[Senate Hearing 108-818]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-818

     AIRPORT IMPROVEMENT PROGRAM AND OTHER AIRPORT FINANCING ISSUES

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

                                HEARING

                               before the

                        SUBCOMMITTEE ON AVIATION

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 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 Carolina
CONRAD BURNS, Montana                DANIEL K.INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        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
                                 ------                                

                        SUBCOMMITTEE ON AVIATION

                   TRENT LOTT, Mississippi, Chairman
TED STEVENS, Arkansas                ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              DANIEL K. INOUYE, Hawaii
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  BILL NELSON, Florida
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
                                     FRANK LAUTENBERG, New Jersey


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 25, 2003................................     1
Statement of Senator Lott........................................     1
Statement of Senator Rockefeller.................................    36
    Prepared statement...........................................    43
Statement of Senator Stevens.....................................    31
Statement of Senator Sununu......................................    33

                               Witnesses

Dillingham, Gerald L., Director, Civil Aviation Issues, General 
  Accounting Office..............................................     1
    Prepared statement...........................................     4
Plavin, David Z., President, Airports Council International-North 
  America........................................................    20
    Prepared statement...........................................    23
Woodward, Woodie, Associate Administrator for Airports, Federal 
  Aviation Administration........................................    14
    Prepared statement...........................................    17

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina, 
  prepared 
  statement......................................................    47
Response to written questions submitted by Hon. John McCain to:
    Gerald L. Dillingham.........................................    48
    Woodie Woodward..............................................    49

 
     AIRPORT IMPROVEMENT PROGRAM AND OTHER AIRPORT FINANCING ISSUES

                              ----------                              


                       TUESDAY, FEBRUARY 25, 2003

                               U.S. Senate,
                          Subcommittee on Aviation,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:40 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Trent Lott, 
Chairman of the Subcommittee, presiding.

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

    Senator Lott. The Subcommittee will come to order. This is 
another in a series of hearings we plan at the full committee 
level and the subcommittee level on aviation legislation, 
aviation issues this year. We have already had, I believe, 
three hearings, and we plan to have others to make sure that 
all sectors of the aviation industry can be heard from. Today, 
this is a hearing on the Airport Improvement Program and other 
airport financing issues.
    We are honored to have on this panel Dr. Gerald Dillingham, 
director, Physical Infrastructure Issues of the GAO, Ms. Woodie 
Woodward, associate administrator for airports, FAA, and Mr. 
David Plavin, president, Airports Council International.
    As the Subcommittee Chairman, I have tried to start a new 
rule, that is hear from the witnesses first, and then the 
senators can make their statements and ask questions, and 
Senator Stevens has agreed to that process, and I hope Senator 
Sununu. But also in that vein, we will give senators extended 
time, if they need it, to make statements or ask questions.
    We are pleased to have you all with us today, and we have 
copies of your statements available to the senators, but we 
would be glad for you to present those statements or an 
abbreviated version of them.
    Dr. Dillingham, we welcome you, and we thank you for coming 
this morning, if you would like to proceed.

  STATEMENT OF GERALD L. DILLINGHAM, DIRECTOR, CIVIL AVIATION 
               ISSUES, GENERAL ACCOUNTING OFFICE

    Dr. Dillingham. Thank you, Mr. Chairman, Mr. Stevens, and 
Members of the Subcommittee.
    Since AIR-21 was enacted three years ago, Congress has 
asked the GAO to undertake several studies related to aviation 
finance in general, as well as studies of financing 
infrastructure development at the Nation's airports. My 
testimony this morning is drawn from these studies and will be 
illustrated with the charts on my right, copies of which we 
have provided to the members.
    We will address three questions. First, what are the 
estimated costs of planned capital development at airports? 
Second, how much funding have airports historically received 
for capital development? And if that funding continues at these 
levels, will it be sufficient to meet future development plans? 
And third, what options are available to address any potential 
differences between the estimated cost of planned development 
and available funding?
    The bottom line regarding developmental cost is that 
although there is a general consensus that maintaining the 
integrity of the Nation's airport system requires continual 
capital investment, there is not a consensus on how much and 
what types of development are needed. This point is illustrated 
in our first chart.
    This chart contrasts FAA's cost estimates for various types 
of development projects with estimates from the Airport Council 
International. The bar on the left shows FAA's estimate for the 
cost of airport planned development. FAA estimates the cost to 
be a little over $9 billion annually between 2001 and 2005. 
This estimate includes all types of projects, such as safety, 
security, capacity, and standards, all of which are eligible 
for Federal funding.
    On the right is ACI's estimate. Their estimate includes an 
annual addition of $5.7 billion. This additional $5.7 billion 
covers a variety of types of projects, some of which are 
eligible for Federal funding, some of which are not. This 
brings the Council's total estimate to nearly $15 billion 
annually.
    The next question is, How much money have airports 
historically received to fund development? This chart shows 
that from all sources, airports receive a little less than $12 
billion annually to fund development. A variety of bonds was 
the largest source of funds and accounted for 60 percent of the 
funds airports received. The next-largest sources of funds were 
the AIP fund which contributed about 20 percent, and PFC 
collections, which contributed about 13 percent. The remaining 
funds came from State and local grants and airport revenues.
    As the next chart shows, if past funding levels continue, 
there would be more than enough money to cover FAA's overall 
estimate of $9 billion for annual planned development. But as 
you can see from the figure on the right side of the chart, it 
would leave a gap of just over $3 billion from ACI's estimate 
of $15 billion annually.
    The potential policy implications of this gap can be seen 
when you look at the analysis of how development plans and 
funding sources differ by airport size. When you look at the 
large- and medium-sized airports, ACI's estimate for 
development, which is shown with the bar on the right side of 
the chart, totals about $11.7 billion, compared with $9.4 
billion in historical funding. For smaller airports, the 
development costs total about $3.3 billion compared with about 
$2.4 billion in historical funding.
    As the pie chart on the left shows, this means that about 
80 percent of the estimated costs for development of large-and 
medium-sized airports would be covered. The pie chart on the 
right side shows that almost 73 percent of the estimated costs 
for development for smaller airports would have been covered. 
Based on this comparison, it appears that it is more difficult 
for smaller airports to finance their development than larger 
airports.
    You can see an interesting dynamic when you compare the 
funding situations for airports today with the situation we 
reported in 1998. In 1998, the funding gap for larger airports 
was about 20 percent. Today, the situation is pretty much the 
same; the gap is still about 20 percent. But there has been a 
significant change for smaller airports. The figure on the left 
shows that in 1998, their funding gap was almost 50 percent. 
Today, the gap has dropped to 27 percent. However, 27 percent 
is still a significant gap for those airports that are most 
dependent on Federal funds.
    This finding suggests two things. First, those 
congressional initiatives, such as the recent increases in AIP 
funds, have helped close the gap for smaller airports. And 
second, those policies and programs that help smaller airports 
continue to be important.
    Mr. Chairman, neither FAA nor ACI's estimate includes the 
cost for airport infrastructure modifications for security 
enhancements. The most significant of these security-related 
infrastructure modifications are those that will be necessary 
to move those large explosive detection machines out of airport 
lobbies and integrate them into the existing baggage 
operations. These modifications have been estimated to cost 
about a billion dollars a year for the next five years. How 
that expense will be funded is a major unanswered question.
    There is also a real concern that funding these 
modifications with AIP funds will limit the ability of airports 
to undertake or complete other infrastructure projects. After 
9/11, AIP funding for security projects increased by more than 
800 percent. It went from $57 billion--or $57 million in 2001 
to just over a half a billion in 2002. This increase for 
security projects had the effect of making less money available 
to fund other types of capital development projects.
    Finally, as a result of our studies, we identified some 
options that the Congress may wish to consider to make more use 
of existing funds or to generate additional funding for 
development and security. These options include removing the 
cap on the PFC funds, redistributing AIP funds among types of 
airports, or expanding the use of letters of intent.
    With regard to security, Congress might want to consider 
the idea that if aviation security is a matter of national 
security, it might be funded from a general fund rather than an 
aviation-specific fund. Alternatively, Congress could consider 
setting up a separate fund for security projects. And finally, 
it has been suggested that such a security fund could operate 
much like the AIP program, including using letters of intent to 
leverage funds for security requirements.
    Mr. Chairman, as the Congress moves forward with 
reauthorizing FAA, it will have to decide on several key 
issues, including how to set and balance priorities of both 
airport development and aviation security. Many stakeholders 
also see this as a window of opportunity, an opportunity to 
prepare for the eventual rebound in the aviation industry and 
to do what is necessary to prevent a reoccurrence of the 
inefficiencies, congestion, and delays that the system 
experienced prior to 9/11.
    Thank you very much.
    [The prepared statement of Dr. Dillingham follows:]

 Prepared Statement of Gerald L. Dillingham, Director, Civil Aviation 
                   Issues, General Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    We are pleased to be here today to discuss airport financing 
issues, which are particularly important as you prepare to reauthorize 
the Wendell H. Ford Aviation Investment and Reform Act for the 21 
Century (AIR-21). Much has changed since the Congress enacted AIR-21 3 
years ago. At that time, the focus was on reducing congestion and 
flight delays. Today, flights are being canceled for lack of business, 
two major air carriers are in bankruptcy, and attention has shifted 
from increasing the capacity of the national airspace system to 
enhancing aviation security. Furthermore, as the federal budget deficit 
has increased, competition for federal resources has intensified, and 
the costs of airport capital development are growing, especially with 
the new requirements for security. Nonetheless, analysts expect the 
demand for air traffic services to rebound. Until that time, the 
unexpected slump in air traffic creates a window of opportunity to 
improve the safety and efficiency of the national airport system.
    My statement today is based on our ongoing and completed work on 
airport funding and addresses the following questions:

        1. What are the estimated costs of airports' planned capital 
        development?

        2. How much funding did airports receive for planned capital 
        development in recent years, and what were their principal 
        sources of funding?

        3. If past funding levels continue, will they be sufficient to 
        meet estimates of planned capital development?

        4. What options are available to address any potential 
        difference between planned development and available funding?

    Because our information on planned airport capital development, 
including the information we obtained from surveying 400 smaller 
airports, is preliminary, it is subject to change as we finalize our 
ongoing work.
    In summary:

   Although there is general consensus among stakeholders that 
        maintaining the integrity of the national airport system 
        requires continual capital investment, estimates vary as to the 
        type and cost of planned airport capital development required 
        to ensure a safe and efficient system. For 2001 through 2005, 
        FAA has estimated annual planned capital development costs of 
        about $9 billion, while the Airport Council International 
        (ACI), a key organization representing the airport industry, 
        has estimated annual costs of about $15 billion for 2002 
        through 2006. The estimates differ primarily because FAA's 
        includes only projects that are eligible for federal funding, 
        whereas ACI's includes projects that may or may not be eligible 
        for federal funding. Neither FAA's nor ACI's estimate covers 
        the airport terminal modifications needed to accommodate the 
        new explosives detection systems required to screen checked 
        baggage. According to ACI, the total cost of these 
        modifications could be $3 billion to $5 billion over the next 5 
        years.

   From 1999 through 2001, airports received an average of 
        about $12 billion a year for planned capital development. The 
        primary source of this funding was bonds, which accounted for 
        almost $7 billion, followed by federal grants and passenger 
        facility charges, which accounted for $2.4 billion and $1.6 
        billion, respectively. The amounts and types of funding also 
        varied by airport type. Of the $12 billion, large-and medium-
        hub airports received over $9 billion, and smaller airports 
        received over $2 billion.

   If airports continue to receive about $12 billion a year for 
        planned capital development, they would be able to fund all of 
        the projects included in FAA's estimate, but they would not be 
        able to fund about $3 billion in planned development estimated 
        by ACI. While this projected shortfall could change with 
        revisions in future funding, planned development, or both, it 
        nevertheless indicates where funding differences may be the 
        greatest.

   Options are available to increase or make better use of the 
        funding for airport development, and these options would 
        benefit different types of airports to varying degrees. For 
        example, raising the current cap on passenger facility charges 
        would primarily benefit larger airports, while increasing or 
        redistributing Airport Improvement Program grant funds would be 
        more likely to help smaller airports.

FAA's and the Airport Industry's Estimates of Airports' Planned Capital 

        Development Vary Substantially
    The estimated costs of planned airport capital development vary 
depending on which projects are included in the estimates. According to 
FAA's estimate, which includes only projects that are eligible for 
Airport Improvement Program (AIP) grants, the total cost of airport 
development will be about $46 billion, or about $9 billion per year, 
for 2001 through 2005. FAA's estimate is based on the agency's National 
Plan of Integrated Airport Systems, which FAA published in August 2002. 
ACI's estimate includes all of the projects in FAA's estimate, plus 
other planned airport capital projects that may or may not be eligible 
for AIP grants. ACI estimates a total cost of almost $75 billion, or 
nearly $15 billion per year for 2002 through 2006. Projects that are 
eligible for AIP grants include runways, taxiways, and noise mitigation 
and noise reduction efforts; projects that are not eligible for AIP 
funding include parking garages, hangars, and expansions of commercial 
space in terminals.
    Both FAA's and ACI's estimates cover projects for every type of 
airport. As table 1 indicates, the estimates are identical for all but 
the large-and medium-hub airports, which are responsible for 
transporting about 90 percent of the traveling public. For these 
airports, ACI's estimate of planned development costs is about twice as 
large as FAA's.



    According to FAA's analysis of the planned capital development for 
2001 through 2005, airports will use 61 percent of the $46 billion for 
capacity enhancement, reconstruction, and modifications to bring 
airports up to the agency's design standards and 39 percent to fund 
safety, security, environmental, and other projects. See figure 1.



    Neither ACI's nor FAA's estimate includes funding for the terminal 
modification projects that are needed to accommodate the new explosives 
detection systems required to screen checked baggage. ACI estimates 
that these projects will cost a total of about $3 billion to $5 billion 
over the next 5 years. A key reauthorization issue facing the Congress 
is how these terminal modification projects will be funded. In 2001, 
the Congress allowed FAA to use AIP funds to help pay for some new 
security projects; however, this use of AIP funds affected the amount 
of funding that was available for some development projects. 
Specifically, in fiscal year 2002, FAA used $561 million in AIP grant 
funds for security projects, or about 17 percent of the $3.3 billion 
available. The use of AIP grant funds for new security projects in 
fiscal year 2002 reduced the funding available for other airport 
development projects, such as projects to bring airports up to FAA's 
design standards and reconstruction projects. The use of AIP grant 
funds for security also caused FAA to defer three letter-of-intent 
payments totaling $28 million to three airports until fiscal year 2003 
or later. \1\
---------------------------------------------------------------------------
    \1\ Letters of intent represent a nonbinding commitment from FAA to 
provide multiyear funding to airports beyond the current authorization 
period. This commitment enables airports to proceed with projects 
without waiting for future AIP grant funds because it provides 
reasonable assurance of reimbursement for allowable costs.
---------------------------------------------------------------------------
Airports Recently Received About $12 Billion a Year, Mostly from Bonds 
        and Federal Sources
    From 1999 through 2001, the 3,364 airports that make up the 
national airport system received an average of about $12 billion per 
year for planned capital development. The single largest source of 
these funds was bonds, followed by AIP grants and passenger facility 
charges. (See table 2.) It is important to note that the authorized AIP 
funding for fiscal years 2002 and 2003 totaled $3.3 billion and $3.4 
billion, respectively. However, because data for funding from other 
sources were not available for these years, we used the figures from 
1999 through 2001, the most recent years for which consistent data were 
available.



    The amount and type of funding vary depending on the airport's 
size. For example, as shown in figure 2, the large-and medium-hub 
airports depend primarily on bonds, while the smaller airports rely 
principally on AIP grants. Passenger facility charges are a more 
important source of revenue for the large-and medium-hub airports 
because they have the majority of commercial-service passengers.



Past Funding Levels Would Cover All of FAA's Planned Development 
        Estimate but Would Fall About $3 Billion Short of ACI's 
        Estimate
    If the funding for airport capital development remains at about $12 
billion a year over the next 5 years, it would cover all of the 
projects in FAA's estimate. However, it would be about $3 billion less 
per year than ACI's estimate. Figure 3 compares the average annual 
funding airports received from 1999 through 2001 with FAA's and ACI's 
estimated annual planned development costs for 2001 through 2006. This 
difference is not an absolute predictor of future funding shortfalls; 
both funding and planned development may change in the future. However, 
it does provide a useful indication of where funding differences may be 
the greatest.



Funding Difference Would Affect Smaller Airports Proportionally More 
        Than Larger Airports
    In percentage terms, the difference between recent funding levels 
and ACI's estimate of planned capital development is somewhat greater 
for smaller airports than it is for large-and medium-hub airports. From 
1999 through 2001, smaller airports received an average of about $2.4 
billion a year for planned capital development while large-and medium-
hub airports received an average of about $9.4 billion. If these 
funding levels continued, smaller airports would not be able to fund 
about 27 percent of their planned development, while large-and medium-
hub airports would not be able to fund about 20 percent of their 
planned development. Figures 4 and 5 illustrate the differences between 
recent funding levels and the costs of planned capital development 
projected for smaller and for large-and medium-hub airports.




Ability to Fund Planned Capital Development Has Improved for Both 
        Smaller and Larger Airports
    The difference between past funding and planned development has 
declined over the past 5 years, and, at recent funding levels, airports 
would be able to fund a higher percentage of their planned capital 
development than they could fund in 1998. At that time, we reported 
that smaller airports could fund about 52 percent of their planned 
capital development, compared with about 73 percent today, which 
represents an increase of 21 percent. We also reported that large-and 
medium-hub airports were able to fund about 80 percent of their 
development and are able to fund the same amount today. \2\ See figure 
6.
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, Airport Financing: Annual 
Funding As Much As $3 Billion Less Than Planned Development, GAO/T-
RCED-99-84 (Washington, DC: Feb. 10, 1999).



    The primary reason why smaller airports can fund more of their 
planned capital development today than they could in 1998 is that AIR-
21 increased both the total amount of funding for AIP grants and the 
proportion of AIP funding that went to smaller airports. Specifically, 
AIR-21 increased the funding for two AIP funds that primarily or 
exclusively benefit smaller airports--the state apportionment fund and 
the small airport fund--and it created general aviation entitlement 
grants, which also benefit smaller airports. \3\ As a result of these 
changes, smaller airports received almost 63 percent of the $2.4 
billion in AIP grant funds that airports received each year, on 
average, from 1999 through 2001. Large-and medium-hub airports can also 
fund more of their planned development today than they could in 1998 
primarily because they are able to issue more bonds and to charge a 
higher passenger facility fee.
---------------------------------------------------------------------------
    \3\ Moreover, if we replaced the AIP figures for 1999 through 2001 
with the AIP figures appropriated for fiscal year 2002 and authorized 
for fiscal year 2003 in our analysis, assuming no changes in the 
distribution of AIP funds, smaller airports would be able to cover even 
more of the estimated cost of their planned development because AIP 
grant funds for fiscal years 2002 and 2003 are about $1 billion more 
than the average annual AIP funding for 1999 through 2001. Because data 
for funding from other sources were not available for these years, we 
used the figures from 1999 through 2001, the most recent years for 
which consistent data were available.
---------------------------------------------------------------------------
Options Are Available to Address Difference between Funding and Planned 
        Development
    Options are available to increase airport funding or to make better 
use of the existing funding. These options, some of which were 
authorized or implemented as part of AIR-21, include increasing the AIP 
grant funding for smaller airports, increasing passenger facility 
charges, creating a separate fund for new security projects, and using 
innovative financing approaches. The various options would benefit 
different types of airports to varying degrees. It is also important to 
note that even though the airlines may be experiencing financial 
problems, most large airports have very solid credit ratings and could, 
if necessary, issue more debt without facing exorbitant interest rates.
    To help address the difference between funding and planned 
development, AIR-21 provided that up to $150,000 a year in AIP grant 
funds be made available to all general aviation airports for up to 3 
years for airfield capital projects, such as runways, taxiways, and 
airfield construction and maintenance projects. On February 11, 2003, 
we reported that since the program's inception in fiscal year 2001, 
general aviation airports have received about $325 million, which they 
have used primarily to help build runways, purchase navigational aids, 
and maintain pavements and airfield lighting. \4\ Most of the state 
aviation officials and general aviation airport managers we surveyed 
said the grants were useful in meeting their needs, and some suggested 
that the $150,000 grant limit be increased so that general aviation 
airports could undertake larger projects. However, a number of state 
officials cautioned that an increase in the general aviation 
entitlement grant could cause a decrease in the state apportionment 
fund that states use to address their aviation priorities.
---------------------------------------------------------------------------
    \4\ U.S. General Accounting Office, Aviation Finance: 
Implementation of General Aviation Entitlement Grants, GAO-03-347 
(Washington, DC: Feb. 11, 2003).
---------------------------------------------------------------------------
    Another option would be to increase or eliminate the cap on 
passenger facility charges. This option would primarily benefit larger 
airports, because passenger facility charges are a function of the 
volume of passenger traffic. However, under AIP, large-and medium-hub 
airports that collect passenger facility charges must forfeit a certain 
percentage of their AIP formula funds. These forfeited funds are 
subsequently divided between the small airport fund, which is to 
receive 87.5 percent, and the discretionary fund, which is to receive 
12.5 percent. Thus, smaller airports would benefit indirectly from any 
increase in passenger facility charges. In our 1999 report on passenger 
facility charges, \5\ we estimated that a small increase in these 
charges would have a modest effect on passenger traffic. At that time, 
we estimated that each $1 increase would reduce passenger levels by 
about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent. 
Since AIR-21 raised the cap on passenger facility charges from $3.00 to 
$4.50, the full effect of the increase has not been realized because 
only 17 of the 31 large-hub airports (55 percent) and 11 of the 37 
medium-hub airports (30 percent) have increased their rates to $4.50. 
Additionally, 3 large-hub airports and 6 medium-hub airports do not 
charge a passenger facility fee. The reluctance to raise passenger 
facility charges is likely the result of several factors, including the 
views of airlines, which are opposed to any increase in passenger 
facility charges because such an increase would raise passenger costs 
and reduce passenger traffic. Nonetheless, if all airports were to 
increase passenger facility charges to the current ceiling, additional 
revenue could be generated.
---------------------------------------------------------------------------
    \5\ U.S. General Accounting Office, Passenger Facility Charges: 
Program Implementation and the Potential Effects of Proposed Changes, 
GAO/RCED-99-138 (Washington, DC: May 19, 1999).
---------------------------------------------------------------------------
    Recently, the head of the Transportation Security Administration 
suggested setting up a separate fund for security projects. Such a fund 
might be comparable to AIP, which receives revenue from various 
aviation-related taxes through the Airport and Airway Trust Fund. 
Having a separate fund would be consistent with the recent separation 
of aviation safety and security responsibilities.
    FAA has introduced other mechanisms to make better use of existing 
funding sources, the most successful of which has been letters of 
intent, a tool that has effectively leveraged private sources of 
funding. As noted, letters of intent represents a nonbinding commitment 
from FAA to provide multiyear funding to an airport beyond the current 
AIP authorization period. Thus, the letter allows the airport to 
proceed with a project without waiting for a future AIP grant because 
the airport and investors know that allowable costs are likely to be 
reimbursed. A letter of intent may also enable an airport to receive a 
more favorable interest rate on bonds that are sold to refinance a 
project because the federal government has indicated its support for 
the project. FAA has issued 64 letters of intent with a total 
commitment of about $3 billion; large-and medium-hub airports account 
for the majority of the total.
    Other approaches to making better use of existing funding resources 
were authorized under AIR-21. Specifically, the act authorized FAA to 
continue its innovative finance demonstration program, which is 
designed to test the ability of innovative financing approaches to make 
more efficient use of AIP funding. Under this program, FAA enabled 
airports to leverage additional funds or lower development costs by (1) 
permitting flexible local matching on some projects, (2) purchasing 
commercial bond insurance, (3) paying interest costs on debt, and (4) 
paying principal and interest debt service on terminal development 
costs incurred before the enactment of AIR-21. FAA has provided about 
$31 million for smaller airports to test these innovative uses of AIP 
funding. According to FAA officials, the results of the program have 
been mixed. The most popular option for airports has been flexible 
matching, which has resulted in several creative loan arrangements.
    In conclusion, Mr. Chairman, the aviation industry and the national 
economy are still struggling to recover their health. Analysts 
nonetheless expect the demand for air travel to rebound, and the 
nation's aviation system must be ready to accommodate the projected 
growth safely and securely. As the Congress moves forward with 
reauthorizing FAA, it will have to decide on several key issues, 
including how it wants to consider the airports' estimate of $15 
billion a year for planned capital development over the next 5 years, 
how terminal modification projects will be funded, and what priorities 
it wants to set, both for development and security. Sustaining recent 
funding levels would allow the majority of planned airport capital 
development to move forward, but it would not cover all of the 
airports' estimated costs, and it would not address the costly terminal 
modifications needed to accommodate explosives detection systems. 
Options such as additional AIP grant funds, increases in passenger 
facility charges, or the creation of a separate fund for new security 
projects could make more funding available for airport improvements. 
However, the growing competition for federal budget dollars and 
concerns about the impact of higher charges on airline ticket sales may 
limit the practicality of these options.

Scope and Methodology
    To determine how much planned development would cost over the next 
5 years, we obtained planned development data from FAA and ACI. ACI 
provided its estimate to us in January 2003, and we are still analyzing 
the data on which the estimate is based. To determine the sources of 
airport funding, we obtained capital funding data from FAA, the 
National Association of State Aviation Officials, Thomson Financial, 
and our survey of 400 general aviation and reliever airports. We 
obtained funding data from 1999 through 2001 because these were the 
most recent years for which consistent data were available. We screened 
the planned development and funding data for accuracy and compared 
funding streams across databases where possible. We also clarified 
ambiguous development or funding source information directly with 
airports. We did not, however, audit how the databases were compiled, 
except for our own survey. However, we have not finished analyzing the 
results of our survey, and the results presented in this testimony are 
still preliminary.
    We have been performing our ongoing work from May 2002 through 
February 2003 in accordance with generally accepted government auditing 
standards.
    This concludes my statement. I would be pleased to answer any 
questions that you or other Members of the Subcommittee might have.

    Senator Lott. Thank you very much, Dr. Dillingham. Very 
interesting testimony, and we'll want to ask you some questions 
about it after we hear from the other two witnesses.
    Ms. Woodward?

            STATEMENT OF WOODIE WOODWARD, ASSOCIATE 
         ADMINISTRATOR FOR AIRPORTS, FEDERAL AVIATION 
                         ADMINISTRATION

    Ms. Woodward. Good morning, Mr. Chairman and other Members 
of the Subcommittee. It is a pleasure to be with you today.
    I commend the Committee for focusing attention on the 
critical role airports play in the Nation's air transportation 
system. As you know, airports are faced with meeting both pre-
September-11th capacity challenges as well as post-September-
11th security challenges.
    Following the terrorist attacks, the financial consequences 
for airports were substantial. In my opinion, airports did 
everything in their financial power to minimize their operating 
and maintenance costs, including imposing hiring freezes, 
reallocating staff, restructuring or refinancing debt, and 
reviewing and, in some cases, raising discretionary charges. As 
a group, I believe airports continue to take the necessary 
steps to improve security and their cash flow.
    Today, I would like to provide the Committee with a brief 
overview of the needs of the system, discuss what happened in 
fiscal year 2002 as we tried to respond to the September 11th 
attacks, and then touch on what we see as the outlook for the 
future.
    Our most recent National Plan of Integrated Airport 
Systems, which we call the NPIAS and which Mr. Dillingham 
referred to, estimates $46 billion in airport development needs 
that are eligible for Federal aid for the period 2001 through 
2005. This figure represents an increase of 32 percent over the 
preceding estimate, or, on an annual basis, an increase from an 
average of about $7 billion per year to $9.2 billion per year. 
We see that every category of airport shows higher development 
needs, with the greatest increases at large-hub, non-hub, 
commercial service, and general aviation airports, and lesser 
increases at medium-hub, small-hub, and reliever airports.
    About two-thirds of the development in the plan is intended 
to accommodate growth in air travel, including more passengers 
and cargo and more and larger aircraft. Development that was 
proposed before September 11th will still be needed, but some 
of it may be deferred until activity rises to the point where 
it is warranted. To date, we have seen little change in the 
projected opening dates for the new runways that are being 
planned at large-hub airports.
    About one-third of the development estimates in our plan 
are intended to rehabilitate existing infrastructure and to 
keep airports up to standards. This includes accelerating 
upgrades of all runway safety areas and projects and projects 
associated with mitigation and prevention of runway incursions. 
The need for this development has not significantly decreased 
as a result of September 11th, but the timing of the 
implementation may be affected by financial concerns of the 
airports.
    In contrast to airfield projects, the expansion of 
passenger terminal buildings has slowed significantly since 
September 11th due to uncertainty about future security 
requirements, the temporary decline in traffic, and near-term 
financial problems of both airlines and airports, and, in 
particular, the airports who are dealing with declining 
revenues and increased operating costs.
    Historically, these projects receive nominal AIP funding, 
with airport revenue bonds and passenger facility charges 
serving as the principal financing tools. We project that these 
projects will resume as air traffic achieves pre-September-11th 
levels.
    As the Committee knows, fiscal year 2002 was a real 
challenge. Due to new security requirements airports needed to 
consider not only improvements to existing access control 
systems, but also changes in terminals and baggage systems, to 
improve passenger flows through screening checkpoints, and to 
accommodate the latest generation of baggage-screening devices. 
DOT's inspector general recently testified that modifications 
to terminals could be as high as $3 billion.
    Clearly, the security challenges for airports were and 
still are twofold--how to meet the new security requirements 
while at the same time preserving customer service and 
efficiency and, above all, how to pay for these new 
requirements.
    Airport operating costs have increased as revenues have 
declined. However, absent further shocks to the system, most 
large commercial service airports are maintaining their credit 
profiles, albeit with lower financial margins and reduced 
flexibility.
    As the airport size diminishes, however, its ability to 
recover is also diminished, as Mr. Dillingham said. The smaller 
airports are feeling the effects of September 11th probably 
more than any other segment. Many airports, especially those 
that have marginal air service, were highly subsidized by local 
communities before September 11th, and those financial 
difficulties are compounded by the serious traffic declines and 
higher security costs.
    Congress responded to this situation by making the AIP 
program temporarily more flexible. In fiscal year 2002, FAA 
applied a record level of $561 million from AIP funds to 
security projects. This represents, as Mr. Dillingham said, a 
more than 800 percent increase over the level of security 
funding awarded in fiscal year 2001.
    Despite this record level of funding for security, the FAA 
was still able to fund all safety projects, including runway 
safety areas and runway incursion action team recommendations. 
We were also able to fulfill our letter-of-intent commitments, 
fund noise mitigation and reduction projects, and ongoing 
projects that were phased.
    However, balancing security and capacity costs will 
continue to be a tough challenge in the future. Even though we 
will see some fruits of our past capacity infrastructure 
investment realized this year, with new runways becoming 
operational at Denver, Miami, Houston, and Orlando, the outlook 
for fiscal 2003 is shaping up to be similar to last year.
    We expect that a level of AIP similar to that in fiscal 
2002 will be used for security. Our colleagues at TSA and the 
FAA are fully aware of this dynamic. We will continue to work 
closely with them as they move to the new Department of 
Homeland Security, and we will commit to being a part of the 
examination of how these costs are to be borne in the future.
    For fiscal year 2004, the good news is that with all the 
other demands on the Federal budget, the President's budget 
provides for a continuation of the healthy funding level of 
AIR-21 for AIP of $3.4 billion. I think it is worth 
highlighting this feature of our budget, because preserving 
that level of support in the current budget environment speaks 
volumes about how important the President, Secretary Mineta, 
and Administrator Blakey believe Federal aid is to the Nation's 
airports.
    We also propose a restructuring of the AIP formulas to 
address some of the issues that Mr. Dillingham raised. One, to 
allow more funds to be targeted to those small airports with 
the greatest need and dependence on Federal assistance, while 
at the same time providing large airports access to Federal 
grants to support important projects that will benefit the 
airport system overall, and, finally, to make available a 
stable source of noise mitigation funding for communities.
    We expect that with this restructuring there will be 
approximately $87 million more for small airports for the 
fiscal year 2003 while still increasing discretionary grant 
funds to enable us to target those projects that serve national 
objectives and achieve the greatest system benefits overall, 
regardless of airport size.
    Details of how we would restructure AIP formulas will be 
provided by our reauthorization proposal that the Secretary 
expects to submit to you next month. The Administration's 
comprehensive bill will not only restructure and simplify AIP 
formulas but will also redesign the noise set-aside to provide 
a more stable source of Federal funding for environmental 
mitigation relating to airport development projects.
    In closing, Mr. Chairman, let me say that I believe the 
Nation's airports have been making good progress in meeting 
security challenges presented by the attacks of September 11th. 
The airport system was harshly affected by the attacks of the 
11th, but thousands of State and local officials working in 
cooperation with the FAA are doing a great job bolstering 
security, and we are well into the long process of recovery and 
stabilization. With Congress' support and guidance, I assure 
you that we will continue to work hard to assist the Nation's 
airports in meeting these challenges through a strong and 
flexible airport improvement program.
    That concludes my testimony. Thank you.
    [The prepared statement of Ms. Woodward follows:]

  Prepared Statement of Woodie Woodward, Associate Administrator for 
               Airports, Federal Aviation Administration

    Good Morning Mr. Chairman and Members of the Subcommittee:
    It is a pleasure to be here today to testify on the state of the 
Nation's airports and the important role the Federal Aviation 
Administration's (FAA) Airport Improvement Program (AIP) plays in 
airport development. I commend the Committee for scheduling this 
hearing because of the critical role airports play in our Nation's air 
transportation system. There has been a lot of attention paid to how 
air carriers are coping with the post-September-11th environment and 
the current economic situation--justifiably so. But it is of equal 
importance to examine the outlook for our country's airports. Airports 
are faced with meeting both pre-September-11th capacity challenges and 
post-September-11th security challenges. I must commend the airport 
community for how they've responded. Following September 11th, they did 
everything in their financial power to minimize their operating and 
maintenance costs, including imposing hiring freezes, reallocating 
staff, restructuring or refinancing debt, and considering raising 
discretionary charges. As a group, airports continue to take the 
necessary steps to improve security and their cash flow.
    An understanding of the broad needs facing the airport community 
should inform the debate on the next reauthorization of our programs. 
Today I would like to provide the Committee with a brief overview of 
the needs of the system, discuss what happened in fiscal year 2002 as 
we tried to respond to the September 11th attacks, and then touch on 
what we see as the outlook for the future.
    The FAA periodically prepares a report to Congress called the 
National Plan of Integrated Airport Systems (NPIAS). Among its 
functions, the NPIAS provides a five-year estimate of airport 
infrastructure development that is eligible for Federal aid and 
determined by the Secretary to be warranted or justified over the next 
5 years for all segments of civil aviation. The NPIAS published prior 
to the enactment of the Wendell H. Ford Aviation Investment and Reform 
Act for the Twenty First Century (AIR-21) estimated airport capital 
requirements at $35 billion over the period of 1998-2002, an average of 
$7 billion per year and an increase of 18 percent over the previous 
NPIAS estimate. Infrastructure needs at the large hub airports 
accounted for most of this increase, with terminal projects the major 
source of new capital requirements. In the face of growing airport 
infrastructure requirements, AIR-21 increased AIP by 70 percent and 
raised the $3.00 cap on passenger facility charges (PFCs) to $4.50.
    The most recent NPIAS, published last August, identified 3,364 
existing airports that are significant to national air transportation. 
It estimates $46 billion in airport development needs that are eligible 
for Federal aid for the period of 2001-2005. This figure represents an 
increase of 32 percent over the preceding estimate, or, on an annual 
basis, an increase from an average of $7 billion per year to $9.2 
billion per year. Every category of airport shows higher development 
needs, with the greatest increases at large hub, non hub, commercial 
service, and general aviation airports, and lesser increases at medium 
hub, small hub, and reliever airports.
    About two-thirds of the development in the NPIAS is intended to 
accommodate growth in air travel, including more passengers and cargo 
and more and larger aircraft. Development that was proposed before 
September 11th will still be needed, but some of it could be deferred 
until activity rises to the point where it is warranted. With respect 
to capital development plans, as a group, most airports are continuing 
with current capital expansions under way, but are revisiting contracts 
not already let and plans not yet started. To date, we have seen little 
change in the projected opening dates for the new runways that are 
being planned at large hub airports. These are large-scale, long-term 
programs that involve a sequence of planning and environmental reviews, 
approvals, financing and construction, typically over a 10 year period, 
and are not particularly sensitive to short-term fluctuations in 
traffic. However, in some cases, airports have had to scale back or 
defer major capital improvements, and we suspect that some of these 
projects may be canceled over the 5-year horizon, but not on a wide 
scale. Until traffic recovers, this only makes good business sense.
    About one-third of the development estimates in the NPIAS are 
intended to rehabilitate existing infrastructure and keep airports up 
to standards. This includes accelerating upgrades of all runway safety 
areas and projects associated with mitigation and prevention of runway 
incursions. The need for this development has not significantly 
decreased as a result of September 11th but the timing of the 
implementation may be affected by financial concerns of airports, 
particularly lower revenues and urgent security requirements.
    In contrast to airfield projects, the expansion of passenger 
terminal buildings has slowed significantly post-September-11th, due to 
uncertainty about future security requirements, the temporary decline 
in traffic, and near-term financial problems of airlines and airports 
dealing with declining revenues and increased operating costs. These 
projects are an increasingly important area of investment, as terminals 
are modified, expanded and replaced to accommodate more passengers, 
larger aircraft and increased competition among airlines. Historically, 
these projects receive nominal AIP funding, with airport revenue bonds 
and passenger facility charges (PFCs) serving as the principal 
financing tools. Based on our consultations with municipal bond rating 
agencies, underwriters, financial consultants and airports, we project 
these projects will resume as air traffic achieves pre-September-11th 
levels.
    As the Committee knows, fiscal year 2002 was a real challenge as 
the aftermath of September 11th continued to be a major driving force 
for airports and aviation as a whole. Due to new security requirements, 
airports needed to consider not only improvements to existing access 
control systems, but also changes in terminals and baggage systems to 
improve passenger flows through screening checkpoints and accommodate 
the latest generation of baggage screening systems. The projected 
capital cost of acquiring and installing security equipment has 
increased substantially since September 11th, but a full and accurate 
estimate is not yet available, so it is not possible to reflect the 
increase in the NPIAS estimate. DOT's Inspector General recently 
testified that modifications to terminals could be as high as $3 
billion. Clearly, the security challenges for airports were--and still 
are--twofold: how to meet new security requirements while at the same 
time preserving customer service and efficiency; and how to pay for the 
new requirements.
    While some of the increased security measures at airports have been 
visible to the public, what has not been so visible is the financial 
strain on the airports. Their operating costs have increased, with much 
of the staff on extended overtime. Additionally, there have been 
numerous requirements for emergency contracts for security equipment 
and services. At the same time, revenues have declined because large 
airports derive most of their money from passengers, directly through 
charges that are collected when airline tickets are sold, and 
indirectly through concessions, parking, and airline rates and charges. 
These major airports have had the greatest ability to rebound. Absent 
further shocks to the system, most large commercial service airports 
are maintaining their credit profiles, albeit with lower financial 
margins and reduced flexibility. As the airport size diminishes, 
however, its ability to recover is also diminished. The smaller 
airports are feeling the effects of September 11th probably more than 
any other segment. Many airports, especially those that have marginal 
air service, were highly subsidized by local communities before 
September 11th and those financial difficulties are compounded by the 
serious traffic decline and the higher security costs.
    Following September 11th, because airport operating costs were 
significant, Congress provided that any security-related cost, 
including operational and maintenance costs, could be funded using AIP 
funds. However, this authority was provided for one year only. 
Likewise, to make sure that airports did not default on loans, grant 
authority was broadened to help prevent any defaults. It was believed 
that by giving a temporary ability to fund these costs in the near 
term, airports would be able to absorb these costs in the future as 
traffic increases and the system recovers. In addition, Congress 
provided an additional $175 million to be used to offset direct 
operating costs for new security requirements placed on airports due to 
September 11th. This funding has been important especially to our 
nation's smaller airports.
    In response to the emergency triggered by the attacks of September 
11th, the FAA applied a record level of $561 million from AIP funds to 
security projects in fiscal year 2002. This represents a more than 800 
percent increase over the level of security funding awarded in fiscal 
year 2001 of $57 million, and exceeded the previous record of $99 
million, awarded in FY 1991, by more than $450 million. Despite this 
record level of funding for security, the FAA was still able, through 
innovative program management, to fund all safety projects, including 
runway safety areas and runway incursion action team recommendations; 
letter of intent commitments; noise mitigation and reduction projects, 
and ongoing phased projects. In addition, in part due to record levels 
of carryover entitlements, which the FAA converted into discretionary 
funds, we were able to fund some new start projects for capacity, 
rehabilitation and standards at the end of the year.
    As a percentage of AIP investment, capacity, rehabilitation and 
standards projects showed the greatest declines in fiscal year 2002 
compared with fiscal year 2001. As a one-year phenomenon, a reduction 
in spending in these areas did not have significant adverse 
consequences for the aviation system. In fact, there was a bright side 
to this scenario. Because of past investment in additional runways and 
improved technology, and in light of the temporary decline in air 
traffic activity, flight delays were down in 2002, with an annual on-
time arrival rate of 82 percent--compared to 76 percent in recent 
years. Balancing security and capacity costs will continue to be a 
tough challenge in the future. The FAA and the Transportation Security 
Administration (TSA) are fully aware of this dynamic. We have been 
working closely with TSA, and will continue to do so as they move to 
the new Homeland Security Department. FAA will be a part of the 
examination of how these costs are to be borne in the future.
    As for the short-term future of AIP funding, the outlook for fiscal 
2003 is shaping up to be very similar to last year--we expect that a 
level of AIP similar to fiscal year 2002 will be used for security this 
year. We have experienced some delays due to the lateness of the fiscal 
year appropriations process, but now that the President has signed the 
omnibus appropriation bill for this year, we expect that we will be 
able to process pending grant applications by early spring. Even though 
safety and security have always been and will continue to be our number 
one priority, I assure you that we have not lost sight of the fact that 
once traffic recovers and grows--and it will--the tremendous pressure 
to expand capacity will return. In fact, we will see some of the fruits 
of our past capacity infrastructure investment this year. New runways 
will become operational at Denver, Miami, Houston, and Orlando.
    As for the outlook for the longer term, there are considerable 
challenges for our grant program. Namely, how can we help meet the 
needs of the airport system as a whole and do so in a way that focuses 
on national priorities but still recognizes the dependence of smaller 
airports on AIP grants? One way is to ensure that our program has the 
necessary flexibility to provide smaller airports the resources they 
need, provide large airports access to Federal grant dollars to support 
important projects that will benefit the airport system overall, and 
make available a stable source of noise mitigation funding to 
communities. To this end, for fiscal year 2004, the good news is that, 
with all of the other demands on the Federal budget, the President's 
Budget provides for a continuation of the healthy funding level of AIR-
21 for AIP of $3.4 billion. I think it's worth highlighting this 
feature of our budget because preserving that level of support in the 
current budget environment speaks volumes about how important the 
President, Secretary Mineta and Administrator Blakey believe Federal 
aid is to the Nation's airports. We also propose a restructuring of AIP 
formulas to allow more funds to be targeted to those smaller airports 
with the greatest need and dependence on Federal assistance. We expect 
that, with this restructuring, there will be approximately $87 million 
more available for small airports than in fiscal year 2003, while still 
increasing discretionary grant funds to enable us to target those 
projects that serve national objectives and achieve the greatest system 
benefits, regardless of airport size. Details of how we would 
restructure AIP formulas will be provided by our reauthorization 
proposal that the Secretary expects to submit to you next month. The 
Administration's comprehensive bill will not only restructure and 
simplify AIP formulas but will also redesign the noise set-aside to 
provide a more stable source of Federal funding for environmental 
mitigation relating to airport development projects.
    Finally, I should note that, in addition to the AIP program, grants 
from state and local governments, bond financing, and their own rates 
and charges, airports also have additional source of funding available 
from PFCs. As of January 2003, FAA has approved 338 airports to collect 
PFCs for eligible projects. Estimated collections for calendar year 
2003 are projected to be $2.1 billion, up from an estimated $2.0 
billion in calendar year 2002. This reflects the implementation of the 
$4.50 PFC level authorized by AIR-21 by a growing number of airports. 
Currently 170 airports (including 29 of the 68 large and medium hubs) 
have requested and received authority to collect PFCs at the $4.50 
level.
    In closing, Mr. Chairman, let me say that I believe the nation's 
airports have been making good progress in meeting the security 
challenges presented by the attacks of September 11th and, at the same 
time, increasing airfield capacity at major airports. The airport 
system was harshly affected by the attacks of September 11th but 
thousands of state and local officials, working in cooperation with the 
FAA and TSA, are doing a great job of bolstering security and we are 
well into the long process of recovery and stabilization. We know that 
the financial consequences for airports have been substantial. With 
Congress' support and guidance, I assure you that we will continue to 
work hard to assist the Nation's airports in meeting these challenges 
through a strong and flexible airport improvement program.
    That concludes my testimony. I would be happy to answer any 
questions you or Members of the Subcommittee may have.

    Senator Lott. Thank you, Ms. Woodward.
    Mr. Plavin, the president of the Airports Council 
International, we would be glad to receive your testimony.

   STATEMENT OF DAVID Z. PLAVIN, PRESIDENT, AIRPORTS COUNCIL 
                  INTERNATIONAL-NORTH AMERICA

    Mr. Plavin. Thank you, Mr. Chairman and Members of the 
Subcommittee.
    I thank Dr. Dillingham and Ms. Woodward for the 
introduction that they have provided, because I think they have 
given you an idea as to where the critical issues in our system 
are. And I thought it might be useful, given the name on this 
hearing today to talk a little bit about a broader set of 
issues about how the airport system gets paid for, because I 
believe that it is rather critical.
    As with everything else, the system is not made up of 
magic. The passengers or the taxpayers pay. And in the aviation 
system, it is overwhelmingly the passengers and the shippers 
who pay for the system. They obviously pay fares. They pay the 
airlines for the airlines' costs and the things that they buy--
airplanes, fuel, airport services. They pay taxes to the 
Airport and Airways Trust Fund to pay for air traffic control 
and for the AIP system. And now they pay for TSA, as well. They 
pay fees--customs fees, agricultural fees, immigration fees, 
passenger facility charges, and they pay the airport for the 
services they buy from airports.
    The airport revenue picture for the operating side has 
about 50 percent of it coming from the people who do business 
at the airport--the airlines, the other tenants on the 
airport--from landing fees and rents, for example. And about 50 
percent of it comes from non-aeronautical charges, charges like 
food and beverage, retail, parking, rental cars. So there is a 
sizable portion of the airport operations that is not related 
to the people who do business on the airports.
    On the capital side, Dr. Dillingham, I think, has given you 
an indication of where the various pieces are over a period of 
time from 1999 through 2001. And as you can see from his 
numbers, the State and local contributions, which particularly 
focus on small airports, represent about 4 percent of the total 
annual cost of doing business. The AIP funding from the trust 
fund is about 20 percent. That number is considerably larger at 
smaller airports, and rather--much smaller at smaller--at 
larger airports. Everything else is generated at the airport--
airport revenues and reserves, about 4 percent; passenger 
facility charges, about 14 percent. And as Dr. Dillingham 
mentioned, about 60 percent of the total is paid for by airport 
revenue bonds of one kind or another.
    It is important that we pay attention to the fact, though, 
that while we have been able to cover them, that particular 
piece of revenue, those bond revenues, have to be repaid. And 
when they get repaid, they get put into the landing fees for us 
to then charge the people who are using our airports. So that 
if we add $5 billion a year to our indebtedness, we are also 
adding $400 million a year to our annual operating costs, and 
that means that over the three-year period Dr. Dillingham was 
looking at, our costs have been required to increase by some 
$1.2 billion per year in order to cover the indebtedness that 
the airports pick up as part of the overall cost of doing the 
capital program. And that means that in the kind of situation 
where we are today, where the airlines are in such significant 
financial distress, adding that level of increment to what they 
are going to have to pay in operating expenses, I think, is a 
significant burden that I hope we will be able to address as we 
talk about the reauthorization program.
    And as Dr. Dillingham mentioned, these numbers do not 
include the cost of security, either the operating costs or the 
capital costs associated with actually putting in place a 
solution which is a final solution, a permanent solution, 
unlike the temporary solutions that TSA put in place quite 
successfully in order to meet the deadlines that Congress put 
in place for them. We estimate that the cost of doing that, of 
putting in these ultimate solutions, probably ranges from $3- 
to $5 billion, numbers that are not reflected in the numbers 
that we were talking about so far.
    Which brings me to the question about what are the 
appropriate roles and responsibilities of the airports, the 
Federal Government, the Transportation Security Administration, 
the FAA, and so on. It is our view that we have moved from a 
situation where we have had a partnership over the years to one 
where the Federal Government and the organizations of the 
Federal Government have been getting the local governments that 
run airports, that are airports, to more and more relinquish 
the kinds of roles and responsibilities that they have had up 
to this point. I think the next FAA reauthorization provides 
airports with an opportunity to begin improving that 
relationship.
    The written testimony talks about some of the specific 
things that we think are important to address as we go through 
the exercise. We need to provide the airports with the 
resources they need to meet future demand. Capacity continues 
to be an issue. While the passengers have not yet returned to 
their year-2000 levels, aircraft are increasing much more 
rapidly, which means that the congestion that we experienced in 
the year 2000 will come back long before the numbers of 
passengers come back. We have got smaller airplanes in the 
system, which means that we actually are very close to the 
level of aircraft operations that we were at well before 9/11.
    Secondly, we believe that the capacity needs are long 
overdue anyway, that airports have been considerably behind 
their ability to meet those needs, and, as this Committee has 
mentioned on a number of occasions, the ability to put a 
capital improvement program in place, particularly with 
runways, is made much more difficult by the kinds of 
requirements that that process includes.
    The FAA has done a very good job in trying to streamline 
that process, but it is still quite lengthy. GAO has reported 
that it often takes as much as 10 to 15 years to build a new 
runway to deal with the kind of capacity we are talking about. 
And ultimately, we also will need, therefore, to put additional 
gates in place, additional square footage of terminals, access 
roads, and so on, parking, at airports.
    Mr. Chairman, I think the point I want to make today is 
that we know the difficulties that the budget includes. We 
understand the difficulties of trying to add additional 
resources to the airport, to the aviation program. But we 
believe that it is necessary. We believe that the airports must 
have additional resources in order to satisfy the requirements 
that have been mandated upon them.
    One thing we can do, for example, is to talk about looking 
at the kinds of conditions that are attached to AIP grants, to 
PFCs, the process for getting them approved. We hope that it is 
possible in the future to begin to look at all of the various 
funding sources as being eligible to fund any lawful airport 
purpose. We are not suggesting that the airports take the money 
that they have and use it for non-airport purpose. On the 
contrary, we believe very strongly that that is a critical part 
of what makes it possible for the airports to get into the bond 
markets. But, at the same time, the differences between those 
various funding sources can be a significant obstacle to 
funding the specific projects that need to be done.
    We believe that we need to streamline that process, and we 
have talked about that a number of times. We believe we need to 
protect passenger facility charges when airlines are in 
bankruptcy from being treated as just another set of funds from 
the State of the bankrupt airline. We would like to eliminate 
some of the bureaucratic restrictions now that occur in 
conjunction with getting the AIP program grants and the PFCs 
approved.
    But, most importantly, we want to be recognized as the kind 
of partner we have been over the years for the enhancement of 
the aviation system and today, especially in the aviation 
security business. We believe that the underlying requirements 
for security are requirements that the airports have met for 
many years, are consistent with their responsibilities as local 
governments, and ones that we would very much like to 
participate in, assuming that we will be allowed to do that.
    Mr. Chairman, airports stand ready to become full partners 
with the Federal Government. By working together, we can 
marshal Federal and local resources to ensure that we have the 
safest and most secure system possible. We can also be prepared 
for the increasing number of passengers who will be using our 
aviation system in the future.
    Thank you very much.
    [The prepared statement of Mr. Plavin follows:]

  Prepared Statement of David Z. Plavin, President, Airports Council 
                      International-North America

    Chairman Lott, Ranking Member Rockefeller and Members the Senate 
Commerce Subcommittee on Aviation, thank you for inviting me to appear 
before your Committee to discuss airport financing. I am testifying 
today on behalf of Airports Council International-North America (ACI-
NA) and the American Association of Airport Executives (AAAE). ACI-NA 
represents local, regional and state governing bodies that own and 
operate commercial airports in the United States and Canada. AAAE 
represents the men and women who manage primary, commercial service, 
reliever and general aviation airports.
    Before I begin discussing airport financing and outlining our 
recommendations for the next Federal Aviation Administration (FAA) 
reauthorization bill, I would like to comment briefly on the current 
relationship between airports and the Federal Government.
    One of the most thoughtful and respected leaders in the airport 
industry is James Wilding, the president and chief executive officer of 
the Metropolitan Washington Airports Authority. Mr. Wilding recently 
announced that he will be retiring in April after spending 43 years 
rebuilding Ronald Reagan Washington National Airport and building and 
expanding Washington Dulles International Airport.
    Mr. Wilding has observed over many years that the relationship 
between airports and the Federal Government has deteriorated 
significantly. It has been moving from a partnership among federal, 
state and local governments to an environment where the Federal 
Government has forced local governments that are airports to relinquish 
many of their traditional roles and responsibilities. The next FAA 
reauthorization bill provides airports with an opportunity to begin 
improving that relationship.
    As everyone on this Committee knows, the Federal Government, 
itself, plays a prominent role in the aviation industry. It regulates 
airline safety, operates the national air traffic control system and 
administers a user-financed grant program to assist with capital 
investment in certain types of airport facilities. The Federal 
Government usually performs those responsibilities exceptionally well.
    The Federal Government, however, often fails to acknowledge the 
unique roles and responsibilities that airports have in ensuring 
safety, security, and capacity at their facilities, independent of the 
growth in federal mandates. Airports are owned and operated by units of 
state and/or local government. But the Federal Government increasingly 
treats airports as if they are private, commercial entities that need 
regulation in the public interest rather than local public entities.
    Mr. Wilding, like airport operators around the country, would 
prefer a more balanced relationship between airports and the Federal 
Government. While there is no single legislative step that Congress can 
take to accomplish that goal, we ask that Members of this Committee 
protect and restore the traditional roles and responsibilities of 
airports as you consider the next FAA reauthorization bill.
    Airports stand ready to become full partners with the Federal 
Government. By working together, we can marshal federal and local 
resources to ensure that we have the safest and most secure aviation 
system possible. We can also be prepared for the increasing number of 
passengers who will be using our aviation system in the near future.
Provide Airports With the Resources They Need to Meet Future Demand
    Mr. Chairman, I would like to begin my comments on airport finance 
by thanking you and the Members of this Committee who worked on H.R. 
1000, the Wendell H. Ford Aviation Investment and Reform Act for the 
21st Century, also known as AIR-21. As most of you know, the last FAA 
reauthorization bill included record funding levels for the Airport 
Improvement Program (AIP).
    Specifically, the law recognized the growing need for investment as 
it included $3.2 billion for the AIP program in Fiscal Year 2001 
(FY01), $3.3 billion in FY02, and $3.4 billion in FY03--a 64 percent 
increase above previous levels in FY01 alone. The law also raised the 
cap on Passenger Facility Charges (PFCs) from $3.00 to $4.50. Together, 
these actions have improved safety and capacity at airports around the 
country.
    In addition to increasing funds for the AIP program, Members of 
this Committee should also be commended for guaranteeing that all 
revenue and interest paid into the aviation trust fund will be spent on 
aviation. AIR-21 provides for budget points of order against any 
appropriations bill that either fails to spend all the trust fund 
receipts and interest or does not appropriate the total authorized 
levels for FAA's capital programs.
    But much has changed since Congress passed AIR-21 almost three 
years ago. The downturn in the economy and the terrorist attacks on 
September 11 has hit the aviation industry particularly hard. The 
entire aviation system was shut down for the first time in history, 
passenger levels declined and the nation's network carriers reduced 
capacity.
    In its Aerospace Forecast issued in March 2000, the FAA estimated 
that airline passenger traffic would decrease to 600.3 million 
enplanements in FY02. Despite this temporary reprieve, the agency 
expects that airline passenger traffic will increase by an average rate 
of 4 percent per year and reach one billion passengers by 2013--just a 
few years later than the agency had predicted before September 11. 
Given that airfield projects generally take a minimum of ten years and 
more to complete, we have no time to lose.
    Gerald Dillingham, the Director of Civil Aviation Issues for the 
General Accounting Office (GAO), recently testified before the House 
Transportation and Infrastructure Committee about the need for 
additional capacity. He said, ``enhancing the capacity and efficiency 
of the national airspace system through runway development and air 
traffic modernization is critical to preparing for the projected growth 
and demand for air travel.''
    Ken Mead, the Inspector General of the U.S. Department of 
Transportation (DOT), in recent testimony said, ``building aviation 
system capacity and more efficient use of airspace'' is one of four key 
issues for the next FAA reauthorization bill. Mead also suggested that 
it would be shortsighted for the FAA not to be ``strategically 
positioned for when demand returns through a combination of new 
runways, better air traffic management technology, airspace redesign 
and greater use of non-hub airports.''
    We agree with the comments made by Dr. Dillingham, Mr. Mead, other 
Administration officials and Members of Congress who have suggested 
that we be prepared for future demand. We should use this temporary 
downturn to our advantage and begin building new runways now--not later 
when passengers experience delays and cancellations like they did in 
2000 when one in four flights were delayed, cancelled or diverted, 
affecting some 163 million passengers. In order to be prepared for 
future demand, however, we need to continue making wise investments in 
aviation infrastructure as Congress did in AIR-21.
    ACI-NA recently surveyed airports around the country about their 
capital needs in order to determine how much investment in aviation 
infrastructure is necessary in the next few years. From that survey, we 
estimate that capital development costs will total more than $61 
billion between 2003 and 2006 at an average rate of about $15 billion 
per year. This estimate includes the costs of construction projects 
that are necessary but not eligible for AIP funds. These include 
parking lots, cargo buildings and terminal development, for example, at 
airports of all sizes.
    Dr. Dillingham cited the ACI-NA survey in his recent testimony. He 
also estimated that the average amount that airports received for 
capital development from all sources was about $12 billion per year 
between 1999 and 2001. If that trend continues, airports would face 
about a $3.4 billion shortfall in capital needs and be forced to delay 
important safety and capacity projects every year through FY06. 
[Members of this Committee should know that we make every effort to 
coordinate the distribution of our surveys with the FAA, the DOT 
Inspector General and GAO.]
    Ideally, AAAE and ACI-NA would prefer that Congress provide another 
major increase in AIP funding, take the aviation trust fund off budget 
and lift the federal cap on PFCs to help airports meet future demand. 
Considering the current fiscal climate and the financial troubles 
plaguing the airline industry, we realize these suggestions might seem 
impractical to some Members of this Committee. However, we encourage 
Congress to take these and other steps to ensure that airports have the 
resources they need to meet future demand.
    Provide Modest Increase in AIP Funding: We recognize the difficulty 
in providing significant increases in AIP funding, but the alternative 
is to fall further behind. Thus, we recommend that Congress authorize 
AIP at $4 billion in FY04 and increase the funding levels by an 
additional $100 million a year. By strengthening the trust fund we 
would also have more money available for necessary infrastructure 
investment as the industry turns around. Even at the funding level, a 
gap would exist between funding from all sources of capital and the 
annual capital needs of airports.
    Maintain Current Budget Protections: We also urge you to continue 
providing budget protections for the AIP program. The budget 
protections that you included in AIR-21 have worked exceptionally well. 
In fact, Congress has appropriated the same amount for AIP per year 
that it authorized in AIR-21. As you consider the next FAA 
reauthorization bill it is imperative that you maintain the current 
budget protections that have worked so well under AIR-21.
Unleash AIP Funds, PFCs and Airport Bonds
    Airports rely on a number of different sources to fund their 
capital needs. The two that may be most familiar to Members of this 
Committee are AIP and PFCs. Unlike many other transportation entities, 
airports generate much of their capital themselves through airport 
bonds, special facility bonds, state and local contributions and 
revenue generated from airport fees, rates and charges.
    One of the most important sources of funding, especially for small- 
and non-hub airports is AIP. Airports use AIP funds to finance a 
variety of capital improvements including runway and taxiway 
construction, navigation aids and airfield lighting. Airports, however, 
are strictly prohibited from using AIP funds for operational costs such 
as salaries, marketing plans and constructing revenue-producing 
terminal areas such as ticket counters and concession stands.
    PFCs are another source of revenue for airports. The PFC program 
allows airports to impose local fees on airline passengers enplaned at 
their facilities in order to pay for the development of the facilities 
they use at that airport. Airports may use PFCs for AIP-eligible 
projects. Unlike AIP funds, airports can use PFCs to pay interest on 
airport bonds and for construction on certain revenue-producing areas 
of airport terminals. The FAA estimates that airports collected 
approximately $2 billion from PFCs in FY02. Currently, 310 airports 
impose PFCs proving this is a local decision.
    Provide Airports with Flexibility on How They Can Use AIP funds and 
PFCs: As I mentioned previously, airports use revenue generated from a 
number of different sources. Each of these ``currencies'' has its own 
strings attached that create significant problems for airports. We 
believe that we should work toward an ``Airport Euro,'' a common 
currency to eliminate these multiple rules and regulations and permit 
airports to use AIP and PFC funds for any airport capital project, 
provided that we retain necessary prohibitions against revenue 
diversion and unjust discrimination.
    Under our proposal, for instance, airports would be free to use AIP 
funds and PFCs to acquire airline baggage systems, information 
technology, ground support equipment, gates and ticket counters. These 
measures are also responsible ways to support airline needs and 
strengthen competition at the same time.
    Streamline the PFC Process: In addition to giving airports 
flexibility in how they can use AIP funds and PFCs, we think Congress 
can improve the PFC program. Airports believe that the PFC program 
would be more useful if it were treated more like airport rates and 
charges. This would require less federal oversight and make the PFC 
program more efficient. At the very least, we think the application 
process should be streamlined.
    It can currently take more than nine months for airports to gain 
approval to begin collecting PFCs. This is simply too long, with no 
added benefits accruing. Eliminating the duplicative Federal Register 
comment process and the additional requirements placed upon airports 
applying for $4.00 and $4.50 PFCs could reduce those delays and save 
airports, airlines and taxpayers scarce dollars. We are encouraged by 
our recent conversation with FAA Administrator Blakey and her staff who 
suggest the FAA is seeking to streamline the PFC approval process.
    Protect PFCs that Bankrupt Airlines Owe Airports: Airlines collect 
PFCs on behalf of airports and then remit them to airports. Two major 
airlines--United and U.S. Airways--have already filed for bankruptcy. 
Other airlines may not be far behind especially if there is a war with 
Iraq causing fuel prices to rise and international passenger traffic to 
drop off. Airports now have to resort to the legal process to recover 
PFCs owed to them. In December a U.S. Bankruptcy Court judge ordered 
United Airlines to pay Denver International Airport $4.7 million in 
PFCs that the airline collected. Congress should codify the principle 
that PFCs are held in trust by the airlines and ensure that airports 
receive their PFCs in a timely fashion from airlines whether they have 
declared bankruptcy or not.
    Eliminate Unnecessary and Bureaucratic Competition Plans: Airports 
support almost of all of what was enacted in AIR-21. However, we hope 
this Committee will revisit the section on ``competition plans'' when 
it considers the next FAA reauthorization bill. AIR-21 included a 
provision that prevents certain large- and medium-hub airports from 
receiving AIP funds or collecting new PFCs unless they file competition 
plans with DOT.
    According to the report accompanying the House version of the 
legislation, the purpose of that provision was to require airports to 
demonstrate how they would provide access to new entrant carriers and 
allow incumbent carriers to expand. Like the Members of this Committee, 
airports want more competition--not less. There isn't a day that goes 
by that airport operators are not thinking about how they can expand 
service to their community. Airports realize that competition is the 
key to their efforts to both develop air service and to hold fares at 
reasonable levels for their passengers.
    The provision in AIR-21 that requires airports to file competition 
plans is unnecessary, burdensome and may have resulted in some 
unintended consequences. For example, FAA issued a revised 15-page 
Program Guidance Letter in November that tells airports that the agency 
expects detailed information on some 60 items. The agency, for 
instance, requests data on ``local passengers, average passenger trip 
length, average passenger yield, and number of city-pair markets served 
disaggregated by distance (distinguishing between markets of 750 miles 
or less and markets over 750 miles) . . . '' Some airports have 
informed us that the FAA treats these program guidance recommendations 
as requirements, even though most are inapplicable to most airports.
    Most of this data that DOT now collects is difficult and expensive 
for airports to mine for useful information. According to a recent ACI-
NA survey, it took some airports more than 200 hours and considerable 
cost to complete their competition plans. Moreover, some airports 
informed us that it took the FAA nine months to review their 
competition plans with little or no benefit provided to the traveling 
public.
    While we understand the goal that Congress had in mind when it 
created this requirement, it has led to unintended and bureaucratic 
consequences with no material change in the airports must do their 
business and not demonstrable impact on competition. The current 
financial straights in which U.S. airlines find themselves make such 
efforts even more superfluous.
    We encourage you to eliminate the competition plan requirement when 
you consider the next FAA reauthorization bill. This is one positive 
provision to recognize the unique roles of airports and restore their 
rights, roles and responsibilities.
    Reclassify Airport Bonds as Governmental: In addition to AIP funds 
and PFCs, airports generate revenue from bonds. Unfortunately, federal 
tax law unfairly classifies tens of billions of dollars in outstanding 
airport bonds as so-called ``private activity'' bonds. As a result, 
airport bond issuers are charged higher interest rates on their 
borrowing than they otherwise would pay and are unable to ``advance 
refund'' outstanding bonds to take advantage of lower interest rates. 
The current charges to airport users would be reduced to reflect these 
lower interest costs.
    But, in addition, airports are public entities that serve a vital 
public purpose. That fact has been proven true repeatedly in the 
aftermath of the September 11th terrorist attacks. We believe that 
Congress should take steps to reclassify these airport bonds as 
``governmental.'' Doing so would save airports millions in financing 
costs and would allow airports to take full advantage of historically 
low interest rates in today's market to refinance outstanding debt. 
After September 11, Congress gave New York City similar authority, and 
billions of dollars were refinanced to the public's benefit.
Partner with Airports to Enhance Aviation Security
    Chip Barclay, the President of AAAE, recently testified before this 
Committee on behalf of AAAE and ACI-NA regarding aviation security. 
During his opening comments, Mr. Barclay urged the Transportation 
Security Administration (TSA) to work with airports as partners rather 
than treat them like a privately regulated party. As he pointed out, 
airports are ``TSA's partners with law enforcement powers and identical 
incentives to keep our citizens safe.''
    Mr. Barclay's comments go hand-in-hand with the remarks that I made 
at the beginning of my testimony about the need to protect and take 
advantage of the traditional roles and responsibilities of airports. As 
you begin considering the next FAA reauthorization bill, the key 
security recommendations that we outlined in that testimony are 
consistent with a partnership approach and are worth repeating.
    Prevent AIP Funds From Being Drained for Security-Related Projects: 
DOT Inspector General Mead said that ``striking a balance on how 
airport funds will be used for aviation system capacity, airport safety 
and security'' will be another major issue for the next FAA 
reauthorization bill. He also pointed out that ``continuing to use a 
significant portion of AIP funds and passenger facility charges (PFCs) 
on security projects will have an impact on airports' abilities to fund 
capacity projects.''
    We share Mr. Mead's concerns about who is going to pay for 
installing explosive detection systems (EDS) at airports and the 
potential impact that this could have on safety and security projects 
at airports. AAAE and ACI-NA have been making the case that airports 
should not be forced to choose between spending AIP funds on much-
needed safety and capacity projects or on security-related projects 
mandated by the Federal Government. Even if we were faced with such a 
choice, there is simply an inadequate amount of revenue generated by 
the trust fund to finance EDS installation.
    Unfortunately, as the GAO has made clear, current policy is forcing 
airports to choose between safety and capacity or security. In FY02, 
airports spent approximately $561 million in AIP to pay for security-
related projects. This is ten times more than the $56 million that 
airports spent on security during the previous fiscal year. In other 
words, airports deferred more than $500 million in AIP funds to improve 
safety and capacity last year because there is not a separate source of 
funds available to pay for security-related construction projects. 
While this may have been justifiable for a year, it is not sustainable 
for the long-term if we prudently plan for future growth and manage 
current safety issues.
    Congress has attempted to provide airports with at least some of 
the funding necessary to install EDS machines. The FY02 supplemental 
appropriations bill included $738 million for that purpose. Airports do 
not know how TSA has spent that $738 million to date, and we look 
forward to the results of the DOT Inspector General's review of the 
spending.
    Even if the full $738 million were spent exactly as Congress 
intended, it still will not be enough to cover the costs of installing 
EDS machines behind the ticket counter and integrating them into 
baggage systems. Boeing estimates that this will cost $3 billion. Based 
on surveys conducted by ACI-NA, we think that cost could reach $5 
billion.
    I would like to stress that installing EDS machines behind the 
ticket counter is not for aesthetic purposes as some have suggested. At 
many of the 429 commercial service airports, TSA temporarily installed 
EDS machines in crowded airport lobbies in an effort to meet the 
December 31, 2002 deadline for screening all checked baggage. But 
keeping these EDS machines in airport lobbies rather than integrating 
them into baggage systems behind ticket counters has created numerous 
problems that go well beyond aesthetics.
    DOT Inspector General Mead pointed out recently that the only way 
you can efficiently screen 100 percent of the baggage for explosives at 
large airports is by integrating EDS machines into baggage systems. 
Second, leaving EDS machines in airport lobbies results in less 
productive use of machines, requires more TSA staff to operate them and 
causes passengers to spend longer times at ticket counters, creating 
unnecessary security and safety risks. Airports around the world have 
many years of experience with the risks associated with the 
concentration of large numbers of people at the front of the terminal.
    On a related issue, we must also strive to reduce the so-called 
``hassle factor'' that is exacerbated when passengers are forced to 
wait in several queues at the ticket counter even before they even 
reach the security checkpoint and the airline gate. This may seem 
insignificant, but the ``hassle factor'' is just one more reason why 
some passengers have simply avoided flying altogether since September 
11.
    Reimburse Airports for New Security Requirements: In addition to 
new construction costs associated with installing EDS machines, 
airports are now paying for new operational security costs. After the 
terrorist attacks on September 11, the FAA and later the TSA required 
airports to deploy additional law enforcement personnel, enhance 
airport surveillance and revalidate all airport-issued identification. 
For the last two years, this has resulted in a 38 percent increase in 
airport operational security costs.
    Congress authorized $1.5 billion in FY02 and FY03 to reimburse 
airports for these additional security mandates as part of the aviation 
security bill. Unfortunately, airports did not receive the necessary 
appropriations. As part of the FY02 Department of Defense 
appropriations bill, which included emergency funding for other 
agencies, Congress approved $175 million to reimburse airports for new 
security requirements. Airports, however, submitted approximately $445 
million in requests that the FAA deemed acceptable leaving about a $270 
million shortfall.
    Congress approved an additional $150 million in the FY02 
supplemental appropriations bill to reimburse airports for their 
operational costs. However, Congress designated those as contingent 
emergency funds, and the President ultimately decided not to spend $5.1 
billion in the bill including the $150 million that was slated to go to 
airports.
    Moreover, security costs are escalating again as airports respond 
to a higher threat level that has been in place since February 7. The 
orange threat level forces some airports to close parking, conduct more 
random vehicle searches and deploy more law enforcement officers. It is 
unclear how long the higher threat level will be in place; however, it 
could continue for some time especially if the United States goes to 
war with Iraq.
    Since the previous authorization of $1.5 billion expires in FY03, 
we encourage this Committee, as part of the next FAA reauthorization, 
to authorize $500 million per year to reimburse airports for new 
security requirements, such as deploying additional law enforcement 
officers. These new security requirements are federal national security 
mandates, and airports should be reimbursed for the cost of 
implementing them. Without reimbursement from the Federal Government, 
airports will have no other choice than to pass those additional costs 
on to the array of airport users, including in large part, the airlines 
that are facing their own financial challenges.
    Require FAA and TSA to Pay for Space the Agencies Use at Airports: 
The FY02 omnibus appropriations bill also includes a provision that 
requires FAA and TSA to pay for the space the agencies use at airports. 
It precludes the use of space at security checkpoints that airports 
provide to TSA without cost. With TSA deploying some 62,000 federal 
screeners at airports around the country, the agency has requested 
significant amounts of space at airports for employee training, office 
space, break rooms and other purposes. It is only fair that FAA and 
TSA--like other airport tenants who occupy space for which airports 
incur the cost of construction and maintenance--should be required to 
pay for the space they use. In addition, we share the DOT Inspector 
General's view that the new Department of Homeland Security should make 
every effort to consolidate airport facilities with other federal 
tenants.
    We are pleased that the Administration's FY04 budget request 
includes a general provision that would require FAA to pay for the 
space the agency uses at airports. Although Congress has supported 
airports on this issue in the appropriations process, we encourage this 
Committee to include a provision in the next FAA reauthorization bill 
that will require FAA and TSA to pay for the space the agencies use at 
airports.
    Allow Airports to Make Decisions About Parking: TSA has asserted 
that it has the authority to determine whether vehicles should be 
allowed to park within 300 feet of airport terminals. This issue of the 
``300 foot rule'' has been a source of continuing friction between TSA, 
airports and the traveling public.
    While TSA has made some improvements recently, we strongly believe 
that airports are able to make their own decisions about parking near 
their terminals after they consult with their Federal Security 
Directors and with other state and local law enforcement authorities. 
The Federal Government does not dictate to local governments on how 
they protect shopping malls, office buildings, schools, museums or 
sports stadiums. The non-aeronautical areas of airports should not be 
treated any differently.
    Use New Technology to Enhance Security and Expedite the Processing 
of Passengers: Just a few days after the terrorist attacks, DOT 
Secretary Norman Mineta formed two teams to examine ways to improve 
airport and aircraft safety. The Rapid Response Team on Airport 
Security recommended that new technologies should be used at airports 
to identify passengers, workers and crews. The team also concluded that 
there is an urgent need to establish a nationwide program of voluntary 
pre-screening of passengers, together with the issuance of ``smart'' 
credentials to expedite the processing of passengers.
    We cannot run an efficient public transportation system if we try 
to treat all 700 million passengers a year like potential terrorists. 
We need a voluntary system that allows frequent travelers to provide 
enough information on themselves, so government and industry can agree 
they belong in a ``low-risk'' pool.
    The aviation security bill that Congress passed last year called on 
DOT to study options for improving positive identification for 
passengers including the use of biometrics and smart cards. We 
encourage this Committee to take additional steps toward deploying new 
technologies when it considers the next FAA reauthorization bill.
    Allow Airports to Continue to Control Perimeter Security: Airports 
should continue to be responsible for maintaining perimeter security. 
Again, this relates to the proper relationship between airports and the 
Federal Government that I discussed at the beginning of my statement. 
Providing perimeter security is inherently an airport responsibility. 
We strongly encourage this Committee to ensure that airports continue 
to control the perimeter around their facilities.
    Require TSA to Conduct Regulatory Burden Tests Like Other Federal 
Agencies: Airports understand that there are times when TSA must issue 
emergency directives that don't fall under the typical Federal Register 
process required of other federal agencies. Nevertheless, that does not 
justify TSA issuing operational directives that duplicate airport-
center responsibilities. At the very least, TSA should have to spell 
out why they need to intrude on a traditional local government, airport 
responsibility and share proposed operational requirements with airport 
operators. Too often, representatives of airports have either not been 
briefed or given so little time to respond that it is clear that the 
input was pro-forma rather than designed for true interchange among 
partners.
    Reimburse Airlines for New Security Costs: When he testified before 
the Senate Commerce Subcommittee on Aviation on February 12, James May, 
the new President and CEO of the Air Transport Association, argued that 
``Congress must establish and enforce an unalterable policy that 
aviation security is the responsibility of the Federal Government.'' 
Airports, too, agree that paying for this national security need should 
be the responsibility of the Federal Government. Airports have a 
symbiotic relationship with airlines, and we want the airlines to 
succeed. We hope that Congress will consider authorizing funds from the 
general treasury to reimburse carriers for their new security costs 
just as we are asking you to reimburse airports for our new capital and 
operational security costs.

Improve Air Service to Small Communities
    Since Congress deregulated the airline industry in 1978, it has 
been difficult for many small communities to retain and attract new 
commercial air service. The terrorist attacks on September 11 and the 
downturn in the economy have made that challenge even more difficult. 
Airline passenger traffic has declined, and airlines responded by 
cutting capacity and service to less profitable small communities.
    In March 2002, the GAO reported that the total number of daily 
departures from airports in small communities that it studied declined 
by almost 20 percent between October 2000 and October 2001. Moreover, 
the agency found that the number of small communities served by only 
one airline increased to 47 percent during the same time period. The 
GAO pointed out that when one or more airlines pulled out of some small 
communities, passengers lost connecting service destinations and became 
more vulnerable to noncompetitive pricing.
    The DOT Inspector General also found that non-hub airports have 
been disproportionately losing access to large airports. According to 
the DOT Inspector General, direct service from non-hub airports in 
small communities to the largest 31 airports declined by approximately 
17 percent between September 2000 and September 2002. By contrast, 
access from medium and large airports to the largest 31 airports 
declined by 5 to 10 percent during the same period.
    Unfortunately for many small communities around the country, it 
doesn't appear that it will be any easier for them to attract new 
commercial air service any time soon. As I noted earlier in my 
testimony, two major airlines have already filed for bankruptcy and 
other airlines may not be far behind. This would likely place even more 
pressure on airlines to reduce capacity and cut service to small 
communities.
    All sizes of airports have adversely affected by the economic 
downturn and by the terrorist attacks on September 11. But it is clear 
from reports issued by the GAO and DOT Inspector General that small 
communities have suffered greatly. The challenge for this Committee 
will be to preserve air service to small communities when it considers 
the next FAA reauthorization bill. AAAE and ACI-NA have a few 
recommendations on how to improve air service to small communities.
    Expand the Small Community Air Service Development Pilot Program: 
On behalf of small airports around the country, AAAE and ACI-NA would 
like to thank the Members of this Committee for creating the Small 
Community Air Service Development Pilot Program in AIR-21. Although 
that program has been up and running for less than a year, we are 
confident that it will help improve air service to airports that suffer 
from infrequent service and high airfares as Congress intended.
    As all of you know, AIR-21 authorized $20 million for the program 
in FY01 and $27.5 million in FY02 and FY03. After Congress appropriated 
$20 million for the program as part of the FY02 DOT Appropriations 
bill, DOT selected 40 communities from 38 states to participate in the 
program.
    The program was extraordinarily successful, reflecting the pent-up 
demand for creative solutions. Unfortunately, however, 139 communities 
that applied for funds did not receive any. As we expected, the demand 
for grants far exceeded the $20 million that Congress appropriated for 
the program in the FY02 DOT appropriations bill. The fact that DOT 
received 179 proposals requesting more than $142 million underscores 
how much interest there is in this program.
    Congress should be commended for appropriating another $20 million 
for the Small Community Air Service Development Pilot Program in the 
FY03 omnibus appropriations bill. However, given the number of 
communities that applied for funds from this program and the continuing 
reduction in air service to small communities, we urge this Committee 
to consider making a greater investment in the Small Community Air 
Service Development Program. We urge you to approve a major increase in 
funding for the Small Community Air Service Development Program that 
reflects current demand.
    Maintain the Essential Air Service Program: The Essential Air 
Service (EAS) program is another program that has helped small 
communities for many years. Congress created the program in an effort 
to ensure that certain small communities would continue to receive 
commercial service after it deregulated the airline industry. The EAS 
program has suffered in recent years from irregular funding and at 
times unreliable service from carriers facing higher operating costs.
    We encourage Congress to improve the Essential Air Service program 
rather than let it die on the vine as the Administration is proposing. 
The Administration's budget request includes only $50 million for the 
EAS program--$65 million less than the amount that Congress approved 
for the program as part of the FY03 omnibus appropriations bill. The 
President's request calls on local communities to provide up to a 25 
percent matching share.
    Like the Federal Government, state and local governments have been 
hard hit by the downturn in the economy and the attacks on September 
11. Some communities simply do not have the resources to come up with 
the local match required under the Administration's proposal. With 
small communities being disproportionately hit by the industry's 
economic declines, now is the time to step up our efforts to help small 
communities--not abandon them and prevent people from having access to 
the air transportation system simply because the live in a small 
community. Access is one of the most vital ingredients of the public 
purposes served by our national aviation system.
    Invest in the FAA's Contract Tower Program: Another program that 
has improved service and safety at airports in small communities is the 
FAA's Contract Tower Program. This program, which is endorsed by the 
DOT Inspector General, has been in place since 1982 and currently 
provides for the cost-effective operation of air traffic control towers 
at 219 smaller airports in 46 states.
    With help from this Committee, AIR-21 created the Contract Tower 
Cost Share Program, which allows more than 30 airports that fall 
slightly below the eligibility criteria to participate in the program 
if they provide local funds. We recommend that this Committee authorize 
$8 million for the Contract Tower Cost Share Program per year to allow 
additional airports to participate in the program and improve air 
traffic safety at their facilities.

Prevent Future Delays by Increasing Aviation Capacity
    Two years ago, the biggest issue facing the aviation industry 
seemed to be a combination of diminishing capacity and increasing 
number of flight delays and cancellations. In 2000, one in four flights 
were delayed, cancelled or diverted affecting some 163 million 
passengers. AAAE and ACI-NA responded by developing the Expedited 
Airport System Enhancement (EASE)--an initiative to expedite the review 
and approval process for projects that would enhance capacity and 
reduce delays at the nation's busiest airports.
    For instance, we called for a coordinated federal review of 
critical national airport capacity enhancement projects and recommended 
that the list of categorical exclusions be expanded. We also suggested 
that airports should be allowed to provide funds to the FAA to hire 
additional, project-specific staff and consultants to expedite the 
review of critical capacity projects.
    On behalf of airports around the country, we want to thank the 
Members of the Senate Commerce Committee for the significant progress 
you have made on project streamlining in the past two years. We would 
particularly like to thank Sen. Hutchison and Sen. Rockefeller for 
sponsoring S. 633, the Aviation Delay Prevention Act. And we thank the 
rest of the Senate Commerce Committee for approving this bill in 2001.
    I commented earlier about the need to protect the roles and 
responsibilities of airports. With that in mind, we urge you to 
reconsider a provision in S. 633 that would prevent certain airports 
from receiving AIP funds and collecting new PFCs if they ``decline to 
undertake expansion.'' This proposed penalty is unnecessary and wrongly 
suggests that airports somehow desire fewer runways, less capacity and 
more delays. Nothing could be further from the truth.
    Airports around the country are exceptionally frustrated by the 
fact that it often takes them 10 to 15 years to construct a new runway, 
and that is why we are seeking legislative assistance. We hope that 
this Committee will revisit this unnecessary provision in the next FAA 
reauthorization bill.
    Despite the welcome progress that this Committee has made in the 
past two years on project-streamlining, Congress was unable to send a 
bill to the President's desk before the 107th Congress adjourned. We 
hope Congress will pick up where it left off last year and pass a 
stand-alone, project-streamlining bill soon. If necessary, we encourage 
Members of this Committee to include project-streamlining provisions in 
the next FAA reauthorization bill.
    Chairman Lott, Ranking Member Rockefeller and Members of the Senate 
Commerce Subcommittee on Aviation, thank you for inviting me to 
participate in today's hearing on airport financing. All of us at ACI-
NA and AAAE look forward to working with you during the 108th Congress 
as you consider the next FAA reauthorization bill.

    Senator Lott. Thank you very much.
    Senator Stevens, I believe, has another meeting he needs to 
go to, so I would like to yield to him.
    Now, how is the Ted Stevens International Airport doing? Is 
security pretty good up there?
    Senator Stevens. I just left it, and it looks good.
    Senator Lott. Good, all right.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. I am concerned about the President's 
recommendation--I approve it--to target medium and small 
airports in the AIP funding portion of the budget this year, 
but I wonder how realistic that is in view of the size of these 
terminals at the major airports.
    As I travel around the country, I have the impression that 
there is a contest between architects to see who can build the 
highest ceilings and the most garish types of airports. Why are 
you all funding those enormous projects, in terms of the size 
of these terminals?
    Ms. Woodward. Senator, terminal projects are not eligible 
for funding out of the AIP program. Many airports choose to use 
their passenger-facility-charge-generated money for those. But 
certainly airport improvement grants are not used at all for 
those terminals.
    Senator Stevens. Are they all funded by bonds, totally?
    Ms. Woodward. From bonds, passenger facility charges, and 
the airlines contribute to some of the funding; it's a 
combination of funding.
    Senator Stevens. You are telling me that none of the money 
for those large monstrosities is coming out of the money that 
should be going to small- and medium-sized airports?
    Ms. Woodward. Correct. AIP money cannot be used for 
terminal projects.
    Mr. Plavin. Senator, I think it is also true that the kind 
of costs that you have been seeing associated with airport 
terminals is not typically a function of the architecture; it 
is simply a function of the space that needs to be provided, 
and they are costs that are typically negotiated with the local 
airport tenants to be sure that they, who are ultimately going 
to have to pay the bill for this, are satisfied with both what 
it looks like and what it can provide for them.
    Senator Stevens. All right, I stand corrected, but I do not 
know why they have to have 50-foot ceilings in those airports. 
It is still something--someone is paying for it.
    Mr. Plavin. Well, the actual cost of the increased 
ceilings, I think we saw an example of that when we went to 
look at the buildings of the Washington National Airport. That 
was actually modified at the request of the airlines with that 
kind of a criticism in mind. And it turns out it did not really 
save an awful lot of money to bring that down. We do need the 
volume to accommodate the number of passengers who are actually 
being accommodated, and the passenger experience, I think, has 
become a very important part of what people are looking for 
when they travel.
    Senator Stevens. What do you think about the security 
program? As you mentioned, all three of you mentioned, we are 
really not dealing with that money here today. It is going 
through another department now, but it is going to be sizeable. 
I was in Nome recently, and I saw that the terminal there had 
been--a third of the terminal had been taken over by the 
security agency. They just moved the airlines aside and said, 
``We need space,'' and took it. That means that those airlines 
have to expand the space if they are going to continue to 
operate. So it does seem to me that the burden of that security 
program is put on the small- and medium-sized airports much 
more than the large airports. Have you all got a plan to figure 
out who is going to pay for that?
    Mr. Plavin. Senator, the current situation does not show 
any Federal funding for any of those projects. That leads us to 
assume that the airports, once again, will have to identify the 
sources from within their own capabilities to fund those.
    Admiral Loy suggested the last time he testified that he 
recognized that there was a wake that he had left as he had 
gone through the airports in installing the equipment necessary 
to meet the short-term deadlines. But I think we all agree that 
the long-term solution probably requires us to build new 
baggage capabilities somewhere behind the ticket counters so 
that we actually get the flow moving, so that we do not have to 
have the lines we have been experiencing.
    And as you point out, the number of square feet that has 
been taken over by the need to actually screen some of those 
bags has been enormous. And it is not just confined to the 
small airports, although the small airports are the ones where 
it is most obvious. Fort Lauderdale, for example, reports that 
their lines, because they used to be in the terminal, have now 
actually extended outside into the roadway because of the 
amount of property that has been taken over, you know, for the 
screening purposes, and that is not atypical. That is rather 
common. So that--and TSA is aware of this, and they have been 
working with us.
    Obviously, we are still trying to find the revenue, and 
that is one of the reasons we have been talking with them about 
either a letter-of-intent program or a memorandum-of-
understanding program where the airports would step up and say, 
``We'll fund the long-term program, but we would hope that, 
subject to appropriation, obviously, over time, we could be 
reimbursed for some of those costs in the same way that we are 
today through the AIP's letter-of-intent program.''
    Senator Stevens. Well, I come from a State where 75 percent 
of the travel between cities is by air. As a matter of fact, 75 
percent of the cities can be reached only by air. And when you 
look at the small- and the medium-sized airports, they have got 
a much different burden today. The delays in those smaller 
airports are much greater than those in the larger airports 
throughout the--what I call the ``megapolis centers'' of the 
country. And I am very worried about how we are going to fund 
that. If you come into this part of the country, you can drive 
between cities, and there seems to be an increasing number of 
people taking that option. We do not have that option, and yet 
we seem to be at the low end of the totem pole as far as 
getting funding for these facilities that are demanded by the 
security systems.
    I want to urge a review of the security systems at small 
airports. Intrastate security does not need to be the same as 
the interstate security, but today it is, and I think that is a 
burden on intrastate travel. So I hope we can find some way to 
review those costs and not put them so heavily upon the small- 
and medium-sized airports, particularly in States such as mine.
    Thank you very much.
    Senator Lott. Thank you, Mr. Chairman. I am sure we will be 
talking to you further about some appropriations that might be 
needed on some of these issues.
    Under the early-bird rule, Senator Sununu, we will be glad 
to take your questions or comments.

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman.
    Mr. Plavin, you talked about the burden for the costs of a 
lot of these improvements and expenditures on infrastructure 
and the burden being carried by, I think you said the 
passengers and the shippers, and you tried to give a picture of 
how the burden was carried. But you did not really say whether 
that was appropriate or not.
    Mr. Plavin. Well, I think----
    Senator Sununu. Is----
    Mr. Plavin.--that's a very fair question. From airport-
specific point of view, since I represent airports, obviously I 
would like to see more of the burden picked up by the taxpayer, 
because it becomes increasingly difficult with the small number 
of players in our business to find the revenue in order to keep 
up with the----
    Senator Sununu. Well, I think it is a pretty fair 
assumption, though, that those that are flying on airplanes, 
are taxpayers; those that are buying the products that are 
shipped on airfreight and incur the costs of airfreight, those 
consumers are taxpayers. So I think you should qualify that. 
You are suggesting it should be paid by those taxpayers that 
are not necessarily flying as much as the taxpayers who are 
flying and buying products that were shipped by air.
    Mr. Plavin. I guess this is a sort of a classic political 
call and probably above my pay grade, but----
    Senator Sununu. Well, no, it----
    Mr. Plavin.--my sense is exactly that.
    Senator Sununu.--it's a practical recommendation.
    Mr. Plavin. My sense is exactly that, in fact, the 
taxpayers, generally, even those who do not fly, get a 
significant benefit out of the system. They get the benefit of 
having their packages delivered to home, they get the benefit--
--
    Senator Sununu. But the costs incurred----
    Mr. Plavin.--of people being able to travel.
    Senator Sununu.--by the shippers who are using the air and 
whatever security that warrants, whatever the freight costs 
including transit, fuel, security, and overhead, it is 
incorporated into the cost of the product, is it not?
    Mr. Plavin. Oh, I think that is right. And I think that the 
point is that at the----
    Senator Sununu. So who is benefitting from the air system 
and not paying for it?
    Mr. Plavin. I think that there are general public examples, 
like, for example, those people who use the roadways which 
would otherwise be used by people who are now flying airplanes. 
There are people who use the railroads, for example, or could 
use the railroads, who are now flying airplanes. I think there 
are a lot of opportunities----
    Senator Sununu. That is good for the air industry.
    Mr. Plavin. Well, it may or may not be good for the air 
industry.
    Senator Sununu. Well, if they are paying their PFCs and 
their airline ticket tax, I assume it is good for 
infrastructure construction.
    Mr. Plavin. I guess my sense of it is that a strong 
aviation system has been demonstrated to be good for the 
broader economy, that, as Senator Stevens pointed out, there 
are some parts of the country where the economy literally 
cannot function without a strong aviation system. And I think, 
generally speaking, since the passenger pays for virtually 
everything in the system right now, my argument would be that I 
think the general taxpayer probably ought to pick up some 
portion of the burden, especially if we are talking about 
national security kinds of issues, that those kinds of things 
are not problems only for people in the--who are on the 
airplanes, as we, unfortunately, saw on 9/11.
    Senator Sununu. I agree wholeheartedly that it is important 
to our economy, and that is why we have supported it in the 
past, and that is why we will continue to support it, but it 
does seem to me that the costs that are borne by those that 
benefit from the system right now seem appropriate. What I am 
trying to get at is whether or not you are recommending a 
significant change from the current burden-sharing. And to be 
sure, those--what you refer to as taxpayers, but, you know, you 
might describe more as those that do not utilize the air 
transportation system right now, they are picking up a share. 
They are--in the AIP program, whether it's $2 billion or $3 
billion.
    And you, I can understand, are advocating for a bigger 
investment in AIP. We are going to do the reauthorization and I 
have a sneaking suspicion, a sneaking suspicion, in the new 
authorization bill, there will be more set aside for AIP than 
in the old authorization bill, but I do not want to go too far 
afield.
    Mr. Plavin. Senator, the AIP program----
    Senator Sununu. So, but----
    Mr. Plavin.--is actually----
    Senator Sununu.--but the----
    Mr. Plavin.--funded by the passengers, as well, because the 
ticket tax that you pay on your ticket goes into the trust 
fund, which is the source of the AIP funds. That was really the 
point I was trying to make.
    Senator Sununu. Okay. So those--you do not consider them to 
be the taxpayers--at least you use that phrase generally. You 
are talking about non-AIP now----
    Mr. Plavin. Right.
    Senator Sununu.--general fund, income taxes, find yet 
another source of revenue for AIP or other infrastructure. 
Okay. Thank you for clarifying there.
    My other question may be a little bit more of a criticism, 
and I hope I do not hurt anyone's feeling here, but, Mr. 
Dillingham, you went through a presentation where you talked 
about the funding gap based on the perceived needs. I think the 
numbers came from ACI, right? The $15 billion number, although 
I add 9 and 5.7, and I get $14.7 billion, not $15 billion on 
your first chart. But I do not want to quibble over a mere $300 
million.
    But that is the--certainly not--so that is the anticipated 
need. Now, then you show, sort of a, sources or current levels, 
and you show an average funding level of $11.8 billion. Now, it 
seems to me that we are looking out toward anticipated needs in 
the future, and you are looking at an average funding level 
from 1999 to 2001. And you have got AIP grants of $2.4 billion 
in your summary total of $11.8 billion. But that does not seem 
to me to really reflect the current level of AIP or even a 
reasonable projection of AIP. What was the AIP funding for 
2002, the actual for 2002 or the estimate for 2003?
    Dr. Dillingham. Senator Sununu, I think, at least I meant 
to say, ``about'' 15 billion. I was not trying to be exact.
    Senator Sununu. Sure.
    Dr. Dillingham. The figures that we used represented an 
average--a three-year average.
    And with respect to the specific question that you asked, I 
think AIP was around $3.4 billion. We used figures where we 
could get all the information, including for bonds as well, so 
we would have a complete picture. If, in fact, we had used the 
2002 AIP, we would still have a gap. The gap would be smaller. 
Instead of 27 percent for smaller airports, I think our 
calculations were that the gap would be about 12 percent. It 
would be about 17 percent for large- and medium-hubs airports.
    Senator Sununu. Thank you. And I think that is important. I 
understand there are still going to be needs, but we, as 
policymakers, are trying to make the best decisions we can 
based on the best information we have. And if, based on current 
appropriations and PFCs in the AIP program, you know, there is 
a gap of 12 percent versus 27 percent, that is a pretty big 
difference. Now, I have no fundamental issue with rounding 14.7 
to 15, but I do think there is a big difference between a 12 
percent funding gap and a 27 percent funding gap. Both are 
important, both are significant, but we may undertake some very 
different policy approaches to deal with it.
    I think the passenger charge that you have, the average 
PFC, again, it was projected before we raised the ceiling up to 
$450 million. So PFCs right now, I think, are running about 2 
billion, maybe even a little bit more than 2 billion, as 
opposed to 1.6 billion. You add up these differences, and I 
think that is how you get from a gap of 27 percent down to a 
gap of 12 percent.
    Now, again, that is not insignificant, but we are trying to 
make good decisions here based on the best information 
available, and it just seems to me that taking 1999 and 2000 
and averaging that and then comparing that to what you think we 
might need or want in 2002 or 2003 or 2006, that is really not 
the best data or the best information available.
    In particular, a final point, is that all of this data 
comes from pre-September-11th. And things have fundamentally 
changed--in some good ways, in terms of funding and addressing 
security issues, and some very bad ways, in terms of the costs 
that we are incurring.
    So I just did not find the, sort of, the funding comparison 
that you made especially helpful in looking forward and trying 
to address, as a policymaker, our future needs. I understand 
you were working with whatever information you had available, 
but I think it is a concern. I think we need to have 
information that more accurately reflects the current state of 
the program.
    It is an important program. I very much agree with some of 
the thoughts expressed by Senator Stevens, where, you know, we 
need to make sure that we have got the right balance for the 
large airports and the smaller airports. And I hope and I 
believe we are going to have the leadership necessary to 
address that this year.
    One final question, and I know you have been more than 
generous. There was some talk about the PFCs, flexibility on 
the PFCs, and I think that is something of real interest, what 
kind of requirements do we put on AIP or PFCs. What would you 
change, any of the panelists, if you were to add more 
flexibility to what the PFCs could be used for? What do you 
want to use them for that we do not allow you to use them for 
right now?
    Mr. Plavin. Well, specifically, I think both AIP and PFC 
have limitations on how they can be used for things where there 
is revenue associated with it. So for parking, for certain 
kinds of terminal projects, for cargo buildings, all of those 
kinds of things are specifically precluded. They are general 
lawful airport purposes under the statute, but you are not 
allowed to use the PFCs or the AIP for a lot of those, and 
there are very significant restrictions on how you actually use 
them, what kind of process you use, what kind of contracting 
you use, what kind of procurement or solicitation you use, as 
well.
    Senator Sununu. Parking garages, concessions, and--within 
terminals?
    Mr. Plavin. As examples, yes.
    Senator Sununu. Okay, thank you.
    Thank you, Mr. Chairman.
    Senator Lott. I will recognize the ranking member of the 
Subcommittee, Senator Rockefeller.

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

    Senator Rockefeller. Thank you, Mr. Chairman.
    I would just ask, I guess, Ms. Woodward, when you're 
thinking about the hub-and-spoke system--there has been some 
talk recently that that is going to disappear. I am not one of 
those people who believe that. I think it is here to stay and 
it is inevitable, it is inexorable. So when you come down to 
it, and you have indicated in your testimony you have 
passengers who are traveling somewhat less and their incomes 
are not doing very well; you have airlines that are traveling 
somewhat less, and their incomes are not doing very well; and 
you have a Federal budget deficit--this is all pre- whatever 
might happen in Iraq and rebuilding Afghanistan and the war 
against terrorism. With that as a background, understanding 
that there are not any easy ways out, I would just be 
interested, philosophically--do not be thrown off by this--how 
you look upon the role of the small airport where people are 
utterly dependent on it, not as dramatically as Senator 
Stevens, you know, where there is just no other way, but where, 
in effect, if you do not have a good airport, you are probably 
going to dry up as a State eventually, particularly if the next 
10 or 15 years are as difficult as I think they are going to 
be.
    So how do you, when you are talking about O'Hare, for 
example, or LaGuardia, and then you get to a place like 
Charleston or, you know--what happens in your head when you 
think about a small airport in a rural area where people have 
no other choice and a large airport in an urban area where they 
may, in fact, have another choice but there are more people? 
How do you balance that?
    Ms. Woodward. I think that is a good discussion to have, 
too, as we approach reauthorization, because you do have small 
areas where airports are great economic drivers. Not only are 
they important to transport people in and out of those 
communities; but for the communities themselves, they are 
important economic drivers.
    So first, as we look at reauthorization, we will make some 
proposals that are very specific, namely at ways in which we 
can maintain, through the formula grants, the money that the 
larger airports need. But we keep in mind, too, as these 
airports increase PFCs or collect PFCs, part of their AIP 
monies goes back to the pot of money to be doled out to the 
smaller airports. So that gives us some flexibility, and that 
is what we look for.
    Two, we are going to look at ways, through formula changes, 
to increase the funding, the percentage of funding, going to 
those smaller airports, because we do believe that smaller 
airports provide unique service and unique abilities for those 
areas to continue to grow. So we will continue to do that.
    I think also if we do, as we are going to propose, increase 
the discretionary money that we have, we will be able to target 
money to the larger projects that need to be funded, but also 
find that right balance to give money to the smaller airports 
that are critical to their communities.
    Senator Rockefeller. But isn't that really too comfortable 
an answer for you? I mean, it rolls off nicely, and I have no 
reason not to trust you completely, but we are in an era, I 
think, maybe for the next 20 years, where there is going to be 
absolutely brutal competition between airlines that say they 
can't and they have got a good case; passengers who say they 
can't, and they have got a good case; local folks who say they 
cannot, they have a good case; the Federal Government will say 
they can't, they have a good case. So then, philosophically, 
you are left with, ``I guess we just can't do it.'' Now, you 
used the word--I think it was on the AIP program--about 
``restructuring.'' And that is one of those words that always 
makes me very, very nervous, you know, because it does not 
necessarily bode well for the Huntington or Charleston or 
Elkins, West Virginia. Essential air services have been cut and 
a lot of things have been cut. So I want to press you further 
on that.
    Ms. Woodward. I think there are a couple of things. One, 
there has been funding, thanks to the Congress, in the last two 
years, for the small community service program, which is 
operated--at $20 million--it's operated by DOT to help focus 
attention on smaller communities that need service and to find 
ways to entice airlines to come there.
    I think when you mentioned in your earlier comments about 
looking at the hub system, I think you are seeing the airlines 
behave differently. You are seeing de-peaking, you are seeing 
flying some direct service to airports they have not flown to 
before. For example, I go down to South Georgia, where I grew 
up, to visit my parents about once a month, and I used to have 
to go through Atlanta or Charlotte to go to Jacksonville, where 
I fly. And now Delta has a non-stop flight from National to 
Jacksonville, which makes travel much easier. So I think you 
are seeing behaviors by the airlines themselves that are 
spreading out some of that traffic.
    Maybe I do sound too comfortable, but I am optimistic that 
this will continue and that we will not see a battle of the 
large versus the small. We will see more of an evening out of 
where the airlines will go. Maybe I am overly optimistic.
    Senator Rockefeller. Where does O'Hare stand?
    Ms. Woodward. We are in the process--the airport has 
submitted an airport layout plan that we are currently 
reviewing in our Great Lakes region. We are just beginning the 
environmental assessment process. And they have submitted a PFC 
application for funding some of the work for the environmental 
process. So we are just beginning a very long journey with that 
project, I think.
    Senator Rockefeller. Mr. Plavin, maybe I could ask you, 
when you think of rural airports, and Senator Lott and I surely 
specialize in those, how do you think of that in the realistic 
national priority budget allocation mix----
    Mr. Plavin. I----
    Senator Rockefeller.--in what are going to be obviously 
budget years? How do you really look at small rural airports?
    Mr. Plavin. I would say that airports look at the national 
system of 4,000 or 5,000 airports as a system, so that--I mean, 
because the large airports need the small airports, as well. I 
mean, that is--they get passengers from those. Their 
interactions with those are part of what the large airports see 
as their function in ``the system.''
    In my mind, I think what the means is that you recognize 
that the small airports probably cannot survive without 
significant kinds of aid out of the national system, 
particularly an AIP-type system. PFCs do not help a lot, 
because they do not have a lot of passengers to generate a lot 
of PFC money. So again we are looking primarily at AIP.
    My perspective suggests that what that means is that you 
wind up letting the airports of all sizes do what they can do. 
So the large airports have some ability to do some things 
outside the Federal program. My argument would be, we ought to 
let them do it. We ought to give them more operational freedom, 
more financial freedom. Right now, they are very heavily 
constrained by Federal policy and law about----
    Senator Rockefeller. Would it be----
    Mr. Plavin.--how they can charge, what they can----
    Senator Rockefeller.--would it be your view, therefore, 
that security funds should not come out of the AIP program?
    Mr. Plavin. Yes, absolutely. In my view--I think we have 
articulated this a number of times--is as a national security 
matter, it really should not come out of the base that we now 
desperately need both to let the small airports operate it and 
to let the system renew itself and expand to meet capacity.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Senator Lott. Thank you again for the testimony from all 
three of you.
    Ms. Woodward, I have asked others from the Administration 
as to when we might expect the Administration's proposal so 
that we could consider that before we begin fully developing 
the legislation that we hope to move. As I look at the calendar 
for, really, the next 18 months, I can see that we are going to 
have a logjam later on this year and next year. And I also 
think that there is an urgency about this need for this 
reauthorization and things, hopefully some improvements we can 
include in that legislation. And therefore, we are hoping that 
we can move forward in March and hopefully have this on the 
floor before the end of May.
    Senator Lott. So when can we expect to receive the 
Administration's proposal?
    Ms. Woodward. Senator, like you, we are anxious to get it 
out there, too, because we think there are some critical issues 
that need to be addressed. The word that we have is that we are 
shooting to have the bill up to you sometime in March, as you 
indicated.
    Senator Lott. Please do not delay too much, because I would 
be of a disposition to go forward without you----
    Ms. Woodward. We will get it here.
    Senator Lott.--if you wait too long, because we need to get 
it done, and if we do not get in the front of the line, we are 
going to get squeezed out later on in the year. So it is not a 
threat, other than just we need to get this moving.
    Let's see here. Dr. Dillingham, some parts of the airline 
industry have recommended a tax holiday, or--if there is war, 
for instance, they are going to be coming in right away to seek 
some relief, and that would be one of their proposals. And of 
course, that goes in the Aviation Trust Fund. Have you 
evaluated what effect that would have on FAA's program, such as 
the Airport Improvement Program?
    Dr. Dillingham. Mr. Chairman, we have not evaluated that 
issue, but I can reflect back to 1996/1997, when there was, 
sort of, a tax holiday. That is, the taxes were not 
reauthorized. And at that point in time, we were beginning to 
see capital improvement projects being delayed and postponed.
    We have a request from your Committee to look at the 
effects of a tax holiday. There are so many factors that need 
to be considered. For example, how long would this tax holiday 
be?
    Senator Lott. When you----
    Dr. Dillingham. And what taxes would we be talking about? I 
mean, there are just a lot of factors that go into this to see 
the effect, and we hope to be able to provide you that 
information.
    Senator Lott. Well, that would be very helpful, and I hope 
you will move forward on that, because we may be faced with a 
decision on that also within the next month or two, and it 
would be very helpful if we had that information.
    As you know, more than 560 million in AIP funds were used 
for security-related expenses in fiscal year 2002, up from only 
57 million the previous year. And recently, TSA Under Secretary 
of the new Homeland Security Department testified that TSA 
would like to have, quote, ``one more bite at the apple'' in 
fiscal year 2003 to use AIP for high-priority projects. 
Frankly, I do not like that idea. I think we are undermining 
the AIP program for security costs.
    Now, when you add to that, perhaps, the further limitation, 
high-priority security projects, maybe that is a different 
thing. We gave them a tough task, and they had to do it 
quickly, within a prescribed period of time, and I think they 
have done a pretty good job. Of course, they also have exceeded 
the money that they were allocated, and I think that maybe they 
in some respects gold-plated some of the things that they have 
done in terms of how much space they have taken over, how much 
money the spend, how many people they employed, and all of 
that. But I just think that there is a real problem with 
another big bite out of AIP funds for security. How do you 
react to that?
    Dr. Dillingham. We reported that, of course, there was an 
800 percent increase last year on security funding. When we did 
our analysis, FAA indicated that they could probably provide 
one more allocation of money for security out of AIP without 
hurting funding for capacity projects. We did see some indirect 
effects on capacity projects. FAA says that they were able to 
fund their safety and security and other kinds of capacity 
projects, but that money that went to security also created a 
situation where some LOIs for airports were delayed. It also 
meant that there was about $140 million reduction in 
reconstruction projects that were not funded, and another $156 
million reduction in standards projects.
    Senator Lott. If you would, what kind of environmental 
projects were not funded?
    Dr. Dillingham. Reconstruction projects, which, as you 
know, included fixing taxiways and runways and things like 
that.
    So indirectly, there was an impact on capacity when with 
the money that was used for security could have been used for 
some of those capacity projects.
    Senator Lott. Over a two-year period, if you take over a 
billion dollars out of any program, it is going to have an 
impact, I would think.
    How do you respond to that same question, Ms. Woodward?
    Ms. Woodward. I agree with Mr. Dillingham. $561 million out 
of the program last year was a sizeable chunk. We survived 
because we have what we call ``carryover money,'' which is 
money that airports have been allocated and they were not able 
to use it and they turn it back to us. So we had a ``windfall'' 
of carryover money at the end of the year, which helped us fund 
the security projects and still get to some of the other 
projects. But that will catch up with us in the end.
    We have been talking with the TSA about working with them 
this year, and have been very clear with them that this year is 
it, in terms of how long we think we could tolerate this kind 
of bite out of the AIP. Because as you say, the AIP was not 
intended for that. It was intended for capacity, safety, and 
security projects, but, quite frankly, we all know, for more 
capital projects like capacity and safety.
    So, as Mr. Dillingham said, we are taking the hit in some 
of the reconstruction projects or rehab projects the airports 
have planned over the years. They could probably put those off 
for maybe a year or so, but we cannot do that over the long 
haul.
    Senator Lott. Mr. Plavin, the same question.
    Mr. Plavin. I think both Dr. Dillingham and Ms. Woodward 
are right, but I think there is another dimension, as well. And 
that is that to the extent that there were high-priority 
projects that would have been funded with AIP, and there were, 
obviously, some of those, what also happens is that the 
airports have to go out and borrow in the markets for 
additional kinds of revenue to do the kinds of things they 
might otherwise have used AIP money to pay for. So there is an 
additional cost to the system of having more indebtedness laid 
on it, which, of course, then raises the charges even further 
to those folks who are paying for the debt service.
    Senator Lott. I guess I take a little different position 
than I think Senator Sununu was taking. I really think State 
and local governments ought to bear more of the costs of 
airport activities. I am from a State that has been 
aggressively pursuing economic development. You know, we have 
got a Nissan plant coming in, $1.5 billion investment for the 
State, made a substantial investment of money, commitment, and 
funds from other sources that help bring that in because of the 
jobs. Well, a lot of these communities, a regional airport, let 
alone an international airport, it has a huge impact 
economically, and I just have a problem with the Federal 
Government building access roads and parking lots. I really 
kind of think that it is a jobs program, and the States only 
come up with 4 percent, State and local. I really think maybe 
they ought to bear a little bit more of the burden. And I am 
from a State that is very poor. But if you are going to get the 
benefit economically, you ought to put a little bit more money 
in there.
    How do you react to that?
    Mr. Plavin. Senator, I think in some respects the 
aggregation of the numbers in the GAO report, sort of, hides 
the fact that at smaller airports, airports smaller than, let's 
say, medium-hub airports, it is not at all unusual today for 
State and local governments to put in a sizeable amount of 
money in the smaller regional airports, particularly. That 4 
percent, remember, is 4 percent of a total that includes all of 
the large airports, and those folks are probably 75 percent of 
the total. If you take them out, I would be real surprised if 
we were not talking about a much higher percentage at the 
smaller airports today.
    Senator Lott. Maybe I should ask you this, but I may have 
to come back to Dr. Dillingham, too. This average annual plan 
development, FAA talking 9 billion, you are talking 15 billion, 
what is the big difference?
    Mr. Plavin. I think the biggest--well, first of all, the 
FAA number is the--what Woodie referred to as the NPIAS. That's 
the AIP-eligible program. There is a sizeable number of 
projects that airports do that are not eligible for AIP--
certain kinds of terminal work, certain kinds of cargo 
buildings, for example, certain kinds of parking structures, 
for example--they are not eligible for AIP, but they are things 
that need to be done under any circumstances that we need to 
find the revenue for.
    Senator Lott. Ms. Woodward, you seem to be wanting to 
respond to that.
    Ms. Woodward. I just wanted to point out what Mr. Plavin 
just pointed out, which is that our figure represents the 
Federal eligibility, those projects that are eligible for 
Federal funds. Their numbers represent projects above and 
beyond that.
    Senator Lott. All right. Well, while I have got you, Ms. 
Woodward, under the AIR-21, FAA was authorized to continue its 
innovative finance demonstration program, which gets to what 
Mr. Plavin was talking about a little bit, other ways, other 
ideas of how we can get revenue into these airport needs. And 
under the program, FAA enabled airports to leverage additional 
funds or lower development costs by permitting flexible local 
matching of some projects, purchasing commercial bond 
insurance, paying interest costs on debt, and paying principal 
and interest debt service on terminal development costs. What 
have been the results of that program?
    Ms. Woodward. It has had very good results. We have had a 
number of airports that have taken advantage of this, and it 
has really been to their benefit. Louisville, Kentucky, comes 
to mind as one that was particularly strong. It has been a very 
good program, and I would anticipate that it would continue, 
because it is a very successful program.
    Senator Lott. I have not been in enough airports yet, and I 
want to get around to all different sizes, and I do acknowledge 
that in some of these airports, the baggage checking things are 
right out there in the lobby. But when you are dealing with 
security and a terrorist threat, aesthetics are not your main 
consideration, or even a little inconvenience. And I do think 
that airline passengers have been very tolerant and patient 
with the things we have had to do the last couple of years. But 
I just do not feel an overwhelming urge to add a lot more money 
to move those machines underground or behind the ticket counter 
just for appearance sake.
    Now, in some airports, you suggested the smaller airports, 
you know, it may be a real problem. You do not have enough 
space. I think maybe TSA has grabbed off too much space and 
should be pushed back, too. I am not after TSA. I think they 
have done a good job of what they were told to do. But I think 
now we have got to evaluate how much is enough and how much 
space you really need and how much did you take that really you 
don't need. And I am not--I just do not get all that excited 
about moving those things.
    For instance, I understand at one airport that I did visit, 
Lexington Airport, they put in these new conveyor belts that 
you put the baggage on the conveyer belts and if there is a 
problem, it throws the luggage off to the side. Now, they have 
got modern computers that show different color codes when there 
is a potential problem. The manager told me, there, that the 
money they are saving on manpower and other costs actually is 
going to pay for the system in two years. And they have been 
aggressive and innovative. It is modern at a pretty small 
regional airport. So why can't more of that be done?
    Mr. Plavin. I think that is exactly where we believe we 
should be going. I think Lexington's a model of what we think a 
well-functioning system should look like. Our concern, frankly, 
has almost nothing to do with aesthetics. Rather, I think the 
concern is that in those places where we are so congested in 
the front of the terminal, we believe that is a safety and 
security issue in and of itself. And I think the Lexington 
model is one that, frankly, we would like to see as one for 
airports of all sizes. And the particular problem of having 
that many people aggregated in the front of the terminal in a 
kind of an uncontrolled fashion, I think gives us some real 
problems on an operating basis. Not to mention the fact that 
what we have got now is grossly inefficient. The ability, as 
you pointed out, to save the kind of money that you can save by 
automating the system is a remarkable improvement in what it 
will cost on an annual basis, and we think that not putting 
that kind of long-range solution in place is going to be not 
only a safety and security problem, but very expensive, to 
boot.
    Senator Lott. Okay. Mr. Plavin, you also indicated that it 
would be helpful if we could eliminate--I am not sure whether 
you said some paperwork or some bureaucracy, probably both, in 
the process of getting AIP funds. I do not know if I want you 
to necessarily give specificity now, but if you could get that 
information to us for the record so we could get it to FAA or 
if we need to do anything legislatively to help make sure that 
actually happens, we would like to do that.
    Mr. Plavin. Yeah, we have it in our written testimony, 
Senator.
    Senator Lott. Do you? Okay.
    Senator Rockefeller, do you have more questions?
    Senator Rockefeller. Just one.
    First of all, I would like to put my opening statement in 
the record, Mr. Chairman.
    Senator Lott. Without objection. Yes, sir.
    [The prepared statement of Senator Rockefeller follows:]

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

    Thank you, Mr. Chairman, for convening this morning's hearing.
    I would like to reiterate a sentiment expressed by Chairman McCain 
at a hearing recently: it is imperative that the Administration present 
its FAA reauthorization proposal as soon as possible.
    FAA reauthorization is a top priority in the 108th Congress, and we 
will have to begin crafting a bill soon. I think everyone agrees that 
it would be preferable to have the Administration's proposal in-hand 
before legislation begins to move.
    A blueprint from the Administration is particularly important this 
year because of the very difficult problems we are confronting.
    By all accounts, there will be at least a $3 billion shortfall in 
aviation security funding next year. And there are no good options for 
making up those funds.
    In 2002 we spent $561 million of Airport Improvement Program funds 
for security related projects. That is more than ten times the $56 
million of AIP funds spent on security in the preceding year.
    While I acknowledge the extenuating circumstances that necessitated 
the spending of AlP funds on security related items, I am wary of 
making that a long-term practice.
    Over the next several years, it is essential that we continue to 
make progress in increasing capacity.
    Therefore, perhaps our principal challenge in reauthorizing the FAA 
will be ensuring that there is sufficient funding for airport security 
without threatening long-term airport expansion.
    One of the ways we can facilitate airport expansion is by 
revisiting legislation I co-sponsored last year entitled the Aviation 
Delay Prevention Act.
    That bill, which passed out of this Committee by voice vote, seeks 
to address delay problems by requiring the FAA to expedite and 
streamline the airport construction process. I continue to believe that 
this is a meritorious proposal, and I hope the Committee will consider 
it again this year.
    In the budget that the President recently submitted, however, AIP 
funds are flat-lined, Essential Air Service dollars are cut, and no 
funds are requested for the Small Community Air Service Development 
Program.
    All of this leads me to wonder what the Administration's plans are 
for airport improvement in general and for small community air service 
in particular.
    As I've said many times, I believe that decent air service is vital 
to job creation, economic growth and quality of life in rural 
communities.
    There is no question but that our nation is currently facing a 
number of daunting challenges, both at home and abroad. Nevertheless, 
it would be ill-advised to threaten the future economic health of our 
small and rural communities by failing to invest in air service for 
them now.
    I will not accept a bifurcated system wherein only large urban 
areas have commercial air service.
    Mr. Chairman, it is my hope that the Administration will not keep 
us guessing for very much longer. I look forward to receiving its 
proposal for FAA reauthorization and to working with you and the rest 
of the Committee to get a bill passed quickly.
    Thank you, Mr. Chairman. I look forward to hearing from Our 
witnesses.

    Senator Rockefeller. I would also like to, all three of 
you, to tell me how wonderful you think the Aviation Delay 
Prevention Act is.
    Senator Lott. Is that your bill?
    Senator Rockefeller. Yeah.
    [Laughter.]
    Ms. Woodward. It is wonderful.
    [Laughter.]
    Senator Rockefeller. Now, you know what it does, right?
    Mr. Plavin. Yes.
    Dr. Dillingham. I agree, it's wonderful.
    Senator Rockefeller. Okay, that is--I just need that for 
the record, Mr. Chairman.
    [Laughter.]
    Senator Rockefeller. Kay Bailey and I did that one.
    And the final thing is that AIP--I see AIP in a very 
special light, because I have watched our airports in West 
Virginia. And when the AIP came on the scene, it was like all 
of a sudden they began to change their mentality. And actually, 
we started to learn this when some of us went down and looked 
at the Shenandoah Airport, which obviously, is in Virginia, 
it's a very small catchment area, but they have done a superb 
job in marketing the airport, which is their money, and having 
success. We used to have a rather large percentage of our 
people drive to Cincinnati or Columbus to get on a cheaper 
airport, a jet, not a propeller. That has now almost been 
eliminated out of our major cities, because the airports are 
marketing themselves. They do not see themselves as static 
pieces of runway and infrastructure. They have to reach out to 
the public and pull the public in and tell them that they are 
getting a good deal.
    In that context, would you just give me a quick summation 
of how you think regional jets, which, more than anything, take 
a rural State, like Mississippi and West Virginia, and give 
passengers and businesspeople who are looking at expanding and 
investing a whole new view.
    A regional jet is a class act. I am not saying that the 
things that takes me three days to get my spine straightened 
out are not good, but we will take what we can get. I have to 
get to Washington. But a regional jet is an unbelievably 
important psychological lift, just as AIP was. What is the 
status of regional jets? What is going on now with them?
    Mr. Plavin. The airlines have made a significant number of 
commitments to regional jets. In fact, a huge proportion of the 
aircraft that they are buying these days are regional jets. One 
of the things that is obviously a limitation from the airline's 
point of view is they still have to deal with the various 
contractual scope clauses that they have with their pilots that 
determine how many regional jets they will actually be allowed 
to fly and in what kind of markets.
    Senator Rockefeller. Isn't there a backlog on orders?
    Mr. Plavin. There is absolutely a backlog in orders.
    Senator Rockefeller. Now, how do you describe that backlog 
in such a compressed economic situation?
    Mr. Plavin. I think what it reflects is the fact that the 
number of passengers has fallen off significantly in the system 
as a whole. We are down probably 10 to 15 percent on the 
passenger side. We are actually no longer able to compete, or 
the airlines are no longer able to compete, simply by putting 
more seats in the market. So what they have been doing is 
reducing the number of seats in some of the major markets and 
actually adding frequencies to make that number up, which is 
why I made the point before that for large airports, regional 
jets can be something of a problem, because they are now back 
to the number of aircraft movements or closer to the number of 
aircraft movements they were at before, but with a lot few 
seats in the market. Now, the airlines hope that that will 
force the fares up to a level that is economic. That is 
obviously an issue for them.
    For the smaller airports, you are really on the exact 
reverse side of the coin. A new system, higher level of 
service, larger number of seats per takeoff and landing, but 
the problem is they still have to have a place to land at the 
other end of their trip. And that is the kind of balance that I 
think for a long time we have tried to figure out how to 
accommodate, being sure that there is access to the larger 
airports from the smaller communities and, at the same time, 
not allow the congestion levels at those larger airports to 
resume with so many fewer seats for capacity.
    Senator Rockefeller. Mr. Chairman, I thank all of our 
witnesses, and I thank you.
    Senator Lott. I thank the witnesses for your time and for 
your testimony, and we look forward to working with you as we 
develop the legislation this year.
    The Subcommittee is adjourned.
    [Whereupon, at 10:50 a.m., the hearing was adjourned.]

                            A P P E N D I X

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

    Good Morning. Today's hearing provides a valuable opportunity for 
the Commerce Committee to assess the outlook for airports in the U.S., 
and the impact that their needs and the Airport Improvement Program 
(AIP) will have on the pending reauthorization of the Federal Aviation 
Administration (FAA). The world has changed greatly since Congress last 
considered FAA reauthorization during the 106th Congress, and these 
changes have had a particularly dramatic effect on the nation's 
aviation industry. The terrorist attacks of September 11, 2001, coupled 
with the slumping American economy, have put our airlines in their 
worst financial shape ever. As a result, we are faced with increased 
competition for dwindling federal funds while the national debt has 
begun to grow again. It is under these difficult conditions that we 
must move forward with the crafting of legislation that continues to 
make progress on the safety, security, efficiency and the environmental 
friendliness of our nation's air transportation system.
    While the aftermath of September 11, 2001, has presented a 
monumental challenge to all facets of aviation, the decline in 
passenger traffic has provided an opening for us to reassess the 
industry as a whole. Congress has already acted to institute a major 
overhaul of the aviation security system, and now, we have an 
opportunity to ensure the safety and efficiency of the national airport 
system until the demand for air travel resurfaces. With the need for 
reauthorization of the FAA's programs, we should take a close look at 
the estimated costs of planned capital development at airports in the 
U.S. and the availability of funding to cover these costs. It is 
essential that Congress provide balanced AIP funding that will best 
meet the needs of all Americans that seek the benefits of using our air 
transportation system.
    Safety and security considerations must remain paramount to our 
thinking, and we must continue to develop approaches that ensure we do 
not shortchange the traveling public on these two fronts. It will not 
be easy. Department of Transportation Inspector General (DOT IG) Ken 
Mead recently testified before this Committee that the costs of making 
necessary modifications to the nation's airportsfor the implementation 
of Explosive Detection Systems (EDS) at all commercial facilities could 
cost as much as $3 billion. Last year, the AIP was tapped to cover a 
significant piece of the security costs, and the FAA did an admirable 
job of making these security needs fit into their budget framework. In 
the future, using the AIP to fund major security costs must be 
carefully considered to ensure that we do not pay for security upgrades 
at the expense of safety needs or the viability of the system.
    Prior to September 11, 2001, our focus was centered on improving 
capacity, and concerns over future demand will again become an issue as 
our security needs are more completely addressed. The FAA's Terminal 
Area Forecast maintains that enplanements in the U.S. are expected to 
increase by roughly 50 percent over the next decade, with as many as 1 
billion passenger boardings annually by 2013. We must be prepared for 
this increase by planning and making the necessary facility upgrades 
now. Investing in our Air Traffic Control (ATC) system, and adding 
runways will provide a needed boost for our National Airspace System 
(NAS) as the system continues to grow.
    There have been numerous suggestions for improving the current 
system of funding our airports and each of these will have to be 
carefully considered. I believe the Aviation Investment and Reform Act 
for the 21st Century (AIR-21) served us extremely well during a very 
difficult period, and we should recognize that. Congress has to accept 
the need for further progress and fully fund the Airport Improvement 
Program (AIP) at levels above and beyond the last FAA reauthorization 
bill, but any sweeping changes to AIP or other matters under the 
reauthorization proposal should be cautiously studied before taking 
action. For example, requirements for certain airports to file 
competition plans with DOT before receiving AIP funding or collecting 
new PFCs have been questioned as a burden by some, but many in Congress 
and the Administration feel this mandate has served a valuable purpose 
by providing useful information about key facilities where questions of 
accountability had been raised. Larger plans to vastly restructure the 
airport grant process also raise concerns, and we must make certain 
that they will improve the entire system and not be detrimental to 
safety before proceeding.
    We have an opportunity to move into the 21st Century with 
legislation that can make a tremendous difference to the future of our 
nation's air transportation system. I know that the Chairman is anxious 
to get us all moving, so let the debate begin and let us move forward 
expeditiously in order to fund these critically important programs.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. John McCain to
                          Gerald L. Dillingham

    Question 1. Some parts of the airline industry have recommended a 
``tax holiday'' for taxes they pay into the aviation trust fund. What 
would be the effect of such a ``holiday'' on the FAA's programs--
especially the Airport Improvement Program?
    Answer. The impact of a tax holiday on FAA's ability to continue to 
fund its programs would vary depending on the type of tax that would be 
suspended. For example, suspending all of the taxes accruing to the 
Trust Fund for a year would require (1) suspension of accounts related 
to the Airport Improvement Program, Facilities and Equipment, and 
Research and Engineering Development from September 2003 through April 
2004, (2) create significant termination costs, and (3) require 
additional general fund support to keep air traffic control system 
functioning. In contrast, suspending the fuel tax or cargo waybill tax 
would have the least affect on FAA's ability to fund its programs. 
FAA's projections indicate that suspending the fuel tax would deplete 
the uncommitted balance of the Trust Fund by October 2006 while 
suspending the cargo waybill tax would reduce the uncommitted balance 
of the Trust Fund to under $100 million in 2008.

    Question 2. If substantial amount of AIP funds are used once again 
during FY 2003 for security, is it possible to determine what type of 
projects will not receive the amount of funding that they normally 
would?
    Answer. In October of 2002, we reported that standards and 
reconstruction projects experienced the largest reductions and that 
certain letter-of-intent payments were deferred, resulting in delays in 
capacity projects at three airports. \1\ If AIP funds continue to be 
used at a similar level for security in 2003 as in 2002, and if other 
factors remain relatively unchanged, we can probably expect that some 
of the projects that were not funded in 2002 may not be funded in 2003.

    \1\ U.S. General Accounting Office. Airport Finance: Using Airport 
Grant Funds for Security Projects Has Affected Some Development 
Projects. GAO-03-27. Washington DC: October 15, 2002.
---------------------------------------------------------------------------
    Question 3. In your testimony you note that one big uncertainty in 
the whole airport funding picture is estimating the cost of fully 
integrating explosive detection systems into the airport baggage 
systems. Why is it so difficult to develop such an estimate? Which 
Federal agency should be responsible for developing such an estimate 
and are they developing one?
    Answer. Developing an estimate of the cost of integrating explosive 
detection systems into airport baggage systems is challenging, in part, 
because it is not clear whether TSA has finalized all the security 
requirements that will be part of the explosive detection system (EDS) 
approach. Additionally, FAA's requirement that TSA must approve the EDS 
approach at each airport before FAA will fund any part of it inhibits 
airport planning for EDS. The lack of certainty about security 
requirements and funding approvals may also be discouraging airports 
from making EDS-related final estimates and decisions and may be 
contributing to a lack of information about EDS systems. TSA said that 
while certain airports--such as Dallas and Boston--have estimated costs 
and even planned for the integration of EDS into airport baggage 
systems as part of long-term security solutions, it has not 
systematically tracked these efforts and does not know what the overall 
costs would be.
    Because TSA is the agency responsible for ensuring the installation 
of EDS systems, it would probably be the appropriate agency for 
developing an overall estimate of what EDS systems will cost. TSA does 
not currently have estimates of the costs to install EDS at airports.

    Question 4. In your testimony, you discuss options to make up the 
spending shortfall for capital improvements. You discuss the benefits 
of some options to larger airports and the benefits of other options to 
smaller airports. In your opinion, if we have to make a choice, which 
group has greater need?
    Answer. In our view, deciding which group has a greater need is a 
policy question. However, in making this decision, Congress should be 
aware of several factors. First, small airports receive the majority of 
their funding from federal programs, such as AIP. Second, larger 
airports receive the majority of their funding from the bond market. 
Finally, there is little consensus among airlines, airports, and FAA as 
to what constitutes an airport ``need''. As such, when comparing 
estimates of available funding with estimates of airport planned 
development, not all planned development may not qualify as needed 
development.

    Question 5. Have you reviewed the Administration's proposals for 
changes in the funding formula structure of the AIP program? What is 
your opinion on that?
    Answer. The Administration's proposal was not released until March 
25, 2003. As a result, we have not had a chance to review it in detail.

    Question 6. Have you reviewed the Administration's proposed changes 
in the EAS program? What is your opinion on that? Do you believe that 
the EAS program has been effective? What about the Small Community Air 
Service Development Program?
    Answer. We have reviewed neither the Administration's Essential Air 
Service (EAS) proposal nor the Small Community Air Service Development 
Pilot Program in detail, so we are unable to express unqualified 
opinions. However, we have completed recent work on the EAS program, 
and have concluded that it has not provided an effective transportation 
solution for passengers at many EAS-subsidized communities. Passengers 
often prefer to drive to an alternate airport, even if that facility 
might be several hours' drive away. We reported in August 2002 \2\ on 
several options to enhance the long-term viability of the EAS program. 
We are encouraged that the Pilot Program funded innovative approaches 
to air service development at several communities, and look forward to 
learning how effective they were.

    \2\ U. S. General Accounting Office. Options to Enhance the Long-
term Viability of the Essential Air Service Program. GAO-02-997R. 
Washington, D. C.: August 30, 2002.
---------------------------------------------------------------------------
    Question 7. One of your charts shows that small airports have been 
the biggest beneficiaries of the large increases in AIP funding under 
AIR 21. Is it therefore fair to state that they will also be the most 
affected by the FAA's plan to spend almost $500 million in AIP funding 
on security this year?
    Answer. In our October 2002 report, we noted that the increase in 
AIP funding for security affected the distribution of grant funds by 
airport type. Large and small hub airports experienced increases in AIP 
funding while all other airports, including non-hub, general aviation, 
and relievers, experienced decreases in FY 2002. According to FAA 
officials, the increase in AIP funding to large hub airports can be 
attributed to their higher security needs and the decrease in funding 
to non-hub airports was because their security needs were much lower 
than those of large hub airports.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. John McCain to
                            Woodie Woodward

AIP Funding for Security
    Question Your testimony indicates that the FAA intends to use a 
substantial amount of AIP funding for security related projects in 
2003. Who decided this would be the case? What is your time frame for 
making these grant awards? Will these be discretionary or formula 
grants?
    Answer. The FAA has committed to make available for security 
related projects an amount roughly equal to the $561 million spent for 
security projects in FY 2002. The decision was made collaboratively 
among the FAA, TSA and senior officials within the Department of 
Transportation. The decision was made in consideration of both the 
continuing need for substantial investment in airport infrastructure 
for security and on the impact of higher levels of security funding on 
the rest of AIP. Specifically as to need, the costs of modifying 
airport infrastructure to accommodate installation of EDS equipment is 
substantial and far exceeds TSA resources available for this purpose. 
As to AIP impacts, spending on security at the FY 2002 level still 
permitted the FAA to fund all identified safety and security 
requirements; meet all commitments to fund ongoing capacity projects--
including letter of intent commitments; and meet statutory requirements 
to fund noise compatibility projects and projects at military airport 
program airports and relievers. The security funding was accommodated 
by modest reductions in the shares of AIP going to rehabilitation, 
reconstruction and standards projects.
    The FAA and TSA are currently reviewing proposed security project 
candidates for AIP funding at the national level to optimize the 
combination of AIP and TSA funds available for financing security-
related airport infrastructure projects. Once a spending plan has been 
developed for the use of AIP funds, the FAA will begin processing 
grants. We intend to allocate the $561 million between discretionary 
and entitlement funds in roughly the same proportion as in FY 2002, 
i.e. approximately $199 million in entitlements and $362 million in 
discretionary funds.
PFC Streamlining
    Question Will the Administration consider ``streamlining'' the 
process for approval of PFC applications, as David Plavin has suggested 
in his testimony?
    Answer. I am pleased to report that the Administration's FAA 
reauthorization bill contains a number of provisions to streamline the 
PFC application and approval process. These proposals are based on the 
result of a comprehensive study of the history of the PFC program which 
identified opportunities to simplify or eliminate elements of the PFC 
application and approval process without sacrificing the benefits to 
the public interest in the Federal PFC review process. First, the 
Administration bill would make the Federal Register comment process 
discretionary, rather than mandatory, for each PFC application. 
However, airports would be required to provide an opportunity for 
public comment at the local level. Second, the bill would reduce the 
burden of the carrier consultation requirement by limiting the 
requirement for individual carrier consultation to those carriers that 
have a significant presence at the airport. The airport could rely on 
general notice for those carriers with limited activity at the airport. 
Third, the administration bill would eliminate the substantial 
contribution test for imposition of a $4.50 PFC at medium and large hub 
airports and allow projects to be approved under the adequate 
justification test applicable to all other airports. Our experience 
showed that the bifurcated test did not enhance the qualify of projects 
being submitted for $4.50 PFC approval at medium and large hub airports 
because those projects were already of the highest caliber under the 
adequate justification test, but the bifurcated test greatly 
complicated the application and review process. Finally we are 
proposing a pilot program for non-hub airports that would permit them 
to impose a PFC based on the filing of a simplified written notice to 
the FAA. Following submission of the notice, the airport could impose 
the PFC unless the FAA objected.

Current Airport Infrastructure Needs
    Question The FAA recently revised estimates of when its passenger 
traffic will reach pre-September-11 levels. Do you believe there is a 
real need for immediate infrastructure investments?
    Answer. At its recent Conference on Aerospace Forecasts, the FAA 
announced that it expects the period of recovery for the aviation 
industry to extend by one or two additional years over what was 
forecast last year, to 2005-2006. Airport investment decisions, by 
their very nature, must take a long-term perspective. Although traffic 
fluctuates in the short term as we are now experiencing, I am confident 
that the demand for air travel will continue its long-term growth. It 
takes many years to build new runways and other airport infrastructure. 
I believe airports should be constructed or expanded to accommodate the 
long-term growth of air traffic, and that it is prudent for airports to 
continue working toward accommodating long term needs even during 
short-term down turns in traffic as we are currently experiencing.

                                  
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