[Senate Hearing 108-847]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-847
 
                     FUTURE OF THE AIRLINE INDUSTRY

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            JANUARY 9, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina,
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON SMITH, Oregon                 JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on January 9, 2003..................................     1
Statement of Senator Brownback...................................     6
Statement of Senator Burns.......................................    12
Statement of Senator Dorgan......................................     9
    Article, dated January 3, 2003, from The New York Times 
      entitled, Partners in Flight...............................    10
Statement of Senator Fitzgerald..................................    16
Statement of Senator Hollings....................................     1
    Prepared statement...........................................     1
Statement of Senator Hutchison...................................     5
Statement of Senator Inouye......................................    11
    Prepared statement...........................................    12
Statement of Senator Lott........................................     8
    Prepared statement...........................................     9
Statement of Senator McCain......................................     3
    Prepared statement...........................................     4
Statement of Senator Nelson......................................    12
Statement of Senator Rockefeller.................................    13
    Prepared statement...........................................    15

                               Witnesses

Anderson, Richard H., Chief Executive Officer, Northwest 
  Airlines, Inc..................................................    56
    Prepared statement...........................................    59
Carty, Donald J., Chairman and CEO, American Airlines............    40
    Prepared statement...........................................    43
Kahn, Alfred, Robert Julius Thorne Professor of Political Economy 
  Emeritus, Cornell University...................................    74
Mitchell, Kevin P., Chairman, Business Travel Coalition..........    77
    Prepared statement...........................................    79
Shane, Jeffrey N., Associate Deputy Secretary, Department of 
  Transportation.................................................    17
    Prepared statement...........................................    19
Woerth, Captain Duane E., President, Air Line Pilots Association, 
  International..................................................    63
    Prepared statement...........................................    65

                                Appendix

Allen, Hon. George, U.S. Senator from Virginia, prepared 
  statement......................................................    91
Kerry, Hon. John F., U.S. Senator from Massachusetts, prepared 
  statement......................................................    91


                     FUTURE OF THE AIRLINE INDUSTRY

                              ----------                              


                       THURSDAY, JANUARY 9, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.

         OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Chairman Hollings. The Committee will come to order. I 
wanted to yield to my Chairman, that is a fact, even though it 
has not gotten into law yet, and welcome him back, and we will 
continue to work together very closely as we have. This 
Committee has been outstanding in its cooperation during major 
parts of the leadership of Chairman McCain.
    We are delighted to have our airline executives here to 
tell us about the status of the airlines. I am going to file my 
statement, Mr. Chairman, and only comment to the effect that I 
take it today we will not have to hear how deregulation is 
working.
    [Laughter.]
    Chairman Hollings. We used to have over a dozen or so 
airlines all competing at a reasonable price. It costs now, a 
round-trip ticket from Charleston, South Carolina, to 
Washington, or it did last year--I think they are trying to 
adjust--$1,036 coach class, and we have gotten most of the 
airlines broke and the rest of them begging. I think they have 
got three that are left in the black, and it is not all 9/11. 
We put in $5 billion as a result of 9/11, and we are willing to 
help in any way we can.
    I know there is a burden with respect to the security of 
the airports. In other words, there is an additional burden. 
However, you can see they have gotten way out of line when, in 
trying to save the airlines, you see the pilots now cutting 
back 30 percent of their salaries, and other cost savings that 
should have been instituted sometime ago, but let us hear from 
the airline executives. Let me yield to Chairman McCain.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Good morning. First, let me express my sympathy to the family and 
friends of the folks that lost their lives in the crash in Charlotte 
yesterday. We have spent a great deal of time focusing on security over 
the last 16 months, recognizing that making people safe and secure in 
their travel is a critical part of what our governmental 
responsibilities are. Crashes are a devastating experience for the 
families and loved ones, and I wanted to express my condolences to 
those folks.
    Turning to the economic plight of the airline industry, above all 
else we must ensure that the industry is safe. We must also work to 
make certain that it is strong and viable. Right now, the Federal 
Aviation Administration (FAA) has targeted the two carriers in 
bankruptcy for greater surveillance. Does the FAA have the resources to 
fully do its job? I do not yet know the answer to that question, but I 
know we will look into this matter.
    It is clear to all of us that the airlines face perhaps the most 
difficult period in their history. Analysts indicate that air carriers 
have collectively lost at least $15 billion over the past two years 
with just a few carriers operating in diminished profitability. More 
than 80,000 good paying jobs have been lost over this same period with 
up to 30,000 more personnel cuts planned for 2003 as companies 
restructure their business models in an effort to remain competitive. 
The aircraft manufacturing sector is faring no better, with more than 
600 airplanes having been moved into storage or early retirement, and 
new orders for Boeing and others continuing to fall off.
    After the tragic events of September 11, 2001, Congress acted 
quickly to provide air carriers access to $5 billion in direct 
compensation and $10 billion in federally guaranteed loans. While this 
support was a needed ``shot in the arm,'' the airline industry 
obviously continues to struggle, and many other businesses across the 
country are facing increasingly difficult times as well. Unlike the 
airlines, these industries did not get a ``bailout'' after the 
terrorist attacks and many companies have not survived as the nation's 
economic slump has worsened. Yet, again we are here to contemplate what 
further steps the Federal Government can take to improve the condition 
of our airlines.
    A number of carriers have expressed the need to have their tax, 
fee, and security burdens lessened. Some airline CEOs have explained 
that when the airlines were profitable, these costs could be passed on 
to customers, but now that the demand is down these costs are absorbed 
by the airlines. We know the carriers were weakened by 9/11, but some 
were weak prior to 9/11. Now, the market has radically shifted and the 
major carriers can not change quickly enough to make a profit. Herb 
Kelleher and Southwest, and Dave Neeleman and JetBlue, continue to make 
money as passengers look for lower fares. The major carriers, like 
American and United, have announced fare reductions in an effort to 
lower business fares and attract more people to fly. The planes are 
full--Northwest had a 77 or 78 percent load factor last month, but 
revenues are down per passenger. I like the lower fares, and the one 
way walk up even for my Charleston flight has dropped by about $400. 
This is good news for the consumer, but the carriers need to reduce 
costs if they are to survive.
    The airlines are calling for Congress to alter the current tax 
system, but we need the carriers to show us what changes they are going 
to make to improve their business structure, service and economic 
viability. The Air Transportation Board was tough on applicants, asking 
for detailed business plans. They did not give loans to all comers, and 
in fact turned down United, and gave US Airways conditional approval 
for $900 million in loans.
    The airlines are also asking Congress to revamp the Railway Labor 
Act by inserting a mandatory arbitration clause. As I see it, 
yesterday, United's pilots--and Mr. Woerth from ALPA can provide us 
details--agreed to cut salaries by 29 percent. The other carriers and 
their unions will need to follow. The labor-management negotiations 
seem to be working, so we should not inject ourselves into the process. 
Management, for its part, has also been making concessions and I am 
hopeful that future efforts among the airlines will continue to 
incorporate a similar balance. I should add that I appreciate Mr. 
Woerth's appearance and want to recognize his efforts following 9/11 to 
help us pass the Aviation and Transportation Security Act. He helped us 
push that bill through, and I want to thank him for his efforts.
    If the airline market failure leads to an industry collapse the 
ramifications for our entire economic system are dire. I find it 
interesting that Congress is being asked to tinker with fees and repeal 
taxes--the majority of which pay for programs that directly benefit the 
air carriers--while the Administration is pushing for a major economic 
stimulus package that provides nothing for our airline industry. 
Clearly, the industry is too important to our nation's economy not to 
take action--but what steps will best provide the most dependable and 
equitable aviation transportation system for the traveling public? 
These issues must be very carefully considered in light of the airline 
industry's current market failure. We need to see real fixes with real 
results, not a system of continual boom and bust that overcharges 
customers in good times and asks for handouts from them in bad.
    This hearing will provide the industry an opportunity to make it's 
case for further support in the form of changes to the current tax and 
fee structures, but know that you are facing a skeptical audience. I am 
hopeful that our time here will lay the groundwork for finding workable 
solutions to lingering troubles in the airline industry which will help 
to benefit aviation, the entire U.S. economy and the American people 
for a long time to come.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Senator Hollings, and I would 
like to note for the record that the Committees have not been 
organized, which means that Senator Hollings remains the 
Chairman of this Committee until such time as that 
parliamentary procedure is completed. And I would like to take 
this opportunity again, as I have over the last 18 years of 
service with Senator Hollings, to thank him for the bipartisan 
fashion in which we have treated these issues. We have not 
always agreed from time to time, but I have always been treated 
with the utmost courtesy and consideration and deference, 
whether--by Senator Hollings--whether I was the Chairman or the 
Ranking Member. I believe this is the third time we have 
rotated that position.
    Chairman Hollings. People cannot make up their minds, can 
they?
    [Laughter.]
    Senator McCain. I do not think that we are a perfect 
Committee. I do believe, however, that the relationship that 
has existed between the two of us, whether it was Chairman or 
Ranking Member positions, has led to beneficial results for the 
American people. The sheer volume of legislation that has been 
reported out and passed by this Committee exceeds by far any 
other Committee of the United States Senate, and many very 
important pieces of legislation such as the establishment of 
the Transportation Security Authority and many other major 
pieces of legislation that have emerged from this Committee and 
passed by the entire Senate signed by the President could not 
have been achieved without a relationship of mutual trust that 
exists between the two of us, so I want to thank you again, Mr. 
Chairman, and I do not look forward to a fourth shift, but if 
it does happen, I will regain and retain my confidence in our 
ability to work together for the benefit of the American 
people, and I say that with all sincerity and goodwill.
    By all accounts, the airline industry has hit one of its 
toughest times ever. The terrorist attacks of 2001 compounded 
the impact of an economic slowdown that was already underway. 
As a result of the attacks, the airlines faced a serious crisis 
that required government intervention, and Congress responded 
with legislation designed to stabilize the industry in the 
short term.
    Our efforts appear to have been somewhat successful, 
because all the major carriers are still operating. However, 
two of them are currently attempting to restructure themselves 
through bankruptcy, others are in serious difficulty. The 
current condition of the industry and its future prospects are 
of paramount concern.
    The airlines are seeking additional assistance from the 
government. Although there may be ways that we can be helpful, 
we must be cautious about any effort that we might undertake. 
There is no dispute about the importance of aviation to our 
Nation, but as a general matter, government involvement in the 
financial health of an industry should proceed cautiously.
    We must ask whether our actions would improperly distort 
the marketplace. The ability of some airlines to remain 
profitable in the current climate raises a question of whether 
there is something wrong with the rest of the industry. We 
should be reluctant to do anything that might keep inefficient 
businesses afloat. Many people believe that the basic business 
model of the traditional hub-and-spoke air carriers was broken 
long before these current difficulties.
    We face no easy choices. I want to repeat: We face no easy 
choices. While I instinctively favor market solutions, one 
potential drawback to allowing the market to sort out winners 
and losers is that the failure of one or more airlines could 
substantially increase market concentration, which necessarily 
means that the consumers will suffer.
    I, for one, do not relish the thought of having the airline 
industry restored to financial health through consolidation or 
other industry action that erodes competition and significantly 
increases air fares in captive or semi-captive markets. 
Furthermore, there could be significant losses of service in 
some markets and regions if one major carrier were to be 
liquidated. We need to look carefully at the potential effects 
of any actions we may take.
    Whether or not Congress provides additional assistance, the 
industry must act to help itself. The economy is struggling, 
and many industries would like governmental aid. Very few have 
received the assistance that has been given to the airlines. 
That assistance has certainly been warranted, but it does not 
mean the government will or should step in every time. The 
aviation industry may simply need to adjust to the new 
realities of air travel before we can take any further 
significant action. There are signs that such efforts are 
underway at some airlines. These efforts may lead to 
difficulties that might be painful in the short term, but also 
might be better for the industry as a whole in the long term. 
It also may mean, for those of us who travel frequently on the 
Nation's airlines, a much less comfortable and enjoyable 
experience, I might add.
    I want to thank our witnesses for being here this morning. 
I look forward to hearing again from Mr. Shane, who has been a 
very frequent witness before this Committee over many years, 
and I believe that this issue is one of paramount importance to 
the future of this Nation, and one that may require us thinking 
and acting outside of the norms of the behavior we have 
exhibited in the past with regard to the airlines of the United 
States. I do not believe that anyone can argue that airlines 
have ever been in a deeper crisis since airline deregulation 
than they are today.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator McCain follows:]

                Prepared Statement of Hon. John McCain, 
                       U.S. Senator from Arizona

    By all accounts, the airline industry has hit one of its roughest 
times ever. The terrorist attacks of 2001 compounded the impact of an 
economic slowdown that was already underway. As a result of the 
attacks, the airlines faced a serious crisis that required government 
intervention, and Congress responded with legislation designed to 
stabilize the industry in the short term. Our efforts appear to have 
been somewhat successful because all of the major carriers are still 
operating; however, two of them are currently attempting to restructure 
themselves through bankruptcy.
    The current condition of the industry and its future prospects are 
of paramount concern. The airlines are seeking additional assistance 
from the government. Although there may be ways that we can be helpful, 
we must be cautious about any effort we might undertake. There is no 
dispute about the importance of aviation to our nation. But, as a 
general matter, government involvement in the financial health of an 
industry should proceed cautiously. We must ask whether our actions 
would improperly distort the marketplace. The ability of some airlines 
to remain profitable in the current climate raises the question of 
whether there is something wrong with the rest of the industry. We 
should be reluctant to do anything that might keep inefficient 
businesses afloat. Many people believe that the basic business model of 
the traditional hub-and-spoke air carriers was broken long before these 
current difficulties.
    We face no easy choices. While I instinctively favor market 
solutions, one potential drawback to allowing the market to sort out 
winners and losers is that the failure of one or more airlines could 
substantially increase market concentration, which necessarily means 
the consumers will suffer. I, for one, do not relish the thought of 
having the airline industry restored to financial health through 
consolidation or other industry action erodes competition and 
significantly increases airfares in captive or semi-captive markets. 
Furthermore, there could be significant losses of service in some 
markets and regions if one major carrier were to be liquidated. We need 
to look carefully at the potential effects of any actions we may take.
    Whether or not Congress provides additional assistance, the 
industry must act to help itself. The economy is struggling and many 
industries would like governmental aid. Very few have received the 
assistance that has been given to the airlines. That assistance has 
certainly been warranted, but it does not mean the government will or 
should step in every time. The aviation industry may simply need to 
adjust to the new realities of air travel before we can take any 
further significant action. There are signs that such efforts are 
underway at some airlines. These efforts may lead to difficulties that 
might be painful in the short term, but also might be better for the 
industry as a whole in the long term.
    I thank our witnesses for being here and hope they will be able to 
shed light on what the future holds for the industry.

    Chairman Hollings. Thank you. I have listed Senator 
Hutchison, Brownback, Lott, Dorgan, Inouye, Nelson, Burns, 
Rockefeller. Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman. I am pleased to 
be able to have this hearing early to talk about the state of 
the airline industry. Anyone who has been reading the 
newspapers knows that our airline industry is in dire straits. 
In my home state, we have three of the major air carriers, 
including the world's largest, American. Before 9/11 there were 
more than 79,000 airline employees in Texas. 8,000 of those 
employees have lost their jobs. The airlines themselves have 
lost $7 billion in 2002.
    We cannot deny the tremendous impact of the attacks on air 
travel. However, the roots of the current crisis go much deeper 
than that single day of terror. 2001 was already shaping up to 
be a terrible year for the airlines on that fateful morning. 
After the travel boom of the 1990's, the airlines entered into 
a series of disastrous contracts with their unions. While I 
fully endorse strong partnerships between management and labor, 
these agreements compromised the financial stability of most of 
the airlines.
    Anyone who has watched the rail industry in our country 
knows that if this happens in the airline industry it will 
annihilate this very important part of commerce in our country. 
That is why I will support the concept behind Senator McCain's 
legislation that would amend the RLA to bring labor 
negotiations to a definite conclusion either by agreement of 
the parties or by binding arbitration. We must make sure that 
this industry stays viable, and I think Senator McCain's bill 
will do that.
    I think it is also critical to maintain the safety 
requirements that we have imposed since 9/11. Certainly, we are 
going to need to add some things like air cargo, which Senator 
Rockefeller and I have been working on in the last year. That 
will be a help, but some of the airlines have indicated that 
the security measures have been part of their economic woes.
    I have to say I reject that. I think the security measures 
have actually helped the airlines from going into a deeper 
hole. So while I think we do need to make some changes to make 
sure that the security system is as efficient and 
noninterfering as possible, I think that the traveling public 
will only stay on the airlines if they believe that security is 
strong. I also believe that the changes we have made in airline 
security have made it extremely strong.
    I am very proud of the Transportation Security 
Administration and the work that they have done in making our 
screeners more professional. I look forward to working with 
them to make it even more efficient and traveler-friendly, and 
I am going to be there to support the airlines.
    I supported both of the proposals designed to help the 
airlines and the loan guarantees that made it into the system. 
I think we need to make sure that we prop up our industry, but 
we also need to ask the industry to monitor itself and do what 
it needs to do to maintain its viability. The government will 
be there when necessary, but not at every turn, because we also 
have other priorities for our country that will be running us 
into deficit. So we need a partnership, and that is what I will 
be working for.
    Thank you, Mr. Chairman.
    Chairman Hollings. Very good. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, and thank you 
again for holding the hearing on the airline industry. As I 
have pointed out and talked about in the past, I wanted to 
speak, if I could, briefly on the aircraft manufacturing 
industry.
    Over the break, I had a chance to sit down with the major 
aircraft manufacturers, all of which have plants in Wichita, 
Kansas. Wichita is home to Boeing, Raytheon, Cessna, and 
Bombardier's major factories or headquarters. Over the break, I 
sat down with leaders of these four major aviation 
manufacturers in Wichita and discussed their situation, and as 
you might suspect, as I pointed out to the Committee 
previously, they are in a very, very difficult situation.
    While the state of the commercial industry is dismal, the 
general aviation community is suffering even more so. Over the 
past 18 months, there have been 10,400 layoffs in Wichita 
alone, 10,400. And this is just the direct layoffs in the 
aviation community. The number does not include the multiplier 
effects that are felt throughout the city. For every one job in 
the aviation industry in Wichita, there are--1.9 jobs created. 
This is devastating, when you consider that even since the last 
hearing that we had in October, Wichita has suffered another 
1,000 additional layoffs.
    The situation is not getting better, and we must commit to 
improve it immediately, and while we're focused so much on the 
airline industries, the manufacturers are really taking a huge 
hit. And much of the business is being moved overseas or taken 
over by Airbus, which I am going to ask the Commerce 
Department, Mr. Shane about later on as well, about what Airbus 
is doing in this period, when we are seeing a downturn in 
aircraft manufacturing and they are upscaling their 
manufacturing during the same period of time. That has to be 
due to heavy government subsidization, for them to be able to 
do that at this time.
    I have got a chart that I just wanted to show briefly if we 
could of Boeing commercial aircraft delivery. That is right 
here if we could put that up, Mr. Chairman. You can see, in 
2001, Boeing Commercial delivered 527 aircraft, 2002, 381, 
projected this year, somewhere between 275 and 285. Now, if 
that last number holds, and you see we are roughly half of what 
we were in 2001, Airbus will take over for the first time since 
its creation's the number 1 position of delivery of aircraft of 
the main airliners throughout the world. They have done that 
through heavy subsidization against agreements.
    So we have got a two-fold problem here. We have got a 
difficult situation financially for the airline industries, 
which--being shown by the manufacturers, and you have a heavy 
subsidization coming in by other countries to take over the 
manufacturing, and that is something I am going to be working 
aggressively on. We need to focus, and I think take into clear 
concern and embrace the recommendations of the Commission on 
the Future of the U.S. Aerospace Industry, that final report to 
Congress. They emphasized the needs and the ways that we can 
bolster basic research for the aviation industry.
    What the manufacturers were telling me is, look, we were 
hurting. We do not have the income, and so we are going, or 
other countries are coming to us and saying, we will pay for 
the research and development of this wing or this engine on 
this aircraft, but if we do that, we want it manufactured here. 
We want it manufactured in China or in Japan, or Thailand, or 
Europe, wherever they are coming to buy the--if they are going 
to pay for the research, they want the manufacturing, the jobs 
to go there, and the companies, strapped for cash, are saying, 
well, I guess we are probably going to have to do that. So you 
are seeing the dismantling of the aircraft manufacturing 
industry in this country now.
    The industry is used to cyclical ups and downs. It's had 
those for a number of years, but what is different about this 
structural change, is that a number of those jobs are being 
then sucked away to other countries that are unlikely to come 
back, so they'll be importing the wing from China, the engine 
from somewhere else, assembling it here, but you have lost 
those jobs and you have lost them on a long-term basis. I 
really hope we look at what this commission reported and we 
take a serious focus on that, and Mr. Shane, I also want your 
Department to be looking, and I am going to be asking questions 
about, what Airbus is presently doing to take this industry 
away via government subsidization.
    Thank you, Mr. Chairman.
    Chairman Hollings. Thank you so much, Senator, for free 
trade. We are all in trouble. We have lost 55,200 textile jobs 
with free trade, and now the airline industry is hit, and 
before long, you farmers are going to get hit.
    Senator Brownback. Free trade, I do not have a problem. It 
is heavy government subsidization that takes it away that I 
have a real problem with.
    Chairman Hollings. That is the kind of free trade we are 
into.
    Senator Lott.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Thank you, Mr. Chairmen, plural, Senator 
McCain, incoming Chairman, and Senator Hollings, outgoing 
Chairman, for having this early hearing. I think it is 
certainly justified, and from what we have already heard, this 
is an area clearly that we are going to have to pay a lot of 
attention to this year. I believe one of the most important 
components of our economy is transportation as a whole, and 
aviation is certainly a critical part of that.
    I want to thank Senator Hollings and Senator Rockefeller, 
and certainly my friend and colleague, Senator Hutchison for 
the work they did last year and in the aftermath of 9/11 
passing emergency legislation that was critical to the 
industry, dealing with such things as the cargo issue. They 
have done great work, and I think that this year this will be 
one of the most active areas in this Committee.
    I am looking forward, when we do get an organization 
resolution, to Chairing the Subcommittee. I have had some good 
discussions already with Senator Hutchison and Senator McCain 
about what we need to do to be helpful. I pledge to meet with 
all sectors of this industry to make sure I understand where 
the problems are and what the Federal Government's role is, and 
how we can improve the situation with modernization. We are 
going to look at security costs, with the impact it is having 
on manufacturing and the whole sector.
    I think that this is a critical area where we need to act, 
probably with two or three bills this year to help deal with 
the problems. To the industry, I have already said, and I have 
always said, you know, Federal Government is certainly not the 
total answer. The industry has problems of its own they are 
going to have to face up to. We need to help make it possible 
for those problems to be dealt with in terms of costs that we 
have helped cause you to deal with in terms of additional cost. 
For instance, the airports. Airports all over this country are 
having additional costs from security that they certainly would 
not have done before 9/11, and also we have to look at the best 
way to deal with labor disputes and we will be looking for some 
answers to that, too.
    I want to hear the witnesses, so Mr. Chairman, I know it is 
not done often enough, but I would like to submit my entire 
statement for the record.
    [The prepared statement of Senator Lott follows:]

                Prepared Statement of Hon. Trent Lott, 
                     U.S. Senator from Mississippi

    I would like to congratulate the Chairman for holding this hearing 
and his commitment to evaluating the status of the aviation industry.
    I look forward to serving as Chairman of the Aviation Subcommittee 
this Congress. Chairman McCain plans to start off the year with an 
aggressive agenda. The Committee is planning to hold hearings on the 
Federal Aviation Administration (FAA) reauthorization, computer 
reservations systems, aviation capacity, and competition issues.
    The Committee also will consider the financial condition of the 
airline industry, air traffic control modernization, the continued 
organization of the FAA into a performance-based organization, and the 
resolution of airline labor disputes. I am anxious to begin working 
with Chairman McCain, Senator Hollings, Senator Rockefeller, and the 
other Committee Members to accomplish these goals and address other 
issues that might arise during the Congress.
    I agree with Senator McCain on the importance of a quick start to 
evaluating the current situation and the future of the aviation 
industry. We have seen the industry hit bad cycles before, especially 
in times of war and economic stress. High fuel costs during Desert 
Storm strained the industry. However, the combination of the slow 
economy and the tremendous drop in air travel since 9/11, have had an 
unprecedented impact on the industry.
    In the immediate aftermath of 9/11, the Congress acted to improve 
aviation security and assist the industry. Now we need to look at what 
should this Congress do to stabilize the industry and ensure that all 
of America, especially smaller communities in states like mine, are 
well served? If the industry does not begin to swing upward, the nation 
is likely to see additional bankruptcies and massive consolidations. 
This often times means higher prices and less service.
    I continue to hear from the aviation industry that there needs to 
be a reduction in the regulatory and security cost burdens on the 
industry. The airlines have taken on the cost of additional air marshal 
tickets, airport security costs not borne by TSA, and security fees 
attached to tickets in order to remain competitive.
    In my home state of Mississippi, the Jackson International Airport 
reports that the TSA's security regulations are costing the airport 
$60,000 monthly. In order to reconfigure the terminal to meet new 
security requirements, the airport is having to dip into AIP (Airport 
Improvement Program) funds. If this continues, airport improvement will 
be deferred and economic development will be hampered.
    Already, two major airlines have filed for bankruptcy under Chapter 
11. While this has allowed them to lower their costs and continue 
operating, the resulting intense price competition may drive the 
remaining carriers to follow that same path as an industry sized for 
the rapid growth of the late 1990's attempts to rapidly reshape itself 
for the current economic reality.
    One of my first priorities will be to meet with representatives 
from all segments of the aviation industry in an effort to explore ways 
that Congress can help.
    Another area where I plan to focus is labor reform. Last year 
Chairman McCain introduced, and I along with several other Members co-
sponsored the Airline Labor Dispute Resolution Act. This legislation 
would move the industry to baseball-style arbitration. I believe with 
the financial crisis the industry is now facing, it is more important 
now than ever to resolve airline labor disputes fairly and in the least 
disruptive manner.
    I look forward to hearing from today's witnesses and working with 
each of you this Congress.

    Chairman Hollings. It will be included. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I agree 
with much of what has been said this morning, and I would like 
to make the point, it is in our selfish interest to care about 
what happens to the airline industry. This country will not 
have a strong economy, in my judgment, unless it has a strong 
airline industry. So for the traveling public, for the hundreds 
of thousands of people who work for the airlines, for aircraft 
manufacturers, suppliers, all of which make up a nearly $1 
billion industry, we have a very big stake in making sure that 
we have an airline industry that is viable in the future. It is 
the case that a soft economy, a recession, and terrorism 
represent things that the industry could not and would not be 
able to control themselves, so this is an important hearing, 
and I appreciate your calling the hearing.
    The airline industry itself is trying to restructure, 
trying to be creative, trying to cut costs. I must say that 
when I saw a report on television the other day, that one 
airline is now beginning to charge for food, it occurred to me 
that I would like to get the names and addresses of those 
Americans who would voluntarily purchase food from the 
airlines. I have some things I would like to market to them as 
well.
    [Laughter.]
    Senator Dorgan. But let me be serious and say that as the 
airlines restructure and think through how they address these 
new crises, it is of particular concern to me that we not 
jeopardize service to smaller markets, rural markets, and 
smaller states. I know that can be a temptation to some, but 
Senator Rockefeller and I have waged a long battle on these 
issues, and I am going to be watching very, very closely to 
make sure that we not have an airline industry restructured in 
a way that hauls people back and forth between the largest 
metropolitan areas and that becomes a skeleton of the industry.
    No industry can sustain the $7 to $8 billion annual losses. 
They are going to have to do a lot of things inside the 
industry, and they are, to address these issues. We need to 
think long and hard about what we can do to ensure that this 
industry gets turned around as well. I would like to say that I 
have been and will always be the first on this Committee to 
object to and oppose most additional mergers that would be 
proposed to further consolidate an already highly concentrated 
industry, but I must say that I do not have the same concerns 
with respect to alliances.
    I have reviewed the alliance proposals and think that most 
of them and many of them can benefit consumers without 
suppressing competition, and I want to include at the 
conclusion of my opening statement an editorial by the New York 
Times, dated January 3, that is called Partners in Flight, and 
I am going to ask Mr. Shane some questions about the alliance 
issue, because I think there is a need to, in areas where 
appropriate, be expeditious in approving requests that are 
thoughtful and that can strengthen airlines. I am not just 
talking about any one airline, I am talking about a range of 
airlines, as long as it does not suppress and injure 
competition.
    I will wait and ask questions of Mr. Shane and others, and 
again let me thank you, Mr. Chairman and Senator McCain, the 
Chairman-to-be, for holding this hearing.
    [The information referred to follows:]

                                         The New York Times
                                                    January 3, 2003
Partners in Flight

    America's beleaguered airlines continue to hemorrhage money at an 
alarming rate. After losing $7 billion in 2001, carriers are expected 
to report close to $9 billion in losses for 2002, the year in which 
both United Airlines and US Airways filed for bankruptcy. With the 
possibility of war on the horizon, and the economy recovering at a 
languid pace, no relief is in sight.
    Congress rushed to the airlines' aid in response to the terrorist 
attacks in 2001, but rightly declined to approve a broader bailout. In 
a deregulated industry, companies should be allowed to suffer the 
consequences of their mistakes in an economic slowdown. However, 
deregulation works both ways. Congress could do a great deal to help 
the airlines if it lifted protectionist limits on foreign investment in 
U.S.-based airlines. That would stimulate competition and provide 
troubled carriers with fresh sources of capital. The likes of Richard 
Branson, the British founder of Virgin Atlantic, should be encouraged 
to start a new airline in the United States, not dissuaded. And if a 
big global player like Lufthansa wants to bail out United, so much the 
better.
    The Department of Transportation, for its part, must act as if it 
understands that airlines are entitled to compete in a deregulated 
industry. Although the government does have a duty to keep airlines 
from engaging in unfair practices such as below-cost predatory pricing 
to undermine competitors, it is not supposed to stop them from trying 
to improve their ability to sell tickets. For example, it is not clear 
why Transportation has delayed approval of a proposed marketing 
alliance linking Delta, Continental and Northwest, even after the 
Justice Department indicated that the deal posed no antitrust concerns.
    Troubled carriers everywhere are wooing partners to build 
alliances. United and Lufthansa are leaders of the global Star 
Alliance, and American and British Airways head Oneworld. These 
partnerships allow carriers to expand their networks (because they can 
book connecting flights on partner airlines), while providing 
passengers more convenience. The government recently approved such an 
alliance between United and US Airways, after blocking their merger.
    Regulators should hasten to allow Delta to join Continental and 
Northwest in their existing alliance, which has benefited consumers 
without suppressing competition. Any further delay would signal an 
inappropriate regulatory impulse to shield bankrupt carriers from 
efficient competition. The fact that the government has the right to 
acquire a stake in some airlines as part of its loan guarantee program 
makes it even more inappropriate for it to block other carriers' 
attempts to help themselves.
    The country needs healthier ``network'' airlines that fly coast to 
coast and an environment that encourages the expansion of nimbler low-
cost carriers like AirTran and JetBlue. The proposed alliance serves 
the former need without imperiling the latter.

    Chairman Hollings. Very good. Senator Inouye.

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. Thank you very much. To say what I am about 
to say would be redundant. May I just say that for the State of 
Hawaii, over 90 percent of our people have to rely upon air 
transportation to fly in and out of our state. You cannot quite 
do it by automobile, and so to say that it is the backbone of 
our economy is almost trite. Most of our Nation's air carriers 
were in trouble financially before September 11, and despite 
the infusion of federal funds, two of the major airlines have 
had to take advantage of the bankruptcy laws. However, we hear 
daily about the number of jobs being lost since September 11th, 
80,000 since then, and we hear that an additional 30,000 or 
40,000 may be coming around the corner.
    When discussing the plight of the air transportation 
industry, we seem to only concern ourselves with the air 
carrier. No one is speaking of service providers. There are 
those who are caterers. What about those who sell tickets, who 
arrange the tours for us, the vacations for us, those who work 
in airports? I would hope that something can be done, because 
under the present programs, there is no federal assistance for 
any one of them. All we provide is for the air carrier.
    Mr. Chairman, may I request that my full statement be made 
part of the record?
    [The prepared statement of Senator Inouye follows:]

             Prepared Statement of Hon. Daniel K. Inouye, 
                        U.S. Senator from Hawaii

    Our nation's air transportation system is the backbone of our 
economy. The ongoing challenge we face is to ensure a safe, efficient, 
affordable national transportation system.
    Most of our nation's air carriers were already struggling 
financially prior to September 11, 2001, and despite an infusion of 
federal aid, two of the six largest airlines have filed for bankruptcy 
protection.
    In response to the changing economic climate, among other things, 
carriers reduced fares and reduced capacity. Although planes are 
relatively full, the amount of revenue generated from each passenger 
declined while costs escalated.
    Airline employment is down by more than 80,000 jobs since September 
11, 2001, with as many as 30,000 additional job cuts expected over the 
next year.
    Air carriers are quick to blame labor costs as the primary cause of 
their financial difficulties, and have pressured labor for greater 
concessions.
    The weak transportation sector has claimed other ``victims,'' such 
as airline service providers, including caterers, airports and the 
travel industry that continue to experience revenue losses, with no 
hope for federal assistance.
    I look forward to hearing the testimony today on what actions can 
and should be taken by air carriers and the Federal Government to 
ensure the viability of the U.S. airline industry and the industries 
that depend upon it.

    Chairman Hollings. It will be included. Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman. As is the case 
with the State of Hawaii, so, too, in my State of Florida, air 
transport is critical to a $50 billion a year tourism industry. 
I would like our witness to address what we saw a few weeks ago 
in Kenya, a shoulder-mounted heat-seeking missile fired at a 
commercial airliner.
    Were there to be such an attack successfully in the United 
States, what would that do? What kind of plans do you have to 
meet such a crisis that would no doubt ground the air transport 
system, with severe economic consequences?
    Furthermore, in your testimony, I would like you to respond 
to some of the process for the loan guarantees. Roughly about 
16 have applied, eight have been conditionally approved. Most 
of the ones that were rejected were on unanimous votes of the 
three-member Committee, but in one particular case, an airline 
that had some economic impact in Florida, it was a split vote 
that was to deny, and I would like to know the integrity of the 
process.
    And in conclusion, Mr. Chairman, clearly, we have to 
reflect on the tragedy that occurred yesterday in North 
Carolina, and this Committee would extend its condolences to 
all the families of the victims.
    Chairman Hollings. It certainly will. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you very much, Mr. Chairman.
    I want to kind of look at a couple of areas that I think 
are important. I was interested in Senator Inouye's comments 
about people who write tickets, arrange tours and this type 
thing for tourists and also business travel. The airlines have 
already disregarded the agencies. They are down to where they 
do not make very much a ticket anyway, so we do have a problem 
there.
    I am also concerned about, we talk about the business 
models of the Southwests and the Jet Blues, and those carriers, 
and how they have had the resiliency to survive after 9/11. 
That is fine and dandy, but that does not answer the question 
as to what do we do in our rural states for air service at all?
    Before the hub system, I can remember flying out of 
Billings, Montana. You had three stops before you made the 
first transfer point or connection, and even though the 
advertising in Billings, Montana, you could fly to Washington, 
DC with what they used to be called through service, and it 
went through Bismarck, and through Fargo, and through 
Minneapolis, and through Chicago, and finally you got into 
Washington sometime next week.
    Now, we are spoiled in this industry. The other night, I 
sat next to a guy, we were 5 minutes late getting into 
Minneapolis, and yet he complained about that 5 minutes all the 
way getting in there. Here we are, whirling through space at 
500 miles an hour, and he is worried about 5 minutes. Maybe we 
should go back to the trains, and we are spoiled a little bit.
    But I am concerned about what happens in rural America on 
flight service. I am also concerned what it costs. I can go out 
here at Dulles and get on the Internet and fly nonstop from 
Dulles to London or to Amsterdam or to Frankfurt on one-third 
the money it costs me to fly round-trip from here to Billings, 
Montana. Now, something is amiss here, and I would like to 
concentrate on that, and also how we are running our security, 
and also the taxes that are being put on the airlines to 
increase their cost, and what we have asked them to do for the 
homeland security part of this Nation. I think those are the 
areas that are most important to me, other than every seat 
occupied, and a face in every window. I believe in that kind of 
a business model.
    But we have to take a look at these areas, and the 
pressures that are being--the unfunded mandate, so to speak, 
that has been forced on an industry that is struggling right 
now to survive, and I thank you, Mr. Chairman, for holding this 
hearing. I think it is very timely.
    Chairman Hollings. Thank you. Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman. I agree very 
much with Senator Nelson that the families of 5481 are very 
much in our minds this morning. I will put my statement in the 
record also, but it is virtually impossible, Mr. Shane, and 
thank you for your patience, but this is our first meeting and 
we have things we have been fighting for for years. We need to 
get them off our chests and into legislation, hopefully. It is 
impossible to overstate the impact of the airline industry on 
this country. We sometimes talk about it as if it were some 
other kind of industry that had an impact or got attention from 
time to time, but this is a day-in, day-out, 24-7 absolute 
bulwark of our economy, and it is in terrific trouble, which 
puts all of us in terrible, terrible trouble.
    We have got a stimulus package that everybody wants to do, 
and where airlines are, I am not sure. The 80,000 people that 
have been laid off has been referred to already. This has an 
extremely substantial effect on the country, so we have a very 
important hearing.
    I was interested to hear Senator Brownback say that 1\1/2\ 
jobs for every airline worker, I have down 18 additional jobs 
created in the economy for every airline worker. I don't know 
which of us is correct, but if either of us is correct, it is 
very significant.
    I think this Committee should be proud of itself, the two 
Mr. Chairmen, for the work that we did after September 11, $5 
billion in direct financial assistance, the $10 billion loan 
guarantee program, the $600 to $700 million per year of the 
FAA's war risk insurance program. Nonetheless, the industry is 
still in absolute dire straits.
    My second point is that the airline industry is important 
everywhere. It is not just important at La Guardia and O'Hare 
and other places. It is important in small communities, like 
Senator Dorgan said, and there can be no let-up on this 
concentration, on this focus.
    Most of this Nation is rural. Just a small part of this 
Nation is, in fact, urban. And the people of this country 
depend upon rural airports. I just sort of picked at random, I 
do not know how these came up. As airlines are struggling to 
deal with costs, I am looking directly at Parkersburg, West 
Virginia; Laurel, Mississippi; Bar Harbor, Maine; Page, 
Arizona; Brownwood, Texas; all places that are under desperate 
threat, and other communities, of losing air service as a 
result of the troubles.
    I am not satisfied with merely fighting to maintain 
service. I want to improve it. That is my job. I represent my 
people. My people do not either receive CEOs, business people 
or tourists, or have them leave the state having seen something 
they like, unless there is air service. I mean, it is a life 
and death matter for the State of West Virginia. It is a life 
and death matter.
    The airlines industry is in trouble, there are all kinds of 
problems, the economy is in trouble. We cannot let up, however, 
on small-community air service, the essential air service 
program, the pilot program, which has produced 40 different 
programs to improve airports around the state, including one in 
Charleston, West Virginia. I want to see not just maintenance, 
but also significant new rural air service, as well as taking 
care of the larger airports that we have discussed over the 
past few years, and which is necessary in order to protect the 
small airports.
    Lastly, I think it is tremendously important that 
management and labor confront these issues together, and I 
think there is a good history of doing that, particularly 
recently, and that management and labor cooperatively work 
during these trying times for the airline industry.
    I am not yet convinced on the binding arbitration approach, 
and in most cases all parties have demonstrated, again 
particularly as the crisis has riveted home, a willingness to 
work together and to take the difficult steps necessary to make 
the financial reductions at cost to everybody, at pain to 
everybody, but they have done it, and they have done it more 
frequently, more recently.
    United Airlines agreed to anywhere between 7 and 29 percent 
wage cuts recently, and US Airways is looking at the same 
thing, so this kind of shared sacrifice, I think, is something 
which is still very much possible. It is part of the tradition. 
It has also been part of the problem of the airline industry, 
but as the airline industry has sunk deeper into problems, this 
has flourished more, the willingness on both sides to help, and 
I do want to talk with Captain Woerth and the airline CEOs to 
see if they can give us some sense of how that has changed and 
how that seems to be working.
    I thank the Chairman.
    [The prepared statement of Senator Rockefeller follows:]

          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Thank you, Mr. Chairman, for holding today's hearing. The future of 
the aviation industry is critically important to the future of our 
economy.
    I would like to say upfront, however, that my thoughts and prayers 
go out to the victims of yesterday's crash of US Airways Express Flight 
5481 and their families. It is important to re-affirm that when it 
comes to aviation, safety is always paramount. It is paramount both to 
the health of the industry and to security. There can be no aviation 
security without safety.
    I would like to make three main points this morning.
    The first concerns the importance of the airline industry to the 
overall health of the economy. Our economy continues to under-perform. 
Unemployment is rising, corporate spending is still declining, and the 
stock market continues to sag. Our economic troubles have worsened to 
the point, in fact, that leaders on both sides of the aisle are again 
calling for the enactment of an economic stimulus package.
    The airline industry's problems are a microcosm of the problems 
facing the economy as a whole--80,000 airline workers are unemployed, 
aircraft orders have been canceled or delayed, and airline stock 
prices, with a few exceptions like Southwest and JetBlue, are at 10-
year lows. And Airbus--with government subsidies--has surpassed Boeing 
in new orders for 2002, according to recent press reports. As a result 
of these problems, service is being cut in some places and is 
stagnating in others.
    What troubles me most, however, is the fact that eighty thousand 
employees have been laid off.
    Eighty thousand layoffs--that means that there are now eighty 
thousand families . . .

 . . . who are struggling to pay their mortgage;
 . . . who may be without health insurance; and
 . . . who are wondering how they're going to pay for their children to 
    go to college.

    That is why today's hearing is so timely: improving the health of 
the airline industry is vital to getting people back to work and to 
ensuring a quick and full economic recovery.
    A thriving airline industry means more air carrier jobs, more 
aerospace jobs, more airport jobs, and more travel and tourism jobs. It 
has been estimated that for each airline worker, 18 additional jobs are 
created in our economy.
    Last Congress, we took some extraordinary steps on behalf of the 
airlines. Shortly after September 11th, we enacted an airline bailout 
that included $5 billion in direct financial assistance as well as a 
$10 billion loan guarantee program. Then, late last year, we extended 
the FAA's war risk insurance program, saving the carriers another $600-
700 million per year.
    Nevertheless, the industry's ongoing difficulties--and their 
implications for the overall economy--demand our continued attention.
    My second point is that a strong airline industry is also important 
to ensuring continued and quality service to small communities. As 
airlines struggle to cut costs, service to smaller communities is often 
the first to be scaled back. That will directly affect communities like 
Parkersburg, West Virginia; Laurel, Mississippi; Bar Harbor, Maine; 
Page, Arizona; and Brownwood, Texas.
    It is important that the airlines regain their financial footing so 
that further reductions in service can be avoided.
    I am not satisfied with merely fighting to maintain existing 
service, however. Quality air service is critical to supporting small 
business development and for generating economic opportunity. That is 
why I am committed to increasing the number of communities served and 
enhancing the service that already exists--even as we restore the 
health of the industry.
    I intend to explore additional ways in which we can expand air 
service in rural areas. That means considering new funds for Essential 
Air Service, expanding the Small Community Air Service Pilot Program, 
considering other small community air service initiatives like tax 
incentives, and increasing funds for rural airports.
    Significant new rural air service legislation is overdue and I hope 
to work with my colleagues on a bipartisan basis to accomplish this 
goal.
    That is but one of our key challenges this year. We must also 
remain committed to re-establishing the strength of this industry. I 
look forward to re-examining the Air Transportation Stabilization 
Board. Before deciding whether to extend this program, however, we must 
determine whether the board has done the job we asked it to do.
    I am open to considering any and all proposals for helping this 
ailing industry. However, I am skeptical of the idea--which some have 
suggested--that all security costs be shifted entirely to the federal 
budget. I believe we must move forward with the understanding that 
security is a shared responsibility between the Federal Government and 
the carriers.
    Lastly, it is important to mention how essential it is that 
management and labor confront these issues together and work 
cooperatively during these trying times for the airline industry. In 
most cases, all parties have demonstrated a willingness to work 
together and take the difficult steps necessary to restore financial 
health. At United Airlines, for example, various worker groups have 
agreed to wage cuts between 7 and 29 percent.
    It will take this kind of shared sacrifice to make this industry 
strong again, and everyone will have to play their part.
    I hope that Mr. Woerth and the airline CEOs can provide us more 
details on how changes are taking place.
    The topic of today's hearing is critically important, both for the 
health of our economy and for the ongoing prosperity of small 
communities. Thank you again, Mr. Chairman, for holding this hearing. I 
look forward to hearing from our witnesses.

    Chairman Hollings. Senator Fitzgerald.

            STATEMENT OF HON. PETER G. FITZGERALD, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. I have no opening statement, Mr. 
Chairman.
    Chairman Hollings. Very good. Let me just comment on one 
thing with respect to that crash in my backyard, and our friend 
Senator Burns mentioned in the pricing, everyone should 
understand that when that occurred, I was immediately concerned 
because I knew there would be residents of South Carolina on 
that plane, at least some that had come up for Senator Lindsey 
Graham's swearing in, because that is in his immediate 
backyard.
    None were residents of South Carolina. Why? Because the 
residents of South Carolina, Senator, they know when they get 
to Charlotte, it is cheaper and quicker in a sense to just go 
rent your car and drive down to Greenville-Spartanburg Airport. 
That is the pricing this crowd has got. They drive from 
Columbia up to Charlotte to save money and everything else of 
that kind.
    What the airlines have been doing is really losing 
business, and the nonresidents do not realize that, and that is 
in large measure about this loss. My deepest sympathy to the 
families of the 21 lost.
    Otherwise, we welcome, the Committee is privileged to have 
our Assistant Secretary of Transportation, Mr. Jeffrey Shane. 
Secretary Shane, we have your full statement. It will be filed 
for the record. You can deliver it in full, or highlight it, if 
you wish. I think maybe highlighting it would save, as we have 
a very important panel to follow you.

  STATEMENT OF JEFFREY N. SHANE, ASSOCIATE DEPUTY SECRETARY, 
                  DEPARTMENT OF TRANSPORTATION

    Mr. Shane. Thank you very much, Chairman Hollings, and then 
I will, indeed, summarize the statement. I realize time is 
short and there is an important panel behind me, so I would 
like to hear what they would have to say as well.
    Thank you, Chairman Hollings, incoming Chairman McCain, 
other Members of the Committee. It is a very special privilege 
to be here to represent Secretary Mineta before you and to 
discuss the state of the airline industry, an industry vital to 
our way of life and to our economic well-being, and to offer 
some comments on its future.
    Senator Burns. Mr. Secretary, could you pull that 
microphone a little closer to you?
    Mr. Shane. Is that working better?
    The airline industry remains stuck in the most difficult 
period of financial distress it has suffered since it was 
deregulated almost 25 years ago, perhaps the most difficult 
period in modern aviation history. The industry as a whole has 
experienced enormous losses for two consecutive years and will 
almost certainly experience them again this year. Among those 
most severely affected by this downturn, of course, are the 
tens of thousands of airline industry employees who have been 
furloughed or laid off, a great many businesses that depend 
upon the airlines are also suffering as a direct result of the 
industry's difficulties.
    Not the least, of course, as Senator Brownback has said, 
are the manufacturers, and not just the manufacturers of 
airplanes, of course, but the manufacturers of all the 
components of airplanes. We are talking about thousands of 
businesses throughout the country.
    The terrorist attacks on 9/11 contributed heavily to the 
industry's losses since that time, but changes that were 
underway well before 9/11 had already begun to reverse several 
consecutive years of record profitability. Those changes have 
set the stage for a likely realignment of the industry, the 
nature and magnitude of which will likely depend on the extent 
to which network airlines can reduce their operating costs, and 
the extent to which business travel rebounds.
    Hints of that possible restructuring can be observed in the 
two very different types of carriers that have evolved in the 
deregulated domestic airline industry, large network carriers 
on the one hand, and low-cost, low-fare carriers on the other. 
For the most part, these two types of airlines have served 
different types of markets, have different business strategies, 
and focus on different customers, even when they operate in the 
same geographic areas.
    The financial turmoil of the large network airlines is due, 
in part, to a rapid cost escalation that occurred in their 
sector of the industry during the 2-year period preceding 
September 11, combined with a serious decline in the business 
travel market that their model so heavily relied upon.
    Today, each of these airlines operates substantially less 
capacity than before 9/11. After a period of partial capacity 
recovery in the months following that day, the network carriers 
appear to be reducing capacity once again.
    Lower-cost carriers, on the other hand, are earning 
profits, expanding operations and are, in fact, gaining market 
share. Even in this period of weakened demand, it seems people 
will fly if the price is right. Carriers whose cost structures 
allow them to charge lower prices and still earn profits, 
therefore, are actually experiencing traffic growth even in 
today's market.
    During calendar year 2001, the major network carriers, plus 
a group of low-fare airlines, incurred operating losses of $10 
billion, and we estimate that total losses in 2002 will be 
approximately $9 billion. Senator Hutchison said $7 billion for 
2002, but I think that is based on the numbers that are 
available as of today. By the time we get the numbers for year 
end, we think it will be closer to $9 billion.
    Those are industry-wide figures. When we break those 
numbers down by carrier type, we see again the ability of lower 
cost carriers to maintain earnings even in the current 
environment. While the six largest network airlines reported 
operating losses of $10.2 billion for calendar year 2001, the 
low-fare carriers as a group reported an operating profit of 
about $.7 billion, $700 million, and it is important to point 
out that this profitability extended beyond just Southwest 
Airlines. Five of the seven low-fare carriers that we examined 
reported operating profits in 2001.
    Even though low-fare carriers, AirTran, American Trans Air, 
Frontier, Jet Blue, Spirit, and Southwest, experienced capacity 
reductions immediately following 9/11 just as the large network 
carriers did, the low-fare carriers quickly recovered. In fact, 
by March of this year, those airlines will have increased 
capacity by a total of 31 percent over the previous 2 years, 
with every carrier except Southwest showing, in fact, a double-
digit increase. As a result, we project that the low-fare 
carriers' share of overall industry capacity will increase by 
nearly half, to 18.2 percent of the overall market by March of 
this year.
    Nobody, of course, can make very firm predictions about the 
ultimate configuration of this constantly changing industry, 
still, it seems reasonable to predict that the changes that 
have occurred during this period of unprecedented challenge 
will leave the low-cost, low-fare side of the industry with a 
larger share of the market than they have enjoyed before.
    I wanted to speak a little bit about responses of the 
government, Mr. Chairman, but I think in the interest of time, 
I will even make that a quicker summary. I was going to talk 
about things that Members of the Committee have mentioned, the 
importance of the legislation which created the Transportation 
Security Administration, the important congressional deadlines 
that were established to increase security. I agree with 
Senator Hutchison, there can be no overstating the contribution 
which that security legislation made to the well-being of the 
airlines and their ability to survive this period of challenge.
    We do argue a lot about the cost of security. The fact is 
that, without that security, the traffic that they experience 
today would be much less than it is. That is my conviction, and 
I think that is the only reasonable conviction anybody could 
achieve.
    We have achieved all of the deadlines. Secretary Mineta 
deserves enormous credit for that. The TSA and the FAA, and all 
of the workforce deserve enormous credit for that. The airlines 
themselves deserve enormous credit for that, and the traveling 
public deserves our thanks for the patience and endurance that 
they have shown through the growing pains, through all of the 
difficulties that they experienced early on.
    I think what they experience now is the most secure system 
they have ever had. There is efficiency in the system once 
again. I think it is fair to say that the waits to get through 
the queue to get onto an airplane are not longer than they were 
before 9/11, and that is an enormous tribute to Admiral Jim Loy 
and the entire TSA screening force in the Transportation 
Security Administration.
    The ATSB, which I am sure we will talk about in Q's and 
A's, is another important contributor to the state of the 
airline industry right now, and I will not say more about it. I 
am sure we will have a discussion of those procedures and what 
the impact has been.
    And finally, what I will just say quickly is that we have 
been working for the last several months on a package that we 
will propose to the Congress sometime later in the spring for 
reauthorizing AIR-21, that is to say the aviation program's 
authorizing legislation, which will run out by the end of this 
fiscal year, by the end of September of this year, and which 
needs to be reauthorized by that time.
    What we are hopeful we will be able to do in bringing that 
legislation to your attention is offer ideas that will, again, 
help to contribute to the recovery of this industry, to 
ensuring that while we look forward to recovery, we maintain 
competition, expand capacity, and look forward to a robust 
future in the industry.
    In closing, let me just say that the coming months will 
clearly be challenging ones as the airline industry continues 
to recover from the economic downturn, and to adjust to the 
post 9/11 atmosphere. We can be confident that a broad-based 
recovery will eventually occur, but it is, of course, difficult 
to predict with confidence when.
    While the Department is generally hopeful about the future 
of the industry, and while we expect it to emerge from its 
current troubles, some important variables will have a big 
impact on the timing of that re-emergence, the price of fuel, 
the possibility of war in Iraq, the timing of a rebound in 
demand among business travelers, the continuing challenge of 
maintaining security and, of course, the availability of 
capital to this industry.
    Mr. Chairman, Members of the Committee, thank you very much 
for the opportunity to testify here today. I certainly look 
forward to answering your questions.
    [The prepared statement of Mr. Shane follows:]

  Prepared Statement of Jeffrey N. Shane, Associate Deputy Secretary, 
                      Department of Transportation

    Chairman McCain, Ranking Member Hollings, and Members of the 
Committee, I appreciate the opportunity to appear before the Committee 
to discuss the state of the airline industry and to offer comments on 
its future.
Improved Aviation Security
    Before I begin, however, I would like to reflect for a moment on 
where we have been since the horrific attacks on our country in 
September 2001, and the steps that the Department of Transportation has 
taken to secure airline passengers since that time. One year ago the 
Transportation Security Administration (TSA) had just been established, 
yet three very important and challenging congressional deadlines were 
prominent on our minds--those by which the Federal Government was to 
assume responsibility for aviation security, provide federal screeners 
for all passenger screening, and ensure 100 percent baggage screening 
at all commercial airports in this country.
    In setting those deadlines--and a great many others--in the 
Aviation and Transportation Security Act, Congress made clear that it 
would accept nothing less than a major overhaul of our aviation 
security system, and a dramatic improvement in the quality of security 
for air travelers. The measures defined in the legislation and the 
deadlines associated with them were extremely ambitious, leading a 
great many observers to question whether they were simply beyond reach.
    On behalf of Secretary Mineta, I am proud to report that as of last 
week those deadlines have all been met. The fact that the Department 
was able to do so is a credit to TSA's leadership and workforce, to the 
Federal Aviation Administration (FAA), airport and airline communities, 
and to the contractors that provided critical advice and support in 
connection with accomplishing the statutory objectives as efficiently 
as possible. In meeting these deadlines, we have made every one of the 
nation's more than four hundred commercial airports--and everyone who 
flies--safer and more secure than they have ever been. We have done so 
while also providing world-class customer service to the traveling 
public by treating people with dignity and courtesy. TSA's leadership, 
and in particular Admiral Jim Loy, have rendered a great service to our 
nation.
    But so have the millions of air travelers whose cooperation--
particularly during the growing pains experienced earlier in the 
process--has been instrumental in accomplishing our goal. If all these 
sacrifices had not been made, we would not have reached our current 
level of security in the aviation system in such a short timeframe.

Airlines in Distress
    Despite the very real success we have enjoyed on the security 
front, however, the airline industry remains in the midst of the most 
difficult period of financial distress since it was deregulated almost 
25 years ago--perhaps the most difficult period in modern airline 
history. The industry has suffered enormous losses for two consecutive 
years, and will almost certainly experience them again next year. Most 
airlines continue to incur large financial losses, several airlines are 
in bankruptcy, including two large network carriers--US Airways and 
United--and several smaller airlines have ceased operating. At the same 
time, however, a number of low-cost, low-fare airlines have remained 
consistently profitable.
    The terrorist attacks on September 11, 2001, certainly contributed 
heavily to the industry's losses since that time. But changes underway 
well before September 11 had already reversed several consecutive years 
of record profitability. 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 up to that point in time. These 
changes had already set the stage for a significant restructuring of 
the industry, but additional changes are clearly coming. The nature and 
magnitude of those changes will likely depend on the extent to which 
large network airlines are able to reduce their operating costs, and 
the extent to which business travel rebounds as the economy gains 
momentum.
    I should add at this point that while there is reason to be 
concerned about the current viability of the airline industry, I am not 
discouraged about its prospects for ultimate recovery. This industry is 
remarkably resilient. During the early 1990's, a combination of an 
economic recession and terrorist-related concerns stemming from the 
Persian Gulf War led to large traffic declines, record losses, and a 
number of bankruptcies. Yet the airline industry emerged from that 
period rather quickly, and during the mid-to-late 1990's went through 
several years of record profits.
    Before turning to an in-depth look at the industry's current 
circumstances and what the future may hold, a brief description of how 
the operational and competitive structures of the industry have evolved 
will help us understand the mixed results we are seeing today within 
the industry, and provide some guidance about likely changes as the 
industry moves through this very stressful period.
    Two very different types of carriers have evolved in the 
deregulated domestic airline industry we see today--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 great 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.
    Network systems developed by the large pre-deregulation airlines 
enable them to provide effective, competitive service to small cities 
within this country and from all U.S. locations to cities of all sizes 
around the globe. These airlines have higher cost structures and tend 
to focus on business travelers as their primary customer base. They 
have focused their operations on serving the needs of this high-yield 
segment of the market rather than providing capacity for lower-yield, 
price-sensitive passengers. The substantially lower costs of low-fare 
airlines enable them to provide capacity for the latter market--price-
sensitive passengers--and to price compete for time-sensitive 
passengers who are otherwise faced with substantially higher prices.
    I bring these two sets of characteristics to your attention because 
of the very divergent experience of these two types of carriers as the 
industry moves through these hard times, and because of the 
implications for future change as a result. The financial turmoil of 
the large network airlines is due in large part to the rapid cost 
escalation that occurred during the two-year-period preceding September 
11, combined with the decline of the business market that their model 
so heavily relied upon. Today, each of these airlines operates 
substantially less capacity than before September 11, and after a 
period of partial capacity recovery in the months after September 11, 
these carriers are reducing capacity once again.
    But while the network carriers are suffering losses and downsizing 
their operations, the lower cost carriers are earning profits, 
expanding operations, and gaining market share. This reflects the fact 
that despite weakened overall demand, the low-fare demand sector is so 
large that airlines that have sufficiently low costs to allow them to 
charge low fares and still earn profits continue to experience robust 
traffic growth.

Recent Financial Performance
    The recent financial performance of the airline industry overall 
is, by any measure, dismal. My testimony today focuses on the 
performance of the major network carriers, plus a group of low-fare 
airlines, that together comprise the vast majority of domestic airline 
operations.
    During calendar year 2001, these carriers incurred operating losses 
of $10.0 billion on revenue of $85.8 billion, for a negative operating 
margin of 11.6 percent. During the fourth quarter alone--immediately 
following September 11--these carriers posted a $4.5 billion operating 
loss on revenue of $16.8 billion, a decline of 30.8 percent from the 
fourth quarter of 2000.
    The picture improved somewhat for the first six months of 2002, 
although very large operating losses ($4.3 billion) persisted. The pace 
of the industry's recovery stalled in the second quarter, however, and 
as a result, losses continued into the third quarter ($2.3 billion), 
typically the industry's most profitable. For the first nine months of 
2002, these airlines experienced, in the aggregate, a total operating 
loss of $6.7 billion. They are likely to experience further losses in 
the range of $2.4 billion for the fourth quarter, bringing total losses 
for last year to approximately $9.0 billion.
    Looking at financial results on an industry-wide basis does not 
tell the full story, however. Rather, looking at the results in greater 
detail reveals markedly different pictures for different types of 
carriers: large network carriers versus low-fare carriers, and even 
between the larger network carriers, with the higher-cost carriers 
reporting much larger losses.
    For example, the six largest network airlines reported operating 
losses of $10.2 billion for calendar year 2001, and had a negative 
operating margin of 13.9 percent. The low-fare carriers as a group, by 
contrast, reported an operating profit of $0.7 billion, or a positive 
operating margin of 10.8 percent. It is important to point out that 
this profitability extended beyond just Southwest. Five of the seven 
low-fare carriers we examined reported operating profits for 2001. 
These clear differences between the large network airlines and the low-
fare airlines continued throughout the first nine months of 2002.
    Similarly, the large network carriers with the highest unit 
operating costs--American, United and US Airways--reported far larger 
losses than the other large network carriers throughout 2001 and into 
2002. By the third quarter of 2002, while Northwest and Continental 
were reporting a small operating profit and a small operating loss, 
respectively, the three higher-cost carriers continued to report very 
large losses, resulting in negative operating margins ranging from 10.5 
percent to 30.3 percent.

Changes in Industry Composition
    As I mentioned earlier, large network airlines are reducing 
capacity while low-cost carriers are expanding operations and 
increasing market share. Given the thin margins that normally prevail 
in this industry, even relatively small market share shifts have 
important consequences. The changes that have occurred during this 
crisis, however, could have a longer term impact on the make-up of the 
airline industry.
    We are witnessing a large-scale decline in capacity in the mainline 
operations of large network airlines, a decline that is being replaced 
only in part by expanded operations of their regional affiliate 
airlines. For example, comparisons of scheduled capacity--using 
available seat miles (ASMs)--for the months of March 2001 and March 
2003 shows an 18 percent reduction for these carriers, with all six 
carriers except Northwest reducing capacity by double-digit 
percentages. While the bulk of this capacity decrease took place 
between 2001 and 2002, it is continuing into 2003. A slightly different 
picture emerges, however, when looking at the major carriers' regional 
affiliates. These carriers also showed capacity reductions between 
March 2001 and March 2002, but between the March 2002 and March 2003 
their scheduled capacity shows an increase of 26 percent.
    Scheduled capacity for low-fare carriers, on the other hand, 
recovered much more quickly after the September 11 attacks. These 
carriers--including AirTran, American Trans Air, Frontier, JetBlue, 
Spirit, and Southwest--also experienced capacity reductions immediately 
following September 11, but by March 2002 their scheduled capacity had 
more than fully recovered and was up 13 percent over a year earlier. 
These carriers' capacity is continuing to increase, resulting in a 
total increase from March 2001 to March 2003 of 31 percent, with every 
carrier except Southwest showing a double-digit increase. As a result, 
the low-fare carriers' ASM share will increase from 12.5 percent in 
March 2001 to 18.2 percent in March 2003, an increase in market share 
of almost 50 percent.

The Federal Government's Response
    In response to the difficulties faced by the airline industry over 
the last two years, Congress has passed several important pieces of 
legislation designed to facilitate recovery. I want to offer a brief 
progress report on the implementation of these provisions.
    Loan Guarantee Program: The Air Transportation Safety and System 
Stabilization Act established the Air Transportation Stabilization 
Board (ATSB) to review and decide on applications for loan guarantee 
assistance, with a total of $10 billion provided for potential U.S. 
Government-backed loan guarantees. Sixteen airlines filed applications 
by the June 28, 2002, deadline, and the ATSB has approved and finalized 
three loan guarantees to date. The first was a $380 million loan 
guarantee to America West Airlines predicated on the carrier receiving 
a term loan of $429 million and more than $600 million in concessions 
from its shareholders, employees, creditors, and suppliers. In 
addition, the ATSB also approved and finalized a $148.5 million loan 
guarantee for American Trans Air supporting a $165 million secured loan 
and a $40.5 million loan guarantee to Aloha Airlines in support of a 
$45 million loan.
    The ATSB has conditionally approved three other loan guarantee 
applications for US Airways, Frontier Airlines, and Evergreen 
International Airlines, but to date none of the carriers has finalized 
their loans. US Airways received conditional approval for a $900 
million loan guarantee to support a $1 billion secured loan. Because US 
Airways is reorganizing in bankruptcy under Chapter 11, the conditional 
approval remains in effect subject to the conditions set forth in the 
Board's July 10 letter to the airline and the bankruptcy court's 
confirmation of a reorganization plan. The Board will review the 
reorganization plan when it is presented and determine whether it meets 
the conditions for issuance of a guarantee. As set forth in the OMB 
regulations governing the loan guarantee program, final action on the 
application will be made in conjunction with the carrier's Bankruptcy 
Court-certified plan for emerging from bankruptcy.
    Frontier Airlines received conditional approval for a $63 million 
loan guarantee to support a $70 million loan, subject to the carrier 
providing additional fees and warrants and completion of final loan 
documents satisfactory to the Board. Evergreen International Airlines 
received conditional approval for a loan guarantee of $90 million in 
support of a $100 million loan for that carrier. Similar to Frontier, 
Evergreen's conditional loan is subject to the carrier providing 
additional fees and warrants and completion of final loan documents 
that are satisfactory to the Board. Evergreen's conditional loan 
guarantee is also subject to resolution of issues related to 
Evergreen's indebtedness and certain structural and financial 
enhancements.
    The ATSB has rejected seven loan guarantee applications, including 
those submitted by Vanguard Airlines, Frontier Flying Service, National 
Airlines, Spirit Airlines, Corporate Airlines, MEDjet International, 
and Great Plains Airlines. The ATSB was concerned in most of these 
cases that these applicants' proposals did not provide a reasonable 
assurance that the carriers would be able to repay the loans, one of 
the factors the ATSB is required to consider under the OMB's 
regulations.
    In addition, on December 4, 2002, the ATSB decided that it could 
not approve the proposal of United Airlines for a $1.8 billion loan 
guarantee, based on its conclusion that the business plan, as submitted 
by the company, was not financially sound. United subsequently filed 
for reorganization under Chapter 11 of the Bankruptcy Act on December 
9, 2002, and because the Board never formally rejected or denied 
United's proposal, the airline can still revise its application with 
the ATSB. However, as the carrier is now under Chapter 11 bankruptcy 
reorganization, any approval of a loan guarantee to United could be 
made only if the guarantee and the underlying financial obligation is 
part of a Bankruptcy Court-certified reorganization plan for emerging 
from bankruptcy. Given United's situation, this matter most likely will 
not be resolved in the near term.
    The ATSB is currently examining two other loan guarantee 
applications from Gemini Air Cargo for $29.7 million and World Airways 
for $27 million.
    In summary, of the $10 billion in loan guarantee authority made 
available by Congress, loan guarantee applications approved to date, or 
conditionally approved, represent a total of $1.6 billion. Applications 
still pending, together with further consideration of United's 
application, would represent as much as $1.9 billion in further loan 
guarantees. Total potential exposure under the loan guarantee program 
is therefore likely to be on the order of $3.5 billion.
    Direct Compensation Program: The Air Transportation Safety and 
System Stabilization Act also provided for $5 billion in direct 
compensation to the airline industry. The application of this law 
extended beyond the large commercial airlines to thousands of smaller 
direct and indirect air carriers. More than 450 applications for 
compensation were submitted to the Department and, to date, over 400 
air carriers have been paid $4.6 billion in compensation.
    Total compensation provided under this statute is likely to be 
approximately $4.7 billion because some carriers didn't incur 
sufficient losses to qualify them for a full share of the $5 billion 
compensation. Most large passenger airlines have received the maximum 
amount of compensation authorized by Congress. At this time, the only 
carriers awaiting full payment are those that filed either incomplete 
or delinquent applications, a small number whose claims continue to be 
disputed, and small carriers whose compensation was changed by the 
Aviation and Transportation Security Act.
    War Risk Insurance: With respect to war risk insurance, the FAA has 
been providing third party war risk coverage to U.S. passenger and 
freight carriers since shortly after September 11, 2001. The Homeland 
Security Act of 2002 mandates that this coverage be continued and 
expanded. Specifically, the Act requires that these policies be renewed 
on the same terms as the policies that were in effect on June 19, 2002, 
and that they be expanded to include coverage for hull, passengers and 
crew. In addition, an air carrier's total premium for all of the 
coverage can be set at no more than twice the premium in effect on June 
19, 2002, and the coverage must begin with the first dollar of any 
covered loss incurred. Using existing authority--because the Act's 
provisions are not effective until January 24, 2003--the FAA 
implemented these changes when it extended the air carriers' policies 
on December 15, 2002, for another 60 days. After January 24, the FAA 
will continue to offer coverage as required by the Act.
    Other Programs: In addition to the programs that have been approved 
by Congress since the September 11 attacks, the Department continues 
its work in a number of other areas to ensure a healthy aviation 
industry. For the past several months, teams of individuals from across 
the Department have been developing potential ideas to include in the 
Administration's AIR-21 reauthorization proposal, which we intend to 
submit to Congress later this spring.
    We are also continuing our work in promoting safety in the 
industry. We are mindful of the tragic crash that occurred in Charlotte 
yesterday and offer our condolences to the families of those 
individuals involved. Nevertheless, flying on commercial airlines 
continues to be the safest way for Americans to travel. As you may 
know, in calendar year 2002, for the third time in the last decade, 
there were no recorded deaths aboard scheduled commercial aircraft. As 
Secretary Mineta has pointed out, while we have built unprecedented new 
levels of security into our system, it also has retained its status as 
the safest system in the world. We compliment all those involved in 
ensuring the safety of the flying public, each of whom can take pride 
in this impressive accomplishment.
    Finally, while the congestion experienced in the summer of 2000 
seems a rather distant memory, we need to carefully evaluate the 
capacity that the aviation system will require in the years ahead. One 
way in which the Department is working to enhance capacity is through 
an environmental stewardship initiative launched by President Bush last 
fall. Late last year Secretary Mineta identified the first group of 
projects, including Philadelphia International Airport's proposed new 
runway, that have been selected as targets for accelerated 
environmental review. A number of other airport sponsors have submitted 
their projects for consideration under this initiative, and we plan to 
announce another set of targeted projects in the near future.

Industry Outlook
    The prospects for revenue recovery in the airline industry will 
need to be closely watched as carriers continue to recover from the 
September 11 attacks and as some work to emerge from bankruptcy. If 
this downturn is like others we have seen in the past, significant 
revenue recovery will eventually occur, but how much and when remains 
to be seen. The airlines' recovery has clearly stalled somewhat since 
early 2002, and industry observers do not expect any significant 
improvement in the near future.
    Other factors further complicate the revenue picture for the large 
network carriers. First, while a core element of their business model 
has been the pursuit of high-yield business travel, studies show that 
this market is becoming more price sensitive, and it is quite possible 
that the revenue potential for this portion of the market may have 
declined permanently.
    Second, the decline in business demand coincides with a sharp 
increase in network airline unit costs, which opens a wider spread 
between their costs and the costs of their low-fare competitors, 
several of which are expanding their services. This began in 1999, well 
before September 11, and even before business travel demand began to 
collapse in early 2000.
    Third, whether or not the business market remains more price 
sensitive, the ability of the network carriers to charge high fares is 
gradually being eroded by the expansion of low-fare carriers. Every 
time a low-fare carrier enters a market with enough service, the 
ability of the incumbent network carrier to charge business passengers 
high prices substantially declines. For many years low-fare competition 
was primarily limited to large, short-distance markets, but this is no 
longer the case. Low-fare service has been introduced in 
transcontinental markets by several carriers, particularly JetBlue, and 
into lower density markets by carriers like AirTran, which now operates 
a low-fare hub at Atlanta.
    The challenge faced by large, networking carriers is clear: the 
continued profitable growth of several low-fare airlines demonstrates 
that people still want to fly. While major carriers have been seeking 
ways to restructure their operations--including capacity reduction, 
fleet retirement, cancelled or deferred orders for new aircraft, 
furloughed employees, closed stations, and hub de-peaking--it will take 
time for such efforts to produce major results. Moreover, absent major 
reductions in labor costs it is unclear whether these efforts will 
produce the cost savings necessary for the large network airlines to 
maintain their current position in an increasingly competitive airline 
industry.
    The coming months clearly will be challenging ones as the airline 
industry continues to recover from the economic downturn and to adjust 
to the post-September 11 atmosphere. We have been encouraged by the 
steps being taken by major carriers to address their cost structures. 
As a result, the industry model likely to emerge from the current 
economic cycle will probably not be terribly different from its pre-
September 11 predecessor. The success demonstrated by low-fare carriers 
in recent years, however, could cause more fundamental structural 
changes in the longer term, especially if the large, network carriers 
are unable to control their costs.
Conclusion
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify here today. I look forward to responding to any 
questions you may have.

    Chairman Hollings. We do have good attendance this morning, 
and so I will cut my questions short.
    Secretary Shane, by just going to the money, now, we 
authorized $500 million to harden the cockpit doors and other 
security measures. What about that money?
    Number one, we had a deadline for April of this year, 2003, 
on the hardening of the doors. Otherwise, there have been other 
bills for security measures that we have authorized or 
appropriated for that they have sent their bills to the 
Department of Transportation, to you, and they are just waiting 
for their money. Can you tell us about paying the bills, and 
sufficient money, or more that is needed? That is what the 
Committee wants to know about.
    Mr. Shane. Yes, Mr. Chairman. On the cockpit doors, the 
President's budget for fiscal 2003 contained $100 million, I 
believe, which would be money available to the airlines today, 
and will be available to them as soon as we have a budget, so I 
am confident that when the appropriation is done, that money 
will be going out.
    On the other very important bill that we paid, it was, of 
course, the compensation that was due under the stabilization 
legislation, and I am happy to tell you that of the $5 billion, 
something like $4.7 billion have already been paid out, and I 
believe--I will check and will correct this for the record if I 
am not correct, but I believe that all of the money that can be 
paid out has been paid out. In other words, everybody that is 
entitled to anything under that legislation under the law as it 
was written has received from the Department of Transportation 
what it is entitled to.
    Chairman Hollings. But other security needs, now, the 
Committee found a need for $500 million, and you say there has 
been appropriated $100 million. Is $100 million sufficient?
    Mr. Shane. The President's budget contained a request for 
$100 million, and I have to believe that the conclusion that we 
made within the Administration was that $100 million would be 
closer to the mark. I cannot give you more detail than that 
right now, but I will certainly be able to improve the record 
after checking.
    Chairman Hollings. Very good. Senator McCain.
    Senator McCain. Thank you, Mr. Chairman.
    Thank you, Mr. Shane. In your testimony, you point out that 
the six largest network airlines reported operating losses for 
the calendar year 2001, and that is obviously true of 2002, and 
yet the low-cost carriers as a group reported an operating 
profit. The difference is in labor costs, is that right?
    Mr. Shane. Not entirely.
    Senator McCain. What is the major difference?
    Mr. Shane. I think it is a combination of lower operating 
costs overall. Southwest Airlines, I think pays something like 
the scale that the large networking carriers pay. It moves its 
airplanes much more efficiently, and it can do that given the 
nature of the business model that they pursue, so they get much 
more utility out of their assets.
    There well may be lower labor costs in a whole variety of 
the other low-fare carriers. I have no doubt, especially the 
new ones coming on would be able to enjoy that benefit at least 
for a while, so that has something to do with it.
    Senator McCain. Well, is it an indictment of the hub-and-
spoke system?
    Mr. Shane. It is difficult for me to imagine a national 
airline industry in this country without a hub-and-spoke 
system, if, indeed, we are supposed to have service to the 
small communities.
    Senator McCain. But yet, Southwest does not use the hub-
and-spoke system.
    Mr. Shane. Correct.
    Senator McCain. And they are all over the country.
    Mr. Shane, a January 3 editorial in the New York Times 
stated that Congress could do a great deal to help the airlines 
if it lifted protectionist limits on foreign investment in U.S-
based airlines. That would stimulate competition and provide 
troubled carriers with fresh sources of capital. What is your 
position on lifting the limits on foreign investment?
    Mr. Shane. My position for many years is that it seems 
strange in this day and age to have a law that actually limits 
the access that U.S. airline companies have to the global 
capital market. That is the net impact of our restrictions 
today. There are a whole host of issues that would have to be 
examined with the relaxation of the current limits on foreign 
investment in U.S. airlines, but overall it seems to me it is a 
debate we really need to have. There is no reason to restrict 
the access to the extent that we do to the global capital 
market today.
    Senator McCain. I received a letter from the American 
Antitrust Institute, which bills itself as an independent 
nonprofit research education and advocacy organization, 
supporting the laws and institutions of antitrust. The 
president of this organization believes that current domestic 
alliances go beyond simple code-sharing. He says that the 
relationship set up by domestic alliances, and referring 
specifically to the Delta-Continental-Northwest plan, require 
continual and intimate coordination of virtually all aspects of 
operation, and are intended to provide the consumer a seamless 
experience.
    He states that this proposed alliance is uncomfortably 
close to being a three-way merger, and it is likely to put the 
remaining non-allied carriers, American, Southwest, and other 
small, low-cost carriers, at a competitive disadvantage that 
will result in fewer choices for the consumers.
    Do you have a position on this?
    Mr. Shane. Yes. I think that with every one of the 
alliances that is proposed, the Department has an absolute 
obligation to review precisely those issues and, indeed, that 
is what we are doing currently in the context of the Delta-
Northwest-Continental proposal.
    Delta, Northwest, and Continental are impatient with the 
Department because we have been looking very closely at those 
issues. I am confident that we are going to come to closure in 
our review of that alliance, and will be in touch with the 
proponents of the alliance very shortly, but it has taken us a 
while because of the very important responsibilities that the 
Department has under the law.
    Senator McCain. You point out that the large network 
carriers with the highest unit operating costs, American, 
United, and US Airways, reported far larger losses than the 
other large network carriers. In fact, by the third quarter of 
2002, Northwest and Continental were reporting a small 
operating profit and a small operating loss respectively, while 
the three higher-cost carriers were reporting very large 
losses. Can the airlines bring down the costs on their own, and 
what do you see is the difference here?
    Mr. Shane. It is difficult to comment on the differences 
because one would have to know an awful lot about the internal 
management of airline companies, and from the vantage point of 
the Department----
    Senator McCain. Is the moral of the story that every 
airline does not have to be unprofitable?
    Mr. Shane. That is quite correct, and what I see happening 
in the industry right now is a widespread recognition, even 
among the highest cost carriers, that their cost structure is 
not sustainable in the current market or any future market one 
can imagine, so there is a wholesale effort right now on the 
part of every carrier, and I think we will all hear a lot more 
about it from the CEOs that will be on the next panel 
themselves, a wholesale effort to reduce cost, and more 
draconian measures taken in that regard than we have ever seen 
before.
    Senator McCain. The industry is asking for tax relief. 
Should we consider that?
    Mr. Shane. There has been an enormous contribution to the 
airline industry through the kind of compensation and loan 
guarantee legislation that has been made available thus far. 
The Administration's position, I am sure, is that tax relief is 
not an appropriate measure to take at this particular moment.
    Senator McCain. Under the present environment, do you 
believe there is inevitably going to be more consolidation in 
the airline industry?
    Mr. Shane. I think it is reasonable to expect there will be 
some proposals in that regard. Again, it is difficult to 
predict, given all the variables we have in front of us. I do 
not see the industry consolidating down to just a few airlines. 
I think the evidence to date is just the reverse, that we will 
see a proliferation of new airlines in the event that we have 
some failing carriers, or even some consolidation in the 
industry.
    Senator McCain. Well, in answer to my question, you have 
come up with some responses that will require legislative 
action, and I would hope to hear from the Administration on 
some of these proposals so we can consider them and act on them 
if necessary.
    Thank you, Mr. Chairman.
    Chairman Hollings. Thank you. Senator Brownback.
    Senator Brownback. Thank you, Mr. Chairman. Mr. Shane, 
thank you for being here, and you heard my comments about the 
aircraft manufacturing industry. That is what I want to point 
my questions toward if I could, and I recognize it would 
probably be better if it was toward the USTR, or the Commerce 
Department. I think I referred to you as the Commerce 
Department. I apologize for that, but I would like to get your 
responses.
    2001, we had Boeing Aircraft deliveries 527. This year is 
projected 275 to 285. If that holds true, that would make the 
Boeing Company in second place behind Airbus for production for 
the first time. As domestic airplane manufacturers were bracing 
for losses, and despite a downturn in the global aviation 
market, Airbus was announcing last August plans to increase 
their industrial presence in the United States.
    Have you looked at this issue? Is Airbus subsidizing their 
way into taking more and more of this global market production 
share at a time when the market is in a downturn?
    Mr. Shane. I cannot report to you any detail on that. The 
Administration is taking it very seriously. It is a worrisome 
development, and as you know, Senator, there is an 
understanding with our European colleagues, the large aircraft 
sector understanding, which was signed in 1992, which was 
supposed to establish the framework in which large aircraft 
sales are pursued.
    It may well be--and you are quite right, this is the 
province of USTR, and so I want to be careful about not getting 
too far out of my depth here, or out of my jurisdiction, more 
importantly, but we will certainly be in touch with USTR to 
take a close look at these trends, and to determine whether or 
not some further action or some response is required.
    Senator Brownback. I talked directly with a number of 
aircraft manufacturers, and they cannot believe that Airbus 
could be making money during this time period when there is 
such a downturn globally in aircraft production, and they just 
see it as the only way you can do that is to have it heavily 
subsidized from outside sources, from government sources, for 
them to be able to take that over.
    And this has been a long-term fight. We have been in this 
for some period of time, but I really think the Administration 
has to step up on the trade field here and press Airbus, and 
press the European Union about this, and I hope you will push 
that within the Administration. I certainly will be.
    If I could, one other issue I wanted to focus you towards 
is the Commission on the Future of the U.S. Aerospace Industry 
and its final report to Congress. Are you familiar with that 
report?
    Mr. Shane. I am, Senator, yes.
    Senator Brownback. The recommendations in that, they are 
basically saying, look, we have pushed our research a lot more 
into space, space research, but we have not pushed much 
research into the aerospace industry that we have presently, 
and we need to do more in that sector. What are your thoughts 
about that, and that of the Administration?
    Mr. Shane. I think one of the big worries that we have in 
the current downturn in this terribly challenging environment 
is that we will forget, because we have a trough in demand, 
that we have an absolute obligation to maintain the movement 
toward greater capacity in the system. If we are going to get 
through this, and when we get through this, we are going to 
have more demand that we can accommodate in the present system, 
as we did as recently in the summer of 2000. It is terribly 
important not only that we continue to build runways at 
airports, but that we use technology as intelligently as 
possible to make sure that we are extracting as much capacity 
out of the present system as we can. That is what the aerospace 
commission was talking about, and I am fully in support of 
that. I think the Commission should be complimented on focusing 
attention on some issues that have not been getting top-level 
attention up to now, and I am hopeful that they will.
    Senator Brownback. What about the area of basic research in 
the aviation industry? What are your thoughts on what the 
report says on that?
    Mr. Shane. Well, the basic research into avionics--do you 
mean about the actual flying of an airplane?
    Senator Brownback. They had it on avionics, on wing design, 
on more efficient engines, and then also on the systems to be 
able to land aircraft safely, successfully, and quicker as a 
part of that as well, the landing systems as well.
    Mr. Shane. I think we need to ramp up our efforts in that 
regard. I think we really need to begin to point toward a 
system that is going to deliver the kind of major increment in 
capacity that we are going to need beyond 2020. We know that 
the Europeans have a plan. They call it the Vision for 2020.
    We have got some plans on the shelf in the United States as 
well. There are some interesting ideas about what the air 
transportation system should look like and what the air traffic 
control system should look like, but what we do not have right 
now, I think, is the quality, the sort of centralized 
initiative that will take us to the goals which a lot of people 
in the industry and observers of the industry believe we should 
be heading toward, and I am hopeful we are going to be able to 
deliver that in the near-term.
    Senator Brownback. Thank you, Mr. Shane, for your input.
    Chairman Hollings. Senator Lott.
    Senator Lott. Thank you, Mr. Chairman, and thank you, 
Secretary Shane, for being here.
    You had indicated that the Administration would have some 
proposals to be considered in the reauthorization by sometime 
this spring. I would like to urge you to--I know you have got a 
lot you are working on, a lot of issues, and they are very 
important, but I hope that you will not wait too late into the 
spring, because this is something that I think the Committee 
will want to consider earlier rather than later, even though 
the House has got to decide what their schedule is going to be, 
but I hope you would make those recommendations as soon as you 
can.
    Just a couple of questions, because again I want to hear 
the other panel. On the cockpit doors, and maybe I should ask 
the next panel this, but how far along are we in getting those 
doors strengthened? Is that program pretty well completed? What 
is the situation?
    Mr. Shane. First of all may I say, Senator, that we look 
forward to working with you in your capacity as Chairman of the 
Subcommittee, and also with Senator Rockefeller in the Ranking 
position. We look forward to a very interesting and productive 
session.
    The cockpit door program, I believe is on track. Boeing and 
other manufacturers of the kits that are necessary to retrofit 
the doors tell us that they have produced them in sufficient 
numbers to retrofit the entire U.S. fleet and, indeed, I think 
it is fair to say that the entire global fleet, at least that 
part of it that flies to and from the United States, should be 
successfully retrofitted by the April 2003 deadline. I am not 
aware that there are any hiccups in that schedule as of the 
present time.
    Senator Lott. As you know, the aviation industry continues 
to say that there is a need for a reduction in regulatory and 
security cost burdens. I know you are looking at all that and 
will have recommendations, but let me ask you about one in 
particular. Part of the security is the air marshall program. 
Everybody understands that has been underway, but we hear that 
there have been some difficulties with it.
    What is your assessment of how that program is working, and 
what the needs are for the future, and also, there is a case 
where, I guess, the airlines are bearing the cost of providing 
those seats, so just briefly--and this will be my last question 
so we can move on--talk about that particular area, because I 
think that is one we are going to want to take a look at.
    Mr. Shane. I can only talk about that--for reasons you are 
aware of--in the most general way, Senator Lott. The program 
has been ramped up dramatically. I think it is one of the big 
success stories of the Transportation Security Administration. 
I think the best thing to say is that we will be happy to 
provide you with whatever detail you would require, but I would 
prefer to do that in a closed session, or privately.
    Senator Lott. Thank you, Mr. Chairman.
    Chairman Hollings. Thank you very much.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, let me ask Mr. Shane what we 
can expect with the Administration's support of the Essential 
Air Service program. We will be receiving a budget from the 
Administration very soon. The Essential Air Service program is 
a very important program for many of us in smaller states. 
What, Mr. Shane, can we expect from the Administration with 
respect to funding?
    Mr. Shane. Well, I do not think I am supposed to say what 
you can expect from the Administration on funding, because that 
decision is going to be made somewhere way above my pay grade, 
and it has not been made just yet.
    What I can tell you, Senator, is that when it comes to 
essential air services, the Department takes very seriously 
every requirement that Congress has imposed in that regard. We 
take the importance of service to smaller communities 
throughout this country as a very important part of our 
responsibility. We have attempted to carry out the Essential 
Air Service program as efficiently as possible, spreading 
support for that program as widely as possible, given the 
always scarce resources that are available for the program, and 
we will continue to do that.
    Senator Dorgan. You said you do not think you are supposed 
to say. Do you know?
    Mr. Shane. I do not know. As of this point, I do not.
    Senator Dorgan. So you cannot say?
    Mr. Shane. That would have been a better answer. I cannot 
say, but even if I knew what the answer was, I probably would 
not be authorized to tell you right now, and I apologize for 
that.
    Senator Dorgan. Mr. Shane, what can be done to protect 
smaller communities as we see some of the restructuring, and 
the shakeout from restructuring as it affects small 
communities? Senator Rockefeller, myself, Senator Burns, and 
others are very, very concerned about this, and do you see 
other things that can be done, other than supporting a strong 
EAS system with respect to this restructuring?
    Mr. Shane. One hoped all the way back at the time that the 
industry was deregulated that the creation of an open market 
where airlines could pursue commercial opportunities wherever 
they appeared would produce sufficient service at a whole 
variety of markets of all sizes and, indeed, the essential air 
services program is authorized initially for 10 years, the 
assumption being that at the end of 10 years there would not be 
the need for any further subsidies of that service.
    That has not turned out to be the case. I think many 
communities do get service now that would not have expected it 
in a pre-deregulated market--in a regulated market, I should 
say, but not all communities that deserve services are getting 
it, and so there needs to be a continuing program.
    I do not have bright ideas beyond trying to make the 
industry as robust as possible in the hope that the hub-and-
spoke system will produce those kinds of spokes to the smaller 
communities that essentially, that have to have this essential 
service, or the path we have been on. I do not have any bright 
ideas about alternative solutions to this problem.
    Senator Dorgan. Let me ask about alliances for just a 
moment. You heard Senator McCain, describe an editorial that 
was critical of alliances? If carriers were to do what was 
implied in the editorial, it would be illegal, would it not? I 
think it would be violative of antitrust laws if several 
carriers got together and decided we are going to run these 
carriers jointly, and make joint decisions about things. We are 
not going to have a merger, but we are going to have an 
alliance in which we all decide how we are going to work 
together to manipulate our fares. That is just flat-out 
illegal, is that not the case?
    Mr. Shane. If they were coordinating prices and capacity, 
yes.
    Senator Dorgan. Right. And the Department has approved 
alliances in which airlines have taken a piece of what was pre-
Mr. Kahn, pre-Professor Kahn, where airlines running their own 
airlines would nonetheless create certain code-sharing 
arrangements so that you could get off one carrier in an 
airport, and get on another carrier and have bought a ticket 
through both carriers. Those carriers were not working together 
in any way in their operations, but back in those days you 
could actually do that.
    That was part of what, in my judgment, we should have kept 
from the old system, but we did not. Now some airlines, short 
of mergers, are saying, let us create alliances that take that 
piece back and allow us to do code-sharing and other things, 
but in my judgment, you have approved some alliances because 
you understand that it is not a case where these carriers are 
running each other's businesses.
    They still compete. It is just that in certain 
circumstances they create something that allows the customer to 
be treated in a much different way, a better way for the 
customer. Is that not the case?
    Mr. Shane. I think that is the case, and it is part of the 
answer to your earlier question about how best to foster 
service to smaller communities. Code-sharing relationships have 
been an enormous benefit to smaller communities, because they 
have created that through service and put them on the aviation 
map for the first time.
    Senator Dorgan. And I feel that way, too, and I feel very 
strongly, perhaps more than anyone on this Committee, that if 
we have additional mergers, I am going to be the first to say 
not only no, but hell no, we do not need more concentration in 
this industry. If I felt that alliances were anticompetitive I 
would be here spending all my time speaking against alliances, 
but I do not think they are anticompetitive. I think they are 
pro-customer, but still produce aggressive competition.
    Let me ask the question, if the airlines themselves are 
trying to find ways to create alliances that help them, but 
also retain competition and help the customer, what can they 
expect from the Department of Transportation in terms of taking 
a hard look at these and making a decision one way or the 
other. The reason I ask is that there was one alliance that was 
asked about earlier, that I think was submitted in August to 
the Department, and I do not think you have made a decision at 
this point. You did not indicate when you might make a 
decision, but given the financial circumstances of airlines, 
when anyone proposes something that might help them, the 
customer, and still retain competition, is there not an urgency 
to get these things done?
    Mr. Shane. There is, and we do not miss the point.
    United and US Airways proposed an alliance and the 
Department approved it relatively quickly. It did not pose the 
kinds of anticompetitive concerns. At least, it did not propose 
anticompetitive concerns that could not be addressed fairly 
directly by a combination of the Department of Justice and the 
Department of Transportation. That was done, and they were able 
to proceed with the alliance.
    The one that is pending before the Department right now, we 
will respond to that I think very shortly. There is an 
extension right now of the time under the statute. This is a 
provision of AIR-21, Senator, that allows us to look at these 
alliances for up to, I think, 150 days. We have extended that 
time currently up until the 21st or the 20th of this month.
    I believe that before we hit that deadline, we will have 
brought this particular matter to closure. I cannot be 
absolutely certain of that because the alliance partners 
themselves will have something to say about that, but what we 
are hoping to do is to have an answer, and hopefully we will be 
able to move on.
    Senator Dorgan. I do not want to spend a lot of time on 
this. I think there are circumstances in which these can work. 
The Justice Department, I understand, has indicated there is 
not an antitrust issue or concern here.
    Mr. Shane, are you traveling any place soon? Would you pay 
for food?
    [Laughter.]
    Senator Dorgan. You do not have to answer that.
    Mr. Chairman, thank you very much.
    Chairman Hollings. Senator Inouye.
    Senator Inouye. Thank you very much.
    Mr. Shane, in the coming weeks, there will be much 
discussion among Members on the future of the industry, and in 
such discussion, certain words and phrases will appear more 
than others, such as mandatory binding arbitration, and as my 
colleague mentioned, mergers. May I get your position on 
mergers and mandatory binding arbitration in airline 
negotiations?
    Mr. Shane. Yes. Mergers are actually the province of the 
Department of Justice under the law today. The Department of 
Transportation looks at certain agreements in the airline 
business. If it is an international agreement that has a cross-
border element to it, that comes before DOT. If it is an 
alliance of the kind I was just discussing with Senator Dorgan, 
that gets reviewed by the Department of Transportation and the 
Department of Justice. The actual review of mergers, classic 
mergers would be solely the province of the Department of 
Justice, and we would presumably offer our 2 cents worth as 
they reviewed that.
    It is very difficult to have a global position on something 
like mergers in the airline business, because first of all the 
environment is changing every day and it is not particularly 
robust right now. Second, every case is different, and that is 
the story of even the alliances that DOT reviews. I think it is 
dangerous to try to pronounce in any kind of monolithic way on 
mergers in the airline industry.
    I think what we will do is, as a government we will look at 
each case that comes before us and form a judgment based on 
what is best for consumers and the industry.
    The second part of the question is binding arbitration.
    Senator Inouye. Before we go to that, you said that you can 
put in your 2 cents worth, but I am certain you will put in 
much more than 2 cents. By your response, do you mean that 
there are acceptable mergers and unacceptable mergers?
    Mr. Shane. I think there may well be acceptable mergers.
    Senator Inouye. What would be an acceptable merger?
    Mr. Shane. If two carriers are both in extremis, or one of 
them is, and it looks as though the consolidation of those two 
carriers may keep service alive in a whole host of markets that 
will lose that service for at least some period of time, there 
cannot be any suggestion that there is anything anticompetitive 
in a merger of that sort. You would actually just be losing 
service. There would not be competition for those markets, they 
would just not have service, so it becomes a very different 
kind of problem for the Administration to look at. That is at 
least a logical possibility, a merger of that sort, and so that 
is why I say I do not want to pronounce in any way against or 
for mergers as a monolithic proposition. I think we really do 
have to be open-textured about it in the way we look at each 
case before us, or I should say the Justice Department should 
be in the way they look at every case before them.
    On the second part of the question, I am certainly aware of 
the issue of whether some change in the Railway Labor Act would 
be warranted. I have no position on that. I think it is an 
issue that is worthy of important amounts of attention both 
within Congress and within the Administration. There is a 
healthy debate about that, and I have not formed a view, quite 
honestly, and I do not believe the Administration has a 
position at this point, either.
    It sounds like an unsatisfactory answer, I am afraid, but I 
think that is the state of play right now.
    Senator Inouye. Thank you.
    Chairman Hollings. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. I want to 
compliment you and the TSA on the introduction of the new 
equipment and the overall operation of the TSA. I have been 
quite pleased in what I have seen, and I go out of my way to 
compliment them when I see them, so congratulations.
    I had raised two questions, and if you would comment on 
both, the integrity of the decisionmaking process with regard 
to the loan guarantees, and what we would do with a major 
disruption of the air transport system due to some additional 
terrorist act such as what we saw attempted in Kenya.
    Mr. Shane. On the ATSB, the Air Transportation 
Stabilization Board, first of all I think you are probably 
aware, Senator, I am not the Department's representative on the 
Board so I do not sit in on the meetings, but I certainly 
participate in our own internal meetings about what our 
representative, who is Kirk Van Tine, the Department's General 
Counsel, will or should say, or vote upon during those 
meetings.
    I am impressed with the quality of the Board's 
deliberations. The statute, I think, was written very carefully 
and established, I think, very sensible criteria, prudent 
criteria. You are not just creating another investment bank. We 
did not need another investment bank. Obviously, if investment 
banks were sufficient, then you would not have to have an ATSB. 
There needs to be something more, a somewhat more forgiving 
standard, but in our interest of protecting the taxpayers' 
stake in all of this, I think there has to be a measure of 
prudence, and the Congress has built that prudence into the 
criteria for the Board--for the Board's deliberations. That 
prudence has been reflected in the regulations put out by OMB 
in anticipation of these applications.
    What I see happening is, I think, a very careful financial 
analysis, which you would insist upon, it seems to me, if 
someone were asking for a major commitment of taxpayer 
resources, and the establishment of some expectation of a 
reasonable ability to repay a loan, or the taxpayers would be 
on the hook for whatever amount it was.
    That is what the board is doing. It is doing it, I think, 
in a dispassionate way. It is applying the same standards to 
every applicant that comes to the door, and I think the results 
have been actually beneficial to the industry. There have been 
a number of rejections. United Airlines, I would emphasize, 
because that is, of course, one that is prominently in 
everybody's mind right now, has not been rejected, as such. 
Their application continues to be pending before the ATSB, and 
they have the ability to come back with a different business 
plan, so that is not a rejection.
    The ones that are rejected simply did not make the cut in 
terms of the criteria established by Congress and established 
by regulation, the same criteria that were applied to those who 
received either a loan guarantee or, in a few cases, a 
conditional loan guarantee, so I am very pleased with what I 
see happening at the ATSB, and I think Congress should be proud 
of having created that body. I think it is a perfectly balanced 
result.
    Now, the prospect of a catastrophe along the lines that you 
describe is--it is no longer unthinkable, unfortunately, 
because we did see that episode in Mombasa. I think all I can 
say in an open forum like this is that the Administration is 
taking that prospect seriously, and is, indeed, thinking hard 
about what responses there would be.
    Again, and I apologize for doing this, I think it is the 
kind of subject that is better-suited to a smaller and perhaps 
a closed session.
    Senator Nelson. I agree, and perhaps, Mr. Chairman, Mr. 
Future Chairman, I would encourage such a discussion in an 
appropriate classified fashion, because that is something that 
we have got to face.
    Senator Rockefeller. (presiding) Senator Burns. Him not 
being here, I will ask my questions.
    You are right, you are not the person on the ATSB, but I do 
not want it to roll off quite so easily. It is carefully 
written legislation. United was discussing the idea of 
bankruptcy, that therefore its business plan obviously could 
not be complete, but one thing that has always happened in ATSB 
is that when a major carrier, so to speak, asked for a delay in 
order to do more work, it was granted. That has always 
happened. It was rejected, the delay was rejected, and you 
talked about the taxpayers having to pick up the cost of an 
unpaid loan were that to be the eventuality.
    I often like to say these are last year's figures, but 
there are not managed care plans in 81 percent of the Nation's 
counties, which is just another way of saying that most of the 
Nation is not served by the kind of highly efficient heavy 
traffic airlines, and for the ATSB to reject a seemingly 
reasonable request and it was extraordinary to me, and highly 
damaging to the taxpayer and to the country.
    I wish to know why it was that a longstanding rule about 
granting delays was seemingly bypassed quite easily, and if 
there needs to be any adjustment made in legislation as a 
result of this, because it was a devastating blow to one of the 
Nation's very largest airline carriers, and I thought a 
shocking decision.
    Mr. Shane. Senator, I do not think legislation is necessary 
to address that. That was, of course, a controverted vote 
within the board, as you know. At the end of the day--and much 
of the reasoning of the board is, of course, on the record. 
There were letters exchanged with United over a period of time. 
There was quite a lot of time spent with United Airlines, as I 
understand it, in leading up to the moment when the board had 
the vote on whether or not to grant some further delay.
    I have to infer from that record that the board concluded 
that there was nothing that United was planning to submit 
within any additional period that would have been granted that 
would have changed the result, and the board must have felt--I 
am surmising here, because again I was not present at the 
deliberations. It must have felt that United would be better 
advised of the reality of the situation sooner rather than 
later.
    It is undoubtedly a judgment that might have come out 
differently with different individuals voting. This was a close 
call, presumably, but I do not think that result in that case 
ought to be the stimulus for an entire overhaul of the 
stabilization legislation. I think the legislation is working 
very well, and we do not know the end of the story of United 
Airlines and the ATSB.
    Senator Rockefeller. I appreciate your, as it is, 
speculation on the matter and respect it.
    To follow up what Senator Dorgan was talking about on the 
essential air service program, I need to make just one point 
and ask one question. The funding of it was bizarre. The 
tracking of its funding was bizarre. It was severely 
underfunded for years and years and years. It was started by my 
predecessor, I believe, Jennings Randolph, many years ago, and 
so it started out from about $26 to then $50 million, and then 
as part of the Air Stabilization Act last year, when we did 
many other good things, it was increased again up to $113 
million, and so to say the essential air service program has a 
solid base of support for funding is to ignore the trail which 
the funding increases pass through in order to arrive at a 
figure.
    So, in that so many of us, Senator Burns, and I am sure, 
Senator Lott and all of us, is there any instinct on the part 
of the Administration to not only continue this program at its 
current level, but in fact to add to it because of the 
overwhelming power of the airline industry economically for the 
good or ill of our citizens?
    Mr. Shane. I understand the question completely. It is the 
right question to ask. I do not have an answer for you right 
now. It is simply a conversation that I have not had with 
anybody at the Office of Management and Budget or even in our 
own front office, so it would be a waste of your time to hear 
an answer from me, because it would not be the instinct of the 
Administration per se. It would just be one person's opinion.
    Senator Rockefeller. I understand that, but it was not a 
waste of time to ask it.
    Secretary Shane, I thank you very much for your patience.
    Senator Rockefeller. Senator Fitzgerald.
    Senator Fitzgerald. I will just have a couple of questions, 
Mr. Chairman.
    Mr. Shane, thank you for being here. I wondered if you had 
taken a look at the debt ratios of the major carriers, or all 
the airlines, in preparation for your testimony here, and 
whether you had any thoughts about even when the airlines do 
turn around, perhaps in 2004, are they not going to be starting 
out with very high levels of debt, higher perhaps than ever 
before even the last downturn at the beginning of the last 
decade?
    Mr. Shane. The answer is no, I did not specifically look at 
those debt ratios, but yes, I agree with you, I think it is 
fair to say that they will start out with very high debt ratios 
once they are up and running again.
    Senator Fitzgerald. So, even when they are profitable they 
are going to be struggling with enormous debt service cost.
    As you know, in my State of Illinois, we have had a lot of 
discussion over the expansion of O'Hare Airport, and Mayor 
Daley has proposed a $15 billion expansion program, and no one 
has really ever said how that would be financed, and I guess 
one way to finance it would be by relying on passenger facility 
charges and increased landing fees at O'Hare, but the landing 
fees at O'Hare are already pretty high, and that adds to the 
airline's cost of operating out of O'Hare, does it not, when 
those fees are raised at O'Hare or any other airport?
    Mr. Shane. Certainly.
    Senator Fitzgerald. And if Chicago were to issue, say, $6 
billion worth of debt to fund just the runways, another $4 
billion for their terminals, that would result in a lot of debt 
service for the airlines operating out of that airport, would 
it not, indirect debt service, that would be amortized by 
increasing the landing fees at O'Hare?
    Mr. Shane. I must say I am speaking without any knowledge 
of what Chicago plans in respect of the financing of their 
proposal.
    Senator Fitzgerald. Nobody has any knowledge of what they 
are planning on financing.
    Mr. Shane. Certainly, if indeed it is going to be--if the 
idea is to recover these costs in landing fees, then I think 
your assumption would be correct, it would raise the cost of 
doing business in Chicago.
    Senator Fitzgerald. Do you know what level the airport 
improvement fund is at now, about how much in annual revenues 
it is generating? There is an excise tax that funds that, is 
that not correct?
    Mr. Shane. Yes, and I do not have a number in my head. I 
would be happy to provide it for the record.
    Senator Fitzgerald. One other thing. Have you noticed any 
trends nationwide about moving to smaller jets? I notice at 
O'Hare, they reclaimed the title of the world's busiest airport 
last year, but they actually had less passengers than the year 
before, and it appears that that was because there was a big 
trend towards smaller regional jets in the past year. Have you 
seen that phenomenon around the country?
    Mr. Shane. Absolutely. The regional jets seem to be the 
most popular aircraft of all right now. Carriers are bringing 
on more and more of them. I understand if you wanted one you 
would have to wait 5 years to get one, because the order book 
is so full, even in this environment. It goes to a discussion 
that we had earlier about the quality of service to smaller 
communities.
    These regional jets are made in heaven for thinner markets, 
for markets that have been getting either a subsidized airplane 
with a couple of propellers one time a day with 19 seats on it, 
and really never becomes anything like a commercial market.
    There are ways of moving these airplanes around quickly 
enough so that you can actually offer more frequent service to 
communities of that kind, and you can actually make money at it 
when the circumstances are right.
    The challenge that it poses, that the advent of the 
regional jet poses, goes back to the exchange I had with 
Senator Brownback. It is about the capacity of the system. 
Obviously, if you are moving a lot of people in smaller 
airplanes, you are going to have a lot more operations. That 
puts a tremendous burden on air traffic control, it puts a 
tremendous burden on the airports, on our runway capacity, and 
so forth, which is exactly why the Commission on the Future of 
Aerospace was right to focus on the need for ramping up our 
technology investment and ramping up our research to make sure 
that we have the capacity to accommodate this air transport 
market, whatever it looks like in the future.
    If it is nothing but regional jets, and a lot more of them 
than are the airplanes flying around today, we should be able 
to accommodate them. We should be able to accommodate personal 
jets. I have no idea what the market is going to look like. 
Nobody can.
    Senator Fitzgerald. And it may necessitate our rethinking 
about how we set up airports. If there are going to be a lot 
more planes, but smaller planes, we might want gateways 
designed for that.
    Mr. Shane. I expect that is the case in many locations, for 
sure.
    Senator Fitzgerald. And I would just point out that this 
trend which you have identified is diametrically opposed to 
Senator Durbin and Mayor Daley's World Gateway at Chicago, 
which was going to build new terminals to handle the big Airbus 
that handles 600 people, and the Boeing 747 400's, and that 
bill was going to put a gun to the head of the FAA and say they 
must approve that plan, and I think we have identified right 
here a defect in that.
    So thank you very much, Mr. Shane.
    Senator Rockefeller. Just before I thank you again 
officially, I want to submit for the record the statement that 
I have on Airbus and the subsidies and the effect on our 
domestic airline construction industry.
    [The information referred to follows:]

Hon. John D. Rockefeller IV's Remarks from the April 23, 2002 Aero Club 
        Lunch
    Thank you very much, Shelly, for that kind introduction. And I 
thank the Aero Club for inviting me to talk to you all today. It's a 
pleasure to be here.
    The past seven months have been an extraordinary and challenging 
time for American aviation, in ways no one could have anticipated. 
September 11 changed the world, and changed all of us. In addition to 
the staggering and tragic loss of life, and the ongoing and very 
serious threat to our security, the American aviation and aerospace 
industry was thrown into a tailspin.
    Fortunately, the affected industries and the Federal Government 
acted rapidly. Together, and to your great credit, all signs are we 
have restored public confidence in our system: the American people are 
flying again.
    But as I think about that very real accomplishment, I can't help 
but think of another potential crisis looming before us. In the coming 
months and years, we must match our ability to respond to this 
terrorist threat, with a similar drive to restore what I fear is a 
serious drop in our aviation and aerospace competitiveness around the 
world. And that's what I would like to talk with you about today.
    For too long, the erosion of our leadership and of our dominance 
around the world has been disguised--by the size and proud history of 
our aerospace companies, by the turnaround in general aviation, and by 
the surge in U.S. travel. But the signs of trouble are everywhere:

   The U.S. trade surplus in aerospace declined last year for 
        the third year in a row--from $41 billion in 1998 to just $26 
        billion in 2001.

   In 2001, Airbus won more new orders than Boeing for the 
        second time in three years.

   The U.S. has largely missed out on the regional jet boom--
        with a $5 billion trade deficit in this fastest growing segment 
        of commercial aviation.

   And we now run a very significant 3-to-1 trade deficit in 
        civilian helicopters.

    These are disturbing trends for an industry that is a pillar of 
American economic strength and national security. And they are trends 
that will accelerate if we do not act--rapidly, effectively, and 
collectively.
    In my view, our long-term decline is rooted in two basic phenomena:

        1. Here in the United States, aerospace R&D spending has 
        dropped by more than half; and

        2. Around the world, foreign governments and national carriers 
        are pursuing an aggressive, possibly illegal, campaign of 
        subsidy and discrimination.

    The result is that our manufacturers are weakened, which means they 
can't invest to develop the new technologies our carriers need to 
expand. So our carriers can't place the new orders our manufacturers 
need to fund their research. It's a vicious cycle.
    The first thing we need to do is fix what's wrong at home. The 
greatest source of American competitiveness is innovation, but in 
recent years, we have not been investing enough to support basic 
aerospace research--

   From the late 80's to the late 90's, U.S. funding for 
        aerospace R&D fell from $34 billion to $15 billion.

   Aerospace has shrunk as a share of national R&D dollars from 
        almost 20 percent at the end of the Cold War to less than 10 
        percent now.

   Today only 5-6 percent of government R&D funding goes to 
        aerospace--a shocking figure, given the importance of aerospace 
        and aviation to our country.

    Much of our aerospace and aviation infrastructure is anchored in 
research initiated two or three decades ago. Because of the lead times 
involved, the current R&D shortfall may not affect our products for 
years. Unless we act, and act now, the day may come when we are forced 
to cede technical leadership in this vital field to Europe or the 
Pacific Rim.
    Of course, increasing R&D won't, by itself, sustain U.S. leadership 
in aerospace if the playing field is tilted against us. And it is long 
past time we recognize that actions by foreign governments and 
companies violate the letter and the spirit of international trade 
rules.
    This problem really begins with Europe. Europe has the next-largest 
aerospace sector, and a long tradition of governments promoting so-
called ``national champion'' industries. But increasingly we see 
Europe's success inspiring copycats, like Brazil, China, Japan, and 
Southeast Asia. Thus, our ability to deal effectively with Europe--or 
not--will determine our future prospects with nations all over the 
world.
    The core problem is government subsidies in the development and 
production of commercial aerospace products. For a while, we deluded 
ourselves into thinking that this problem would go away. But, in fact, 
the opposite has happened. The flood of Airbus subsidies, including 
interest, is estimated to be at least $30 billion. And that total will 
increase by at least another $4 billion as European governments 
subsidize the development of the new A380 jumbo jet.
    Separately, the British Government has extended well over $1 
billion in subsidies to Rolls-Royce over the past decade to develop 
aircraft engines, and last year announced it would provide an 
additional $400 million to fund the development of an engine for the 
A380. Earlier this year, the European Union specifically cited Airbus 
as a model when trying to cajole European governments into providing 
subsidies for Galileo, the new European GPS [Global Positioning 
System].
    And subsidies are just the beginning.
    Last year the European Commission arbitrarily killed the GE/
Honeywell merger. And Europe fought efforts to block the access of 
``hush-kitted'' U.S. aircraft to European airports--an effort that was 
ultimately rejected by the entire International Civil Aviation 
Organization (ICAO) [`` eye-KAY-oh ''].
    Last year, the French Government said it was prepared to sell off 
25 percent of its jet engine maker to an international partner. But 
when GE expressed interest, the French Government clarified that by 
``international'' it really meant ``non-American.''
    And in the defense aerospace sector, there is an effort to create 
``pan-European'' projects that freeze U.S. products out of military 
contracts.
    We have to fight back immediately, at home and abroad.
    At home, we need to use our tax code to encourage American 
aerospace companies to devote resources to risky, long-term research--
by making permanent the R&D tax credit. And restoring federal funding 
for aerospace R&D must become a national priority.
    Overseas, we must fight back, with every weapon at our disposal.

        1. (It is time for us to start talking seriously about mounting 
        a WTO challenge to the EU's financial supports in aerospace. 
        There was a time that taking Airbus to the WTO would have been 
        considered a de facto declaration of trade war. But no rational 
        person seriously thinks the U.S. wants to drive Airbus out of 
        business. A WTO case would simply ensure that Airbus plays by 
        the same rules we do. And the Europeans have shown they 
        certainly have no hesitation about challenging U.S. trace 
        practices at the WTO--whether it's our tax policies or tariffs 
        on steel.

        2. We must develop a unified and comprehensive response to 
        foreign regulatory decisions that discriminate against U.S. 
        aerospace products or producers. Whether in antitrust measures, 
        noise rules, or safety standards, foreign governments must know 
        that if they discriminate against U.S. interests, there will be 
        more than an expression of dismay. There will be a strong and 
        concrete U.S. counteraction.

        3. And we must maximize every bit of the leverage we still 
        have. If U.S. aerospace companies are excluded from investment 
        or merger opportunities in Europe, we should make clear that we 
        will prohibit European companies from making acquisitions in 
        the U.S. If illegal European subsidies to certain companies 
        continue, then those companies should be refused access to 
        lucrative Pentagon contracts in the United States.

    Over the last 30 years, I have had a front row seat for the 
American steel industry's grim decline. I have seen a strong, 
confident, wealthy industry reduced to near death by a combination of 
factors remarkably similar to those facing you: a decline in government 
support for R&D systematic and remorseless trade discrimination; and a 
reluctance to pull the industry together and mount an organized fight 
until it was almost too late.
    The silent mills and unemployed steelworkers who still dot the Ohio 
Valley are monuments to an industry that found itself in this very 
situation--and to government policies that put diplomacy and tact ahead 
of America's companies and workers. Government policies that lost a 
trade war in steel.
    That can't happen again. I stand ready to support you and help you, 
in the Aviation Subcommittee, in the Commerce Committee, in the Finance 
Committee, and in the Foreign Relations Committee. On Capitol Hill, in 
West Virginia, in Seattle, in Chicago, in Brussels and at the WTO.
    But you have to engage in the fight, too, to a far greater extent--
airlines and manufacturers, general aviation and commercial aviation, 
labor and management. I know you face very real and immediate problems 
and needs, but I implore you to focus on the big picture and to take 
ownership of the future. Aviation is too important to our society, our 
economy, and our national security for us to decide we don't have the 
political will to defend our global leadership.
    There is time, but not much. Let us work together to build a 
strategy and take the actions we need to prevent a long, slow decline 
of the American aerospace and aviation industry.

    Senator Rockefeller. Secretary Shane, thank you again very 
much. You have been very patient. Again, this is our first 
hearing. We are eager and will grow more eager as time goes on. 
I now call upon our next panel, Mr. Donald Carty, Chairman and 
CEO of American Airlines, Mr. Richard Anderson, Chief Executive 
Officer, Northwest Airlines, Professor Alfred Kahn, Cornell 
University, Mr. Duane Woerth, President, Air Line Pilots 
Association, and Mr. Kevin Mitchell of the Business Travel 
Coalition. If you gentlemen could have a seat, we will start, 
Mr. Carty, with you.

   STATEMENT OF DONALD J. CARTY, CHAIRMAN AND CEO, AMERICAN 
                            AIRLINES

    Mr. Carty. Thank you, Senator Rockefeller, Chairman McCain, 
Members of the Committee. Thank you for the opportunity to 
appear before you today. All of you I know are familiar, we 
have been discussing already this morning the economic trials 
our industry is going through. These trials are as well-
documented as they are severe. In the written testimony that I 
have submitted, I offer some facts and figures that illustrate 
that in this industry's 75-year history, a history long under 
stress and short on economic success, these really are, as one 
of the Senators said earlier, the most challenging times that 
we have ever faced.
    Now, many of the forces that are driving our current 
problems are dramatic. They are visible. We have talked about 
them this morning, the economic downturn, the steep fall-off in 
business travel, and in the wake of 9/11 widespread concerns 
both about security and the hassles associated with new 
security arrangements.
    Less publicized, but equally troublesome factors include 
dramatically higher security and insurance costs, as well as 
the raft of fees and taxes which have been imposed on air 
travelers that are ultimately, in this kind of marketplace, 
absorbed by the airlines themselves.
    Now, while there is no shortage of culprits to explain our 
situation, as a representative of the largest airline in the 
world I definitely want to acknowledge the point that both 
Senator Hollings and Senator McCain made at the outset, and 
that is that our industry would have been faced with 
fundamental change even without 9/11, or even without the 
economic slowdown. Those events have simply accelerated the 
need for change.
    In recent years, the growth of discount carriers has 
allowed them to reach a critical mass, and now they compete on 
roughly three-quarters of the routes that we fly. While they 
only represent 20 percent of the capacity, they are now 
influencing competitive activity in some three-quarters of our 
markets, and this, of course, along with the explosion of e-
commerce, which has made airline pricing completely transparent 
to anybody with a PC, preceded and accelerated the airline 
revenue decline that was driven by 9/11 and the sluggish 
economy, and coincident with our revenue struggles, we have 
seen rapid increases in our labor cost, our distribution cost, 
and certainly our tax cost.
    Now, from an American Airlines perspective, dramatic change 
really just represents more of the same, because for 75 years, 
our history has been marked for the most part by continuous 
change, and while the evolve-or-perish theory has long been a 
way of life for us, I would like to put to rest the notion that 
the large hub-and-spoke network model is no longer viable and 
no longer important.
    The ability that we enjoy in this country, and some of you 
observed this in your own comments, to allow us to move from 
virtually any medium to large community and many small 
communities around the country on one side of the country to a 
counterpart on the other side, as well as dozens of 
international destinations at a reasonable cost and within a 
reasonable level of convenience is very much a product of the 
hub-and-spoke system.
    The large airline model will remain viable as the mobility 
that it has created for people has become fundamental to our 
Nation's economic infrastructure. In fact, we owe it to our 
customers, we owe it to our employees, we owe it to our 
shareholders and the communities that we serve throughout the 
country to meet what are our economic challenges head on, and 
to do that we have to acknowledge that, given the bursting of 
the economic bubble, the rise of discount carriers and the 
rapid growth of online travel distribution, it is going to be a 
very long time, if ever, before the airline revenues approach 
the levels that were reached in the late 1990's and in the 
early part of the year 2000, and that means very simply we have 
to attack our expenses. We have to find new and inventive ways 
to deliver value to our customers, and to do so at a lower 
cost.
    Now, at American we have set out to remove $4 billion from 
our permanent cost structure. That means every aspect of our 
business has to be reexamined, and literally, we have launched 
at American hundreds and hundreds of projects to reduce 
expenses and to restructure the way we do business.
    Now, my written testimony provides a number of details on 
at least some examples of those efforts, but let me now say for 
the record that our efforts to date have been grouped into 
seven major areas of our business. We have reexamined our 
schedule efficiency, we have reexamined the complexity of our 
fleet and moved toward simplification, we have moved to 
streamline interaction with our customers in every point of 
contact with our customer around the airline, we are in the 
process of changing and reexamining the way we distribute our 
product and the cost of distribution, we are reexamining the 
way we price our product, we are reexamining our in-flight 
product offering, we are looking at our flight operations 
themselves and, of course, we are attacking rigorously our 
overhead in the form of our headquarters and administrative 
costs.
    Now, when we have fully implemented all the changes that we 
have identified in those seven areas, we will produce annual 
savings for American Airlines of over $2 billion. Now, that is 
a big number, which means, unfortunately, however, that we are 
only halfway home. There is going to be a lot more for us to 
do.
    The most important factor that I have not touched on at 
all, and the biggest expense item that of course we have--and 
has been alluded to a number of times this morning--is labor 
costs. Labor costs continue to represent about 40 percent of 
our total operating cost, and labor is more than three times 
the next biggest expense that we have.
    Now, at American I think it is fair to say our people have 
risen to every challenge circumstance has placed before them, 
and with the layoffs we have been through, which are now well 
over 20,000 people, along with all the uncertainty that 
surrounds our business, they have been through an enormous 
ordeal already, so we have been very loath to address labor 
costs explicitly until we in management had done everything 
under our control to align the company with the realities of 
today's marketplace.
    In the meantime, we have tried to work hard to build 
credibility between management and labor, obviously not always 
successfully, but it has certainly been our focus. Credibility 
is based on telling the truth, and the truth is that the future 
of our company is not going to be assured until we find ways to 
significantly lower our labor cost. It is a harsh reality, but 
as I continue to tell our employees, together we have the 
opportunity to demonstrate to ourselves and to the world that 
an airline can save itself by working together, and by working 
together cooperatively and creatively, and it is my hope and 
expectation that we are going to seize that opportunity at 
American Airlines.
    Now, I have to confess that I have been walking a bit of a 
tightrope this morning. I am, I believe, blessed with the 
greatest team in the industry, whose members by and large share 
an unshakable belief in American Airlines, and I cannot help 
but be upbeat about that, and yet I fear sometimes that my 
optimism masks the urgency and the magnitude of our crisis and 
the importance of your role in working with us to preserve the 
vibrant air transportation system that our country needs and 
our country deserves.
    Indeed, as we scan the horizon we are now confronted with 
two new clouds. One, of course, is the recent run-up in fuel 
prices which threatens to wipe out much of the progress all of 
us in the industry have made in reducing costs, and the other, 
of course, is the possibility of a war in the Middle East, 
which would at once further depress demand for air travel and 
could quite possibly exacerbate the fuel problem.
    Now, a year ago this Committee and the leadership of 
Congress rallied in a time of crisis to provide us a lifeline. 
In fact, I think it is fair to say you literally saved the 
airline industry of the United States, and I think it has also 
not been said often enough by all of us that we are immensely 
grateful for that.
    We do continue to need your help in the areas of security 
costs and the area of taxes, but my mission today is not to ask 
for relief, but rather to let all of you know that at American 
Airlines we are exhausting every conceivable means of self-
help, and we are far from done.
    Mr. Chairman, Members of the Committee, we are most 
grateful for both the reality and the symbolism of this 
Committee choosing the concerns of the airline industry for one 
of its first hearings of this Congress, and we do look forward 
to continuing this dialogue and working with you throughout the 
year.
    [The prepared statement of Mr. Carty follows:]

                Prepared Statement of Donald J. Carty, 
                  Chairman and CEO, American Airlines

    Good morning Mr. Chairman and Members of the Committee. Thank you 
for the opportunity to appear before you today to discuss the airline 
industry.
    I am here today with two goals. First, to emphasize the magnitude 
of the problem that we as an industry face. Second, to convince you 
that we are responding to the crisis with a degree of self-help that is 
unprecedented in our industry's history.
    What this testimony represents is a condensed version of a 
presentation that I have been making to our employees in dozens of 
meetings around our system. These meetings have immensely encouraged me 
because our employees have shown an unwavering sense of seriousness, 
knowledge, and commitment to fix the problems.
    When we began the process of radical change at American, we decided 
that, as management, we could not possibly ask our employees to make 
sacrifices without, first, having done everything possible in our 
control to solve the problems and, second, taking the lead in making 
the same sacrifices ourselves. Both of these are important elements in 
making the permanent changes we need simply to survive.
    I usually begin my presentations to employees by showing some 
commercials from various ad campaigns we have done over the years. I do 
so because, while the music and pictures may change a great deal, there 
is one constant at American that has always been our core strength: the 
high quality of our employees. At American, we understand this business 
is all about our employees, what kind of job they do, and their 
professionalism. That is going to continue to be at the heart of our 
culture and at the heart of the marketing to our customers.
    With that said, it can't be stated strongly enough that the 
magnitude of the problem we face as an industry is absolutely 
staggering. So I will begin with some facts about the industry as a 
whole and then get much more specific about what we at American are 
doing about our own problems.




    Let me start with some industry data. What you see on this first 
slide is a history of the profitability of the industry. You will 
recall, we had an economic downturn in the early 1990s, compounded by 
the Gulf War. We, like the rest of the economy, moved into a healthier 
period in the late 1990s, the longest period of sustained economic 
growth in recent U.S. history, with tremendous growth in the demand for 
travel.
    Then in April of 2001, we began to see the impact of the economic 
downturn that was occurring. It started in the high tech and 
telecommunications industries, but quickly spread across the U.S. 
economy. American Airlines, in particular, was hit very early because 
of the level of capacity we operated in a number of markets where the 
high tech industry was concentrated, such as Dallas, Austin, Boston, 
and San Jose.
    By the summer of 2001, we were already experiencing the financial 
consequences of the economic softening and recognized that the third 
quarter, typically a strong period, wasn't developing the way we had 
hoped. We knew then that we weren't going to have satisfactory 
financial results for the entire year.
    At American, we began taking corrective action as soon as the 
downturn became apparent. A number of cost cutting measures were 
quickly initiated. Then came 9/11 and the devastating effect those 
terrible events had on our industry.
    The very large losses recorded in 2001 and 2002 were the result of 
a weakened economy, the impact of 9/11, the fear of flying, followed by 
the public's aversion to the perceived hassle of flying due to the new 
security procedures. In addition, the new costs of increased security 
and insurance had a significant impact. In short, by the end of 2001, 
we had flown in economic terms into the ``Perfect Storm.''
    To make this chart completely clear, the $7.7 billion lost in 2001 
was after the government compensation of $5 billion. In other words, 
our actual losses were closer to $13 billion for the industry in 2001.
    Many of us expected that the economy would begin to recover by the 
middle of 2002. We were also hopeful the effects of 9/11, which drove a 
great deal of traffic from our airplanes, would also dissipate, and 
that we would recover by year-end. Obviously that hasn't happened. In 
fact, Wall Street analysts now estimate that the industry lost $9 
billion for the full year.




    To give you some idea of the order of magnitude of the impact all 
of these events had on the market, Slide 2 shows the percentage change 
in total airline revenue for the whole industry year-over-year, for the 
past twenty years.
    The graph shows that while revenue growth has fluctuated, 
historically it seldom went negative. However, for the period 2000-
2002, revenue has literally ``fallen off a cliff.'' Not only is the 
economy weak, but the airline industry's share of the economy is 
completely unhinged from anything we've ever seen before. At no time in 
the history of aviation has the industry suffered such great losses.
    The next slide shows a major source of the recent problem.

    
    

    Since mid-2001, business travel has dropped precipitously. 
Corporate accounts tend to give us the best, high-frequency, high-yield 
business. These bars measure the deterioration of the amount of 
business trips that are taken. Comparing April 2000 to 2001, travel by 
the best corporate accounts for the entire industry (not just American) 
was down 25 percent during this five-month period. If you compare the 
year 2002, it's actually down over 40 percent.
    In addition to the loss of business travel, the traditional network 
carriers must increasingly respond to the growth of discount carriers 
who generally set the price for leisure travel. In 1992, when we had 
our last economic downturn, these carriers represented 4.5 percent of 
the business. Today they're up to 18 percent and it looks like they'll 
be over 20 percent in 2003.
    But that figure greatly understates their impact. While they are 20 
percent of the capacity, discount airlines now operate in 70-80 percent 
of the markets served by the network carriers. The bulk of the markets 
not served by the discount carriers are the small communities, still 
served exclusively by network carriers and their affiliates. In short, 
low-cost carriers are influencing pricing in virtually every major 
market.
    I raise this point not to complain, but to recognize a fundamental 
fact--the competitive landscape of our industry has changed forever. We 
cannot plan our business in anticipation of large increases in revenue 
and, therefore, must restructure to reduce costs.
    Complicating this challenge is the problem that the post 9/11 world 
and resultant new security and insurance impacts have combined to drive 
our costs up dramatically. The impact on American Airlines alone was 
nearly half a billion dollars in 2002. Slide 4 indicates six elements 
contributing to that total.




    The first column represents increased security tax. Although the 
security fee is technically a tax on our passengers, it actually became 
a cost to us. In the current marketing environment, we can only put 
passengers on the airplane by stimulating the market with price. To the 
extent we have to lower our prices to attract passengers, there is no 
way we can simply ``tack on'' a security tax without driving away 
passengers. In reality, the airlines are paying the tax because we have 
to get the total fare, including all fees and taxes, low enough that 
people are willing to fly. As a result, the security tax is costing 
American more than $200 million.
    The second column represents increased insurance costs. This year, 
our insurance premiums increased $164 million. Of course, we are 
immensely grateful for your extension of the war risk program, without 
which this increase would be much greater. We hope that the current 
situation will be resolved in order for us to fully utilize this 
benefit.
    The third column represents increased costs due to new postal 
service restrictions. We have not been allowed to carry mail over 16 
ounces. At American alone, that cost is at least $15 million a year.
    The fourth column represents additional freight restrictions that 
the government has imposed on us, costing us $8 million annually.
    The fifth column addresses cockpit door reinforcement. 
Reimbursement for the mandatory cockpit door replacement has not 
equaled the costs incurred, with $21 million in additional costs.
    The final column represents over $60 million in costs that we 
believe the government indicated they would pay for, such as catering 
security costs, that we have not received.
    In total, that's nearly half a billion dollars in new costs for 
American. The industry's cost for security is over $3 billion. This, by 
the way, does not include the hundreds of millions in annual payments 
that carriers make to the Federal Government for security reimbursement 
costs.
    As we have said in the past, we believe that the public policy 
debate should be about national security, not airline security. We 
believe that protecting citizens against terrorism anywhere--in 
airplanes, trains, buildings, shopping centers or stadiums--is a 
government function. Unlike other industries, airlines are bearing a 
tremendous amount of the cost burden for security. Is there any reason 
to tax airline passengers for protection when we don't tax the people 
in Times Square on New Years Eve who were protected by the government, 
or citizens entering public buildings?
    At the same time, I should acknowledge the very positive 
contributions of the TSA under the leadership of Admiral Loy. The 
agency is focused on providing excellent security, while, at the same 
time, helping us improve customer service. More needs to be done, but 
great progress has been made.
    Moving from a discussion of the industry to the specific challenges 
we have at American, I explain to our employees that the only way we 
have survived these unprecedented losses is to borrow money. So the 
more money we borrow, the more interest we're going to have to pay, and 
the tougher it is to recover and return to profitability.
    Second, I explain that low-cost carriers are everywhere--that's not 
going to change. While the network carriers have to retrench for 
economic reasons, the low-cost carriers are continuing to grow. It's a 
reality that's here to stay as we think about the next twenty to thirty 
years at American Airlines.
    Furthermore, technology has made it easier to shop for the lowest 
prices. The majority of the traveling public has access to the 
Internet. In the airline business, you can find the lowest fare in 30 
seconds. So our pricing is and will continue to be much more 
transparent than pricing for many other consumer products.




    American has been uniquely challenged by the fact that the regions 
which have shown the greatest market softness were the domestic markets 
and Latin America, where American has the largest presence. We also saw 
relatively weak revenue and traffic at London Heathrow, where American 
has the largest of its European operations.
    In addition, we continue to suffer from being the only 
international carrier not permitted to codeshare with our largest 
European partner. The DOT now has before it an application for a 
limited codeshare agreement between AA and British Airways. Expeditious 
approval of this codesharing, explicitly authorized under the U.S.-U.K. 
bilateral agreement, will permit American to begin marketing 
destinations beyond London that we cannot economically serve ourselves. 
This is a critical first step if we are to compete on equal footing 
with other major U.S. carriers.
    As we refocus our planning in 2003, we are shifting capacity to 
markets with stronger demand. We will adjust slightly our international 
routes and continue to curtail domestic capacity because of continued 
weakness in these markets.




    This slide shows revenue per seat mile and cost per seat mile. We 
are getting our costs down and are making steady progress in narrowing 
the gap a bit, but we continue to have a tremendous difference between 
what it costs to run the airline and the amount of revenue our 
customers are willing to pay. The difference leads to increased 
borrowing.
    Obviously we can't continue to do this for very long. The fact is 
we have been borrowing money just to pay the fuel bill and meet 
payroll.




    For example, American had $2.5 billion in cash a year ago, and we 
still have $2.5 billion today. The problem is, in order to maintain 
that number, we've had to increase our capital borrowing. Since 9/11, 
American has borrowed approximately $6.5 billion, which has caused our 
debt to skyrocket. The chart in Slide 7 is sobering indeed. It 
indicates that in the 3rd quarter we were running through about $5 
million a day in cash. At that rate, we don't have forever to fix our 
problems.




    Devalued stock prices at all network carriers--not just American--
have resulted in an all time low market capitalization for the 
industry.
    If you think about this in historical context, in October of 2000, 
our stock was at almost $34 a share, a market capitalization of about 
$5 billion. At the close of business two years later (October 31, 2002) 
the stock was at $4.66, making it worth about three-quarters of a 
billion dollars.
    Historically, American has relied on a relatively small number of 
our business customers being loyal to American. We began to recognize 
in the 90's that model was going to get tougher and tougher to sustain. 
With the downturn in business customer travel, we've had to find new 
ways to generate revenue.
    There are many things we do as a large carrier that customers value 
and will always value. Customers do value convenience, network, and 
service. Nonetheless, we believe that to compete effectively, we have 
to get annual costs down by roughly $4 billion, permanently.
    We are trying to reinvent ourselves as quickly as we can in a time 
of immense financial crisis. This is a plan we would have gradually 
implemented over five or six years. Now there's pressure to get there 
faster, and there's pressure to survive so we can get there at all.
    At American, every aspect of our business is being reexamined. 
Literally hundreds of projects have been initiated to reduce expenses 
and restructure our business model.
    These efforts have been grouped into seven major areas of the 
business. The first area of initiatives is scheduling efficiency.
    As you know, American and many of our major competitors, both in 
the U.S. as well as foreign flag carriers, operate a hub and spoke 
scheduling system. This system has proven to be a very efficient means 
of providing frequent service between communities that otherwise would 
not have enough local traffic demand to support that service level. 
Business travelers have told us time and again that schedule frequency 
is a critical feature.
    Just the same, the traditional approach to hub and spoke 
scheduling, in an effort to drive passenger connect times to an 
absolute minimum, has resulted in less efficient asset utilization. 
Historically, we have needed extra airport gates and manpower to 
support a schedule where the incoming bank of flights and outgoing bank 
of flights all arrived and departed within a narrow time window. In the 
current environment where there is less business demand traveling on 
higher fares, this scheduling approach is less effective.
    In April 2002, we moved our Chicago hub operation to a depeaked 
schedule. We expanded this initiative to our Dallas-Fort Worth hub in 
November 2002. The gist of this concept is that planes arrive at 
uniform rates throughout the day. Ground times at the gate are based on 
how quickly our crews can turn the aircraft, rather than waiting to 
meet directional banks of aircraft.
    The cost savings at O'Hare and DFW from this change have been 
significant. At O'Hare, we were able to operate the same number of 
frequencies with five fewer aircraft, four less gates, and we realized 
a 5 percent increase in employee productivity. These changes have also 
reduced congestion and delays at these airports, contributing to 
improvements in on-time performance, not only for AA but also for the 
industry. By de-peaking both O'Hare and DFW, we have been able to make 
improvements in our spoke airport gate and manpower productivity as 
well.
    The impact to local Chicago and Dallas-Fort Worth passengers is all 
positive, with better spacing of flights throughout the day. This, in 
turn, helps to reduce waiting time at check-in and security. For 
connecting passengers, the average connect time has gone up roughly 10 
minutes. When viewed in context of the overall trip length for 
connecting passengers, this is a fairly modest change. This fact has 
been reflected in our share of connecting passengers, which has 
actually been up slightly since the change.
    The second major initiative we undertook was fleet simplification. 
As a carrier with service ranging from small cities in the U.S. to our 
hubs, large transcontinental U.S. markets, as well as an extensive 
international schedule, American will always need to operate with a few 
different fleet types. During the boom years, carriers like American 
could afford the extra costs of maintaining a large number of fleet 
types. This was possible because business travelers were willing to pay 
more for their travel and major carriers responded by offering 
specialized products. But in today's marketplace, the costs of having a 
diverse fleet outweigh the revenue we are able to generate. As such, we 
had begun work to simplify our fleet well before September 11.
    In June 2001, American operated 12 different fleet types, requiring 
unique crew training, and 30 different subfleet types. Through aircraft 
retirement and standardization during the next few years, we will 
reduce the number of fleets requiring unique crew training to five and 
decrease the number of subfleets to ten and possibly fewer. When 
compared on the number of aircraft units per unique fleet type, 
American should be second only to Southwest by 2006.
    The third area is to streamline our interaction with every single 
customer by simplifying processes and using automation to achieve 
better customer service and increased productivity. We are working 
aggressively to eliminate the need for paper tickets and to expand the 
availability and functionality of self-service devices to make our 
airports more efficient. Similarly, voice recognition and new 
automation tools will improve the efficiency of our reservation 
offices. At the same time, we will be shifting our reservation activity 
to our even lower cost platform by encouraging the increased use of the 
Internet. An example of this is providing customers the ability to book 
AADVANTAGE award travel on AA.com. This is all about having a customer 
service experience that's easier for the customer and less labor 
intensive for American.
    The fourth area we are addressing is distribution and pricing. 
Distribution costs represent our third largest expense after labor and 
fuel. These costs include commissions, booking fees, credit card fees 
and a variety of other costs of making the sale. As part of the 
longterm restructuring of our business, we have targeted a number of 
strategic initiatives that will significantly reduce these costs--
including a substantial reduction in commissions--without depressing 
revenues or adversely affecting customer service.
    Over the past several years, Computer Reservation System booking 
fee expenses have increased far faster than inflation--about 7 percent 
annually since 1995--even as technology costs have fallen. In 2002, we 
spent more than $400 million on booking fees, or about 2.4 percent of 
passenger revenue.
    Booking fees have risen dramatically, largely because of outdated 
DOT regulations which do not allow us to bargain with individual 
Computer Reservation Systems, as we can with anyone else whose services 
we buy. Fortunately, the DOT has recently proposed new rules that would 
change this one-sided business relationship. We applaud the Department 
for this step and hope they move promptly with these proposed rules so 
that we can get this cost item under control.
    As for our own efforts to reduce booking fees, we have recently 
launched the EveryFare program. The EveryFare program makes lower web-
only fares available through participating travel agents who are 
willing to help us achieve lower distribution costs, equal to the costs 
on the Internet, for all bookings. This program is truly a win/win for 
consumers, travel agents, and American. Customers needing the 
assistance of a travel agent can still get access to our low-internet 
fares, and American will gradually reduce its total booking fee 
expense.
    Our fifth area of cost reduction is our inflight product offering. 
The logistics behind providing meals on short domestic flights with 
limited ground time are extraordinary. While many customers have valued 
the level of meal service we have provided, few have valued it as much 
as it costs to deliver. This is particularly true given the increased 
security requirements for catering services after September 11. 
Increasingly, more and more of our customers simply want to make their 
own choices, prior to boarding the aircraft. To align with this 
evolving customer value equation, we have reduced the level and 
complexity of food service on most of our shorter haul flights.
    This simplification of our inflight product is not limited to food 
service. We recently announced that there would no longer be any charge 
for in-flight movies, provided that customers bring their own headsets. 
For customers not bringing their own headsets, we sell headsets 
onboard. The net impact is more customer self-sufficiency and less 
logistical challenges for American, resulting in lower overall costs.
    Our sixth area of emphasis is flight operations. In an effort to 
make our flight operations more efficient, we're focusing on the 
fundamentals of the business: operational safety, performance and 
efficiency. AA's arrival performance this year has improved in every 
quarter as compared to 2001. Over 84 percent of our flights arrived on 
time in the third quarter of 2002. Everyone in the operation has 
contributed to this improvement.
    In addition to flight and maintenance savings generated by fleet 
simplification and depeaking, AA is also making changes to lower other 
operational costs. Fuel is our second largest operational expense after 
labor. We have taken a number of steps which, while seemingly small, 
result in significant cost savings. The largest improvement is that we 
have reduced aircraft auxiliary power unit fuel usage by half during 
the time the aircraft is parked at the gate. This has been achieved by 
acquiring ground equipment to provide power and air-conditioning to the 
aircraft and through comprehensive training and awareness programs for 
airport and flight crews. Fuel reductions have also been achieved by 
running aircraft taxi operations to and from runways on a single engine 
and by more closely monitoring excess ramp arrival fuel levels.
    We are also implementing changes in our maintenance areas, which 
will enable us to operate more efficiently. Portable technology, which 
gives mechanics and inventory clerks up-to-date information on parts 
availability, will significantly improve productivity. Automation of 
the work card system will also allow our mechanics to maintain aircraft 
more efficiently.
    Returning to profitability and running a safe airline are not 
mutually exclusive. As we continue to focus on operating a streamlined 
and efficient company, our employees know that the most important 
contribution they make is doing their jobs safely.
    The seventh and final area of cost reduction initiatives includes 
looking at ways to streamline our headquarters and administrative 
functions. As American's losses continue to mount, we're leaving no 
stone unturned, reducing everything from staffing to paper paychecks to 
the way we buy our supplies. So far, we've implemented and/or 
identified cost-savings in management productivity, supplier strategy, 
facilities consolidation, capital spending, human resources and 
accounting. Combined, these savings total more than $500 million in 
reduced annual expenses. Here's a closer look at what we've done in 
each of these areas.
    We are lowering the cost of purchasing goods and services by 
rigorously examining everything we purchase and determining ways to 
save every possible dollar. We are combining volumes of business with 
suppliers to get higher discounts, reducing inventory levels, rolling 
out global sourcing strategies, utilizing eBusiness tools and 
identifying opportunities to lower our suppliers' costs that are passed 
on to us.
    In conjunction with looking at how we work, we're looking at where 
we work. Every square foot of space we can give back to the landlord 
saves us money.
    Airport construction projects have been either deferred or scaled 
back significantly, saving more than $250 million in capital 
commitments. Those few projects that are going forward are, in most 
cases, projects that would cost more to cancel or are being funded 
directly by the airport. We've also cut capital spending in other 
areas. Since the fourth quarter of 2001, we have deferred the delivery 
of 40 aircraft, saving over $3 billion. And we've cut spending on 
aircraft modification projects, information technology and ground 
equipment. In total, we have deferred more than $4 billion in capital 
spending from our pre-9/11 plan.
    In the Human Resources area, we are aggressively using automation 
to move paper processes and human-assisted transactions to online self-
service. Ultimately, Jetnet, our employee Internet portal, will be a 
convenient, one-stop resource: ``From hire to retire, everything 
online.'' Already, our employees can go to Jetnet for benefits 
enrollment, pension/401k transactions, employee support and payroll 
services, company communications personalized to each workgroup, real 
time operations information, policy and technical manuals, and company 
reference information. In addition, all employee travel is planned and 
booked online, executed via self-service check-in, and will be 
completely paperless in 2003.
    We are looking at ways to battle skyrocketing health benefit costs, 
a problem not just for American, but for corporate America as well. We 
are increasing our focus on preventative healthcare, encouraging the 
use of generic versus brand drugs, and requiring higher co-payment 
amounts, resulting in more than $14 million of cost avoidance.
    We've made similar automation strides in accounting, with a 
relentless focus on going paperless. In payroll, disbursements, and 
revenue accounting, we are moving rapidly to 100 percent electronic. 
These efforts will produce great savings for us, and greater service 
for our customers.
    Since September 11, American has reduced its management and 
administrative headcount by 22 percent. In addition, management 
employees have received no pay increases since 2000, and will not see 
one in 2003. Company wide, across all labor groups, job reductions to 
date total about 27,000, and--unfortunately--we're not out of the woods 
yet. As we adapt to the new and increasingly low cost business model, 
our company will look very different from what we've known in the past. 
Our ability to adapt will be critical to our survival.
    Many of these cost cutting ideas were submitted by our employees. 
Our people stepped up to the plate in a big way when I asked for cost-
savings ideas. They submitted ideas that ranged from revising our 
headset policy to limiting the distribution of ticket jackets. To date, 
thousands of ideas have been received. Of these, hundreds have been 
implemented and dozens more are under review. When tallied, we estimate 
that employee ideas have saved the company hundreds of millions of 
dollars.
    So far I've talked about restructuring in seven major areas where 
we've been actively seeking to reduce costs. In total, these changes 
will produce $2 billion of annual cost savings when fully implemented. 
With that being said, I haven't addressed an area equally important to 
our recovery--that is restructuring our labor costs. Labor is our 
company's single greatest expense and, with the exception of taxes, our 
fastest growing expense. In fact, at about 40 percent of our total 
operating costs, it's more than three times our next biggest expense.
    Despite its importance, there's a reason I mention labor costs 
last. Unlike some of our competitors, we recognized early on that the 
industry's problems were structural and not simply the result of a 
typical business cycle. And so, rather than merely cut pay and 
benefits, we took a different tack in attempting to solve our financial 
problems. Instead, we first set out to do everything that was under 
management's control to change how we operate, increase efficiency, 
eliminate waste, cut expenses and so on--all encompassed in the seven 
areas that I've just discussed with you.
    Throughout that process, we have valued labor's input. And indeed 
they have certainly borne their share of our common challenge thus far, 
with the staffing cuts that I've mentioned previously and by working 
harder and doing more with less. But because our financial task is so 
great, we must also examine our labor costs--just as we have in every 
other area--if we are to stem our losses, remain competitive, and 
return to profitability. That's not an easy thing to do, indeed it can 
be extraordinarily difficult for everyone, but it must be done.
    Toward that end, we've met with our unionized groups, as well as 
our non-represented employees, all across the company to ask for their 
help. We've explained our situation clearly and even given them 
complete access to our financial data so they could make informed 
decisions. To date, we've asked that everyone forego scheduled wage 
increases next year--management included. We must go further, however, 
and we're requesting productivity improvements and increased 
flexibility from all work groups to lower our labor costs.
    Through it all, we've worked hard to build credibility between 
management and labor. Our goal has been to create a partnership that 
will allow us to successfully meet the fundamental challenges we face. 
It's time now for that partnership to produce results, beginning with 
an acknowledgement of the depth of our problems, a recognition of the 
changing nature of our true competition and a restructuring of our 
labor agreements to allow us to effectively compete. We're hopeful 
we'll be successful in that regard. As I continue to tell employees at 
our town hall meetings, we have an opportunity to demonstrate to 
ourselves and to the world that an airline can save itself by working 
together, cooperatively and creatively.
    In a peculiar way, however by emphasizing the positive steps that 
we are taking and our determined spirit of optimism, I worry that I 
have understated the magnitude of the crisis and the importance of your 
role in working with us to solve the problems of our industry.
    There are, in fact, two more clouds on the horizon that are very 
troubling. First is the rapid increase in fuel prices. One of the few 
things that saved us last year was a substantial drop in year-over-year 
fuel costs. Those savings are now long gone. Fuel is spiking rapidly 
and this will add significantly to our cost challenges in the months 
ahead. This is, perhaps, as much driven by the situation in Venezuela 
as by the Middle East crisis. But it is a very real problem indeed. 
Moreover, the predicted colder winter in the Northeast will add further 
to the problem since jet fuel and home heating fuel are, for the most 
part, the same commodity and increased demand for either drives up the 
price for both.
    The second cloud is the impending conflict in Iraq. If the history 
of the Gulf War is any indication, a conflict in Iraq will have very 
profound and adverse consequences for the airline industry. We are 
planning for this probability to the best of our ability. But a 
combination of even higher fuel prices, together with a precipitous 
drop in demand, will be an extraordinary challenge for us all.
    A year ago, this Committee and the leadership of Congress rallied 
in a time of crisis to provide us a lifeline. I simply can't state 
strongly enough how important that was. You literally saved our 
industry. We continue to be grateful beyond words.
    As I have indicated in this and previous discussions, we continue 
to need your help in the areas of security costs and taxes; however, 
that is not my primary mission today. Rather, my goal is to let you 
know that we are exhausting every conceivable means of self-help. At 
American that process is not yet complete. Our dialogue with our 
employees is intended to build a consensus within our company about a 
survival strategy. I can assure you there will be sacrifices needed by 
every single person involved, including, most certainly, both myself 
and the officers of the company. Indeed, the largest cuts to date have 
been in management--22 percent are gone permanently. By most corporate 
standards, we are running a very lean machine. After 9/11 all the 
officers took pay cuts, bonuses were eliminated, and managers' salaries 
were frozen.
    In summary, that is our situation as of January 9, 2003. We hope it 
will improve and are doing everything in our power to make that happen. 
And finally Mr. Chairman and Members of the Committee, we are most 
grateful for both the reality and the symbolism of the Committee 
choosing the concerns of the airline industry for one of its first 
hearings of this Congress. We look forward to continuing this dialogue 
and working with you throughout the year.

    Senator Rockefeller. Thank you, Mr. Carty.
    Mr. Anderson, you will be next.

  STATEMENT OF RICHARD H. ANDERSON, CHIEF EXECUTIVE OFFICER, 
                    NORTHWEST AIRLINES, INC.

    Mr. Anderson. Thank you, Mr. Chairman, and first, both as 
CEO of Northwest Airlines and as chairman of the Executive 
Committee of the Air Transport Association I want to express 
our thanks to this Committee and the leadership that it has 
provided. I agree with Mr. Carty in his statement that but for 
the work of this Committee after 9/11, including the work on 
the Transportation Security Administration, that has been vital 
to where we are today in the industry, that without your help 
and assistance in the post 9/11 environment, I dare say the 
circumstances we would be discussing here today would actually 
be far worse, if you could imagine that.
    With that said, you really need to understand what the 
industry faces today in the context of deregulation. 
Deregulation set about changing dramatically our industry--and 
I am sure the father of deregulation, sitting down at the end 
of the table, will have a much better vantage point on this. 
Deregulation at a macro level has been a great success.
    The safety record of the industry is phenomenal. Nominal 
air fares since deregulation have gone down 50 percent in 
constant dollars from 1980 to 2001, and we hit nearly 700 
million passenger enplanements in the year 2000, so by all 
measures, air transportation has gone down in cost, safety has 
gone up, and air transportation has become much more accessible 
to many more Americans.
    With that said--this is the third inflection point in this 
industry since deregulation. If you will recall, in 1980 with 
the failure of Braniff Airlines, we had a really significant 
down cycle in the industry. At the time of the Persian Gulf 
War, which saw the loss of Pan American World Airways and 
Eastern Airlines and Midway Airlines, we had another inflection 
point, and we are actually at the third significant inflection 
point in the post-deregulation environment, and the changes 
that are being made that many of the speakers before me, or the 
two speakers before me have highlighted, are permanent.
    And I think the permanence, without going into any other 
fact, in 2002, the airline industry will have $19 billion in 
fewer revenues than it did in the year 2000. So, you 
essentially have businesses that today are operating on the 
same revenue streams that they had 6 years ago, and those 
changes are permanent. We can go into a lot of the reasons, the 
reasons being the impact of the Internet, the impact of new 
entry into the marketplace, but they are a reality that 
ultimately we have the responsibility as the leaders of these 
companies to fix. It is not at its core a government 
responsibility with respect to private industry righting its 
ship.
    What have we done? Why are we here? We have talked about 
recession. We have talked about a significant reduction in 
business travel, the fall-off in travel after 9/11, and the 
continuing aftermath of the impact of 9/11, and more 
particularly now the war in Iraq, and the effect that the 
possible war in Iraq has, particularly on airlines that operate 
internationally, is very significant.
    What have we done about it? It is first and foremost our 
responsibility, and Senator McCain, you mentioned Northwest 
eking out an operating profit in the third quarter of this 
year. It was as the result of some very painful and difficult 
decisions that we had to take along the way, like laying off 
12,000 employees, closing a maintenance base in Atlanta, 
closing an engine shop, and basically going through our 
business and eliminating every unnecessary expense, including 
merit increases for officers of the company, reducing the 
number of officers at the company, imposing a 20 percent health 
care premium on our employees, and virtually going after every 
single expense at the company.
    Those efforts have to continue, but in the end, it is our 
responsibility to get our costs in line with the ability of our 
airlines to generate revenues.
    Now, there have been discussions about the hub-and-spoke 
system, and I would submit to you that the hub-and-spoke system 
is first the product of a deregulated market. One of the first 
significant events after deregulation in a free marketplace was 
the evolution of hub-and-spoke systems.
    Second, airlines did not invent hub systems. They were 
actually invented by railroads and steamship companies, and it 
just so happens that most of the large hubs in the United 
States today happen to be in the same place where railroads 
built hubs, because it makes logistic sense to gather traffic 
and cargo and bring them into hubs and then redistribute, and 
if you look at even the low-cost carriers, several of the low-
cost carriers operate hub-and-spoke systems. AirTran has a hub 
in Atlanta, Frontier has a hub in Denver, America West operates 
a hub in Phoenix, and Southwest Airlines relies on almost 30 
percent of its traffic in hubbing kind of traffic. That is, 
flow traffic and through traffic. Most particularly, hubs are 
how small communities are served.
    I actually have a slide that I brought (before I knew that 
Senator Lott would have his new position) that shows our 
service to Mississippi versus Southwest Airlines service to 
Mississippi. Southwest Airlines serves one city in Mississippi. 
Northwest Airlines serves seven cities in Mississippi, and we 
serve them every day, three times a day. We can take you to 
Minot, North Dakota, Brainerd, Minnesota, and on one stop put 
you in Tokyo.
    We serve Bangkok, we serve Regina, Saskatoon. Most of the 
low-fare carriers have one fleet type, and they tend to serve 
large markets. They do not serve international destinations at 
all. It is very expensive operating a fleet of 40 747's, but 
from the standpoint of a global aviation community, and the 
importance, I know in the communities that I serve, where we 
have our hubs, our international service is critical to the 
auto industry in Detroit, and our international service in 
Minneapolis is critical to the success of 3-M and Target and 
Cargill, and the large companies that are the backbone of the 
economy in our communities.
    We have ultimately the responsibility to right our ship, 
and I agree with Don Carty when he says we are not here asking 
for anything, but it does bear pointing out several issues with 
respect to the intersection of our business and government.
    First, the Transportation Security Administration and the 
legislation this Committee created was exactly what the 
industry needed. The TSA has done a great job implementing that 
legislation, but much of the burden, including the cockpit 
doors that were intended by this Committee to be covered by the 
Transportation Security Administration, has not been covered by 
the Transportation Security Administration. The reality is 
there are significant financial burdens that remain on the 
airline industry that were intended by the legislation to be 
borne by the TSA.
    Second, our cargo and mail revenue, a very significant 
portion of airline operations, has essentially been cut in half 
post 9/11 because of restrictions in the post-9/11 environment.
    Third, market solutions like the Delta-Continental-
Northwest alliance should be allowed to work. We are a 
deregulated industry. The Justice Department has clearly said 
there are no antitrust issues with respect to our alliance, and 
we should be allowed to go forward with a marketplace solution.
    Fourth, in my testimony, I have put a simple map in, or a 
simple chart in that shows that on the average round trip 
ticket in the United States today, the tax is 26 percent. It 
has gone up; that tax has gone up 145 percent in 10 years.
    Next, the CRS rules--the Department of Transportation has 
proposed rescinding the computerized reservation system display 
rules, and we endorse that effort on the part of the Department 
of Transportation. One of the very real significant costs that 
we have as legacy airlines is the cost of distribution, and the 
distribution costs are really driven by the CRS rules, which 
are a legacy of regulation, and those rules need to be 
repealed.
    And lastly, I would leave with you that we absolutely and 
completely support our government in its efforts in the Middle 
East. Many of our pilots are flying there. Many of our 
mechanics are working on those airplanes, and our airlines have 
the responsibility, and the Civil Reserve Air Force, to provide 
full support.
    With that said, the impact of what is going on in the 
Middle East is very significant now. The price of a barrel of 
oil has been hovering from $30 to $32 a barrel. That number 
should be down, in a free market sense, in the $22 to $25 a 
barrel, and we know from our experience in the Persian Gulf War 
that in the event there are hostilities, that number will jump 
up to over $40 a barrel. Fuel represents, after labor, the 
second-largest item of cost on our statement of operations.
    Once again, thank you for the opportunity. I am sorry the 
red light went on, but we do appreciate the opportunity to be 
here today, and look forward to your probing questions.
    [The prepared statement of Mr. Anderson follows:]

  Prepared Statement of Richard H. Anderson, Chief Executive Officer, 
                        Northwest Airlines, Inc.

    Mr. Chairman, Members of the Committee, my name is Richard 
Anderson, and I am CEO of Northwest Airlines. Mr. Chairman and Senator 
Hollings, thank you and the Committee for all of the support you have 
given this industry, particularly in the last year. Unfortunately, the 
financial viability of the industry continues to deteriorate and we are 
confronting new economic challenges. I appreciate your holding this 
hearing to discuss the struggles we face.
    I would like to begin today by stating three general principles 
that I believe are a necessary starting point for any analysis of the 
current state of the airline industry or any discussion of possible 
prescriptions for curing the severe problems it currently faces:
    First, a viable and convenient air transportation system is an 
indispensable component of a well-functioning U.S. economy and has 
developed into a critical element in the quality of life enjoyed and 
expected by most Americans. Our air transportation system is the best 
in the world, as deregulation has been a tremendous success. Aviation 
safety has dramatically improved since 1978; the average fare has 
steadily decreased as more and more Americans have had access to the 
air transportation system at affordable prices.
    Second, network airlines, with their hub and spoke systems, have 
viable business models and will continue to be the most efficient means 
to provide high frequency, convenient air transportation service 
domestically and internationally, to the vast majority of Americans, 
particularly to those located outside the major metropolitan areas.
    Third, the U.S. airline system, in general, and the network 
airlines in particular, are currently facing their most significant 
challenges since deregulation. The industry is facing permanent changes 
to the revenue model that has fueled the tremendous growth and success 
of commercial aviation in the two decades since deregulation. What is 
this permanent change and how has it manifested itself? Put simply, 
passenger and cargo revenues have declined sharply for the whole 
industry. Beginning in February 2001, we saw a precipitous drop in 
overall airline industry revenue. Then September 11th occurred and 
devastated the industry. We had hoped for passenger traffic and yield 
recovery in the second half of 2002. That recovery did not occur. 
(Attachment 1 illustrates the revenue shortfall). U.S. carriers are 
projected to lose more than $7 billion in 2002, and could lose another 
$3 billion in 2003 before reapproaching profitability in 2004.
    Two statistical comparisons will bring home the dramatic nature of 
the challenge we are confronting in the airline industry.

    Northwest in 2002 operated an airline about the same size 
        as we did in 1996. And we will be lucky to have about the same 
        revenues in 2002 as we had in 1996. But to run the same size 
        airline, our costs will be over $1 billion higher in 2002 than 
        they were in 1996.

    At Northwest, comparing August 2002 to August 2000, our 
        actual passenger revenue declined 20 percent, on 9 percent less 
        capacity, and 500,000 fewer enplaned passengers, an 8 percent 
        decline. During the same time period, Northwest's total 
        operating expenses declined 11 percent.

    What are the reasons for this precipitous drop in revenues? First, 
is the economic recession. We at Northwest recognized early on the 
impact on our business of the recession and immediately took action to 
begin reducing our costs. But the recession turned out to be even 
deeper than we, or most others, thought it would be. And, perhaps more 
importantly, the recession has had a much larger impact on business 
travel than anyone could have anticipated based on past experience. 
Business passenger revenues for the industry are down 21 percent for 
the first 11 months of 2002 as compared with the same period in 2001 
and they were down 36 percent as compared with the same period in 2000. 
As you can see from those numbers, the revenue problem is severe.
    A second, and undeniably substantial, contribution to the 
industry's financial difficulties was the September 11 attack, which 
caused the entire system to be shut down and passengers to be stranded, 
sometimes for days. The overall effect of September 11th and its 
aftermath have produced an even greater dampening effect on demand for 
air transportation service. And here again, the impact has been 
disproportionately on business travel, by making the product less 
convenient and hence less valuable, further reducing the willingness of 
business travelers to pay a premium price.
    Third, there has been a fundamental change in passenger buying 
habits. Business passengers (and their employers) have become much more 
price conscious--and more willing to trade inconvenience for a lower 
price (a phenomenon that is not unique to airlines).
    These factors that have produced the current state of affairs, I 
would submit, have been not only dramatic and fundamental, but to a 
large degree, have become permanent, irreversible features of the 
industry landscape. Plainly stated, passengers are accustomed to paying 
lower fares, especially for business travel, than they were willing to 
pay just a few years ago. This is not to say that the economy won't 
recover; but we will not see again soon, if ever, the level of economic 
activity during the bubble years of 1999/2000, and we will certainly 
not see the willingness to pay significantly higher premium fares for 
domestic business travel. Moreover, the sustained growth of low cost 
carriers means that consumers will continue to have ever-increasing 
opportunities to make travel choices based on price. Added to this, the 
Internet is a powerful and ubiquitously available enabler of individual 
consumer choice. It thus will continue to be a mechanism for driving 
the widespread availability of low fares.
    How should airlines address these challenges? On behalf of 
Northwest, here is what we are doing. First, one thing has not changed 
in the way we conduct our business. Our first priority has been, and 
will continue to be, the provision of a safe, reliable transportation 
system that provides convenient service to our customers. While we have 
not departed from our fundamental business mission, we recognize that 
because we have a cost structure that is higher than our revenue 
generating capability, we must match our costs to the revenue 
generating capacity of our network.
    Northwest is often identified as being in relatively better 
financial condition than many of the other major carriers. One reason 
for this is that we recognized the need, and had the will, to take 
early action to cut costs as the drop-off in demand began to 
materialize in 2001. Beginning early that year, we implemented two 
rounds of cost cutting before September 11th. And we've implemented 
additional rounds of cuts since then.
    During 2001 and 2002, Northwest substantially cut flying, and with 
that the staffing levels and fuel expenses that went with those 
flights. Those flying-related cost reductions total $1.2 billion per 
year. More importantly, we've implemented an additional $1.2 billion 
per year in permanent cost reductions in 5 rounds of actions, before, 
during, and after September 2001. We've cut distribution costs. We've 
cut management headcount by 24 percent (1,350 positions). We have also 
eliminated 24 percent of our contract employee workforce--that's 11,980 
positions eliminated. We've eliminated some major facilities entirely. 
We've accelerated the use of technology.
    Throughout this crisis, we have met regularly with the leaders of 
our employees. We have three union representatives on our board and our 
employee leaders have been kept fully up to speed on Northwest's 
financial outlook and the challenges we face together. Frankly, we, as 
with most other U.S. carriers, have collective bargaining agreements 
whose foundations were built in the era of regulation and which were 
negotiated in the context of a business model that is dated.
    While each airline must be responsible for solving its own 
problems, actions by the Federal Government have sometimes added to, 
and complicated, this task.
    First, we fully support and commend the Congress and DOT for the 
work on security. But, much of the burden and costs of implementing 
security safeguards mandated by the Federal Government has been placed 
on the industry. Airline tickets already bear a September 11th security 
fee. To that is being added extra charges in the form of un-funded 
mandates on airports and airlines, requiring them to bear the costs of 
various federal security functions: the provision of TSA office space 
at airports; security at airport perimeters; additional local law 
enforcement officers at airports to meet new TSA requirements; airport 
screening of caterers and other service employees; the funding of much 
of the build-out of airports needed to deal with new TSA requirements; 
and the payment of the costs of the permanent cockpit door 
modifications, much of which remain un-reimbursed. Congress rightly 
made all of these functions federal responsibilities in the Aviation 
and Transportation Security Act. And they ought to be funded 
accordingly. Second, we have had to bear the loss of revenue from 
prohibitions on carrying significant amounts of mail and cargo.
    Third, consistent with Congress' intent in deregulating the 
industry, the government should allow carriers to innovate and compete 
to the same degree as firms in other unregulated industries. One of the 
major initiatives we have taken in aid of our recovery is to propose 
expansion of our existing, and highly successful, code sharing alliance 
with Continental to include Delta Air Lines. Northwest, Continental, 
and Delta last August submitted the proposed marketing agreement to 
DOT. It involves the same features as our current alliance with 
Continental and as the United/US Airways agreement that DOT cleared 
after a brief review. Like these other alliances, our marketing 
agreement preserves the competitive independence of the carriers, as 
well as their incentives to compete. There is no antitrust immunity 
being requested, so the carriers remain fully subject to the antitrust 
laws. Like the other two alliances, the marketing agreement promises 
substantial consumer benefits in terms of broader network offerings, 
new online routes, improved service on existing routes and expanded 
frequent flyer and lounge program benefits. These service enhancements 
will stimulate consumer demand and thereby allow each of the carriers 
to earn critical incremental revenues.
    The Justice Department completed its review of the marketing 
agreement last October, based on our agreement to conditions that we 
understand to be identical to those required of United/US Airways. 
Nearly three months later (and more than five months since we submitted 
the agreement), the Department of Transportation remains enmeshed in 
its review of a proposal that does not present any issues that were not 
equally presented by the United/US Airways agreement, which DOT cleared 
after a review period of a little over two months. We are not asking 
for special treatment; only that the Federal Government provide 
equitable treatment, particularly in view of the extreme importance of 
the marketing agreement as part of our recovery plan.
    Fourth, the airline industry is overtaxed. In 1972, shortly after 
the Aviation Trust Fund was established to support airport and airway 
development and ticket taxes were imposed, 7 percent of an average 
ticket went to ticket taxes and fees. By 1992 that figure had increased 
to 10.5 percent. Today the taxes amount to 26 percent of the average 
ticket, counting ticket taxes, security fees, and PFC's authorized by 
the Federal Government. (Attachment 2 illustrates the tax burden on a 
typical ticket). In the case of the most deeply discounted tickets, 
over 40 percent of the ticket price can be accounted for by government-
imposed ticket taxes.
    These taxes and fees are simply too high and they cannot be passed 
on to passengers in the form of higher ticket prices. This means that 
they are an added cost at a time when we are already under tremendous 
pressure to cut costs throughout our system.
    Fifth, despite steps we have taken, distribution costs remain one 
of our highest cost categories. In particular, U.S. airlines pay over 
$2 billion per year in Computer Reservation System fees, fees that the 
Departments of Justice and Transportation have long found to be 
excessive. We are not asking for any extraordinary relief here, only 
the chance to bargain for better fees, just as we bargain over the 
price of any other goods or services we buy. The Department of 
Transportation has recently proposed changes to the CRS rules that 
would create the possibility that we could bargain with the CRSs for 
more reasonable fees. This is a modest but necessary step in our 
ability to get these excessive costs under control, and I commend the 
Department for their proposal. It would in fact be one of the few ways 
we could reduce costs without either reducing amounts paid to employees 
or air service to communities.
    Sixth, the overhang of war in the Middle East and its impact on 
fuel prices and demand is one of the biggest risks facing the airline 
industry right now. A war with Iraq would raise fuel costs, lead to a 
drop in passenger traffic and increase security measures at airports 
and airlines as further security precautions become necessary. In 
addition, carriers would have to bear an extra cost for rerouting their 
flights around air space in the Middle East. War would delay any 
recovery in the industry that is still under severe strain from the 
effects of the terrorist attacks of September 11th.
    I want to thank the Committee again for its interest in these 
issues of critical importance not only to the industry, but also to the 
traveling public. Notwithstanding the huge challenges we face, I am 
optimistic that we will find a way to navigate through this storm. The 
airline industry is an indispensable component of our national economy. 
With responsible action by the Federal Government, airlines and their 
employees will rightly be held responsible for their own successes or 
their failures. We at Northwest intend to succeed. I would be happy to 
take any questions the Committee may have.




    Senator Dorgan. (presiding) Senator Rockefeller will return 
momentarily.
    Next to testify is Duane Woerth, president of the Air Line 
Pilots Association. Mr. Woerth, why don't you proceed.

   STATEMENT OF CAPTAIN DUANE E. WOERTH, PRESIDENT, AIR LINE 
               PILOTS ASSOCIATION, INTERNATIONAL

    Mr. Woerth. Thank you, Senator. Thanks to all the Members 
of the Committee. Thanks particularly Senator McCain and 
Senator Hollings for the invitation to testify. I am president 
of the Air Line Pilots Association, which represents 66,000 
airline pilots who fly for 42 airlines. I am also a vice 
president of the AFL-CIO's Transportation Trades Department. We 
represent in that body the mechanics and the flight attendants 
and the customer service agents, and certainly even those on 
the manufacturing side which have been impacted by this. This 
is affecting Boeing. This is affecting all the manufacturers. 
This is affecting all the avionics people.
    Basically, about 150,000 people in the aerospace business 
have lost their jobs since September 11. I think what we have 
to focus on, what is different about this recession? We are 
deregulated. We live with the ups and downs of the economy. 
Every time there has been a recession--I have been in this 
business 25 years--people get laid off, and people take pay 
cuts. That happens every time. When we recover, we try to get 
pay raises and make our life a little better, but what is 
different this time is the war on terrorism, and we need to 
focus on that distinction.
    We are a global industry. We buy our airplanes from the 
same two manufacturers. We buy our fuel in a global market. We 
even use the same capital markets. Half our loans are from 
Japanese or German banks. It is a global industry, but the 
industry is not in trouble globally. It is only in a crisis in 
the United States of America, and the only thing that is 
different between Lufthansa and KLM and the Japanese carriers, 
and even Canada and Mexico, who are making money, is we are 
fighting a war on terrorism, and we have extraordinary costs. 
It has affected our consumers, and it has affected them in a 
dramatic way.
    I think the most important debate that was started before 
you all adjourned at the end of the last session was over 
homeland security. That is probably the most important thing in 
front of this country, along with fixing our economy.
    So, the debate centers on this for our industry. What is 
the appropriate amount of cost to be borne by the airlines and 
its passengers or cargo shippers, and what is an appropriate 
cost of homeland defense? We are not just defending airplanes. 
We are defending citizens in the cities. We learned that in New 
York City. It could be true in Chicago, in Los Angeles, any 
place in this country.
    Homeland security is defending the Nation, not just the 
airline industry. So I think we need to have a full and fair 
debate on what is the appropriate cost for the airlines and 
their passengers to bear, and how much of this security--should 
be borne by the TSA and the Homeland Security Department.
    I would also think Congress would like to review the 
intention of the Air Stabilization Act and how it was applied. 
Certainly--and I really appreciate all your efforts. ALPA 
worked with all of you, in the rapid response that this 
Congress displayed--30 days after September 11, you had passed 
legislation in both bodies, and I am very much grateful for 
that effort. But none of us probably knew or suspected at that 
time how bad the industry was going to get, how long it would 
take to recover. The $5 billion in grants, as Secretary Shane 
has stated, has pretty much been granted, but two-thirds of 
that package was $10 billion in loan guarantees, and I am 
wondering, did Congress intend that that money not be actually 
used, or was it to stabilize the industry?
    The result is, we do not have a stabilized industry, and 
most of that $10 billion in loan guarantees was never used, and 
I think we deserve, and I think you deserve an explanation from 
those in the Administration administrating that program. Is 
that what you intended, that none of this money would be loaned 
out? I think that was a mistake.
    The third thing I would like to address is that we have 
another disaster coming down the road. It is the time bomb of 
the problem in the airline business, and that is with pensions. 
Because of pension law, the crisis has been deferred. The law 
allows many months, 18 months, 24 months before you have to 
catch up with your pension obligations. Well, that time is upon 
us, and certainly at places like US Airways, we are at a crisis 
point.
    I think you are probably aware both Senator Specter and 
Senator Santorum will be offering some legislation that would 
help the PBGC stabilize the pension system so we can amortize 
them over a longer period of time and not force these things 
into distress terminations and cause a great burden to the PBGC 
and also harm the workers.
    Lastly, I must say that I think it is a poor workman who 
quarrels with his tools, and I am referring to trying to amend 
the Railway Labor Act to protect us from ourselves. The Railway 
Labor Act produces contracts 99 percent of the time. Only about 
once every 10 years do we have a strike in this business, but 
in spite of dozens and dozens and dozens of airlines--I 
represent 43 airlines, 42 airlines now after some mergers, and 
only every 10 years do we have a strike, so if any law produces 
99 percent success, how are we calling that a failure, and why 
should I blame, or ask Congress for an arbitration--a 
compulsory arbitration--instead of solving the problems 
ourselves, and not have any buy-in from the workers or 
management?
    I do not think removing the collective bargaining rights--
and that is what this does--if anybody would make compulsory 
arbitration, collective bargaining would be over. I do not 
think any of these executives who might be pushing this would 
accept this in any other part of their business. Would you 
accept arbitration of your fuel bills? Would you accept 
arbitration of the price of your airplanes? For the price of 
your jetway? Of anything? Free enterprise, free markets, 
collective bargaining is a part of that, and we should not 
willy-nilly eliminate those rights.
    I believe that as a union president--it is my 
responsibility to get it right with bargaining, to work with 
the National Mediation Board and get it done with management 
cooperatively. I think it is too big, and a risky and 
unnecessary step to try to make compulsory arbitration. It is 
provided voluntarily in the act now, and the president has a 
way to protect the public with a presidential emergency board. 
I think this is a solution in search of a problem.
    Thank you.
    [The prepared statement of Mr. Woerth follows:]

  Prepared Statement of Captain Duane E. Woerth, President, Air Line 
                   Pilots Association, International

    My name is Duane Woerth, and I am the President of the Air Line 
Pilots Association, International. ALPA represents 66,000 airline 
pilots who fly for 42 U.S. and Canadian airlines. I also appear as a 
vice president for the Transportation Trades Department, AFL-CIO, whose 
35 member unions represent several million transportation workers 
including the vast majority of the nation's airline employees.
    We sincerely thank you Chairman McCain for inviting ALPA to present 
our views on the state of the airline industry and our recommendations 
for solving some of the industry's problems while protecting the 
interests and jobs of America's aviation workers.
The State of the Airline Industry
    The New Year opens with the airline industry experiencing problems 
of catastrophic proportions. Revenue losses are considerable: industry 
analysts estimate that losses for 2002 will total $7.4 billion compared 
to a 2001 loss of $6.2 billion. The industry experienced a net loss of 
$1.6 billion, and stock values plummeted--dropping 54 percent for the 
major airlines just for the third quarter.
    The Airline Index as of January 3, 2003 is shown below as Figure 1.

    
    

    Two major airlines are in bankruptcy.
    In addition, general industry forecasts are difficult to determine 
due to a number of events. The combination of an unstable economy, the 
continued threat of terrorism, and possible war all factor into the 
possibility for recovery or the potential for further erosion of 
industry income. Analysts have been revising their forecasts downward 
throughout the year. It is projected that the industry will experience 
a $3-4 billion net loss for 2003. (Figure 2)




    Other factors are contributing to this bleak forecast. We are 
seeing a second round of global furloughs for airline employees. For 
bankrupt carriers US Airways and United this will mean more employee 
cuts. Revenue levels continue to deteriorate with estimates for 2002 at 
25 percent below 2000 levels. (Figure 3).




    The current environment continues to challenge the industry. 
Customer behavior changes have been seen by the weak passenger mix, as 
the business passenger has sought lower fares. The airlines' inability 
to raise fares in a time when the airlines have little pricing power is 
having a very negative effect on profitability. Below find Figures 4 
and 5, which show the decline in Domestic and International, fares.



    Fuel prices remain volatile and the debate looms regarding the 
potential impact the industry will face if the U.S. goes to war in Iraq 
(Figure 6).




    Travelers continue to be deterred from air travel due to the 
``hassle factor'' and are using alternate forms of travel. Single day 
business trips are now being conducted by conference calls.
    Indeed, the state of the industry was characterized as being in an 
``economic meltdown'' in a recent speech by Carol Hallett, Air 
Transport Association President and CEO.
    For airline workers, the consequences have been devastating. More 
than 150,000 airline and aerospace employees are now laid-off and 
thousands more brace for lay-off as air carriers struggle to emerge 
from or avoid bankruptcy and aircraft purchases continue to sag. And I 
remind the Committee that those workers were among the first to 
experience the dire economic consequences of 9/11 as thousands have 
exhausted their unemployment benefits and health care coverage.
    To date, nearly 7,000 ALPA pilots are out of work, with more 
furloughs predicted. Within the next two months, we could see this 
number grow to nearly 8,000 very qualified and experienced pilots out 
of work. In an effort to help their airlines reduce costs, pilots have 
made major concessions, agreeing to significant pay cuts and other 
benefit reductions. What is the result of these concessions? Well Mr. 
Chairman, US Airways pilots took a $465 million cut effective last year 
with an additional $101.3 million, excluding pension savings, for a 
total of $566.3 million average per year. These average annual pilot 
cost savings are effective through December 31, 2008. United Airlines 
pilots, just yesterday, ratified a 29 percent wage cut package.
    These concessions are just those made by the pilots. They do not 
include the concessions made by all the other employee groups.
    In addition, we are seeing degradation and, in some cases, total 
elimination of long-held airline employee retirement and insurance 
benefits. These benefits were bargained in good faith, in lieu of 
direct compensation, with the expressed purpose of protecting pilots 
and their families before and after their employment years ceased. In a 
cruel twist of fate, pilots have made meaningful concessions to protect 
these benefits and then seen a confluence of negative events, beyond 
labor's control, conspire to further jeopardize their retirement 
security. These ongoing events include an extremely negative stock 
market performance and a historically low interest rate environment 
that mandates additional retirement funding charges, at a point in time 
when air carriers can least afford to pay.
    The consequences of this meltdown are so grave that in that same 
speech, Ms. Hallett stated that, to save the industry it may, and I 
quote, ``necessitate nationalization of the industry.''
ALPA Recommendations
    I think we all agree that nationalization is not a solution to this 
crisis. I'm not sure that some form of re-regulation might not be 
required, however, that is a discussion for another day.
    There are other solutions that can be implemented right now that 
can turn this industry around. However, everyone must do their part and 
take immediate action to implement these solutions.
    ALPA pilots are committed to ensuring the survivability of the 
industry. They are doing their part and will continue to work with 
management, federal agencies and other industry organizations to return 
the industry to viability. They are working with management to reduce 
costs and help establish financial stability through reductions in pay 
and benefits and increased productivity.
    Airlines are working to find ways to reduce costs, and Congress has 
enacted legislation and established an oversight Board to help the 
airline industry. While we applaud these efforts, though, they are not 
enough and to this day, despite bipartisan support for action following 
9/11, Congress and the President have failed to provide relief to the 
staggering number of jobless aviation industry employees who, through 
no fault of their own, are out of work and have no reasonable 
expectation of becoming re-employed in the foreseeable future.
    We must make a concerted effort together to turn the industry 
around.
    First, the Air Transportation Stabilization Board needs a course 
correction. Congress charged the ATSB with providing airlines with loan 
guarantees to help ailing airlines weather the effects of 9/11. But to 
date, it has failed to carry out this charge. It has turned its back on 
several airlines--two of which are in bankruptcy, and one that is out 
of business because they didn't get help. The Board must be held 
accountable. Either change the law so that the Board must carry out its 
mandate, or replace it with a more responsive and responsible entity.
    Next, we must provide major tax relief for the airline industry. 
Taxes are choking the industry to death. Airlines face a myriad of 
charges on passengers, fuel, cargo, and security. They are able to keep 
far less of a percentage of their revenue generated from passenger 
ticket price and cargo fees than carriers from many other countries.
    Currently, airline travel is the highest taxed good or service 
available (Figure 7). Airline passengers who buy a single-connection 
roundtrip ticket for $200 can expect 25.6 percent of their ticket 
charge to go to the Federal Government in taxes and fees (Figure 8). In 
1972 and 1992 the taxes represented 7 percent and 15 percent, 
respectively, of the total ticket fare. A comparable trip for $100 gets 
taxed a massive 44.2 percent! (Figure 9) (PFC in Figure 8 and 9 is the 
passenger facility charge.) The airline industry's tax burden must be 
reduced.



    Third, Congress must take action to ensure employee pensions are 
protected. If the Pension Benefit Guaranty Corporation is unwilling to 
use its broad mandate to take action necessary to preserve pensions 
such as those at US Airways, Congress must act. ALPA and US Airways 
seek to amortize the payments necessary to fund the pension plans over 
a thirty year period consistent with their business plan as a basis to 
secure the ATSB loan guarantee and emerge from bankruptcy.
    Fourth, Congress must provide extended jobless assistance to the 
laid-off workers in this industry who unfortunately were the first to 
face the devastating economic effects of 9/11 and to this day struggle 
to provide for their families as this industry's downward spiral shows 
no signs of reversal.
    Finally, we must shift the burden of security costs to the Federal 
Government. The airlines, and their customers are now bearing 
additional security-related costs exceeding $4 billion annually.
    The bill to approve creation of the Department of Homeland Security 
does not include appropriations to pay for all the security programs 
that Congress and the Administration have created--programs that ALPA 
members strongly support. The Federal Government must assume 
responsibility for these costs, as they do for national defense, while 
at the same time ensuring that all security measures are in place and 
enforced.
    As I said earlier, our pilots are ready and willing to work 
together with management and the government to solve the problems of 
the airline industry. This is not a time to impart blame. Labor-
bashing, as we have seen within certain elements of the airline 
industry, won't turn this industry around.
    Remember, it was our pilots and the other airline workers who 
returned to flying during the dark days immediately after September 
11th. It is our pilots that have worked with this Committee, as well as 
the Transportation Security Administration and other organizations to 
make flying safer and more secure. It was our pilots who continue to 
develop and offer additional security measures to enhance air safety. 
It was our pilots and their cabin crew partners who flew nearly 600 
million passengers safely, without a single fatality this past year.
    And, let's not forget that many of our pilots are getting ready to 
go off to war again in support of the government's actions against 
another threat to our national security. This problem is not our fault 
and it's not any employee groups' fault. The sooner everybody--pilots, 
management, other employee groups and Congress--starts working together 
as part of the solution, I guarantee the sooner that solution will 
come.
    ALPA thanks you again for the opportunity to appear before you 
today to make our views known to the Committee. I would be pleased to 
respond to any questions you may have.

    Senator Rockefeller. (presiding) Thank you, Captain Woerth.
    Professor Kahn.

  STATEMENT OF ALFRED KAHN, ROBERT JULIUS THORNE PROFESSOR OF 
         POLITICAL ECONOMY EMERITUS, CORNELL UNIVERSITY

    Mr. Kahn. Thank you. I am honored by your invitation. I 
hope it is not presumptuous of me to congratulate the 
Committee. I think these hearings are terribly important.
    I would only add, because I am afraid you would not 
otherwise have enough work to do, that you ought to have a 
similar look at telecommunications. That is to say, we have 
here two fundamental huge industries, both of which have been 
affected by, in the one case, complete deregulation, in the 
other something that goes under the guise of deregulation, but 
is obviously neither one nor the other, and I think this look 
is just terribly important. It was a challenge to me to look at 
the industry again in its present abysmal condition.
    I think I do--without in any way imposing on you by 
rearguing the case for deregulation, I want only to say 
peremptorily, and I regret it is in the absence of your present 
Chairman, that deregulation in the airlines has been an 
outstanding success, that the savings to travelers have been 
estimated now at $20 billion a year by the most authoritative 
studies we know, and, of course, the growth of hub-and-spoke, 
which, as one of our witnesses pointed out, could not possibly 
have occurred under a regulated industry, has permitted a great 
increase in the number of origins and destinations available 
from all origins across the country, and that history of 
regulation demonstrates could not possibly have happened as 
long as every change in a company's route alignment or 
structure had to be subject to judicial, quasi-judicial 
determination by a Civil Aeronautics Board that was determined 
to take the place of private enterprise in deciding what would 
be profitable and what would not be profitable, and whether it 
would be injurious to competitors or not, which is, of course, 
in a sense the essence of competition.
    Now, just one other sentence on that, in a sense self-
justification. Of course those sharp reductions of fares and 
the great savings to travelers have been accompanied by a great 
increase in congestion, a clear deterioration in the quality of 
service, but I suggest that was a success of deregulation, not 
a failure.
    When the average load factor on your planes is only 50 
percent, or 52, as it was in the decade before deregulation, 
and it has been in the 70 percent range in the 5 years before 
the present downturn, of course you are going to have more 
congestion. That is, however, what makes possible the offer of 
lower fares, and the problem with the previous system was that 
it offered people good service at uniformly noncompetitive high 
fares, and a competitive market offers people options, 
including the option of crowded service, long lines, 
uncomfortable service, but at very, very low prices, and I am 
proud of that. That was our intention, and incidentally, in 
contrast, or in support of the argument I made to the heads of 
the AFL-CIO back in 1978, in fact, we have not had an increase 
in unemployment. On the contrary, employment in the industry 
has doubled during this period.
    Now, the fact remains that the industry is in a financial 
crisis, and that inevitably raises the question of whether we 
need any fundamental changes. The thing to remember is that the 
airline industry has always been unusually sensitive to changes 
in the state of the economy generally, both before and after 
deregulation, and we have to concede that, by unleashing price 
competition, deregulation has permitted the economy-wide 
recessions to be aggravated by competitive price-cutting. But 
that is always going to happen in a competitive industry which 
has very, very heavy fixed costs, you are going to have a great 
deal of price competition.
    Now, remember that in the 1990 to 1993 period the industry 
lost some $13 billion, more, it is said, than it earned in its 
entire history since the Wright Brothers first flew. At that 
time, there were cries for renewed regulation and government 
assistance, but we argued that it was a normal, cyclical 
phenomenon. Demand would recover. The industry would learn from 
its previous mistakes, and in point of fact, of course, the 
industry's profits were highly satisfactory--by no means 
characterized as monopolistic, but nevertheless highly 
satisfactory--in the 5- or 6-year period in the late 1990s.
    Now, the fact remains also, however, that the industry is 
in a much more catastrophically bad financial situation now 
than it was even in the early 1990s, and, of course, as you all 
recognize, this has been greatly exacerbated by September 11, 
and in the circumstances, I have had no hesitation in agreeing 
whenever I was asked, that temporary assistance, large-scale 
assistance to such an important industry with these huge, in 
effect quasi-military costs imposed on it, was not in my belief 
in any way incompatible with the philosophy of deregulation.
    Of course, I also argued that the offers should indeed be 
made--contingent offers of government assistance--on major 
give-backs of extraordinarily inflated wage costs that were 
achieved by powerful unions, and point out only briefly that, 
to my pride, I argued for exactly the same thing in 1978, when 
we gave a multi-hundred-million-dollar loan guarantee to 
Chrysler at the very time when the UAW had signed a contract 
giving them over 13 percent raises per year over a 3-year 
period, and Senator Proxmire called the bill back and demanded 
concessions from dealers, from parts suppliers, and from the 
unions, and I do not see anything wrong with that process now.
    The real problem before us now, however, is, there seems to 
be, as I think all the witnesses have stated, a secular change 
that is also taking place in the industry. One of the major 
successes of deregulation was the spread of hub-and-spoke, 
which made it possible to serve small communities via 
strategically placed hubs, and even to sparsely settled areas, 
but those, I should point out those advantages of the hub 
system never translated into enormous profitability, but the 
fact is that the serious fact of which we have become 
increasingly aware is that giving that kind of ubiquitous 
service, or almost ubiquitous service--and by the way I 
supported the essential air community, or air service bill as 
well--that that involves very, very heavy fixed costs. It is 
not just serving a lot of destinations that would not otherwise 
be possible, but having convenient scheduling, and when you 
have an industry that has extremely heavy fixed costs, it is 
not surprising--it is a phenomenon in the economy in general--
that the industry developed really brilliantly what they call 
yield management.
    Now, I know a lot of people hate yield management. They 
think it is discriminatory. The fact is, as economists have 
known for 100 years, that industries with very heavy fixed 
costs have to develop differentiated price structures in which, 
in the case of the airlines, you fill the planes by offering 
very low, as low rates as are necessary to fill the empty seats 
and still get some contribution, while at the same time 
charging the people to whom the convenience of the hub-and-
spoke system and the convenience of the scheduling are 
particularly valuable, and that has, in fact, occurred, and it 
has been necessary, and there is nothing immoral in it.
    Senator Rockefeller. Professor Kahn, with great respect, 
you understand that the red light is on.
    Mr. Kahn. I will be very brief, or--I promise, and I will 
talk fast.
    The problem then that the Committee, I think, has to 
confront is what kind of government policy is appropriate in 
the situation in which the industry is going through, not just 
a temporary emergency, but as Don Carty pointed out, a 
structural change in the direction and the diminution of 
supportability of hub-and-spoke operations. It is not 
surprising in these circumstances that members of the industry 
have turned to mergers and have turned to alliances.
    I do hope that you will look carefully at the proposed 
alliance of Delta, Northwest, and Continental. As everybody has 
pointed out, alliances are an extension of hub-and-spoke. They 
have permitted the advantage of those to go to more origins and 
destinations with a single fare, a unified fare, which in 
itself, I point out in my statement, is very, very valuable, 
and the evidence shows it is lower.
    At the same time, and I am not suggesting an opinion, I 
simply think it is necessary to be more certain than I am that 
the negotiations on one carrier A saying we will put my 
travelers, my customers on your planes, and you will put your 
customers on my planes, is simply--and this is truly an 
expression of ignorance--I do not quite see how you do that 
without agreeing in some way to curtail your scheduling, I will 
curtail my scheduling and put mine on yours.
    The only other thing I want to call to your attention is--
and that was a question. The other is the combining of frequent 
flyer programs. Frequent flyer programs are a brilliant 
competitive tactic--and developed, I think, initially by 
American Airlines, but they also operate by, in effect, giving 
exclusive patronage discounts.
    The value of these credits gets higher and higher as you 
stick to one carrier. Therefore, it has also been brilliantly 
successful with the hub-dominating carriers, and I am worried 
that the--at least I want to know the answer to the question of 
whether putting together these three carriers, (1) in any way 
threatens horizontal competition between them on the routes on 
which they are likely to be the only or the major carriers, 
that is, between their respective spokes, and second, can we be 
certain that putting the frequent flyer programs together does 
not exclude smaller competitors from a fair opportunity to 
compete on the basis of their efficiency.
    This is not an argument, per se, against alliances, because 
alliances are an extension of hub-and-spoke, and hub-and-spoke 
has been successful. The regulation is not the way to help the 
industry solve its problems. They are going to have to work it 
out themselves. To what extent that does require alliances and 
to what extent that can truly be done without suppressing 
competition is an open question in my mind.
    Thank you very much.
    Senator Rockefeller. Thank you, Professor Kahn.
    Mr. Mitchell.

   STATEMENT OF KEVIN P. MITCHELL, CHAIRMAN, BUSINESS TRAVEL 
                           COALITION

    Mr. Mitchell. Mr. Chairman and Members of the Committee, 
thank you for inviting the Business Travel Coalition to this 
important hearing. The airline industry is in crisis and in 
need of reform, as is abundantly evident. A brief story 
underscores the need for this reform, and reform in the 
broadest sense.
    I was on the phone recently with a journalist in Syracuse, 
New York, who had to go to Phoenix, Arizona. The problem was 
that the fare was $1,800, so he went onto the Internet, which 
gives transparency not only to the major network carriers' fare 
structures but also to low-fare carrier offerings and 
alternative airports. He ended up finding a fare, and he drove 
to Buffalo and connected through Pittsburgh for $268.
    I shared that with a number of airline executives at an 
industry gathering recently, and they said, Kevin, you just do 
not get it. When that guy realizes the value of his time, he 
will be back, and I said, in all due respect, you may get him 
back at $368 or $468, or maybe even $568, but the days of 
$1,800 are clearly over.
    There is a backlash among business travelers and senior 
managers who oversee corporate travel budgets, and the backlash 
is against major airlines' policies and the overall travel 
experience. Specifically, sky-high business air fares, eroding 
customer service levels, and aviation system gridlock converged 
during the late 1990's to greatly deepen and lengthen the fall-
off on business travel demand that the airlines are currently 
facing. However, BTC is optimistic. Over the next 18 or so 
months, it is very likely that these three issues, pricing, 
service, and aviation system reliability, will be largely 
addressed by an industry restructuring.
    Driving factors that are forcing major network airlines to 
restructure include recognition, as late as it might be, that 
the fall-off in business traveler demand is not 100 percent 
tied to the economy, and the business traveler now has an 
unprecedented range of alternatives to a seat on a major 
airline. These alternatives, the automobile, train, bus, 
charter jet, fractional jet, videoconferencing, webcasting, in 
effect combine to form a powerful disciplining force on major 
airline pricing. In effect, they represent a proxy for the 
market contestability theory upon which deregulation was 
premised.
    Of all the alternatives, though, it is the low-fare airline 
product that is disciplining the major airlines the most. Low-
fare airlines as a segment have nearly doubled their national 
market share since the last industry cyclical downturn in the 
early 1990's. They now have seasoned management teams, more and 
newer aircraft, expanded route systems, and an air fare 
structure that consumers can understand and embrace.
    Of particular importance to this hearing is that when low-
fare competition and the consumer were threatened in the late 
1990's by artificial barriers to market entry, and in some 
cases alleged predatory competitive behaviors, this Committee's 
work was critical in drawing national attention to the problem 
and helping preserve competition.
    Importantly, were it not for a resurgent low-fare airline 
segment, it is doubtful that major airline executives and 
airline union leaders would be taking the restructuring so 
seriously right now. As optimistic as I am, however, there are 
three serious threats to low-fare competition and to successful 
major airline restructurings.
    Number 1, Federal taxes, taxes that are now baked into the 
airline ticket can exceed a third of the ticket price. This 
burden is threatening the continued democratization of air 
travel enabled by deregulation, particularly as it 
disproportionally impacts low-fare carriers. As important, 
these taxes weaken an industry which represents a powerful 
economic engine and fulcrum across the U.S. economy. This issue 
deserves new and serious review.
    Number 2, national security costs. The airline industry 
should, in BTC's view, be provided some permanent relief from 
the post 9/11 security-related costs. We do not support the $4 
billion in Federal Government support the airlines are 
requesting. However, it is clear that the airline industry and 
its customers are shouldering a disproportionate burden in what 
is in part a national security budget.
    Importantly, once a baseline financial responsibility were 
established for airlines for security, it should be codified in 
legislation that future increases in security fees will be paid 
for by U.S. citizens through the Federal Government. We all 
benefit from this kind of national security program, and a 
security tax is too easy a target for increased funds.
    Number 3, and finally, industry consolidation. The proposed 
marketing lines between Continental, Northwest, and Delta that 
would comprise close to 40 percent of the marketplace is bad 
for low-fare competition and would be harmful to consumers and 
the corporations that fund business travel activities. The 
premise of this proposal, the United Airlines-US Airways 
alliance, is obsolete, given their bankruptcies.
    More importantly, the opportunity to abuse the privilege to 
coordinate marketing opportunities is enormous, and I quote 
from a 1999 GAO study. It is difficult to determine when the 
partners in the alliance will continue to compete, or whether 
the alliance will encourage them to act in a manner that may 
reduce competition.
    With that as a backdrop, one BTC member wrote me this week, 
and this member is a very large buyer of air transportation 
services, and I quote: ``Northwest, Continental, and Delta 
currently say if you, the buyer, tell us it is okay to work a 
deal via a percentage discount off published fares with all 
three of us acting as one, then it is okay. It is legal.'' To 
continue the quote, ``what these three airlines are saying is 
that just say the word, and we will work as one airline, and we 
can talk and will talk about discounts among all three of us 
for you. This makes me very nervous,'' end quote.
    This kind of anticompetitive activity would eliminate two 
competitors from the marketplace, and would enable this 
alliance to force customers in a local market who want to 
maintain some level of hub discount to shift business in a 
distant market, including international markets, to these 
alliance partners. This would harm competition and artificially 
increase business air fare levels.
    And if a Fortune 500 corporation with its purchasing 
volumes is nervous, the other 9 million U.S. business should 
be, too.
    Thank you for the opportunity to speak to you today.
    [The prepared statement of Mr. Mitchell follows:]

  Prepared Statement of Kevin P. Mitchell, Chairman, Business Travel 
                               Coalition

    Mr. Chairman, and Members of the Committee, thank you for inviting 
the Business Travel Coalition to this important hearing, and for your 
interest in the views of the customer of the commercial air 
transportation system.
    The airline industry is in crisis. Major network airlines will 
transform themselves or go out of business. The process will be painful 
for employees, their families and the communities in which they live 
and work. However, major network airlines have the prospect of coming 
out at the other end of this crucible more competitive and responsive 
to customers and better able to solve their own problems.
    There is a backlash among many business travelers and corporate 
senior managements regarding major airlines' policies and the overall 
travel experience. Sky-high business airfares, eroding customer service 
levels and aviation system gridlock converged during the late 1990s to 
help deepen the falloff in business travel demand airlines are facing 
today.
    However, BTC is very optimistic about the future. Over the next 
eighteen or so months it is very likely that these three issues--
pricing, service and aviation system reliability--will be largely 
addressed. A driving factor forcing the major network airlines to 
restructure is the recognition, as late as it might be, that the 
business traveler now has an unprecedented range of alternatives to a 
seat on a major airline. These alternatives--the automobile, train, 
bus, charter jet, fractional jet, video conferencing, web casting--to 
name just a sampling, combine to form an effective proxy for the market 
contestability theory.
    Of all the alternatives, though, it is the low-fare airline product 
that is disciplining the major airlines the most. Low-fare airlines, as 
a segment, have nearly doubled their national market share since the 
last airline cyclical downturn in the early 1990s. They have great 
management teams, more and newer aircraft, expanded route systems and 
an airfare structure that all consumers can understand and embrace.
    When low-fare competition and the consumer were threatened in the 
late 1990s by artificial barriers to entry and, in some cases 
predation, this Committee was critical in drawing national attention to 
the problem and helping preserve competition. Were it not for a 
resurgent low-fare airline segment, it is doubtful that major airline 
managements and airline union leaders would be taking restructuring so 
seriously. Competition and the consumer will benefit greatly from 
successful major airline reforms.
    There has been much industry discussion about whether there is room 
for the low-fare, point-to-point business model and the hub and spoke 
model embraced by major network airlines. BTC agrees with those whose 
determination it is that both models can coexist in a similar manner as 
the U.S. automakers coexist with low-cost foreign competitors.
    The question is how fast can the major airlines reconfigure their 
cost and productivity platforms to stem threatening financial losses 
and market share losses to the low-fare airline segment. Every day 
major airlines operate with relatively high cost and low asset 
utilization levels they cede ever more share to low-fare competitors. 
This competitive reality is encouraging pro-customer reforms such as 
America West's new air fare structure, or American Airlines' fare 
structure reduction and simplification experiment--now in several 
hundred markets.
    As optimistic as I am, however, there are three serious threats to 
low-fare competition, and to successful major airline restructurings, 
that BTC hope this Committee will seek to better understand and 
influence through future hearings.
    1--The proposed marketing alliance among Continental, Northwest and 
Delta--comprising close to 40 percent of the marketplace--is bad for 
low-fare competition and would be harmful to consumers and the 
corporations that fund business travel activities.
    2--The taxes that are now baked into the price of an airline ticket 
can exceed a third of the price. This burden is threatening the 
continued democratization of air travel enabled by deregulation and the 
health of an industry that represents a powerful economic engine for 
the national economy.
    3--The airline industry should be provided some permanent relief 
from post 9/11 security and insurance-related costs. Moreover, once a 
baseline financial responsibility was established for the airline 
industry for security, it should be codified that any future increases 
in security fees should be born by the taxpayer.
    I thank you again for the opportunity to speak here today.

    Senator Rockefeller. Thank you, gentlemen, all very much 
for your statements, and we will begin the questioning with 
Chairman-to-be McCain.
    Senator McCain. Thank you, Senator Rockefeller.
    Professor Kahn, given the differing financial fortunes of 
the low-fare airlines and the major carriers since the economic 
downturns, are the major carriers' business models flawed?
    Mr. Kahn. No, I don't think that it will prove in the end 
that those models are simply obsolete. What I am saying is that 
nobody can predict what the ultimate balance is going to be.
    Senator McCain. What do they need to do?
    Mr. Kahn. Well, clearly, I think the gentlemen at my left 
all pointed out, the necessity of getting cost under control. 
That is just terribly----
    Senator McCain. Are their major costs, labor costs?
    Mr. Kahn. I think that is the major cost, right, but they 
may have to search more about which operations they can 
continue and which they cannot. Bankruptcy is regarded as 
unfair, and in a sense it is unfair to the firms that do not 
have the advantage of going into receivership, but that is 
another way that we will get restructuring in the courts.
    I am certainly not competent to say what the ideal 
structure would be. The only thing I insist is that neither 
could the Civil Aeronautics Board, or anything like the Civil 
Aeronautics Board.
    Senator McCain. What is the biggest single thing the 
airlines can do to get back on their feet?
    Mr. Kahn. The biggest single thing they can do to----
    Senator McCain. To get back to viability.
    Mr. Kahn. I would have to defer to the people at my left. I 
think what they are doing, the number of things, one, 
reexamining whether some routes are really contributing 
anything to the recovery of their incremental costs, putting in 
lower low-cost affiliates, making fuller use of regional jets, 
which are terribly important from the point of view of cost, 
and beyond that, if they do not survive in the competitive 
market, that is too bad. I will have to go to a business school 
and see if anybody has any wisdom to impart. It would be 
presumptuous of me to tell these people how to run their 
businesses.
    Senator McCain. Mr. Woerth, the New York Times urged that 
Congress lift limits on foreign investment in the airlines. Do 
you still oppose that, lifting these limits?
    Mr. Woerth. Senator, we, the Airline Pilots Association, 
have always believed that the real question is control. I do 
believe that--the act talks about foreign ownership and 
control, and we have always been interested in keeping, as I 
think the intention of the Congress has always been the control 
of the airlines in U.S. hands, and I think that the Defense 
Department, with the Civil Reserve Air Fleet, are also 
concerned about it.
    I have never believed there is anything magic about 25 
percent. You could probably control an operation, depending on 
the corporate structure, with less than that, but if we are 
going to move to higher limits, say something like 49 percent, 
I would certainly like to have in any bill, caveats that 
certainly met control tests, and remedies that the Department 
of Transportation could impose if they failed those tests and, 
indeed, a carrier had shifted to foreign control.
    Senator McCain. Mr. Carty, last August you were quoted as 
telling your employees that the then-current business fare war 
with Northwest was, quote, ``true madness'', unquote, that even 
the low-fare carriers were complaining about the discounting 
that was going on. There is anecdote after anecdote of major 
airlines pricing below cost to gain market share.
    Why does an industry that is losing billions of dollars 
insist on price wars that, while they may be good for the 
consumer, are in your words true madness, and I would be 
interested in hearing Mr. Anderson's comments on that.
    Mr. Carty. Senator, I guess I would start off by agreeing 
with something the professor said, and that is that industries 
like the airline industry that have very high fixed cost have a 
tendency to lend themselves to this kind of incremental 
pricing.
    Now, that being said, when I talk about some amount of 
pricing activity being true madness, I am talking about 
situations that go beyond that, where I believe airlines, for 
whatever reason, or people within the airlines' pricing 
department for whatever reason take actions that make not only 
no economic sense to them in the short-term, but no economic 
sense in the long-term. These things sometimes spiral out of 
control, and I think if I have a criticism of ourselves as 
managers of these industries, it is the senior management of 
the company not bringing more discipline to competitive 
response, because I think we leave a lot of money on the table 
in the most extreme of these cases.
    Now, that being said, we are going to see incremental 
pricing in our industry, because of the fixed-cost nature of 
it.
    Senator McCain. Mr. Anderson.
    Mr. Anderson. Our analysis shows that Northwest has been 
pegged as the spoiler. Since I took over we have not matched 
the system-wide increase either on the discount side, the 
leisure side, or on the business side, and it is really just 
based on the evidence of what fare increases have produced with 
respect to yield, and the elasticity of those increases.
    The bottom line is, every fare is elastic, and if you look 
at the period 1999 through 2001, walk-up business fares went up 
30 percent and yields went down 5 percent, so there was not a 
relationship between your yield increasing. And, in a time when 
the economy is weak, business travelers are moving away, and 
our fare structure is very elongated between the walk-up 
business fare and the discount fare, it was our best judgment 
that the revenue-maximizing strategy for Northwest was to not 
match fare increases to the walk-up business fare. But in fact, 
to take steps to deal with the elongation of the fare structure 
between leisure fares and business fares.
    Senator McCain. Mr. Chairman, if I could just ask one more 
question.
    Mr. Anderson, in this envisioned alliance, would that mean 
you would be doing joint scheduling so that passengers could 
have more and better access and less delay?
    Mr. Anderson. No, sir, there is no joint scheduling, and 
that is the misnomer between all the critics of our alliance. 
In fact, the most vociferous critic of our pricing policies or 
pricing practices have been our alliance partners at 
Continental. Very simply put, we operate as completely 
independent entities, and that is why the Justice Department 
has signed off from an antitrust perspective on the Northwest-
Continental alliance and the United-US Air alliance, so no, we 
do not coordinate schedules or coordinate pricing in any way.
    Senator McCain. Well, I thank you, and I would like to 
repeat, as I said at the beginning of the hearing, this is a 
most critical part of America's economy and America's life, and 
we will continue to explore with you ways that we can keep a 
healthy, robust, and competitive airline industry in America. I 
think you have given us some very important and valuable 
information today, and there will be more hearings, and perhaps 
legislative remedies to be of assistance without doing harm.
    I thank you, Mr. Chairman. I thank the witnesses.
    Senator Rockefeller. Thank you.
    The same question, but I will ask it in two parts to Mr. 
Carty, Mr. Anderson, and then Mr. Woerth. The cost of labor 
obviously looms large, and that is because there are a lot of 
employees, and they are paid, and you need them to fly, 
service, and do all the rest of the things you do for your 
airlines.
    Now, in the case of American and Northwest, you are 
perfectly aware, of course, that some of your competitors are 
cutting their costs by reducing their costs, by negotiating 
wage, and by benefit cuts, and my question to you, and then I 
will go right to a question of Captain Woerth, is in response 
to that, you are going to probably have to do the same thing, 
in fact you indicated such, and have indicated some success on 
such. What do you anticipate in the way of a response on the 
part of employees to what it is that you ask, or how they 
respond to the negotiations that you are all in together?
    Then to Captain Woerth, I would say that you have indicated 
that there is one strike every 10 years. It seems to get 
awfully close to being more than that, but you may be correct 
on that. However, you do understand that in order to cut costs, 
airlines have to negotiate on all fronts, including labor, and 
in that binding arbitration, which I do not start out favoring, 
and letting the system work. It then becomes extremely 
important as to not only how management reacts and feels, but 
also how labor and not just ALPA feels and reacts, if we are to 
keep the Nation's economy working. It is my view that if the 
airlines get into too bad a position, this country is 
devastated economically. So I would be interested in all three 
of your questions, and any interaction that might ensue 
therefrom.
    Mr. Carty. Let me take a crack at trying to be responsive 
to a number of your comments. In the first instance, when we 
talk about labor costs being our largest single cost component, 
it is true, but there are several aspects to what drives labor 
costs. One, obviously, is the contractual relationship we might 
or might not have with a particular union. The other is how we, 
as management, organize work and use automation, and use 
technology to be labor-efficient, and the efforts we have had 
underway at American to date to restructure the company, which 
began long before 9/11 because we saw these trends developing, 
involved attacking the issues that management can control, 
bringing automation to the workplace, whether it is at the 
airports or the res offices, our maintenance operations, 
rescheduling our airline in ways that will present work to our 
employees in a way that they can be more productive, and so we 
have been grappling with all those things.
    You know, Senator, because I know you pay attention to 
these issues, that technology has enhanced the productivity of 
labor across America. I think, in fact, the airline industry in 
the 1990's lagged, and I think we have got some catching up to 
do, and an awful lot of that is our job.
    There is a second piece of that, and it has to do with our 
existing labor contracts. Now, United and US Air and other 
carriers that ended up filing for bankruptcy are certainly 
going to influence the outcome of what our relationships with 
our employees look like. That is inevitable.
    United is our biggest single competitor and has been for 60 
years, and we cannot ignore our major competitor, but we have 
premised our strategic plan on having to develop a financial 
formula, not to deal with United, but to be responsive to the 
advent of this new business model, the low-cost carrier, and 
that is where the $4 billion objective for American came from. 
It did not come from United.
    Now, as it turns out, it is starting to get validated by 
what is happening in the bankruptcy court. We attacked that $4 
billion. We have identified over $2 billion. We are not 
finished. We are going to try to identify more, and what we 
have now done is said to the folks that represent our 
employees, and I might add our unrepresented employees, we need 
to all get in the room and reexamine the history of our 
contracts in a way that helps us finish the job of getting to 
$4 billion.
    Now, that is something I hope we will do. It will not be an 
easy task, because it obviously is going to mean changes, and 
some of those changes will not be changes that our employees 
will necessarily embrace. At the same time, we do not 
necessarily embrace all of them, too. You know, one of our 
objectives is to create uniquely good outcomes for all three of 
our constituencies, including our employees, so we do not feel 
that the airline ills need to be visited solely on the back of 
our employees.
    Those contracts need to be reexamined and restructured. We 
have invited that process. We hope in the next 30 to 60 days, 
that process will be well underway. As a matter of fact, with 
our pilots, since we are in section 6 negotiations in any case, 
that is going forward.
    Now, as to the longer-term issue, and I consider it a 
longer-term issue, as to whether we need revisions to the 
Railway Labor Act, they are not going to get us through this 
crisis whether they happen or not happen, because they would 
only bear on contracts that were officially in negotiation. We 
have contracts that run several years from now. I know Richard 
does as well, so that is more of a long-term consideration.
    And the question of, once we get the airline industry 
healthy, do we need such changes to keep the industry healthy, 
and I know there are varying views about it, and we are not 
going to resolve that question this morning. In fact, I would 
rather not engage in the debate this morning, but we believe 
that there have been problems with the old model that have not 
only affected the companies, but have affected our employees 
unfavorably and affected our customers unfavorably, and 
therefore we think, as Senator McCain challenged both us and 
organized labor to do a year ago, we need to reexamine that 
labor code, and I think it needs to be reexamined.
    The exact form of whatever changes might come up I think 
have to be determined, but we do think it needs to be changed 
for the long-term health of the industry.
    Senator Rockefeller. Thank you, Mr. Carty.
    Mr. Anderson, in answering the same question, Mr. Carty was 
generic in his answer. I understand that, given this being a 
public hearing, but has there been progress? Has there been an 
understanding on, in this case the two sides? Well, there is 
organized, unorganized employees, and there is management. Has 
there been a change of nuance, a change of the sense of what is 
at stake as these matters have progressed, as you see it?
    Mr. Anderson. I absolutely believe that there is that 
comprehension. We are a bit unusual at Northwest. In fact, 
Duane Woerth used to be on my board of directors, because 
Northwest once before faced this challenge in 1992, shortly 
after the Persian Gulf War, and at that time, we did a 
successful ESOP with our employees, and in fact today have 
three labor directors and a Northwest 747 captain on our board 
of directors, and so we are very close.
    Our labor leaders have every piece of information about 
what goes on in our company because they sit on our board of 
directors, and we are very engaged, and they are very--it is 
difficult. It is very hard to do things that affect people's 
lives, the worst being when you have to lay an employee off or 
impose, in our case, premiums for health insurance, which we 
did for the first time this year, but the reality has set in, 
and our leaders, our labor leaders are very pragmatic. It is 
evidenced by the fact that one of them is sitting two chairs 
down from me and has served on our board, and we have shown in 
the past that we have been able to weather these difficult 
times, and I think the reality has set in and we are in regular 
discussions with all of our labor leaders.
    We have something called the Labor Advisory Committee at 
Northwest that meets now every 2 weeks, which is the senior 
leadership of all of our labor unions, and we think we first 
have an obligation to be certain we are doing everything else 
in our business to restructure the business, whether it is 
forming an alliance with Delta Airlines, whether it is 
enhancing our KLM alliance, whether it is taking other steps to 
reduce non-labor costs across the company.
    We are doing all of those things, but ultimately we have to 
be in a position where the cost of operating the airlines fit 
the revenue and capital regeneration that is necessary to keep 
the business viable. We have been in business since 1926 
operating as Northwest Airways, and it is every intention, I 
believe, of our labor leaders and management of the company 
just as we did when we faced this crisis before in 1990, after 
the Persian Gulf War, to do it successfully again in 2002, and 
2003 and beyond.
    Senator Rockefeller. Thank you, sir. Captain Woerth.
    Mr. Woerth. My belief is that I think we should do a quick 
review again of the very proactive way labor has responded to 
this crisis right now. The United pilots, for example, had the 
first economic plan renegotiated with management a year ago. 
Then, when that was not enough, they did a second one, economic 
recovery plan 2, and most recently voluntarily under collective 
bargaining, of their free will, no bankruptcy court judge 
order, just signed a 29 percent pay cut, by far larger than any 
other employee group, and took a leadership position.
    US Airways pilots have done the same thing. They did not 
wait to get into bankruptcy. They were negotiating, 
collaborating with their company for a joint survival plan in 
the free market with collective bargaining. That happened, and 
it has been our track record, and certainly the track records 
of the principals in the transportation trade as well, that we 
are--if we are approached with a legitimate business plan for 
our survival, we will engage in a negotiation.
    I cannot predict the outcome of that, mostly because the 
circumstances are very different. I want to make this clear, it 
is not an automatic assumption, because United Airlines or US 
Airways for various competitive problems, different leasing 
arrangements where the cost structure was not the same, that 
does not transpose the same contract from US Airways or United 
that is going to end up at United or Northwest or anyplace 
else. We will see what collective bargaining produces.
    But if allowed to remain in that market, and when workers 
always feel they have the right to determine their own destiny 
and have a stake in that destiny, I think the history of the 
recessions in the 1970's and the 1980's and the 1990's, shows 
we have always responded responsibly and sought the recovery of 
those airlines. Airline employees have no illusions. You do not 
just go from door to door and end up a captain in an airplane. 
You start over from the bottom. That is true of the mechanics, 
that is true of the flight attendants, so we feel all of our 
employees are extremely committed to the success of that 
airline, because their seniority and their pensions are not 
transportable, so I believe events will transpire.
    I think the biggest open question is, and I am sure Mr. 
Carty and Mr. Anderson will agree their biggest concern right 
now, what is going to be the pricing policies of some of these 
carriers that are in bankruptcy or may approach bankruptcy? You 
know, there is the cost side of the equation, there is the 
revenue side of the business, and how that affects their 
revenue is probably the thing they wake up losing as much sleep 
at night over besides their labor cost. What is the revenue 
going to look like in this industry as we proceed over the next 
few critical months?
    Senator Rockefeller. Thank you, Captain Woerth.
    Senator Fitzgerald, the last question is yours, sir.
    Senator Fitzgerald. Thank you, Mr. Chairman, and thank all 
of you for being with us. It has been a long morning. You have 
all been patient.
    Mr. Anderson and Mr. Carty, thank you both. I think both of 
you have been doing good jobs with your respective carriers in 
very difficult times, and I want to compliment both of you on 
the friendliness of your employees. I was up in Minnesota 
recently and the Northwest employees are hardworking and 
friendly, as they are at American every time I go through 
O'Hare, Mr. Carty, and you should be very proud of the hard 
work of the people on the lines there in your company. I do 
have some questions.
    Mr. Carty, I thought you showed great creativity in de-
peaking your schedule at O'Hare, and that turned out to be a 
way to try and lower your costs in your hub system, and we were 
running into a real problem at O'Hare a few years ago.
    Both the Chicago Tribune and the Sun-Times had exposes 
about how the airlines marketing departments were going out to 
find out what time people want to fly, and they would find that 
8:45 in the morning was a very popular time to fly, and so they 
were scheduling all of their flights for 8:45 in the morning. 
In fact, there would sometimes be 25 or more flights scheduled 
to take off at 8:45 in the morning out of O'Hare.
    Well, the airport only has capacity for three planes to 
take off every minute, so this was resulting in long delays, 
and I think that the spreading out, the de-peaking that 
American has done, has done a lot to alleviate delays, but the 
obvious question that I would want to ask you, Mr. Carty, is, 
isn't de-peaking a lot cheaper than building more runways, and 
wouldn't that be a wiser course for you and United to take at 
O'Hare than incurring humongous, massive, gargantuan amounts of 
debt to tear up and rebuild O'Hare Airport at this time?
    Mr. Carty. Well, Senator, I think I certainly know your 
views on the expansion of O'Hare. I think you know mine. I 
would only say this, that O'Hare Airport has over the years--
and I think you touched on this--been a chronic problem in 
terms of dependability and reliability, and that is, as Dr. 
Kahn suggested, the consequence of the great success of 
deregulation and the amount of activity there.
    You made the point that there was a little bit of a decline 
in traffic at O'Hare last year, but in fact, O'Hare was one of 
the few airports in the country that actually saw growth in 
activity again in 2002, in spite of this downturn.
    My own view is over time--and Jeff Shane referred to this--
we need to address the infrastructure problem, and that O'Hare 
is a huge, huge piece of the infrastructure problem. The 
current plan for runway expansion takes a very, very long time 
to complete, and I do not think we should be confused about 
some modest de-peaking by American or United, or the current 
economic downturn as solving the woes of O'Hare.
    I think the demand for O'Hare is there. O'Hare is a very 
important connecting airport. It is one of the busiest 
airports--it is the busiest airport in terms of activity in the 
world, and I think the demand for that activity is just going 
to increase, and so I think having a long-term plan for 
O'Hare--the exact timing and the form of the financing probably 
needs further debate, but we need capacity at O'Hare, and even 
the plan that the city has advanced does not get us much 
incremental capacity for quite a long time to come, but if we 
do not get started we will never get to the end.
    Senator Fitzgerald. Now, once it kicks in, though, and they 
issue those bonds, by the figures I have seen, it would raise 
your debt service costs or your operating costs. By virtue of 
your landing fees. It would add about $200 million a year at 
least of debt service to both you and United, and you still 
feel prepared to assume that added debt service?
    Mr. Carty. We are not terribly excited about any cost 
increase. You quite rightly pointed out that--and this sort of 
bears on the government loan program, by the way. Very few 
airlines need more debt. Whether it is government-guaranteed or 
not, that is not our problem.
    So, further obligations are a challenge to us. Nonetheless, 
the future of our business and the future of the profitability 
of Chicago as a hub to us is dependent on the ability for us to 
continue to participate in the growth in this aviation market, 
and it is going to grow. We have got a current crisis, but it 
is going to grow, and I think it would be a terrible mistake 
for Chicago not to have a long-term expansion plan for O'Hare.
    Senator Fitzgerald. Professor Kahn, you had some 
interesting statistics on, the benefits of deregulation saved 
consumers some $20 billion a year, and I have heard other 
statistics that aviation passenger travel has gone up some 400 
percent since deregulation.
    Mr. Kahn. That sounds reasonable.
    Senator Fitzgerald. But is it not true that at the same 
time--and you mentioned we have developed some problems like 
congestion, and I suppose that is what the O'Hare issue is 
about, but have you noticed we have not really built any 
airports except Denver in this country, big airports? What do 
you think about that?
    In the case of Chicago, United and American have opposed a 
new airport in Chicago, which the FAA strongly encouraged. Back 
in 1984, they pretty much ordered Chicago to build another 
airport. O'Hare reached capacity in 1969. The old Mayor Daley 
tried to build a third airport and it was opposed. I gather 
United and American, they have most of the capacity, about 87 
percent of O'Hare. They do not want new entrants coming in to 
compete with them. What are we going to do about that problem? 
Don't you think we need to build more capacity, and if all the 
hub carriers are just trying to keep other entrants out of 
their market, how do we break that logjam?
    Mr. Kahn. You are asking me a political question.
    [Laughter.]
    Mr. Kahn. I have the wonderful situation of having tenure 
at Cornell, but I think that there has got to be some 
institutional device that does not depend simply upon the 
consent of the carriers for the government or whatever agency 
it is to increase infrastructure.
    Senator Fitzgerald. But since they pay for the airports, 
they do have a say, right?
    Mr. Kahn. Well, one of the problems, of course, is that 
they--having financed the original construction of the 
airports, or previous expansion--are in a position to, in 
effect restrict competition, but I do not see, from what Mr. 
Carty has said, that that is the obstacle. They seem to 
recognize that it will be necessary to incur the additional 
costs, and that the other side of it, of course, is that they 
will be able to handle more traffic. They have run up against 
it. So I do not have any knowledge that it is the opposition of 
the incumbent carriers that is preventing the construction.
    I do not know what the--I mean, I know that there are 
political obstacles, but I am not going to instruct you on 
them.
    [Laughter.]
    Senator Fitzgerald. Okay. One final question and I will be 
done.
    Mr. Carty, American and the other legacy carriers, they do 
have unfunded pension liabilities. What is your unfunded 
pension liability?
    Mr. Carty. I cannot give you that number off the top of my 
head, Senator. I will get back to you on it, but it is 
significant. The problem----
    Senator Fitzgerald. In the billions?
    Mr. Carty. In the hundreds of millions.
    Senator Fitzgerald. It is not over a billion?
    Mr. Carty. I think depending upon whether you calculate it 
actuarially or otherwise, it is a big number.
    Senator Fitzgerald. You are in better shape than United, 
though, on that.
    Mr. Carty. We have historically been one of the better-
funded pension plans. This weakness in the stock market has 
obviously impacted us, as it has impacted everybody, and the 
recovery period that Captain Woerth referred to is probably an 
important thing for us to debate as a country, because it 
affects so many industries.
    Senator Fitzgerald. Well, I would just encourage you to 
think about--I think funding those pensions is very important. 
I would congratulate you if you are, to the extent you are 
better-funded than the other carriers. I think that is 
something we have got to fight for for the employees of the 
airlines, and Mr. Woerth, I will look forward to working with 
you.
    Mr. Chairman, it is great to have another aviation hearing, 
and thank you all for being here.
    Senator Rockefeller. Gentlemen, thank you. I would just 
conclude by saying we could not have a hearing with Senator 
Fitzgerald present without getting into runways at O'Hare, and 
that is the way life should be.
    [Laughter.]
    Senator Rockefeller. I want to congratulate each of our 
witnesses for your patience on this monumentally important 
subject. Thank you, and the hearing is adjourned.
    [Whereupon, at 12:20 p.m., the Committee adjourned.]

                            A P P E N D I X

               Prepared Statement of Hon. George Allen, 
                       U.S. Senator from Virginia

    Mr. Chairman, I apologize that I am unable to attend today's 
hearing on the future of the airline industry. I am currently 
accompanying the President to a constituent company in Northern 
Virginia to review his economic growth and jobs program. I very much 
wish I could be at the Committee hearing to discuss the severe 
challenges facing so many of our American based airlines. Our airlines 
are such an integral component of our national economic strength and 
security.
    Efficient U.S. air transportation is a tremendous national asset, 
carrying more than 600 million passengers per year, providing more than 
11 million American jobs, and generating $900 billion in U.S. economic 
activity. Obviously, both the growth of our country's job market and 
Gross Domestic Product are directly related to an efficient and growing 
air transportation system. Therefore, as the economic health of 
America's airlines has declined in recent years, large numbers of 
Americans have lost their jobs and our national economy has suffered.
    Serving as the headquarters to US Airways and containing hubs for 
some of the nation's largest airlines, Virginia is especially sensitive 
to the current state of the airline industry. For instance, as airlines 
such as US Airways and United Airlines have worked to emerge from 
bankruptcy protection, Virginia jobs have been lost, entire routes have 
been cancelled, local airports have suffered, and businesses have been 
disrupted. Clearly, the continued prosperity of Virginia and the nation 
is directly related to the future success of these airlines. I know 
that the leaders of US Airways' labor and management are working 
diligently to keep operating. This type of cooperative efforts will be 
needed for the older airlines to survive.
    As noted in the Walker Commission report, to ensure such future 
success, government and industry must work together to address the 
problems plaguing the airline industry. For example, in an industry 
where time equals money, security procedures must be expedited to 
mitigate delays and waiting periods while maintaining the highest level 
of safety possible. Furthermore, cutting edge technologies must be 
utilized to better coordinate and direct flight patterns, thereby 
creating an air traffic management system that can accommodate a 
greater and more flexible schedule. In addition, the Federal Aviation 
Administration must confront issues of runway development, expediting 
airport expansion projects without neglecting existing environmental 
standards. And, in a larger sense, for our nation's competitiveness and 
security, we must remain committed to Aeronautic Research and 
Development efforts. Senator Dodd and I intend to introduce again our 
Aeronautics Research and Development Revitalization Act to secure the 
funds needed to ensure that the United States retains its leadership 
position in aeronautics and aviation--both in commercial market share 
and military air superiority. Through such efforts, I am confident that 
our country's airline industry will continue to serve as a great source 
for American jobs and a cornerstone of our country's economy. Thank 
you, Mr. Chairman.
                                 ______
                                 
               Prepared Statement of Hon. John F. Kerry, 
                    U.S. Senator from Massachusetts

    Mr. Chairman, I would like to thank you for holding this hearing 
and thank the witnesses for testifying before the Committee. We're here 
today to discuss the financial state of the airline industry, a key 
sector of our economy that facilitates the flow of commerce and 
provides employment for many thousands of Americans. Over the past 
year, two of the six major air carriers have declared bankruptcy, tens 
of thousands of workers have lost their jobs, and the industry as a 
whole has lost over $9 billion. It does not help matters that economic 
growth has been sluggish, and that the overall forecast for 2003 
remains gloomy. Had the Congress not acted in the aftermath of the 
terrorist attacks and passed a relief package, it is probable that more 
airlines would have gone into bankruptcy last year, and more jobs would 
have been lost.
    These are dire times indeed for the airline industry, and it is my 
hope that a consensus can be reached on what role the government should 
play to help spur its recovery, and what changes the airlines can make 
to develop more efficient business models and return to profitability. 
Many of the major airlines have indicated that high operating costs, 
mainly labor and security costs, are hampering full financial recovery.
    While labor costs represent a significant portion of any airline's 
operating budget, it is flat out wrong to argue that containing labor 
costs will solve this industry's problems. Much of the industry decline 
was, and still is, the result of a sagging economy resulting in lower 
ticket demand and business travel, flawed business practices such as 
the very costly hub and spoke system, overcapacity of planes and 
routes, and extreme ticket fare discrepancies between coach, business, 
and first class seats that has alienated customers. Indeed, airline 
workers should not be made the scapegoat for the industry's current 
financial crisis, and labor costs should not be used to scare policy 
makers into revising existing labor law. At a time of high-security 
alert, it is imperative that the industry retain a highly-skilled, 
competitively-paid workforce and that any relief package introduced in 
the Congress acknowledge worker's collective bargaining rights.
    Further, though the airlines have also incurred higher security 
costs in the aftermath of the terrorist attacks including those 
mandated by the Aviation and Transportation Security Act, the industry 
was losing money long before the tragedy of September 11, 2001. I am 
pleased that we were able to extend the war risk insurance plan as part 
of the Homeland Security Act--which will save the airlines a 
considerable amount to insure their planes--and I am optimistic that 
the government and the industry will work out a security scheme that is 
factored in to any recovery initiative and which is fair to both 
parties.
    No one with any vested interest in this industry wants more 
bankruptcies and more job cuts. When airline workers lose their jobs 
they lose much more than their paycheck, they lose their seniority, 
their pensions and their benefits, none of which they get to take with 
them to another airline. At a time when the industry is looking to cut 
costs and restructure, it is imperative that the Congress approach 
aiding the industry with a focus on helping the airline's retain a 
well-trained competitive workforce and restore sound business 
practices. I look forward to working with industry leaders and my 
colleagues to help get this vital sector of our economy back on track.

                                  
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