delighted to get together with the committee on 
this, some good news on that ongoing rollout on STARS as we go 
forward. So those two I would call your attention to.
    I would also call your attention to the fixed-price 
contract that we have for the Oceanic Aerospace. Again, that 
contract is going forward and it is staying within the fixed 
cost that we have anticipated. And that is something that is 
supported.
    And may I finally give you one other piece, because we all 
like good news. Our WAAS, this is the Wide Area Augmentation 
System, is providing a lot of support in terms of guidance for 
smaller airports in particular. It is important to our general 
aviation community for vertical guidance.
    That is going to come in early. We are going to turn it on 
this summer. And we are discovering again, we got some 
efficiencies through computer modeling. Rather than having to 
fly every approach for 530-some-odd airports we are going to 
roll it out for, we are able to do that on a sampling basis and 
model the rest of them and save some real money and get it 
online quicker. So that is going well. It costs a lot 
initially, but I think you are going to see that it is going to 
be a great asset in the system.

                    AIP AND SECURITY RELATED FUNDING

    Senator Shelby. Thank you. More than $560 million in AIP 
funding was used for security related expenses in 2002, which 
was up from only $57 million the previous year. Recently TSA 
Undersecretary James Loy testified that TSA would like to have 
``one more bite at the apple'' this year to use AIP for high 
priority security purposes.
    Is the FAA contemplating spending fiscal year 2003 AIP 
funds for installation of explosive detection equipment at 
airports? And if so, how much does the Administration propose 
using?
    Ms. Blakey. There are massive costs for a lot of our 
airports involved with installing these van-sized pieces of 
equipment.
    Senator Shelby. They are not cheap, are they?
    Ms. Blakey. They are not cheap at all, I will tell you. In 
fact, for some of our airports it is over $200 million. So the 
short answer is yes, because I think we have to. What I would 
caution the committee about is this, we have said that 
certainly we can sustain another bite at the apple of about the 
same size bite as last year.
    Senator Shelby. Not the whole apple, though.
    Ms. Blakey. Not the whole apple, and over the long run we 
will eat it to the core in terms of maintenance, safety, 
enhancing capacity. So for out years, I think you have to pay 
attention to that.
    Senator Shelby. What effect would the use of AIP at 2002 
levels, or even higher levels, have on other important safety, 
service improvement, or noise related projects in 2003?
    Ms. Blakey. AIP is a critical program in terms of both the 
kinds of issues you just highlighted and certainly in terms of 
noise. I am happy to say that the way the AIP funds work right 
now, we are able to substantially mitigate the effect on our 
citizens, 14,000 of them every year through AIP on the noise 
front.
    We are also going to use some of those funds for emissions, 
issues of air quality. I have to tell you, I am very pleased 
that the reauthorization that we are putting before you all is 
very aggressive on the environmental front, both in terms of 
using those funds well and wisely for that, and also in terms 
of streamlining so we do not drag these projects out the way we 
have.
    In terms of capacity, I mentioned earlier some of the 
airports we are bringing online. One thing I would tell you is 
this, while these great big runway projects, Chicago, Denver, 
pick one of them, but we are talking, in some cases, over a 
billion dollars for these runways, are supported significantly 
through passenger facility charges.
    For the smaller airports AIP money makes all the 
difference. And so we would like to see a greater percentage of 
AIP money going to smaller airports because they really cannot 
raise the money in other ways the way the big airports can.
    So I would say on the capacity and safety front, that is 
important and I would urge your attention on that.
    Senator Shelby. Mr. Shane, what would be the long-term 
impact on using AIP funding at these levels for security 
purposes.
    Mr. Shane. As the Administrator hinted, I think we really 
begin to take a great big bite out of our ability to grow 
capacity. And we have to grow capacity, even in this 
environment. If we stop growing capacity, as the Administrator 
said in her earlier remarks, we will be losing an enormous 
opportunity. We will have the summer of 2000 again. We will 
have it in the summer of 2004 or 2005. And we will not have a 
very good excuse for it. It is just terribly important to 
maintain AIP for capacity growth purposes.

          CONTROLLER-IN-CHARGE PROGRAM AND OPERATIONAL ERRORS

    Senator Shelby. Mr. Mead, has expanded controller-in-charge 
programs had any impact on operational errors?
    Mr. Mead. We cannot say for sure that it has. We can say 
that there is a statistical correlation. What you need to watch 
in this controller-in-charge program is in order to move out 
some supervisors, FAA would designate the elite controllers, 
the best performing ones as in charge.
    What has evolved at some facilities, in some large 
facilities, is the FAA has designated about 100 percent of the 
controllers as in charge, controllers-in-charge. I do not think 
they need that many supervisors.
    In some of these facilities we have seen a statistical 
correlation between the program and operational errors but I 
would stop short of saying it was cause and effect 
relationship.

                              AIP SPENDING

    May I respond to your question on the AIP? I would put the 
brakes on spending AIP money until you had a firm idea of how 
much the Administration thought it needed to overhaul, to 
install these SUV-sized machines and where. And that you get 
from FAA a list with some granularity of what your near-term, 
big safety capacity projects are.
    Senator Shelby. Senator Murray.
    Senator Murray. Thank you, Mr. Chairman.

                 STARS AND OTHER PROGRAMS' COST GROWTH

    Mr. Mead, you heard Ms. Blakey a few minutes ago talk about 
the STARS program, a fairly rosy scenario, which was 
interesting. I have heard you be very critical in the past. And 
I wondered if you could let us know are you feeling better 
about where it is moving, or do you still have concerns?
    Mr. Mead. I am certainly feeling better about Philadelphia. 
Actually before Administrator Blakey and I have talked at 
length about STARS. I think every one of our concerns, about 
how it was going to work, the technical problems and so forth, 
Administrator Blakey set forth to address them. And they were 
addressed in Philadelphia. And Philadelphia went online.
    That being said, I am very concerned about the cost of this 
program. It has gone from $800 million to $900 million. Now we 
are telling people it is about $1.6 billion. I would be 
surprised if you can deliver the bacon on that.
    I am concerned about when you take the four or five big 
acquisitions at FAA, which include the WAAS and STARS, when you 
add up all that cost growth, I can hand you the equivalent of 
one full year's appropriation. That has a cascading effect on 
other meritorious projects that you cannot undertake. It is 
going to affect our ability to achieve the vision that both 
Administrator Blakey and Jeff Shane were speaking about.
    Ms. Blakey. Let me also just mention one thing, if I might, 
on the cost growth issue. I think one of the things we have to 
do, and I am addressing this at the FAA largely, but I think 
the industry and everyone has to accept this approach. And that 
is that we cannot keep adding to the requirements. We cannot 
keep shifting what these systems are intended to do without 
accepting the fact that it then costs a lot more money.
    One of the things we are trying to do is develop real 
discipline, as well as bring them to the forefront more 
quickly, so that this issue of accretion of new and different 
changing requirements does not just completely knock a hole in 
the budget.

                            REPAIR STATIONS

    Senator Murray. Thank you. I know the chairman wants to 
conclude here and I have a question I wanted to come back to 
because I heard Mr. Mead talking about repair stations and 
oversight of repair stations and that air carriers are 
outsourcing as much as, I think it is 47 percent of their total 
maintenance costs.
    Ms. Blakey, if you could just tell us whether you think 
your safety personnel are providing the same level of scrutiny 
to contract repair stations as they are providing to air 
carrier's in-house maintenance facilities?
    Ms. Blakey. We are very aware of this phenomena of the 
increase in contractor repair stations both here and abroad. It 
is certainly a subject for our focus. We have a very rigorous 
regime of inspections, as well as requirements for the air 
carriers themselves to maintain a very diligent oversight. And 
when it is abroad, for our corresponding civil aviation 
authorities to do the same thing.
    Senator Murray. I think I heard Mr. Mead say that the 
foreign repair stations, some of them are not inspected at all; 
is that correct?
    Mr. Mead. Yes, that is correct. It is delegated to the 
foreign equivalent of the FAA, in some cases.
    Senator Murray. Especially when we are in an era of 
worrying about terrorist attacks and those kinds of things, are 
you going to be increasing the number of inspections for our 
foreign repair stations? Or how are you going to deal with 
that?
    Ms. Blakey. We have a strong regime right now of 
inspections on foreign, and they are required also to have a 
renewal of their certificate every 12 months to 24 months.
    Senator Murray. Does that require an on-site inspection for 
foreign stations?
    Ms. Blakey. Yes, from the FAA standpoint, we do require 
that.
    Senator Murray. So every 12 months, you are inspecting 
foreign stations?
    Ms. Blakey. Every 12 to 24 months. It is in that range. It 
depends on the level of service and what the specifics are with 
that repair station.
    Let me assure you of this, though. I realize this is an 
area of great concern. This is something again, there is a 
phenomena of increasing usage of this. And this is certainly 
something that at the FAA we are going to pay increased 
attention to in a number of ways. So I would be very pleased 
also to get back with you on some specifics.
    Senator Murray. I would really like you to do this, 
especially in this era. I think we really need to pay attention 
to that. And if we are contracting more out, I think we need to 
really be watching. I would like to hear more from you.
    [The information follows:]

               FAA's Oversight of Foreign Repair Stations

    FAA assigns a principal maintenance inspector and, depending on the 
size of the facility, additional staff to provide regular oversight and 
inspection of repair stations located in the United States or abroad. 
The standards that repair stations have to meet remain the same 
regardless of whether the repair station is a domestic facility located 
within the United States or a foreign repair station located outside 
the United States.
    The National Flight Standards Work Program requires a facility 
inspection at least once a year on all repair stations. Additional 
inspections may be required for various reasons, including changes in 
the internal workforce composition, NTSB recommendations, or aircraft 
accidents.
    In addition, if a repair station performs maintenance for an 
airline it must follow the airline's approved maintenance program. An 
FAA principal maintenance inspector assigned to the airline inspects 
the repair station to determine that the proper maintenance procedures 
are followed.
    When an applicant applies for FAA certification as a foreign repair 
station, the FAA must first determine if a U.S. repair station 
certificate is necessary to maintain or alter U.S.-registered/operated 
aircraft and/or aeronautical products at the applicant's proposed 
location. If the certificate is found to be necessary, and is granted, 
the foreign repair station is required to apply for certificate renewal 
every 12-24 months, as appropriate. If a foreign repair station no 
longer maintains U.S. aircraft or components, the certificate may not 
be renewed or the FAA limits the repair station's capabilities to only 
those articles used on U.S. aircraft. FAA is not obligated to renew a 
foreign repair station certificate.
    The regulations do not require FAA to justify or provide cause for 
not renewing foreign certificates. Foreign repair stations are well 
aware of this, which is reflected in their certificate revocation 
rates. There were 11 violations filed against foreign repair stations 
in 2002 and no violations so far this year. For the last 8 years, the 
average number of violations for foreign repair stations (out of the 
total of enforcement filed for all repair stations) came out to be just 
4.7 percent.
    Finally, the airline is responsible to conduct audits of any repair 
stations it uses. FAA inspectors review the results of the airline's 
audits to evaluate the performance of the repair station.
    For repair stations located in France, Germany and Ireland, the FAA 
has negotiated bilateral agreements that allow the civil aviation 
authorities in those countries to provide oversight of 173 foreign 
repair stations on our behalf. FAA provides similar oversight to 1,159 
of the 4,571 domestic repair stations located in the United States that 
have been approved by the Joint Airworthiness Authorities of Europe.

    Mr. Mead. One of the interesting dimensions of this is that 
when an air carrier does most of its maintenance in-house, FAA 
has a team that is essentially dedicated to that airline. They 
know that airline's maintenance system and so forth. Once the 
maintenance is done out-house, though, the jurisdiction, the 
responsibility for the oversight is of a different unit.
    In other words, the people that are dedicated to United 
Airlines inspections by FAA, would not necessarily be the 
people that check on how good the maintenance is at the repair 
station where UAL planes are being maintained.
    So I think FAA needs to develop a greater connectivity 
between the two.

                   ADDITIONAL SUBCOMMITTEE QUESTIONS

    Senator Murray. I appreciate that.
    Mr. Chairman, I do have some other questions I will submit 
for the record, since we are out of time.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

                Questions Submitted to Marion C. Blakey

            Questions Submitted by Senator Richard C. Shelby

           ENVIRONMENTAL REVIEW PROCESS FOR CAPACITY PROJECTS

    Question. The FAA has made a concerted effort in recent years to 
streamline the review and approval process for key capacity-related 
projects. What is the status of those efforts? How have they affected 
the time it takes to review key projects? Do you anticipate further 
administrative improvements in this area? Do you support efforts in 
Congress to make further improvements to the process?
    Answer. FAA issued a Report to Congress in May 2001 reporting on 
Federal environmental requirements related to the planning and approval 
of airport improvement projects together with recommendations for 
streamlining the environmental review process associated with those 
types of projects. Six initiatives for streamlining were identified and 
implemented, as outlined below.
  --FAA established Environmental Impact Statement (EIS) Teams for 
        preparing EISs for major runway projects at large hub primary 
        airports. Since the Report to Congress in 2001, FAA Teams have 
        been working on the EISs for nine major runway projects 
        (Atlanta, Boston, Chicago-O'Hare, Chicago South Suburban 
        Airport (SSA), Cincinnati, Greensboro, Los Angeles, 
        Philadelphia, and San Francisco). EISs have been completed for 
        five of the projects (Atlanta, Boston, Greensboro, SSA-Tier I, 
        and Cincinnati) with the other four in various stages of EIS 
        preparation.
  --FAA has reallocated staff to provide for five more environmental 
        specialist positions in the Office of Airports. With the 
        passage of the fiscal year 2003 Department of Transportation 
        and Related Agencies Appropriations Act, funding has been 
        provided for hiring 18 more airports environmental specialists 
        and 13 environmental attorneys. These additional personnel will 
        specifically conduct and expedite the environmental analysis 
        and review of airport and aviation development, so as to 
        maximize the capacity benefits to the National Aviation System. 
        FAA is implementing plans to hire qualified personnel to fill 
        these positions at various locations around the country.
  --FAA continues to maximize the use of consultant resources to 
        perform more EIS tasks that can be outsourced by the FAA.
  --FAA is working with the Council on Environmental Quality (CEQ) to 
        expand the FAA list of categorical exclusions that will be 
        published in revisions to FAA environmental orders. Initiatives 
        are being explored to provide for shortened and streamlined 
        EISs, as well as environmental assessments, that will also 
        involve CEQ and the Environmental Protection Agency (EPA).
  --FAA continues to engage other Federal agencies at the beginning and 
        during preparation of EISs, about their environmental reviews 
        and permit requirements in order to avoid unnecessary delays. 
        Also, the FAA, and the National Association of State Aviation 
        Officials, has undertaken a joint review of Federal and State 
        environmental processes and coordination. As a result of this 
        partnership, opportunities have been identified for improving 
        ways in which Federal and individual State requirements can be 
        more effectively and efficiently combined and coordinated.
  --FAA has developed, published (on FAA's web site) and updates (at 
        least twice a year) a compendium of best practices for EIS 
        preparation and management. The compendium of best practices 
        addresses practices that are the responsibility of the airport 
        proprietor, the EIS consultant, as well as those of the FAA.
    The 2001 Report to Congress noted that the average time for 
completion of an EIS (from start of the EIS until EIS approval) was 3 
years. The average time to issue an agency Record of Decision (ROD) was 
3 months. Looking at data available for four of the five runway EISs 
completed since issuance of the 2001 Report to Congress, and 
implementation of FAA streamlining initiatives, the Atlanta EIS took 7 
months less than the 3-year average; the SSA EIS, 12 months less than 
the average; and the Cincinnati EIS, just 2 months more than the 
average. RODs for Atlanta, SSA, and Cincinnati were prepared and issued 
in 1\1/2\, 2, and 3 months respectively. The Boston project was unique 
and controversial and, therefore, the EIS process was lengthy (almost 7 
years). Adding to the process was an 18-month delay between 1996 and 
1998 because of a change in Massport leadership and priorities, and 
extraordinary steps taken to engage community groups and the public in 
the process. The Boston EIS was not a typical new runway EIS project. 
In the ongoing EIS projects, FAA streamlining initiatives are being 
utilized to ensure that environmental process times are minimized to 
the maximum extent possible, and hiring more environmental staff will 
greatly aid the effort.
    FAA hopes that further agency, as well as congressional actions, 
will lead to administrative improvements in streamlining the 
environmental process for major runway projects around the country.
    Further action taken by the FAA includes our implementation of the 
environmental streamlining provisions of Presidential Executive Order 
(E.O.) 13274, Environmental Stewardship and Transportation 
Infrastructure Project Review. Two airport EIS projects (Philadelphia 
and Los Angeles) have recently been designated as priority projects for 
oversight under the E.O.
    The Administration's Flight-100 bill proposes a number of 
streamlining provisions including:
  --Designating aviation congestion projects and aviation safety 
        projects for high priority coordinated, concurrent reviews;
  --Concurrent reviews will be through newly-established Interagency 
        Environmental Impact Statement (EIS) teams;
  --Interagency EIS teams are directed to establish milestones, and 
        responsible Federal agencies are directed to give these 
        projects the highest priority within their own agencies;
  --Interagency EIS teams will defer to the Secretary on project 
        purpose and need, and on determining reasonable alternatives, 
        aviation factors, and aviation noise and emission analyses;
  --Noise mitigation for capacity enhancement airport expansion may be 
        funded from the noise set-aside without an additional Part 150 
        process requirement, and FAA may commit in the EIS Record of 
        Decision to changes in flight procedures to minimize noise 
        impacts due to the capacity enhancement project;
  --Airport sponsors are permitted to fund additional FAA staff to 
        facilitate timely processing of the environmental actions for 
        the airport's capacity enhancement project.

                          OCEANIC AIR TRAFFIC

    Question. The FAA has a long history of problems in attempting to 
provide new air traffic control equipment to manage oceanic air 
traffic. Since 1995, FAA has spent more than $290 million but has yet 
to deliver a new oceanic system.
    Answer. Since 1995, the FAA has delivered incremental oceanic air 
traffic improvements and capabilities, required to keep pace with 
international standards:
  --Two way controller/high frequency radio operator ``email'' 
        automatically updating the controllers' flight data processor, 
        followed by high frequency radio operator voice relay to pilot 
        via conventional radio transmission, 1995.
  --Two way controller/pilot direct ``email'' via satellite data link 
        operational prototype, 1995.
  --Interim Situation Display which automatically updates and displays 
        tracking aircraft positions, 1997.
  --Reduced Vertical Separation Minima allowing more planes to fly 
        preferred routes with increased numbers of flights, 1997.
  --Conflict probe which provides an automatic or controller initiated 
        conflict prediction tool, 1997.
  --Automated ``email'' transfer of flight data between international 
        flight information regions, 1997.
  --Two way controller/pilot direct ``email'' via satellite data link 
        in all Oceanic sectors, 1999.
  --Host & Oceanic Computer System Replacement, replaced aging hardware 
        with Year 2000 compliant computers supporting Oceanic air 
        traffic control communications, 1999.
  --MicroEARTS, as the platform for the Capstone program, provides 
        surveillance data directly to airlines, allowing them to track 
        aircraft in flight, 2002.
    FAA led the way in implementing reduced vertical separation 
standards in the Pacific and followed suit with our partners in the 
Atlantic. Further separation reductions require a fully integrated, 
modernized system and its accompanying procedures.
    In March 2000 the FAA initiated the Advanced Technologies and 
Oceanic Procedures (ATOP) program to take advantage of technology 
developed for the international marketplace. After conducting a robust, 
global competition, the FAA awarded the ATOP contract to Lockheed 
Martin in June 2001. Program costs are within the Acquisition Program 
Baseline budget, approved in May 2001 by FAA's Joint Resources Council.
    Question. The schedule of the current effort, the Advanced 
Technologies and Oceanic Procedures (ATOP) is significantly behind 
schedule.
    Answer. The FAA's Acquisition Program Baseline schedule for the 
ATOP program calls for initial operational capability at Oakland in 
June 2004. The program is operating within its baseline schedule.
    Question. What problems are the FAA experiencing with this 
acquisition program and what corrective measures are you taking?
    Answer. Lockheed Martin Air Traffic Management (ATM) underestimated 
the amount of source lines of code and the amount of modification 
needed to its existing commercial system. In March 2003, an independent 
assessment team concluded that the job is larger than expected, and 
will take longer to complete. The fixed price contract ensures that the 
cost of developmental delay is borne by the vendor.
    Installation of ATOP hardware is on schedule at the New York, 
Oakland and Anchorage centers. The FAA continues to prepare for system 
test, operational training, and site acceptance test activities.
    Question. When can we expect a new system for oceanic air traffic?
    Answer. Initial operational capability at Oakland Air Route Traffic 
Control Center (ARTCC) is expected by June 2004.

                OPERATIONAL ERRORS AND RUNWAY INCURSIONS

    Question. What progress has FAA made in reducing the number of 
operational errors and runway incursions?
    Answer. FAA has achieved an 11 percent reduction in operational 
errors, following 4 years of steady increases. Operational errors 
declined from 1,194 in fiscal year 2001 to 1,061 in fiscal year 2002.
    FAA continues to address operational errors within the National 
Airspace System. Several initiatives have been developed and 
implemented in an effort to increase management focus on operational 
errors in areas such as communications, position relief briefings and 
operational focus. The FAA deployed an enhanced terminal radar replay 
tool, updated quality assurance training provided by the FAA Academy, 
produced and distributed a training video on communication errors, and 
conducted more than 30 special evaluations focusing on operational 
errors. A 3-year operational error reduction plan has been implemented 
and represents a collaborative approach to the reduction of operational 
errors.
    Runway incursions have declined from 407 in fiscal year 2001 to 338 
in fiscal year 2002, due in part to FAA's aggressive actions to reduce 
these incidents. FAA established a system to categorize runway 
incursions by severity risk and has reduced the number of close calls 
(those runway incursions in the two highest categories) from 53 in 
fiscal year 2001 to 37 in fiscal year 2002 and 18 to date in fiscal 
year 2003 (through April).
    FAA plans to continue its aggressive actions in reducing runway 
incursions by continued training of pilots in situational awareness 
while on the airport surface, and the use of existing and new 
technologies to warn pilots and controllers of potential incidents.

                        WAKE TURBULENCE RESEARCH

    Question. In the last 2 fiscal years, FAA has requested $1 million 
for the wake turbulence research program. Congress recognized that the 
wake turbulence standards must be reassessed in a data-driven research 
program to address important capacity and safety issues, and enacted $4 
million in fiscal year 2002 and $8 million in fiscal year 2003, to 
accelerate this important research. By proposing to zero-fund this 
program in fiscal year 2004, FAA has ignored the need for this research 
and has disregarded Congress' obvious intent to have an adequately 
funded wake research program. Why has FAA failed to provide funding for 
this important research program? What are the specific plans for the 
FAA to rectify this problem and accordingly revise its fiscal year 2004 
request?
    Answer. The FAA will complete the Joint FAA/NASA Wake Turbulence 
Research Management Plan and the Investment Package for the near and 
mid-term wake research activities within the next few months. FAA has 
no plans to revise its fiscal year 2004 request, but will reexamine the 
program in future years.

                         COST ACCOUNTING SYSTEM

    Question. What is the current status of the cost accounting and 
labor distribution systems and when can we expect the full 
implementation of these systems?
    Answer. Cost accounting has been implemented in 80 percent of the 
agency to date. Managers are beginning to use the Cost Accounting 
System (CAS) data. For example, the Air Traffic Services organization 
has used CAS data to target and track initiatives to reduce field 
maintenance by 3.5 percent, reduce overhead costs by 4 percent, and 
hold costs in Oceanic and Flight Services constant.
    Implementation of the cost accounting/labor distribution reporting 
system will be completed in fiscal year 2004. CAS is now in place in 
Air Traffic Services, Commercial Space Transportation, Financial 
Services/CFO, Human Resource Management, Free Flight, and the Academy 
and Logistics Center at the Mike Monroney Aeronautical Center. In 
fiscal year 2004, CAS will be implemented in Research and Acquisitions, 
Airports, and Regulation and Certification.

                          AEROSPACE COMMISSION

    Question. The Commission on the Future of the United States 
Aerospace Industry issued a report making a number of recommendations 
to ensure the competitiveness of the American industry. One of the 
Commission's recommendations called for the Federal Government to 
establish a national aerospace policy and promote aerospace by creating 
a government-wide management structure. How is the FAA responding?
    Answer. FAA formed a Joint Planning Office (JPO) comprised of 
Federal Aviation Administration (FAA), Department of Defense, 
Transportation Security Administration, Department of Commerce and 
National Aeronautics and Space Administration, to focus on development 
of the next generation air traffic management system. FAA leads the 
team. The Agency is also establishing a high-level policy committee to 
guide this effort. It will be chaired by the Secretary of 
Transportation, and will be established this summer. The next steps are 
to establish advisory committees for this activity, to coordinate a 
framework for the initiative through the five participating agencies 
and departments, and begin drafting the national plan.
                                 ______
                                 
              Questions Submitted by Senator Patty Murray

                        CHIEF OPERATING OFFICER

    Question. Will the FAA ever have a Chief Operating Officer?
    Administrator Blakey, at previous FAA hearings in this 
subcommittee, it has been noted that the FAA has yet to appoint a Chief 
Operating Officer for the agency. This position, as you well know, was 
created in AIR-21 and is considered critical to moving air traffic 
control into a more performance-based operation. The COO position has 
never been filled. Your reauthorization proposal modifies the 
responsibilities of the Chief Operating Officer to clarify that the 
position will focus on the day-to-day operational functions of the air 
traffic control organization.
    Why do you think these changes will improve your chances of 
recruiting a Chief Operating Officer?
    Answer. While the changes proposed are modest, the FAA and the 
executive search firm believe that clarifying the role of Chief 
Operating Officer (COO) is key to the successful recruitment for the 
position.
    Question. What can you tell us about your efforts to recruit a COO 
so far, specifically how many serious candidates have you considered?
    Answer. With the help of Korn-Ferry International, there was a 
search conducted earlier this year. The Administrator and Deputy 
Administrator have interviewed several of the top candidates. 
Discussions are ongoing.

                         CONTROLLER RETIREMENTS

    Question. Ms. Blakey, over 50 percent of the controller workforce 
will be eligible to retire by the year 2010 and the General Accounting 
Office has estimated that roughly 5,000 controllers plan to leave the 
FAA by the end of fiscal year 2006. Your budget requests funding for 
only 302 additional air traffic controllers. Based on this request, I'm 
concerned that the agency isn't adequately preparing for the surge in 
controller retirements.
    Given that it takes as much as 5 years to train a new employee to 
become a fully certified controller and assuming that the GAO's 
estimates are correct, shouldn't we be concerned that safety or the air 
traffic control system's operational capabilities might be compromised?
    Answer. Staffing standards have been revised based on recent 
traffic forecasts. These standards are an important element, along with 
projected retirement losses, to predicting future controller 
requirements and hiring needs.
    With the drop in staffing requirements due to reductions in air 
traffic, the 302 additional positions in the fiscal year 2004 budget, 
and the FAA's hiring plans for future years, the agency is positioned 
to meet all of its staffing needs.
    The agency is sensitive to the additional hiring needs that are 
needed to address the surge in retirements. The FAA's annual retirement 
projections have been very accurate, and the FAA has been meeting its 
annual hiring goals. Over the last 6 years, the agency has hired more 
than 3,000 new controllers.

                     AVIATION TRUST FUND REDUCTIONS

    Question. Ms. Blakey, the Inspector General's testimony states that 
over the next 4 years, Aviation Trust Fund tax revenues are expected to 
be about $10 billion less than projections made in April, 2001. He also 
stated that the options for compensating for these declines--whether it 
is increasing excise taxes, limiting investment in the aviation system, 
or relying more heavily on General Funds--are not attractive.
    Ms. Blakey, in order of preference, how do you think we should 
bridge the gap between declining trust fund revenues and the FAA's 
budgetary needs? Should we raise excise taxes, defer investments in air 
traffic control modernization or contribute more General Funds?
    Answer. Just as a healthy industry is important to FAA's mission, 
FAA is important to a healthy industry. By virtue of its mission to 
regulate and promote the U.S. aviation industry, the FAA plays a vital 
role in sustaining the health of this critical section of the U.S. 
economy. The recent economic hardships experienced by the industry have 
caused the FAA to refocus on how its programs affect the industry, and 
particular, on what actions it might take to help improve the serious 
conditions facing the industry.
    The FAA must continually endeavor to make its own operations more 
efficient and responsive to the needs of industry and the public, 
particularly in a time of tighter Federal budgets. Areas where the FAA 
is investigating possible improvements are procurement activities, 
staffing requirements, organizational structure, and enhancements to 
our financial systems--DELPHI, Cost Accounting (CAS), and Labor 
Distribution Reporting (LDR). Potential benefits include the ability to 
respond more efficiently, quickly, and cost effectively to the needs of 
industry and the public.
    The Airport and Airway Trust Fund is the principal source of 
funding for FAA programs, accounting for all capital program funding. 
In fiscal year 2004 approximately 79 percent of operations funding will 
be derived from the Trust Fund. FAA remains committed to using the 
Aviation Trust Fund only to fund the Department's aviation programs, 
but in a change from AIR-21, the Agency is proposing to increase the 
use of balances that have built up in the Trust Fund. In fiscal year 
2004, FAA would use $12.4 billion of trust fund dollars and $1.6 
billion from the General Fund.

                        CARRIER SAFETY OVERSIGHT

    Question. What specific measures has your safety inspection 
workforce taken to ensure that the air carriers aren't shortchanging 
critical maintenance needs? For example, how does the frequency and 
intensity of your on-site inspections of financially-distressed 
carriers differ from those conducted on financially stable carriers?
    Answer. In addition to monitoring an air carrier's regulatory 
compliance, FAA inspectors are constantly monitoring their carriers' 
financial and labor relations circumstances so they have a complete 
picture of the airline's status. When inspectors see indicators of 
financial trouble, the inspectors increase their interaction with the 
airline's management and adjust their surveillance plan to increase 
their focus on areas that might be at risk due to financial cutbacks.
    Each carrier's experience is different and requires that the 
surveillance plan be tailored to the circumstances. As a carrier 
reduces its schedule, its fleet, and its employee ranks, the impacts of 
these reductions must be constantly evaluated and surveillance plans 
amended. Areas of adjusted surveillance would include: training to 
ensure employees who are reassigned are properly prepared for their 
assignments; maintenance to ensure that discrepancies reported by 
pilots are properly addressed; and other areas affected by the 
carrier's plans.
    The carrier's quality assurance and quality control process are 
monitored to ensure they are being followed and that findings are being 
addressed. Data and trends--such as dispatch reliability, on time 
performance, and minimum equipment list deferrals--are monitored and 
surveillance is retargeted if the data indicates a negative trend.

           OVERSIGHT OF FOREIGN AND DOMESTIC REPAIR STATIONS

    Question. Please provide us specific detail as to how the FAA 
intends to increase its oversight of foreign and domestic repair 
stations in terms of frequency of inspections and safety audit 
requirements?
    Answer. Currently, the FAA is looking at a new model for 
Certificate Management Oversight of Part 145 repair stations. The model 
is designed to mirror that of a major air carrier Certificate 
Management Unit, and has already been put in place to provide oversight 
for a major repair station in the Seattle area. The FAA has increased 
the inspectors assigned to oversee this station from 1 to 5.
    Under this model, the Certificate Management Unit is able to 
identify possible deficiencies in the repair station's organizational 
structure, quality control procedures and repair stations' manual. This 
enables the repair station to make needed changes to the organization 
and procedures to mitigate and/or eliminate known risks.

                  STATUS OF THE ASR-11 RADAR AND STARS

    Question. Have all the software problems now been resolved with 
this radar and has your testing of the radar uncovered any additional 
performance concerns that would delay its implementation or increase 
its costs further?
    Answer. Yes, all software problems associated with the ASR-11 radar 
have been resolved. Results of testing have proven the system suitable 
for operational use, as is the case for the Willow Grove ASR-11, which 
currently feeds the Philadelphia STARS.
    FAA does not foresee any performance issues that would delay 
implementation of ASR-11, although some sites may present a challenge 
to obtain optimum performance. In these unique situations, as with any 
radar, additional measures (e.g. extra adjustments/enhancements) may 
need to be considered.
    ASR-11 is a joint FAA and Department of Defense (DOD) procurement 
program intended to replace aging Airport Surveillance Radar Models 7 
and 8, which are nearing the end of their service life and becoming 
more difficult to maintain. The ASR-11 system is an integrated system 
that includes a primary radar system and associated beacon system. The 
ASR-11 will provide digital radar input to new automation systems such 
as Standard Terminal Automation Replacement System (STARS).
    Question. Since the full deployment of STARS is dependent upon the 
ASR-11 to provide the digital radar feed, how confident are you that 
STARS will stay on schedule?
    Answer. FAA has developed a deployment plan and budget for STARS 
which is currently being validated by an independent third party. The 
waterfall schedule has been coordinated with the ASR-11 team to ensure 
synchronization as much as possible. FAA will continue to coordinate 
both program schedules throughout the deployment of both STARS and ASR-
11. In the event of a delay to the ASR-11 schedule, several radar 
digitizers have been purchased which can be used in place of the ASR-11 
until the two programs line up.
    STARS is a joint FAA and Department of Defense (DOD) procurement 
program intended to replace the aging Automated Radar Terminal System 
(ARTS) at FAA TRACONs and DOD terminal facilities. STARS will work in 
conjunction with digital radar systems to allow air traffic controllers 
to track aircraft within the terminal area. The new equipment and 
software will be based on a digital platform and provide higher-
resolution screens with color capabilities and higher system 
reliability. STARS can also be expanded to meet increased traffic 
demands and accommodate new automation functions.

               REVISION OF THE OPERATIONAL EVOLUTION PLAN

    Question. Ms. Blakey, the Operational Evolution Plan (OEP) was 
unveiled just 3 months prior to the tragic events of September 11. The 
OEP was expected to be the FAA's blueprint for how to increase the 
capacity and safety of our Nation's air traffic control system by 2010. 
Your recently released Aviation Forecast predicts an even slower 
recovery than what was estimated last year. Given the anticipated 
slower recovery, how has the OEP changed--what specific programs have 
been modified, deferred or expedited?
    Answer. There is no doubt that the timelines for the Operational 
Evolution Plan have been impacted by the events of September 11 and by 
the subsequent downturn in the airline industry. Airlines have had to 
deal with their own financial issues as well as additional costs for 
security. As a result, they have not been able to maintain the level of 
investment they had hoped for in OEP improvements.
    The most recent update to the OEP (Version 5, published in December 
2002), reflected adjustments made over the past 18 months in response 
to these forces. Runways at Atlanta and Seattle were delayed and 
Charlotte's runway has been deferred as a result of decisions reached 
by the local community. We also scaled back activities in Miami with 
the Controller Pilot Data Link because of the airlines' limitations to 
voluntarily equip as originally planned. With Version 5, the OEP added 
a new runway at Cleveland and Boston, four Traffic Management Advisor 
(TMA) sites were added, along with several other capacity enhancing 
technologies, to include required navigation performance, collaborative 
decision-making, and more efficient approaches to airspace management. 
Further discussions with industry will occur this summer, leading to 
the next update of the OEP.

              AIR TRAFFIC CONTROL AS A COMMERCIAL ACTIVITY

    Question. Ms. Blakey, in February, the Department of Transportation 
published their Federal Activities Inventory Reform or FAIR Act list 
which changed the status of air traffic control from a governmental 
activity to a commercial activity. As you well know, the National Air 
Traffic Controllers Association has expressed concern that this takes 
air traffic control one step closer to privatization.
    Why was the classification of air traffic control changed?
    Answer. On December 18, 2002, the Secretary of Transportation 
determined that air traffic control is commercial and not inherently 
governmental. There are two reasons: (1) Functions that are inherently 
governmental involve a sovereign act on behalf of the Government or 
bind the Government to a particular course of action. The separation 
and control of air traffic does not meet this rigorous definition and 
takes into account the FAA's existing contract tower program. (2) There 
are 219 contract towers that are safely and efficiently providing air 
traffic control services by private contractors. However, this was not 
a step toward privatizing the air traffic control system. This is not 
under consideration.
    Question. Ms. Blakey, in February, the Department of Transportation 
published their Federal Activities Inventory Reform or FAIR Act list 
which changed the status of air traffic control from a governmental 
activity to a commercial activity. As you well know, the National Air 
Traffic Controllers Association has expressed concern that this takes 
air traffic control one step closer to privatization.
    How can you assure the committee that air traffic control will 
continue to be a core mission of the FAA and that it will not be 
subject to privatization?
    Answer. On December 18, 2002, the Secretary of Transportation 
signed a formal determination that functions involved in the separation 
and control of air traffic are a core capability required for the 
successful accomplishment of the FAA mission to ensure the safety and 
security of the National Airspace System. Based on the Secretary's 
determination, these functions are not subject to competition and will 
not be contracted out. I fully support the Secretary's position.

           ENVIRONMENTAL REVIEW PROCESS FOR AIRPORT PROJECTS

    Question. Ms. Blakey, last October, Secretary Mineta announced a 
list of seven transportation construction projects that were selected 
to receive accelerated environmental reviews. The Philadelphia 
International Airport runway construction project was the only airport 
project that was included on that list. Why was only one airport 
included in this initial list of projects selected for accelerated 
environmental review?
    Answer. Secretary Mineta chose the initial selection of priority 
transportation projects in order to get the accelerated environmental 
review process underway before completion of project nominations in 
December. The Secretary, therefore, asked for project nominations by 
the Modal Administrators. He considered several airport projects before 
making his selection. Because the initial list of selected projects was 
to be small in number, the competition was keen. As a result only one 
airport project was selected.
    Question. Ms. Blakey, last October, Secretary Mineta announced a 
list of seven transportation construction projects that were selected 
to receive accelerated environmental reviews. The Philadelphia 
International Airport runway construction project was the only airport 
project that was included on that list. Since that announcement, how 
many other airport projects have been selected for accelerated 
environmental review? Which specific airports?
    Answer. Since announcing the Philadelphia Airport project, one 
other airport project was selected for accelerated environmental review 
under Executive Order 13274. Secretary Mineta announced the selection 
of the Los Angeles World Airport project on February 27, 2003 with five 
other transportation construction projects. Five other nominated 
airport projects remain on the Department's project review register for 
future consideration.
    FAA highest priority projects for expediting or streamlining the 
environmental review process continue to be those major runway projects 
at large primary airports. These projects are the types that reduce 
national congestion the most. FAA will continue to apply and carry out 
streamlining initiatives for these projects regardless of whether such 
projects are nominated or selected for review under Executive Order 
13274.

                      AIRPORT IMPROVEMENT PROGRAM

    Question. At a time when airports are struggling to pay for the 
installation of explosive detection systems, what is your rationale for 
keeping the Airport Improvement Program (AIP) flat while requesting 
increases for FAA's other major programs?
    Answer. AIP was funded at levels up to $1.95 billion prior to the 
enactment of AIR-21. Post AIR-21, AIP funding increased in fiscal year 
2000 to $3.2 billion, a 65 percent increase. In fiscal year 2003, AIP 
funding rose to $3.4 billion. This represents a dramatic increase in 
funding that the President's Budget would retain in fiscal year 2004. 
Although airports face high costs associated with the deployment of 
explosive detection systems, there is other Federal money available to 
assist airports, specifically from the Department of Homeland Security 
(DHS).

             GRAPHIC ADVISORIES FOR GENERAL AVIATION PILOTS

    Question. Ms. Blakey, the recently-passed 2003 Omnibus 
Appropriations Bill directed the FAA to publish graphic advisories in 
addition to the notice-to-airmen advisories and to make these available 
to flight service stations and the aviation community via the Internet. 
The increased number of special use airspace and temporary flight 
restrictions subsequent to September 11, 2001, and the recent elevation 
of the threat to Code Orange make it even more critical to share this 
information with pilots. As yet, the FAA has not done as Congress has 
directed. Why not?
    Answer. The FAA web page contains a link to graphic depictions of 
Temporary Flight Restrictions (TFRs). The site was activated shortly 
after September 11, 2001. Except for general notices, each TFR contains 
corresponding graphics.
    The flight service stations (FSS) were heavily impacted by the 
above event, which led to the activation of the Flight Service 
Operation Support Center (FSOSC) team. The FSOSC creates graphical 
depictions of TFRs, as well as plain text versions of the TFR Notice to 
Airmen (NOTAM) using the TFR Operational Display System (TODS) special 
version software developed by Jeppesen for FSS use. This information is 
stored on the Jeppesen server and can be accessed via the Internet. At 
that time, most FSSs did not have the connectivity to access this data. 
The FAA has since purchased and deployed the hardware and software to 
support this capability. This information will be available to the FSS, 
pilots, and others on June 15, 2003.
    Question. When precisely can we expect these graphics to be 
available to general aviation pilots via the Internet?
    Answer. Graphical Temporary Flight Restrictions (TFR) information 
is currently available to pilots through one of the FAA's direct user 
access terminal system (DUATS) vendors, CSC (formerly Dyncorp, Inc.). 
The TFR Operational Display System (TODS) products will be made 
available to the general aviation public on June 15, 2003.

                  SAN JUAN COUNTY'S AIRSPACE FREQUENCY

    Question. What specific steps are you taking to ensure pilots 
flying in San Juan County, without the assistance of any air traffic 
control, will be aware of and adhere to the new frequency?
    Answer. The FAA process to inform all pilots of new frequency 
changes is to submit the change to the National Flight Data Center 
(NFDC) in the FAA Headquarters, Washington, DC. The information is then 
published in the National Flight Data Digest (NFDD), which comes out 
daily. This publication is sent to subscribers of NFDD, which includes 
air traffic facilities, chart producers, airlines, computer database 
providers, military, etc. General aviation pilots do not normally 
subscribe to the NFDD. The NFDD is used as the official authority to 
incorporate the change into airmen's charts and the Airport/Facility 
Directory (AFD). New charts and the AFD are published every 56 days. 
Since pilots are required, under 14 Code of Federal Regulations, Part 
91.103, Preflight Action, to ``become familiar with all available 
information concerning (their) flight,'' they are aware of any changes 
in the National Airspace System, including frequencies, as of the 
effective date of these publications. Therefore, frequency changes 
should coincide with charting cycles so pilots are aware of these 
changes when they discard outdated charts and AFDs, and begin to use 
new or updated charts and AFDs.
    Additionally, many fixed-based operators will post proposed changes 
to the airport and the surrounding airspace, including Common Traffic 
Advisory Frequency and Unicom frequency as soon as they become aware a 
change is planned.
    Question. Should we hold off relinquishing the CTAF until we are 
sure that pilots are educated enough to not create a safety problem?
    Answer. In this case, education and notification are 
interchangeable terms. The FAA recommends that notification occur via 
the publication of the Airport/Facility Directory (AFD), and that the 
change to the new frequency coincides with the date the new frequency 
will be charted. The FAA will provide timely notification to the pilots 
by ensuring that CTAF changes do not occur until the AFD and new charts 
are published. Pilots are required to be aware of the AFD chart changes 
and to use current publications. If the frequency change does not 
coincide with the charting cycle, the FAA would then be obligated to 
notify pilots through other means, such as Letter to Airmen or Notice 
to Airmen. A common practice is to provide pilot notification of 
changes through the AFD and charts.

                       AIR TRAFFIC MODERNIZATION

    Question. Administrator Blakey, the Aerospace Commission 
recommended making the transformation of the U.S. air transportation 
system a national priority. The Commission's report specifically called 
for the ``rapid deployment of a new, highly automated Air Traffic 
Management system, beyond the Federal Aviation Administration's 
Operational Evolution Plan, so robust that it will efficiently, safely, 
and securely accommodate an evolving variety and growing number of 
aerospace vehicles and civil and military operations.'' I am very 
interested in seeing this recommendation implemented to ensure the 
economic security of our country.
    Can you tell me what your agency is doing to respond to this 
recommendation?
    Answer. Working with other government agencies, the FAA has 
initiated an informal working group to develop a unified national air 
transportation plan for 2020 and beyond. The key objectives of the plan 
are to develop a series of unified strategic goals and actions that 
will move the industry forward. Critical to this is an emphasis on 
aligning the activities and resources of the various government 
departments to support the plan.
    FAA will continue to follow the blueprint laid out in the 
Operational Evolution Plan (OEP) for the capacity goal. To help the 
Agency in assessing the aviation system of the future, FAA had 
discussions with industry representatives to explore what they believed 
will be the changes and challenges to the system. FAA is considering 
broadening this goal to better reflect the mobility goal of the 
Department by focusing more directly on the passenger experience. In 
that way, the OEP will become the jumping off point for the longer-term 
national plan. The scope of the team's work will include issues related 
to air traffic management, aviation safety, capacity enhancement, 
airport improvement, security, and homeland security.
    Question. When do you expect to have a design and development plan 
for a next generation Air Traffic Management (ATM) system in place and 
when do you envision starting the implementation of such a plan?
    Answer. A draft plan is scheduled to be completed by December 2003. 
The plan, which FAA is developing jointly with DOD, NASA, DHS and DOC, 
will establish a more formal coordination process for research and 
implementation activities.
    Question. Since this recommendation will require a great deal of 
interdepartmental coordination to meet both our civil, defense and 
homeland security needs, what are you doing to ensure the appropriate 
level of participation from DOD, NASA, and DHS?
    Answer. The FAA has a long and successful working relationship with 
NASA on research and development, an excellent relationship with DOD in 
coordinating airspace requirements, and a new partnership with DHS/TSA. 
By continuing to strengthen the relationships the Agency has with these 
partners we can develop a joint approach--and most importantly a 
greater alignment of resources--that will enable regular monitoring of 
the unification of our plans, goals, and objectives.
    Question. Administrator Blakey, what is your agency doing to take 
advantage of the current slow down in the air travel demand to move 
forward on Air Traffic Management (ATM) system modernization to ensure 
we don't end up with horrendous delays like we had during the summers 
of 1999 and 2000 when traffic returns?
    Answer. The goal of the Operational Evolution Plan (OEP) is to 
increase capacity and by doing so, improve the efficiency of the 
National Airspace System and reduce delays.
    It is the FAA's objective, through the initiatives of the OEP and 
related Air Traffic Modernization projects, to increase the capacity of 
the National Airspace System by 31 percent during the next 10 years. 
While the events of September 11, and the subsequent downturn in the 
industry have impacted various elements of the plan--particularly those 
requiring collaborative work with the industry--the FAA is continuing 
to put considerable energy into this initiative.
    During the past 2 years the FAA has aggressively pursued its OEP 
related initiatives. This includes airspace redesigns throughout the 
National Airspace System, the implementation of Required Navigation 
Performance (RNP), various capacity enhancing technologies, 
collaborative decision making, and new runway construction.
    The industry has experienced a reduction in the number of flights 
and passenger loads. The market is not expected to reach pre-September 
11 levels until 2005. However, overall capacity of the system, because 
of the OEP, is continuing to grow by 3 to 5 percent each year. This 
means, that when the system does recover we will be far less likely to 
experience the delays we faced in 1999 and 2000.

                                 ______
                                 
           Questions Submitted by Senator Barbara A. Mikulski

                                ACE-IDS

    Question. It is my understanding that air traffic controllers are 
very pleased with the performance of the new ASOS Controller Equipment-
Information Display System (ACE-IDS) systems that is currently provided 
by a small business. I also understand that the older SAIDS4 systems in 
the field use hard to maintain obsolete software and use computers that 
have limited extensibility. What is your agency's position on the 
desirability of the acquisition of ACE-IDS for additional towers and 
TRACONS to replace the out of date systems?
    Answer. Air traffic controllers are pleased with the ASOS 
Controller Equipment-Information Display System (ACE-IDS). The 
Information Display System 4 (IDS4) does include aging hardware and 
software that will eventually need to be replaced. The FAA is 
developing an acquisition strategy for the next-generation display 
system. However, the agency will consider ACE-IDS as a potential 
solution for satisfying requirements that exist prior to the next-
generation display system award.
    Question. There are many capable small businesses that provide 
products, services and systems to the FAA, including the current 
provider of ACE-IDS. To what extent would the ACE-IDS or FAA Data 
Display System (FAADDS) program lend itself to being set aside for 
small business? Has the FAA examined that possibility?
    Answer. The FAA is currently developing the acquisition strategy 
for the next generation display system. All available options, to 
include small business set asides, will be considered in the course of 
the acquisition.

                                 ______
                                 
            Questions Submitted by Senator Richard J. Durbin

        WORKING GROUP ON THE AIRLINE INDUSTRY'S FINANCIAL CRISIS

    Question. Does the FAA have a working group to address the 
financial crisis in the airline industry?
    Answer. The Office of the Secretary (OST), not the FAA, is 
responsible for oversight of the financial condition of the airline 
industry. OST does not have a formal working group on this issue, but 
has undertaken extensive efforts both to monitor the financial 
condition of the industry and to evaluate longer-term effects of the 
industry's ongoing financial plight.
    The airline industry is in the midst of the most difficult period 
of financial distress since it was deregulated almost 25 years ago. 
This began well before the terrorist attacks of September 11 and 
reflected a combination of rapidly escalating costs--a trend that 
started in 1999--and severely decreased demand beginning in early 2001. 
With these changes, several years of record profits quickly turned to 
losses.
    The terrorist attacks greatly exacerbated losses for the passenger 
carriers and led to record losses. The industry has suffered operating 
losses of about $10 billion during each of the past 2 years, and is now 
expected to lose another $7 to $8 billion this year. A number of 
smaller carriers have failed, and two major carriers, United and US 
Airways, filed for bankruptcy, although the latter carrier has now 
successfully emerged from that process. To compensate for the ongoing 
losses, airlines have undertaken large-scale capacity cuts, laid off 
more than 100,000 employees, made operational changes designed to 
enhance efficiency, and engaged in a wide variety of other efforts to 
reduce operating costs. These efforts have not yet stopped continuing 
losses as the industry has been confronted by a continuing series of 
events that have affected demand, such as the Iraq war and SARS.
    It is also important to note that not all news is bad. While the 
large network airlines in particular have suffered massive losses 
throughout this period even while significantly reducing capacity, in 
marked contrast several low-fare airlines have profitably expanded 
throughout this same period. Now that several low-fare airlines have 
gained a critical mass and are expanding, cost control by the large 
network carriers is paramount. The structure of the industry that will 
evolve from this financial turmoil will depend in large part on how the 
less stable carriers respond to their cost cutting and restructuring 
efforts, but also on how soon and to what extent the economic recovery 
brings relief.

                   OPERATIONAL EFFICIENCY IN THE NAS

    Question. What steps are being taken to improve operational 
efficiency in the national aviation system? Will they help the airlines 
operate more efficiently and save money?
    Answer. The FAA's work in improving the operational efficiency of 
the National Airspace System can be considered both on a short-term and 
long-term basis. Near-term operational improvements include such 
initiatives as continued deployment of Traffic Management Advisor, 
enhanced use of collaborative decision making tools to mitigate the 
impacts of weather on efficiency, and Reduced Vertical Separation 
Minima. Longer-term initiatives include additional runways as well as 
the modernization of the en route automation system.
    These efforts and systems will provide the airlines and flying 
public with fuel-efficient routes, predictable schedules, and minimize 
the disruptions caused by weather.

              AIRPORTS WHICH WILL BENEFIT FROM NEW RUNWAYS

    Question. Is Chicago O'Hare one of those airports which will 
benefit from new runways?
    In your testimony, you state ``We believe that new runways added at 
the right airports are the single most effective way to increased 
capacity.'' Is Chicago O'Hare one of those airports?
    Answer. Chicago is one of the 35 airports in the agency's Capacity 
Benchmark Study/Operational Evolution Plan. Since over 70 percent of 
all scheduled traffic moves through these 35 airports and 15 of these 
airports account for 80 percent of the total delays in the entire 
National Airspace System (NAS), any project which increases capacity or 
reduces delays at these airports has benefits that ripple through to 
the entire NAS. O'Hare ranks third in the number of delays over the 
past 5 years and had the highest ratio of delays to operations of any 
of the Operational Evolution Plan (OEP) airports in 2002 (57.60 per 
1,000). Given that O'Hare also handled more operations than any other 
airport last year, these delay ratios are indicative of a delay problem 
at O'Hare.
    Delays at O'Hare International Airport will continue to grow as 
demand increases. Delays at O'Hare are having a ripple effect 
throughout the country and additional capacity is needed. The FAA is 
currently evaluating a draft plan proposed by the City of Chicago for 
the modernization of O'Hare Airport that is expected to significantly 
increase its capacity. The modernization plan includes the realignment 
of existing runways as well as the addition of a new runway.

                                 ______
                                 
                Questions Submitted to Jeffrey N. Shane
            Questions Submitted by Senator Richard C. Shelby

           ROLE OF THE OFFICE OF THE SECRETARY IN FAA MATTERS

    Question. Secretary Shane, now that the Coast Guard and TSA have 
moved to the Department of Homeland Security, do you see an increased 
role for the Office of the Secretary in matters relating to the FAA? 
Can you give us a few examples?
    Answer. There has been no change in the role of the Office of the 
Secretary (OST) with relation to the Federal Aviation Administration 
(FAA) since the transfer of the Coast Guard and Transportation Security 
Administration (TSA) to the Department of Homeland Security. OST 
coordinates the broad policy goals of the Department and the 
administration among all the operating administrations. Its role with 
regard to the FAA is no different than its role with any other modal 
administration. For example, the aviation reauthorization legislation 
(Flight-100) that was proposed by the administration was a 
collaborative effort between the FAA and OST. The same collaborative 
process was followed with the various operating administrations 
included in the administration's surface transportation reauthorization 
proposal (SAFETEA). We expect this coordination role to continue with 
regard to all operating administrations within the Department.

                     FAA MANAGEMENT OF PROCUREMENT

    Question. When you were at the Department in the early 1990's as 
the Assistant Secretary for Policy, the FAA and the Department were 
struggling with the Advanced Automation System procurement (AAS) and 
now, to read the IG's testimony, we still seem to be struggling with 
procurement at the FAA: WAAS, STARS, and Oceanic to be specific. And, 
in fact, I believe that STARS and Oceanic are, in part, follow-on 
procurements to the AAS procurement that was such a disaster for the 
FAA.
    Do you think that the FAA does a good job in managing procurements?
    What should OST do or Congress do to help the FAA improve its 
ability to deliver desired capability, reduce schedule slippages, and 
reduce cost overruns?
    Answer. The FAA remains committed to delivering National Airspace 
System (NAS) systems within cost and schedule baselines. FAA has made a 
number of management changes that strengthen its ability to develop 
leading-edge technologies. For example, about 2 years ago, the agency 
instituted a more disciplined process to establish cost, schedule, and 
performance baselines. This new process acknowledges that a great deal 
of planning and analysis must be invested in a program before clear 
cost and schedule parameters can be established in an official 
acquisition program baseline. The FAA's investment review board also 
reviews major programs on a regular basis to identify and remove 
barriers to successful completion. These processes are producing more 
accurate cost estimates and better performance vis-a-vis program 
baselines. In fact, over the past 2 years, the FAA has stayed within 
cost estimates for the vast majority of modernization programs. With 
respect to the specific programs mentioned:
    The Wide Area Augmentation System (WAAS) program has overcome its 
technical challenges and was commissioned on July 10, 2003. The Oceanic 
program has been delivering significant, incremental improvements to 
oceanic controllers since 1995. The Advanced Technologies and Oceanic 
Procedures program combines those earlier oceanic improvements, adds 
others, and integrates everything into a single controller workstation. 
The program is on track to meet the deployment milestones in its 
official acquisition program baseline.
    The Standard Terminal Automation Replacement System (STARS) program 
is also on track. Except for a 3-day delay in achieving an early 
display capability in Syracuse in June, 2002, STARS has met every 
single milestone on or ahead of schedule for the past 3 years. The 
first full version of the STARS system began operations at an FAA 
facility on April 30, 2002, in El Paso. It is currently operational at 
El Paso; Syracuse; Philadelphia; Portland, Oregon; and Miami.
    The FAA has also shown that it is willing to make hard decisions 
when faced with significant cost variances. The agency cancelled the 
Gulf of Mexico buoy program last year and just recently decided to 
defer further expansion of the controller-pilot data link 
communications program.
    The Office of the Secretary of Transportation will continue to work 
closely with the FAA--to establish realistic and accurate cost/schedule 
baselines, improve program management, execute according to plan, and 
cancel or defer programs when their costs exceed benefit profiles.

               THE FUTURE OF THE U.S. AEROSPACE INDUSTRY

    Question. The Commission on the Future of the United States 
Aerospace Industry issued a report making a number of recommendations 
to ensure the competitiveness of the American industry. One of the 
Commission's recommendations called for the Federal Government to 
establish a national aerospace policy and promote aerospace by creating 
a government-wide management structure. How is the Department 
responding?
    Answer. The Secretary is establishing a joint planning office (JPO) 
to address the air transportation portion of the recommendations. The 
objective of the JPO is to coordinate with the National Aeronautics and 
Space Administration, the Departments of Commerce, Homeland Security 
and Defense, and outside stakeholders on a national plan for the 
transformation of the air transportation system. These joint activities 
will unify interagency research and development by aligning our vision, 
goals, policies, and resources out to 2025. A second piece of the 
management structure will be a policy committee, chaired by the 
Secretary of Transportation, which will advise and guide these planning 
efforts with inputs on the overall national policies that will promote 
economic growth through the transformation of air transportation.

                          SUBCOMMITTEE RECESS

    Senator Shelby. Thank you.
    This concludes today's hearing. The subcommittee is in 
recess subject to the call of the Chair.
    We thank all of you for appearing.
    [Whereupon, at 12:18 p.m., Wednesday, April 2, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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