    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

        COMMERCIAL JET FUEL SUPPLY: IMPACT AND COST ON THE UNITED STATES
                                AIRLINE INDUSTRY

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

                                    (109-45)

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                                    AVIATION

                                     OF THE

                                  COMMITTEE ON
                       TRANSPORTATION AND INFRASTRUCTURE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 15, 2006

                                   __________

                           Printed for the use of the
                 Committee on Transportation and Infrastructure

                        U.S. GOVERNMENT PRINTING OFFICE

    28-261 PDF                  WASHINGTON : 2007
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                 COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                          DON YOUNG, Alaska, Chairman

    THOMAS E. PETRI, Wisconsin, Vice-    JAMES L. OBERSTAR, Minnesota
    Chair                                NICK J. RAHALL, II, West Virginia
    SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
    HOWARD COBLE, North Carolina         JERRY F. COSTELLO, Illinois
    JOHN J. DUNCAN, Jr., Tennessee       ELEANOR HOLMES NORTON, District of
    WAYNE T. GILCHREST, Maryland         Columbia
    JOHN L. MICA, Florida                JERROLD NADLER, New York
    PETER HOEKSTRA, Michigan             CORRINE BROWN, Florida
    VERNON J. EHLERS, Michigan           BOB FILNER, California
    SPENCER BACHUS, Alabama              EDDIE BERNICE JOHNSON, Texas
    STEVEN C. LaTOURETTE, Ohio           GENE TAYLOR, Mississippi
    SUE W. KELLY, New York               JUANITA MILLENDER-McDONALD,
    RICHARD H. BAKER, Louisiana          California
    ROBERT W. NEY, Ohio                  ELIJAH E. CUMMINGS, Maryland
    FRANK A. LoBIONDO, New Jersey        EARL BLUMENAUER, Oregon
    JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
    GARY G. MILLER, California           BILL PASCRELL, Jr., New Jersey
    ROBIN HAYES, North Carolina          LEONARD L. BOSWELL, Iowa
    ROB SIMMONS, Connecticut             TIM HOLDEN, Pennsylvania
    HENRY E. BROWN, Jr., South Carolina  BRIAN BAIRD, Washington
    TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
    TODD RUSSELL PLATTS, Pennsylvania    JIM MATHESON, Utah
    SAM GRAVES, Missouri                 MICHAEL M. HONDA, California
    MARK R. KENNEDY, Minnesota           RICK LARSEN, Washington
    BILL SHUSTER, Pennsylvania           MICHAEL E. CAPUANO, Massachusetts
    JOHN BOOZMAN, Arkansas               ANTHONY D. WEINER, New York
    JIM GERLACH, Pennsylvania            JULIA CARSON, Indiana
    MARIO DIAZ-BALART, Florida           TIMOTHY H. BISHOP, New York
    JON C. PORTER, Nevada                MICHAEL H. MICHAUD, Maine
    TOM OSBORNE, Nebraska                LINCOLN DAVIS, Tennessee
    KENNY MARCHANT, Texas                BEN CHANDLER, Kentucky
    MICHAEL E. SODREL, Indiana           BRIAN HIGGINS, New York
    CHARLES W. DENT, Pennsylvania        RUSS CARNAHAN, Missouri
    TED POE, Texas                       ALLYSON Y. SCHWARTZ, Pennsylvania
    DAVID G. REICHERT, Washington        JOHN T. SALAZAR, Colorado
    CONNIE MACK, Florida                 JOHN BARROW, Georgia
    JOHN R. `RANDY' KUHL, Jr., New York
    LUIS G. FORTUNO, Puerto Rico
    LYNN A. WESTMORELAND, Georgia
    CHARLES W. BOUSTANY, Jr., Louisiana
    JEAN SCHMIDT, Ohio

                                      (ii)

                            SUBCOMMITTEE ON AVIATION

                        JOHN L. MICA, Florida, Chairman

    THOMAS E. PETRI, Wisconsin           JERRY F. COSTELLO, Illinois
    HOWARD COBLE, North Carolina         LEONARD L. BOSWELL, Iowa
    JOHN J. DUNCAN, Jr., Tennessee       PETER A. DeFAZIO, Oregon
    VERNON J. EHLERS, Michigan           ELEANOR HOLMES NORTON, District of
    SPENCER BACHUS, Alabama              Columbia
    SUE W. KELLY, New York               CORRINE BROWN, Florida
    RICHARD H. BAKER, Louisiana          EDDIE BERNICE JOHNSON, Texas
    ROBERT W. NEY, Ohio                  JUANITA MILLENDER-McDONALD,
    FRANK A. LoBIONDO, New Jersey        California
    JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
    ROBIN HAYES, North Carolina          BILL PASCRELL, JR., New Jersey
    HENRY E. BROWN, Jr., South Carolina  TIM HOLDEN, Pennsylvania
    TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
    SAM GRAVES, Missouri                 JIM MATHESON, Utah
    MARK R. KENNEDY, Minnesota           MICHAEL M. HONDA, California
    JOHN BOOZMAN, Arkansas               RICK LARSEN, Washington
    JIM GERLACH, Pennsylvania            MICHAEL E. CAPUANO, Massachusetts
    MARIO DIAZ-BALART, Florida           ANTHONY D. WEINER, New York
    JON C. PORTER, Nevada                BEN CHANDLER, Kentucky
    KENNY MARCHANT, Texas                RUSS CARNAHAN, Missouri
    CHARLES W. DENT, Pennsylvania        JOHN T. SALAZAR, Colorado
    TED POE, Texas                       NICK J. RAHALL II, West Virginia
    JOHN R. `RANDY' KUHL, Jr., New       BOB FILNER, California
    York, Vice-Chair                     JAMES L. OBERSTAR, Minnesota
    LYNN A. WESTMORELAND, Georgia          (Ex Officio)
    DON YOUNG, Alaska
      (Ex Officio)

                                     (iii)

                                    CONTENTS

                                   TESTIMONY

                                                                       Page
     Cirillo, Michael A., Vice President, Systems Operations
      Services, Air Traffic Organization, Federal Aviation
      Administration.................................................     6
     Felmy, John, Chief Economist, American Petroleum Institute......    17
     Hawk, Jeffrey, Director, Certification, Environment and
      Government Relations, the Boeing Company.......................    17
     Heimlich, John P., Vice Pewsident and Chief Economist, Air
      Transport Association of America, Inc..........................    17
     Shages, John D., Deputy Assistant Secretary, Office of Petroleum
      Reserves, U.S. Department of Energy............................     6

              PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

    Boswell, Hon. Leonard, of Iowa...................................    35
    Carnahan, Hon. Russ, of Missouri.................................    37
    Costello, Hon. Jerry F., of Illinois.............................    52
    Johnson, Hon. Eddie Bernice, of Texas............................   102
    Oberstar, Hon. James L., of Minnesota............................   106
    Pascrell, Hon. Bill, Jr., of New Jersey..........................   109

                   PREPARED STATEMENTS SUBMITTED BY WITNESSES

     Cirillo, Michael A..............................................    38
     Felmy, John.....................................................    55
     Hawk, Jeffrey...................................................    73
     Heimlich, John P................................................    87
     Shages, John D..................................................   113

                           SUBMISSION FOR THE RECORD

     Cirillo, Michael A., Vice President, Systems Operations
      Services, Air Traffic Organization, Federal Aviation
      Administration, responses to questions from Rep. Costello......    47

       COMMERCIAL JET FUEL SUPPLY: IMPACT AND COST ON THE UNITED STATES
                                AIRLINE INDUSTRY

                                  ----------

                          Wednesday, February 15, 2006

            House of Representatives, Committee on
                Transportation and Infrastructure, Subcommittee
                on Aviation, Washington, D.C.
        The committee met, pursuant to call, at 10:00 a.m. in room
    2167, Rayburn House Office Building, Hon. John Mica [chairman
    of the committee] presiding.
        Mr. Mica. Good morning. I would like to call this hearing
    of the House Aviation Subcommittee to order.
        The topic of today's hearing is Commercial Jet Fuel Supply:
    The Impact and Cost on the U.S. Airline Industry. I would like
    to welcome our participants and members. What we are going to
    do as far as proceeding is start with opening statements. Then
    we have two panels of witnesses, and we will recognize them.
        With that, I will start with my opening statement and then
    yield to other members.
        One of the principal reasons why the United States airline
    industry lost an estimated $10 billion last year is due to the
    supply and cost of commercial jet fuel, which is the subject of
    our hearing today. America's commercial aviation industry was
    nearly brought to its knees last year when Hurricanes Katrina
    and Rita crippled our Gulf Coast refineries and two major
    pipelines. The resulting supply disruption propelled commercial
    jet fuel prices to a record high of $3.13 per gallon.
        In January 2005, the average market price of a gallon of
    commercial jet fuel by contrast was $1.33. To put this into
    perspective, every penny in increase in the price of a gallon
    of jet fuel results in an additional $195 million in annual
    fuel costs for the United States airline industry. Airlines
    cannot be profitable when the average price of jet fuel exceeds
    $70 per barrel or about $1.67 per gallon.
        The average price for commercial jet fuel was about $72 per
    barrel, or $1.81 per gallon last month. The price of commercial
    jet fuel has more than doubled over the past five years.
        In order for the U.S. airline industry to reverse its
    recent string of multi-billion annual losses, several critical
    challenges relating to jet fuel must be addressed by Government
    and industry initiatives. First, I think we need some mechanism
    for stabilization of jet fuel prices. Secondly, expansion of
    our domestic refining capacity is also a challenge that we
    face. Third, improvements to the Nation's oil and refined
    product distribution network need attention. And finally,
    further gains in commercial aircraft fuel efficiency can also
    be an important element.
        There are many reasons why the cost of jet fuel remains at
    record highs. It is more expensive and less profitable for a
    limited number of U.S. refiners to produce jet fuel. Another
    factor is the high cost of crude oil from which jet fuel is
    refined. Although the oil costs remain high for many reasons,
    most industry analysts cite limited U.S. refining capacity,
    increased demand around the world, including India and China,
    and also geopolitical events which affect price and supply.
        Jet fuel supply problems were compounded last fall by
    Hurricanes Katrina and Rita, which eliminated about 25 percent
    of the domestic jet fuel production capacity. The jet fuel
    supply problem following the hurricanes prompted some oil and
    aviation industry analysts to propose the creation of a jet
    fuel reserve, similar to the existing Strategic Petroleum
    Reserve.
        With the damaging impact of soaring oil prices and in light
    of jet fuel supply crises following the hurricanes, I believe
    we should seriously consider establishing some type of jet fuel
    reserve. I understand many European countries have taken
    similar measures to ensure an adequate supply of fuel.
        Although most of the U.S. jet fuel supply is refined in the
    United States, 60 percent of our oil, of course, comes from
    overseas and is imported, oil prices will no doubt increase
    further if Iran, the world's fourth largest exporter of oil,
    follows through on its recent threat to stop exporting oil to
    the United States due to diplomatic and other concerns relating
    to Iran's nuclear weapons program. A major terrorist attack in
    the Middle East would also have a really bad effect on our oil
    supply and could result in even higher jet fuel costs for the
    airline industry.
        I am also concerned that the U.S. jet fuel supply is being
    further constrained by the export of U.S.-produced jet fuel
    abroad, where jet fuel is even more profitable today. At least
    one U.S. producer has taken voluntary steps to restrict exports
    that other producers have not taken similar steps to limit.
        Regrettably, regulators in Washington are also contributing
    to higher jet fuel prices and supply problems. The Department
    of Energy recently warned that the distribution of jet fuel and
    other refined petroleum products may be impeded later this year
    due to the phase-in of more emissions friendly ultra-low sulfur
    diesel fuel, which has been mandated by EPA. Suppliers and
    refiners will have to take special measures to prevent
    contamination of ultra-low sulfur diesel during the petroleum
    refining process, as well as the storage and transport of jet
    fuel and other refined products. The added cost of these
    measures most likely will be passed on to the airlines in the
    form of even higher jet fuel market prices later this year.
        Another regulatory threat to jet fuel price stability in
    2006 is the proposed increase in the standard, the Federal
    Energy Regulatory Commission tariff rate that owners and
    operators of oil and refined products pipelines can charge
    their customers. Virtually every drop of commercial jet fuel
    passes through the Nation's vast network of pipelines.
    Ironically, I understand that the stronger pipeline security
    mandates from the Department of Transportation is one of the
    main reasons why the major pipeline association is seeking a
    higher than usual tariff rate this year.
        Although the result of these new regulatory burdens could
    be just a penny or two increase in the cost of jet fuel, as I
    mentioned previously, this is a very significant added cost to
    the airlines, given that, as I said before, every one cent
    increase in the price of jet fuel adds $195 million to their
    operating costs. If jet fuel prices had remained at 2004 levels
    last year, the U.S. airline industry would have recorded a
    profit instead of an estimated $10 billion loss. The airline
    industry could make a strong recovery if somehow jet fuel costs
    stabilized in the $60 per barrel range.
        One creative way the airline industry has coped with the
    rising jet fuel costs is through the practice of hedging, in
    which airlines lock in a fixed price or maximum cap for fuel in
    the future by buying a contract at a specified price. Due to
    the hedges made when jet fuel prices were low, Southwest
    Airlines and Alaska Airlines are currently paying or have been
    currently paying between 40 and 48 percent less for a
    significant portion of their current fuel needs.
        Unfortunately, legacy carriers have not had the cash or
    creditworthiness to pay for fuel hedge contracts. With oil
    prices so high for so long, fuel hedges will almost run out, be
    non-existent by 2010. By this time, the core business of the
    airlines industry will be the one way ticket to sustain
    profitability.
        Although there is little that the Federal Government can do
    in the short term to lower oil prices or jet fuel prices,
    industry and Government can work in tandem on several fronts.
    First, to stabilize the jet fuel supply by possibly
    establishing some sort of jet fuel reserve. Secondly, by
    lowering regulatory barriers that impede the Nation's oil and
    refined product distribution network. Third, by increased
    domestic refining capacity or some incentives or assistance in
    that regard. And fourth, by reducing demand and taking steps to
    further improve commercial aircraft fuel efficiency.
        I have also directed our Subcommittee staff to begin
    looking into the various factors behind the soaring costs and
    some of the sort of jacked up costs after the recent natural
    disasters we have seen, take a very serious look at what has
    taken place and is there price gouging or what is going on.
        The U.S. airlines have improved fuel efficiency by 18
    percent over the last five years by changing operating
    procedures and utilizing technology to make their aircraft more
    fuel efficient. In addition, the use of composites and other
    advanced aircraft manufacturing technologies will make future
    commercial jet liners more fuel efficient. We will hear a
    little bit more about what is being developed by one of our
    witnesses, Mr. Hawk, from Boeing.
        The Subcommittee, through its oversight responsibilities,
    can also help airlines further improve fuel efficiency by
    ensuring that certain air traffic control modernization
    programs remain on track and on budget to move forward. We will
    also hear from FAA's air traffic organization to discuss some
    of those programs in detail.
        Finally, I just want to mention for the record, I am
    concerned about reports that the operator of London Heathrow
    Airport, BAA, is engaged in a fuel rationing scheme that
    discriminates against U.S. airlines. The fuel rationing system
    was established after a fire and explosion damaged the
    airport's major fuel depot in December. We will also hear from
    some folks from the Air Transport Association who will testify
    on our second panel and give us an update on this situation.
        I am pleased to recognize at this time the Ranking Member,
    Mr. Costello.
        Mr. Costello. Mr. Chairman, thank you, and I thank you for
    calling the hearing today. The last time this Subcommittee held
    a hearing on jet fuel was in October of 2000, after crude oil
    had climbed to a 10 year historic high of almost $38 a barrel.
    At that hearing, the former Chairman of this Subcommittee, Mr.
    Duncan, said rising fuel costs had created havoc in all of the
    transportation sectors and threatened to derail global economic
    growth.
        To put today's hearing in perspective, the average price
    for a barrel of crude oil in 2005 was $56 a barrel and $72 a
    barrel for jet fuel. To further put it in perspective, every
    penny, as you noted, in the increase in price in a gallon of
    jet fuel results in an additional $195 million in annual fuel
    costs for the U.S. airline industry.
        Although average air fares are still low, and lower than in
    2000, it has been reported that rising fuel costs have led U.S.
    airlines to raise fares 12 times in 2005 and once so far in
    2006. In total, the industry has lost $44 billion since the
    beginning of 2001. Roughly a quarter of the U.S. aviation
    capacity is in chapter 11.
        Consequently, airlines have made efforts to drive down
    their operating costs, particularly labor costs. In total, U.S.
    passenger carriers cut labor costs by almost $3 billion between
    2000 and 2005. During that period, 140,000 airline workers have
    lost their jobs, thousands have accepted pay cuts and benefit
    cuts, and still thousands more have lost their pensions or have
    significantly seen their pensions reduced.
        However, the labor cuts have been more than offset by the
    rising fuel costs. In total, U.S. passenger carrier fuel costs
    have increased by more than $11 billion between 2000 and 2005.
    Fuel unit costs have risen despite the fact that airlines are
    operating more efficiently through fleet changes, weight
    reductions and operational changes. U.S. passenger and cargo
    airlines are projected to consume 19.5 billion gallons of jet
    fuel in 2005, 800 million gallons less than the peak experience
    in the year 2000. Unfortunately, the airline industry analysts
    predict that jet fuel will likely remain at $70 a barrel in
    2006.
        Mr. Chairman, as you noted, during Hurricanes Katrina and
    Rita, U.S. production of commercial jet fuel dropped by almost
    25 percent. The U.S. relied heavily on foreign imports, which
    more than doubled during that period, including some imports
    from European emergency stocks. Some have suggested that in
    addition to the Strategic Petroleum Reserve, which contains
    crude oil, the U.S. should form a strategic reserve comprised
    of refined petroleum products like jet fuel. I am interested in
    hearing from our witnesses today about their thoughts
    concerning that issue as well as other ideas that they may
    have.
        Our greatest hope for addressing high fuel prices may lie
    in technological advancements, both in the air traffic
    infrastructure and in aircraft itself. The bottom line is that
    there is a very clear connection between infrastructure,
    airline profitability and the ultimate issue of American jobs.
    This Subcommittee must ensure that adequate resources are
    dedicated to modernizing the national air space system.
        Airlines must continue to invest in equipment upgrades and
    new aircraft that will enable them to take full advantage of
    Government infrastructure and investments. Regarding new
    aircraft, I am pleased that we have a witness here from the
    Boeing Company today to testify about advances in aircraft
    manufacturing, including the use of lighter composite plastic
    air frames, improved aerodynamics and innovations in engine
    design.
        Mr. Chairman, that summarizes my statement, and I will put
    my entire statement in the record. I look forward to hearing
    from our witnesses today.
        Mr. Mica. I thank the Ranking Member. We will include his
    entire statement in the record.
        Mr. LoBiondo.
        Mr. LoBiondo. Thank you, Mr. Chairman. I appreciate your
    holding this hearing.
        I understand the difficulties that the aviation industry is
    having in dealing with the high prices of jet fuel. I think one
    of the best ways that the Government can be helpful is by
    increasing the fuel efficiencies through the modernization of
    our air traffic control system.
        As you, Mr. Chairman, know, and have highlighted on many
    occasions, we are managing air traffic with technology and
    procedures developed in the 1970's that were not intended nor
    are suited to the traffic demands of today. As a result, there
    is an enormous amount of fuel that is wasted: thousands,
    possibly tens of thousands of gallons from sitting in line to
    takeoff or circling, to wait to land or some other problem with
    traffic or weather.
        Efforts by the FAA to implement new air traffic control
    technology and procedures are woefully behind schedule. In
    order to keep our aviation system efficient and safe, I think
    we need to find ways to step up the pressure, pressure and/or
    investment in traffic flow management technologies in the next
    generation of air traffic systems. Once again, Mr. Chairman, I
    thank you very much for holding this hearing and your interest
    in this particular topic.
        Mr. Mica. Thank you.
        Mr. DeFazio.
        Mr. DeFazio. Thank you, Mr. Chairman. Thanks for this
    timely hearing.
        When I look at the numbers here, it causes tremendous
    concern. With United Airlines' emergence from bankruptcy, I saw
    a number of assumptions they made. Their assumption regarding
    the future price of fuel for the airline to succeed is far less
    than what is projected in our memos and by many industry
    experts. So that raises a concern about how long they are going
    to stay out of bankruptcy and the viability of that airline.
    There are many other airlines that are jeopardized in a similar
    way by the high price of fuel.
        Unlike the crisis, or so-called crisis, we saw after
    Katrina, odd that on the West Coast they jacked up prices
    almost as much as the East Coast, even though we are in a
    different supply area, but anyway, so-called refinery capacity
    or whatever, there is sufficient refinery capacity for aviation
    fuel. The problem is, the industry diverts from that production
    to gasoline production when they are extorting consumers with
    artificially high prices and making bigger profits on that
    side.
        I think Government oversight and action in this area is
    necessary, both for consumers of gasoline for their automobiles
    and to protect the crucial aviation sector. Exxon-Mobil made
    $100 million a day last year. That means airlines, some of our
    airlines are losing $1 million a day, and Mobil is making 100
    times that in profits, in one day. It is not from free market
    exercise here.
        And then we should be looking at other innovative ideas.
    Maybe since the Republicans want to move more tax cuts and they
    want to talk about energy efficiency, maybe we should provide
    some incentives to airlines to upgrade or make their fleets
    more efficient with U.S. manufactured aircraft, providing jobs
    here and also providing some help in that area. Many of them
    need to upgrade their fleets anyway, but can't afford to do it
    because of the pressures of fuel prices and other things.
        So I think there are some very interesting and perhaps some
    innovative and different ways to look at this, the petroleum
    reserve, which my colleague from Illinois mentioned, to offset
    when the oil industry diverts over to gasoline, perhaps a
    gasoline reserve too, to help drive down their extortion of
    profits in that area and remove the incentive for them to
    divert production from jet fuel and be able to jack up the
    price on both sides.
        So I am hopeful that we will hear some very plain talk from
    folks today and some interesting new ideas and perhaps the idea
    that the so-called free market is not working in this area.
    Thank you, Mr. Chairman.
        Mr. Mica. Thank you, Mr. DeFazio.
        Are there additional opening statements? Mr. Brown?
        Mr. Brown. No, thank you, Mr. Chairman.
        Mr. Mica. Mr. Kuhl?
        Mr. Kuhl. Nothing, thank you, Mr. Chairman.
        Mr. Mica. All right. No additional opening statements.
        Then we will proceed with our first panel, and our first
    panel consists of Mr. John D. Shages, Deputy Assistant
    Secretary of the Office of Petroleum Reserves in the Department
    of Energy. The second witness is Mr. Michael A. Cirillo. He is
    Vice President of Systems Operation Services, the Air Traffic
    Organization under FAA. I would like to welcome both of you. If
    you have lengthy material or information, background you would
    like to be made part of the record, we would welcome that and
    also summarizing any of your statements.
        I will first call on Mr. Shages with the Department of
    Energy. Welcome and you are recognized, sir.

    TESTIMONY OF JOHN D. SHAGES, DEPUTY ASSISTANT SECRETARY, OFFICE
      OF PETROLEUM RESERVES, UNITED STATES DEPARTMENT OF ENERGY;
        MICHAEL A. CIRILLO, VICE PRESIDENT, SYSTEMS OPERATIONS
         SERVICES, AIR TRAFFIC ORGANIZATION, FEDERAL AVIATION
                             ADMINISTRATION

        Mr. Shages. Thank you very much, Mr. Chairman. I have
    submitted my statement for the record.
        Mr. Mica. Without objection, the entire statement will be
    made part of the record. Please proceed.
        Mr. Shages. Thank you very much.
        I am honored to be here today to talk about jet fuel and
    the U.S. Strategic Petroleum Reserve. The Strategic Petroleum
    Reserve is a very large and robust crude oil stockpile, located
    at four sites along the Gulf of Mexico and Louisiana and Texas.
    It is the most efficient stockpiling system in the world.
        We currently have 685 million barrels of oil in storage. We
    can draw it down at a rate of 4.4 million barrels per day. The
    Reserve is authorized by the Energy Policy and Conservation Act
    to protect us against petroleum supply interruptions and in
    their event, to offset their impacts on the United States. The
    Reserve has been used under presidential authority to respond
    to severe energy supply interruptions only twice. The first
    time was in 1991 in conjunction with Operation Desert Storm;
    the second time in September 2005 in response to the damage
    caused by Hurricane Katrina.
        The sale last September immediately followed loans to
    refiners made under authority of the Secretary of Energy who
    would otherwise have stopped refining for lack of feedstock.
    Between the loans and sales, we made almost 21 million barrels
    of oil available. In addition to the Strategic Petroleum
    Reserve, the United States is a charter member of the
    International Energy Agency. It is our policy that we will
    coordinate with the other member countries of the IEA during a
    supply emergency.
        In the case of the 2005 hurricanes, that coordination was
    critically important. While the United States offered 30
    million barrels of oil for sale, the other member countries
    made available 33 million barrels of crude oil and products. A
    large portion of that was refined products.
        The release of those products allowed U.S. imports,
    including jet fuel, to surge during September, October and
    November. As a result, fears of shortages were quickly
    dispelled and prices began to retreat. The United States has a
    strong infrastructure of producing, refining, transporting and
    selling petroleum. While the hurricanes of 2005 dealt that
    infrastructure a devastating blow, systems recovered amazingly
    quickly. Thankfully, the Strategic Petroleum Reserve and our
    partners in the International Energy Agency backstopped the
    private sector, as designed, at the heart of the devastation.
        Since then, we and industry have been cataloging ways to
    improve infrastructure and respond to future disruptions. It is
    our duty to protect the United States, its people and its
    businesses from disruptions of supply. We have done it in the
    past and we believe we are well equipped to do it in the
    future.
        Mr. Chairman, that ends my opening statement.
        Mr. Mica. Thank you. We will now hear from Michael Cirillo,
    Vice President of Systems Operations Services under FAA. We
    will save questions until we have heard from both of you.
        Mr. Cirillo. Good morning, Chairman Mica, Congressman
    Costello and members of the Subcommittee. I would please like
    to ask that my written statement be entered into the record.
        Mr. Mica. Without objection, the entire statement will be
    made part of the record. Please proceed.
        Mr. Cirillo. Thank you. I am here today representing the
    Department of Transportation, the Federal Aviation
    Administration and the Air Traffic Organization on the topic of
    fuel consumption in the commercial jet fuel market, and its
    impact on the U.S. aviation industry. This is an extremely
    important issue to us all.
        We know that fuel costs have increased dramatically and we
    feel the impact, as do our customers. Through daily
    collaboration with them, we are providing services that
    maximize the most efficient routing from point A to point B.
        The good news is that we have developed new technologies
    and procedures, many already in place, which help our customers
    reduce fuel consumption. I would like to tell you a little bit
    about them today. Some of these programs have been in place for
    a while, programs like TMA and URET. The FAA's traffic flow
    management program provides about $340 million in benefits to
    our customers every year, while the user request evaluation
    tool, or URET, saved airlines approximately 25 million miles
    and $175 million in fiscal year 2005.
        Last year we made significant progress when we doubled the
    number of usable altitudes in the high altitude air space with
    domestic reduced vertical separation minima, or DRVSM. The
    procedure essentially allows more planes to fly fuel-efficient
    routes over the United States.
        All the estimates were that DRVSM would save airlines
    approximately $5.3 billion through 2016. That estimate now
    appears to be conservative in light of the dramatic increase in
    fuel prices in the last year.
        In 2005, our new oceanic air traffic control system, ATOP,
    became operational. This system uses state of the art
    technology to reduce the separation minima from 100 to as few
    as 30 miles. This allows more airplanes to fly fuel efficient
    routes over the oceans.
        Another new initiative, Area Navigation, or ARNAV, uses
    more precise routes for takeoffs and landings, reducing the
    amount of fuel burned and the time between takeoffs and
    landings, with no impact on safety. Delta Airlines expects that
    ARNAV procedures at Atlanta will save them $30 million.
    Projections for savings from ARNAV procedures at Dallas-Fort
    Worth are approximately $10 million a year.
        Another tool, Required Navigation Performance, or RNP,
    promises to add to capacity and save fuel. This is because RNP
    uses onboard technology that allows pilots to fly more direct
    routes. RNP provides both lateral and vertical guidance and
    impacts all aspects of the flight, departure, enroute, arrival
    and approach. This not only will allow for more efficient air
    space management, but will also provide significant savings in
    fuel.
        Last year, we partnered with Alaska Airlines to implement
    new RNP approach procedures at Palm Springs International
    Airport. Under the conventional procedures in use today at Palm
    Springs, planes cannot land unless the ceiling and visibility
    are at least 2,300 feet and 3 miles. With these new RNP
    procedures, airlines can land in all sorts of weather, with a
    ceiling and visibility as low as 734 feet and 1 mile. In the
    first 11 months of 2005, this allowed Alaska Airlines to
    complete 27 flights that would otherwise have been diverted to
    an airport 70 miles away.
        RNP approaches also reduce the distance an aircraft has to
    fly by as much as 30 miles. This translates into fuel savings
    for our customers.
        Finally, we continue to work with our customers on our
    Nation's air space design. The Florida Air Space Optimization
    Project is a result of collaboration between the airline
    industry and FAA to redesign the air space in Florida to
    improve air traffic efficiency by reducing the complexity of
    the air space. The benefits include shorter distances on routes
    into south Florida airports and reduced departure delays from
    Boston, New York and Washington, D.C. to Florida destinations.
    The projected cost savings as a result of the Florida Air Space
    Optimization is $18.2 million a year.
        In summary, the FAA and its Air Traffic Organization are
    working hard to help our customers save fuel. We will continue
    to work collaboratively with industry, academia and the
    Congress to ensure our future technologies meet the needs of
    our air space system. We take this commitment seriously, as we
    continuously strive to provide the safest, most efficient,
    national air space system possible.
        Mr. Chairman, this concludes my testimony. I would be happy
    to answer any questions you may have.
        Mr. Mica. I thank both of our witnesses.
        We will jump right into questions. I have a few. Mr.
    Shages, during the hurricane, I quoted, we eliminated about 25
    percent of our daily production of jet fuel. Subsequent to the
    hurricane, we saw a situation where we could have literally run
    out of jet fuel.
        Can you lay down the pros and cons, or give us any of your
    thoughts, about establishing some type of jet fuel strategic
    reserve? Right now, you are not having specifically any jet
    fuel as a component in your reserve, is that correct?
        Mr. Shages. That is absolutely correct. The Strategic
    Petroleum Reserve has 685 million barrels of crude oil. A
    separate but related program is the Northeast Home Heating Oil
    Reserve, we have a very small reserve of 2 million barrels of
    heating oil. But those are the only two components of the
    Nation's Strategic stockpiles.
        The choice to make the reserve almost solely crude oil goes
    all the way back to 1976, after the original enactment of the
    Energy Policy and Conservation Act. The Act had required
    regional refined product reserves, but gave planners the option
    of substituting crude oil and centralizing storage of that
    crude oil, if it was justified for economic purposes, or cross-
    purposes. In addition, if we had a high level of certainty that
    the centralized storage could actually satisfy the needs in the
    regions.
        So the original SPR plan submitted to the Congress did
    actually substitute crude oil and centrally stored facilities
    for all the requirements for all products in our regional
    reserves. We continue that way to this day. It is still
    primarily driven by cost.
        Mr. Mica. What about, again, setting aside a specific
    reserve for jet fuel?
        Mr. Shages. We could do that. We have the authority to do
    it. If we were to build facilities for jet fuel----
        Mr. Mica. Would you need legislative authority, or do you
    have existing authority, do you feel, to set that up?
        Mr. Shages. The authority that we have in the Energy Policy
    and Conservation Act authorizes a reserve of up to a billion
    barrels. The definitions allow us to store any petroleum
    product, refined or crude oil.
        Mr. Mica. So you think you have that authority?
        Mr. Shages. We have that authority.
        Mr. Mica. One of the problems I heard was the shelf life of
    jet fuel is only about a year. Would it be necessary to sort of
    have that a rotating or revolving supply?
        Mr. Shages. That would be absolutely the case. You would
    have to rotate it on a regular basis. Depending on how you
    stored it, that would determine the frequency of the rotation.
        Mr. Mica. I am also told that in Europe, they require, I
    guess, the airlines to maintain a reserve a little bit
    different. I am not sure how all of them do it, but I
    understand some of them have reserves. Are you familiar with
    that?
        Mr. Shages. I am not intimately familiar. I do in general
    know that each of the member countries has a separate system,
    and each country differs a little bit from the others. Mostly,
    it is a regulatory system where the companies, whether they are
    the oil companies or the individual airlines are forced to keep
    excess inventories at their expense.
        Mr. Mica. We have nothing of that?
        Mr. Shages. We have nothing like that or any regulatory----
        Mr. Mica. Also we have the difficulty with so many of them
    in financial trouble, they can't even hedge, let alone keep a
    supply on hand.
        Well, again, we are trying to find some way to stabilize
    the supply. Refining capacity is another issue. Is there
    anything else we can do? Do either of you gentlemen want to
    speak to refining capacity, which again is somewhat limited? We
    import all that fuel, as I said, the crude oil. Most of it is
    refined, aviation fuel, in the United States, and then much of
    it is exported. Is that the case? And do you have any
    recommendations on refining capacity?
        Mr. Shages. Well, of course, we would like to see there be
    more refining capacity in the United States. There have been
    announcements of expansions in refining capacity. Currently we
    are at about 17.1 million barrels a day of capacity. By the
    year 2010 we expect that to be up almost 2 million barrels a
    day. So that is a significant growth in the actual capacity.
        There will also be improvements in capacity, so that you
    can generate more high quality fuels from low quality crude
    oil. It is a very robust industry. And we do, there is no
    question, we do import products and we also export some small
    amounts. But we don't see that there is a crisis in refining.
    It would be a good thing to have more refineries.
        Mr. Mica. Well, finally, one of the things I heard that we
    have a problem with is that much of this refined product is in
    fact shipped overseas, or a significant amount. And there
    aren't any, there aren't controls on what is exported in in an
    emergency situation. Some of what is done now is sort of
    voluntary. The rest finds its highest price on the world
    market. Is that correct?
        Mr. Shages. Yes, that is essentially correct. The United
    States actually benefits from imports. If we are talking about
    jet fuel, we are importing about 150,000 barrels of day of jet
    fuel and exporting about 50,000 barrels of jet fuel. So on
    average, we regularly benefit. In general, it is that way with
    other products.
        But at any given point in time, the flow could be in either
    direction. Frankly, it is critically important that there not
    be any controls on that, because take the situation with
    Hurricane Katrina. Without imports, the entire East Coast of
    the United States would have been critically short of products.
    Those products came from Europe, for the most part. That
    wouldn't have been possible unless the Europeans would have
    released their strategic reserves.
        So it is very important that we not stop our exports for
    fear of stopping the imports from those people that we
    otherwise export to.
        Mr. Mica. I appreciate your viewpoint. Let me defer now to
    the Ranking Member, Mr. Costello.
        Mr. Costello. Mr. Chairman, I do have some questions, but I
    would ask at this time that we recognize Mr. DeFazio.
        Mr. Mica. OK, Mr. DeFazio.
        Mr. DeFazio. Thank you, Mr. Chairman. And thanks to my
    friend, the Ranking Member. I have a very important meeting
    later in my office and I am going to have to go. Not that this
    is not important.
        But I have a concern which has been brought up by another
    industry. I am not sure whether Mr. Shages can really address
    it. And this is a concern of truckers as we move toward the
    introduction of the ultra-low sulfur diesel and because of the
    multiple uses of our pipelines. They are saying because of the
    standards that are going to be imposed that there will be huge
    penalties for just minuscule amounts of sulfur contamination,
    which will be likely in some portion of the fuel when you are
    moving different fuels through the same line. You send through
    fuel that doesn't require the ultra-low sulfur diesel and then
    you send another slug of fuel behind it and there is no real
    way to prevent an interim amount of fuel that is mixed. The
    question is OK, what are you going to do with all that, how is
    this all going to work?
        And the airlines are going to potentially, it seems to me,
    have problems in the same area. I am seeing yet another excuse
    for the industry to jack up prices, saying, oh, my God, it is
    that new Federal regulation on ultra-low sulfur diesel in the
    pipelines.
        Can you address what actions, are you aware of any actions
    that have been taken by the Administration either to look at
    some sort of regulatory relief for the minuscule amounts of
    contamination that might be in some of this interim fuel or
    other things that would assure us that the pipelines are going
    to continue to be used effectively during this transition?
        Mr. Shages. I have some knowledge of the issue. I can't
    speak authoritatively for the Administration, and I don't know
    of any regulatory relief that might be had. I do know that you
    do move, especially through the Colonial and Plantation
    pipelines, you move all sorts of products, some of them very
    high sulfur, and obviously with the ultra-low sulfur, you need
    to not only leach out sulfur from the pipeline from other
    products that would cause you to go above spec.
        My understanding is that the refiners understand that
    problem and that they are refining to a standard that will
    allow for the pickup of some sulfur. I believe the standard is
    less than 15 parts sulfur per million. They are actually
    planning on shipping ultra-low sulfur diesel that is down in
    the range of 8 parts, because they use----
        Mr. DeFazio. But what I am saying about the trucking
    industry is they don't think that all the capacity is going to
    be there to move to that ultra low, so that it can pick up the
    contamination, and they think it is going to be an excuse for a
    jack-up in diesel prices in trucks. Have you heard any inklings
    of that?
        Mr. Shages. No, I haven't actually heard that or been told
    that.
        Mr. DeFazio. OK. So do you think the way they are going to
    compensate, then, is to do this ultra-clean refining and then
    pick up some contamination along the way and still be below the
    standard?
        Mr. Shages. Well, it is not regulated. I think that is a
    possible solution. I think there may be other things that may
    have to happen. There may have to be longer runs of any
    specific product. Of course, the reason this all happens is
    because things are batched. And you may have to have longer
    runs of any given fuel to minimize the amount of contamination.
        Mr. DeFazio. If there is adequate storage for that fuel at
    the other end. Some of it is because of just in time problems
    and not being adequate storage, which is why the dispatch in
    smaller slugs, right?
        Mr. Shages. That is right. So I have, I am not an expert on
    that subject. I brought a few experts on other matters, but I
    don't have anybody here that can actually address that problem
    per se.
        Mr. DeFazio. OK. I appreciate that. I knew it wasn't your
    particular area of expertise.
        Just one quick question on the storage issue. You would
    need an appropriation, I assume, to construct----
        Mr. Shages. If we were going to deviate from our current
    configuration, we don't have any facilities that could store
    any kind of refined product. So we would need a separate
    appropriation to either build or lease those facilities.
        Mr. DeFazio. OK. Do you think it might be a possibility?
        Mr. Shages. The budget that we have just sent to Congress,
    we do not ask for any appropriation.
        Mr. DeFazio. No, but I am not saying, I am saying is there
    leasable capacity out there potentially?
        Mr. Shages. Well, it depends on what we are talking about.
    Actually, I would say right at the moment, there is probably
    not enough. If you are thinking in terms of a very large
    reserve, since inventories have been building for the better
    part of a year, if we actually went out and tried to store some
    large volume in existing facilities the way we do with the
    Northeast Home Heating Oil Reserve, we would end up driving up
    prices dramatically, because we would suck up virtually all of
    the available tankage. And it being a free market, the price of
    storage would go up dramatically.
        We can see that now, just to give you an indication, we
    have been storing heating oil, 2 million barrels in commercial
    facilities, in the Northeast for the last five years. We are
    paying about $2.50 per barrel per year to store that in
    commercial facilities.
        If we were to go out for a contract today, the price would
    be more in the range of $4 per barrel, simply because the
    inventories are so much higher today than they were five years
    ago when we created it. And so if we can, we are so big, that
    whenever we do something like this, we can drive prices around,
    not just for parts, but for the actual storage facilities. So
    we have to be a bit careful.
        Mr. DeFazio. OK, thank you. Thank you, Mr. Chairman.
        Mr. Mica. Thank you. Mr. Duncan?
        Mr. Duncan. Thank you, Mr. Chairman, and thank you for
    calling this hearing on this very important topic.
        I want to first, I want to commend the FAA and Mr. Cirillo
    for the innovations and the progress they have made on air
    traffic management, because I think that has helped this
    situation quite a bit. I want to commend Boeing and others in
    the aviation industry for making their planes so much more fuel
    efficient than they were 30 or 40 years ago. That has helped
    quite a bit.
        As Mr. Heimlich from the ATA, a later witness will testify,
    or at least it is in his testimony, that each one penny
    increase in jet fuel costs the aviation industry $195 million,
    and I have heard similar figures like that from the ATA for
    several years, so this is a very serious problem. Oil has gone
    down a little bit over the last few days. I think it is under
    $60 a barrel now, and that is hopeful.
        But we also have some of these experts saying that it could
    go way up from here. Some even predicting as high as $100 a
    barrel, and I don't believe that is going to happen. I
    certainly hope it doesn't. But this is something that we all
    need to talk about and work on as much as possible and see if
    there are other steps that can be taken.
        I think part, a big part of the problem is the fact that
    you have some of these groups around the Country, they don't
    want any natural resource production in this Country. They
    don't want you to cut any trees, they don't want you to produce
    any natural gas, they don't want you to dig for any coal, and
    they especially don't want you to drill for any oil.
        I have noticed that most of the people in those groups come
    from very wealthy or very upper income families. But who that
    hurts the most, when they stop all natural resource production,
    it hurts the poor and the lower income working people, because
    it drives up prices and destroys jobs. I think the key to this
    whole thing is, Mr. Felmy from the American Petroleum
    Institute, in his testimony later, he says we can no longer
    afford to place off-limits vast areas of the Eastern Gulf of
    Mexico or off the Atlantic and Pacific Coast, and offshore
    Alaska. Similarly, we cannot afford to deny American consumers
    the benefits that will come from opening the Arctic National
    Wildlife Refuge and from improving and expecting approval
    processes for developing the substantial resources on Federal
    multi-use lands in the West.
        Whenever you talk about doing any natural resource
    production, people, somebody on the other side will always say,
    well, you know, there is just not enough there. But if we just
    increased our production just a little bit, I am convinced that
    some of these foreign energy producers would get so concerned
    or so worried that they would start coming down on their
    prices, or at least hold them down.
        And then in my home of Knoxville, we have just been
    through, as many cities around this Country have been through,
    the unfortunate experience with Independence Air, who had such
    a big presence in Knoxville. They based all their projections,
    as I understand, on $35 a barrel oil. So even though they had
    more start-up capital than any new airline, I think, in the
    history of the Country, they couldn't make it.
        So I think that is just, at least some slight increase in
    our natural resource production in this Country, domestically,
    is probably the key to either bring down prices or at least
    hopefully holding them stable. Because that is going to be the
    biggest challenge or the biggest problem, biggest concern that
    I see that airlines could have. A strong aviation industry is
    important even to people who don't fly, because it is the key
    to our whole economy, not only for the movement of people, but
    for the movement of goods and services.
        Let me just ask one question, and maybe you don't know
    this, but I will ask Secretary Shages. We always hear, too,
    about alternative fuels or alternative sources. Are there any
    alternative fuels that you know of in the near future, other
    products that we could put into jet fuel that will hopefully
    bring the price down? Is anything like that realistic in the
    next five or ten years, or do you know anything about that?
        Mr. Shages. I know a bit about it, in the Energy Policy
    Act. My office was given responsibilities for strategic fuels.
    We are looking at those things. The time frame that you talk
    about, five years, there is virtually nothing. There are
    hundreds and millions of dollars being poured into alternative
    fuels. But the R&D timelines and the development timelines are
    vast.
        Mr. Duncan. Right.
        Mr. Shages. We have one of the largest untapped resources
    in the world out in the Rocky Mountain area, it is oil shale.
    We have as much oil in oil shale as Saudi Arabia has oil. And
    we have never produced any on a fully commercial basis. There
    was production, heavily subsidized production, back in the
    1970's. Now there is no production.
        However, companies are pouring hundreds of millions of
    dollars into doing research. But they have to go through all
    the steps: they have to do the research, pilot level programs,
    commercial demonstrations and we are talking an industry that
    might have 2 million barrels of production, but 20 years from
    now, not 5 to 10 years. It is very similar to the Canadian tar
    sands that are very, very successful now. But that was because
    they started in the 1970's and didn't give up on it.
        Mr. Duncan. Actually, that is what I assumed you would say,
    that we are still pretty far off. I hope that we can make
    progress in that direction.
        But then the other key thing is, you can't go as long as we
    have in this Country without opening up any new refineries, at
    a time that demand has increased greatly, not only in this
    Country but all over the world. That is something else that is
    going to have to be done if we are not going to just drive
    prices out the window.
        We have, air traffic, air passenger traffic has been
    greatly increasing. We just saw a report yesterday about the
    Washington airports having a record 45 million passengers.
    There is a lot of hopeful signs out there if we don't blow the
    whole thing up once again with some huge increases in the price
    of oil. I certainly hope that we don't do that.
        Mr. Chairman, thank you very much.
        Mr. Mica. I thank the gentleman. Mr. Boswell.
        Mr. Boswell. Thank you, Mr. Chairman. I think pretty much
    what I was going to say has been said. I would like to just
    submit a statement for the record.
        But I really appreciate the dilemma for our airline
    industry on fuel. I am one of the several general aviation
    pilots around here, and that has certainly hit my pocketbook,
    to keep trying to fly even though I am buying navgas versus jet
    fuel. But I am a big supporter, as you all probably know, of
    the airline industry, and I want to see it succeed. We are
    intrigued with this idea of jet fuel reserve, patterned after
    the Strategic Petroleum Reserve.
        Having said that, I would just like to, Mr. Chairman, if I
    could, I think it is germane to this discussion, but Mr. Duncan
    and others have made some very good remarks, as well as
    yourself and others. We have a fuel crisis in this Country. And
    we are in bondage to OPEC, we all know that. I would submit to
    you, and I would hope we would have some hearings, discussions,
    whatever, that we have developed some alternatives: ethanol,
    biodiesel and so on. There is no reason that science will let
    us get into jet fuel as well, from our own natural resources,
    that are biodegradable. This is important.
        I don't think that the alternative is any threat to
    petroleum whatsoever. They just can't produce that much. With
    the increase in China and India, usage, and so on, we are going
    to still be importing. If we use all the alternatives we can
    use and all the oil we can use, we are going to still be
    importing. And what we can do for our own economy, it seems
    like our time has come. The tests are done. We know the
    alternatives work. We are done. We have run them in commercial
    vehicles, we have run them, in the State of Iowa, we have run
    alternatives in State automobiles for several years. I was in
    on it. I know a lot about it.
        There is just no threat. I know the petroleum industry has
    a lot of clout, a lot of lobby clout here. I think it is time
    to move on beyond that. The biggest problem we have in
    alternatives, Mr. Chairman, is transportation. We have the
    transportation, it is buried in the ground, the pipelines. I
    don't know why, Mr. Shages, you couldn't be part of maybe, if I
    can persuade you to start talking about this, first, it is not
    a threat. We have the transportation. The oil industry that
    owns the pipelines could take a piece of the pie to transport.
    And we could have biodiesels and ethanols and whatever else we
    wanted to produce all over the Country. It would help.
        Still, we are going to import. I fully believe that, and I
    think you do, too. So I just, Mr. Chairman, would lay that out
    there, that we need to get into that discussion very badly. I
    thank you for your time.
        Mr. Mica. I thank the gentleman.
        Are there other members with questions? Mr. Costello.
        Mr. Costello. Mr. Chairman, thank you.
        Mr. Shages, let me ask you to clarify a point. The Chairman
    asked you a question about the European Union. I took it that
    your answer was that from a regulatory standpoint, that the
    reserves are the responsibility of the airlines and each
    airline has a different procedure.
        It is my understanding that there is a regulation that
    actually puts the responsibility on the oil companies as
    opposed to the airlines. Can you clarify that point for me?
        Mr. Shages. Yes, I believe that the vast majority of it is
    on the oil companies. It may also be on the airlines. I don't
    know that for a fact. I do know that most of what I hear about
    it is on the oil companies.
        Mr. Costello. Well, I would further ask what your opinion
    is as to implementing that type of a policy in the United
    States. The Chairman made the point that many of the U.S.
    airlines are, as I mentioned, a third of our capacity is in
    bankruptcy right now, chapter 11. So they may not be able to
    afford to take the risk. But certainly the oil companies can,
    as Mr. DeFazio mentioned, they are making huge profits, record
    profits. What would be wrong with having a regulation that
    places the responsibility on the oil companies to in fact have
    a strategic product reserve for jet fuel?
        Mr. Shages. Well, I think it is philosophical. When the
    Strategic Petroleum Reserve was created and it was authorized,
    there were originally choices. You had a Federal reserve and
    you also had a possibility of regulating and causing industry
    to store oil. The original plan said we are going to do it all
    federally owned and absorb all the costs and the taxpayers will
    pick up all the costs and reap whatever benefits there are, if
    there are benefits, to owning it. That was chosen, a plan was
    put together for that, sent to the Congress, Congress agreed.
        Then later, in the year 2000, the authority to actually
    have industry do this was deleted from the line in the Energy
    Act of 2000. So it is a philosophical matter who picks up the
    cost and who reaps the benefits.
        I don't think, I can't speak for the Administration from my
    position on making a change in that philosophy. It is just a
    philosophy, it has been there for a long time, which I think
    has actually worked well. Despite having been branded with the
    idea that we buy high and sell low, of course, the average
    costs to do all that we have bought to put into the reserve is
    about $27. It is clearly worth a lot more than that now if we
    were to sell it. The taxpayer would profit.
        If you regulate it and you make a company hold it when it's
    actually sold, if the price is high the company will profit. It
    is a philosophical question.
        Mr. Costello. It is indeed, and I know you can't speak for
    this Administration and this policy has been in place for a
    number of years through not only this Administration but
    previous Administrations. But can you offer your opinion? Do
    you think, speaking for yourself, would this be a good thing?
        Mr. Shages. Speaking for myself, I like the situation as it
    is. I tend to think that the benefits of reserves are general,
    broad-brush, they are not specific to individuals or companies.
    It is appropriate for the taxpayer to pay for it and for the
    taxpayer to reap the benefits when the oil is sold.
        Mr. Costello. Final question for you is, we talked about, I
    think Congressman Duncan talked about alternative fuels. We
    have talked about strategic product reserves. We have talked
    about, in my opening statement, technological advances and
    improving the ATC system. Is there any one single thing that
    you think should be at the top of the list?
        Mr. Shages. I am sorry, I don't think of any one thing that
    just jumps out to me. If you like, I can respond later to the
    record.
        Mr. Costello. Mr. Chairman, thank you.
        Mr. Mica. Thank you.
        Well, we may have some additional questions that we will
    submit, if there are no other questions for the panel at this
    time. What I will do is excuse you and thank you again for your
    participation today.
        Let me introduce our second panel of witnesses and have the
    staff go ahead and put their name cards out. We have Mr. John
    Heimlich, Vice President and Chief Economist of the Air
    Transport Association of America. Mr. John Felmy, who is the
    Chief Economist and Director of the Statistics Department of
    the American Petroleum Institute. And Mr. Jeffrey Hawk, who is
    the Director of Government Certification and Environment with
    the Boeing Company.
        I would like to welcome the witnesses on our second panel
    and as I mentioned to our first witnesses, if you have lengthy
    statements or documents you would like to have made part of the
    record, or referred to in the record, just request that through
    the Chair. Lengthy statements will be made part of the official
    record.
        So let me introduce and welcome for his testimony John
    Heimlich, Vice President of Air Transport Association of
    America. Welcome, and you are recognized.

        TESTIMONY OF JOHN P. HEIMLICH, VICE PRESIDENT AND CHIEF
      ECONOMIST, AIR TRANSPORT ASSOCIATION OF AMERICA, INC.; JOHN
     FELMY, CHIEF ECONOMIST, AMERICAN PETROLEUM INSTITUTE; JEFFREY
       HAWK, DIRECTOR, CERTIFICATION, ENVIRONMENT AND GOVERNMENT
                     RELATIONS, THE BOEING COMPANY

        Mr. Heimlich. Thank you, Mr. Chairman, and good morning. I
    appreciate the opportunity to address the issue of jet fuel
    supply and its impact on commercial aviation. ATA's members
    have a vested interest in ensuring access to an affordable,
    reliable supply of jet fuel.
        Today I will describe the effect of rising jet fuel prices,
    provide examples of unprecedented measures U.S. airlines have
    taken to reduce fuel costs and explain how modernization of our
    Nation's air traffic control system can help all system users
    minimize fuel consumption.
        From 1991 through 1999, jet fuel prices averaged 56 cents
    per gallon, and never exceeded 65 cents. The significance is
    not only the reasonable average price, but also its stability.
    It is against that backdrop that operational decisions and
    investments were made. Airline financial planners did
    anticipate higher fuel prices, but nowhere to the extent and
    duration they witnessed over the last few years. For most
    carriers, fuel has now tied or overtaken labor as their largest
    expense.
        Between 2003 and 2005, the average market price of jet fuel
    soared from 88 cents to $1.72 per gallon. In the period during
    and after Hurricanes Katrina and Rita, prices in the Gulf Coast
    spiked to $3.13. The outlook for 2006 is no better, with
    experts projecting an average in excess of $1.80.
        This forecast is especially critical at this time because
    airlines are increasingly exposed to fluctuating market prices
    as their fuel hedge positions deteriorate. This includes
    leading low cost carriers, all of whom likely would have lost
    money in 2004 and 2005, had it not been for their hedges. On
    the other hand, at 2003 fuel prices, nearly every U.S. carrier
    would have recorded meaningful profits.
        At today's consumption rate, every penny increase in the
    price of a gallon of jet fuel does drive an additional $195
    million in annual industry operating expenses. In fact, from
    2000 to 2005, the industry's fuel tab doubled from $16.4
    billion to an estimated $33 billion, even though it consumed
    less, thanks to increased fuel efficiency.
        That is just staggering. Like any other tax, fee or cost
    increase, it is virtually impossible to pass through to the
    consumer in this environment of limited pricing power.
        Our airlines have an enormous built-in financial incentive
    to reduce consumption. Indeed, the industry's track record
    shows just that. Fuel efficiency has risen an impressive 18
    percent since 2000, and tripled since 1971. Airlines have left
    no stone unturned in identifying ways to conserve fuel, through
    improved aerodynamics, weight reduction and operational
    procedures. The use of winglets, which cut fuel consumption 3
    to 5 percent, the removal of ovens or entire galleys to reduce
    aircraft weight, and procedures like continuous descent
    approaches are just a few examples.
        Jet fuel is similar in composition to diesel fuel and home
    heating oil and consumers of those other products compete with
    airlines and other jet fuel users for that portion of refinery
    output. Also, because the price of jet fuel is principally
    determined by the underlying price of crude oil, any efforts to
    conserve energy across the broader economy ultimately provide
    some relief to the aviation community. We strongly encourage
    other industries to take similar actions.
        In short, airlines have not been able to cut costs or raise
    fares fast enough to keep up with skyrocketing fuel costs.
    While we recognize that the U.S. Government can do relatively
    little in the short term to reduce jet fuel prices, it should
    first do no harm. I refer you to recent fuel tax changes and a
    pipeline rate case before the Federal Energy Regulatory
    Commission detailed in my written comments submitted to the
    record.
        Finally, I want to end by emphasizing how air traffic
    control modernization could mitigate fuel expenses. The
    existing ATC system has generally served our Nation well.
    However, it was not designed with fuel conservation in mind.
    Nor was it built to accommodate the anticipated growth in
    volume and complexity. A modernized system, utilizing available
    technologies and recently developed procedures, could save
    hundreds of millions of gallons per year.
        In addition to reducing costs to operators, fuel savings
    achieved through ATC improvements produce significant
    environmental benefits. For every gallon of fuel not burned,
    related emissions are not released into the atmosphere.
        In conclusion, no other industry is more conscious of
    energy consumption than the airlines. In the best of times,
    conservation and efficiency are a way of life. In the worst of
    times, they are a matter of survival. We are proud of our fuel
    efficiency gains over the past 30 years, and we intend to
    continue.
        With the pending aviation reauthorizations, Congress has an
    opportunity and an obligation to leverage advancements in
    technology and bring about long-needed changes in our national
    airspace system. This must be a cooperative effort among all
    participants in our Nation's aviation system. We look forward
    to working together to save fuel, save time and save jobs.
    Thank you.
        Mr. Mica. Thank you, and we will withhold questions until
    we have heard from all the panelists. Mr. John Felmy, with the
    American Petroleum Institute, you are recognized next.
        Mr. Felmy. Thank you, Mr. Chairman.
        I am John Felmy, Chief Economist of the American Petroleum
    Institute, the national trade association of the U.S. oil and
    natural gas industry, representing all sectors of the industry
    including companies that make, transport and market jet fuel.
    We very much appreciate this opportunity to discuss commercial
    jet fuel supply and its impact on the airline industry.
        Our companies are making the maximum effort to meet the
    demand of airlines for jet fuel. However, to better meet the
    long term fuel needs of U.S. consumers and businesses, changes
    are needed in our energy policy. We need to increase oil and
    natural gas supply, reduce demand and expand and diversify our
    energy infrastructure.
        Let me summarize our current situation. For the week ended
    February 3rd, national inventories of kerosene jet fuel were
    43.5 million barrels. This level is 2 percent above last year's
    level and 6 percent above the average for 2001 to 2005 levels
    for the week. Production of kerosene jet fuel so far in 2006
    has been about equal to the average of the years 2001 to 2005.
        Last year, even with the major disruption to refineries
    caused by Hurricanes Katrina and Rita, jet fuel production
    nearly matched 2004's four year high. These results are
    consistent with the very high level of refinery utilization
    with which the industry has been operating. Over the past year,
    the Nation's refineries have operated at more than 90 percent
    of capacity for nearly two-thirds of the time and above 85
    percent for nearly 95 percent of the time.
        While the refinery system is running all out to produce jet
    fuel and other oil products to meet consumers' fuel needs,
    there is a limit to how hard refineries can run. The operations
    of a refinery is subject to decisions by each refinery manager,
    and most importantly, involve decisions on operations that are
    dominated by health and safety concerns. The U.S. oil and
    natural gas industry will not compromise the health and safety
    of its workers or surrounding communities for any reason.
        The United States uses about 1.6 million barrels per day of
    jet fuel. Of this amount, about 1.5 million barrels a day are
    produced domestically and about 148,000 are imported. A small
    amount, 52,000 barrels a day, are exported, 77 percent to
    Canada and United Kingdom, primarily as fuel for international
    flights. Jet fuel usage peaked in 2000 and then after September
    2001, declined sharply with a complete shutdown of air travel
    for a period and a sharp decline in travel with operations
    resumed. It has remained at about 1.6 million barrels a day
    since 2002.
        Prices of jet fuel have generally followed the price of
    crude oil. Since 2000, the correlation between spot jet fuel
    prices and spot crude oil prices has been about .98, indicating
    a strong relationship between the cost of crude oil to produce
    jet fuel and the price of jet fuel. This relationship varies at
    times due to the relative supply and demand conditions in the
    jet fuel market, and is particularly affected by major supply
    disruptions, such as we experienced after the hurricanes in
    2005.
        We recognize how the price of jet fuel has been a serious
    problem for airlines. For example, about 20 billion gallons of
    jet fuel are used each year, so this has meant that for every
    penny increase in the cost of jet fuel, it means over a $200
    million increase in the cost of jet fuel annually.
        We believe that positive changes in U.S. energy policy can
    help alleviate this burden on the airline industry and better
    meet the energy needs of American consumers and the U.S.
    economy as a whole. API is prepared to work with the Congress
    and the Administration to bring these changes about.
        Thank you, Mr. Chairman. I am prepared to answer any
    questions you might have.
        Mr. Mica. Thank you, and we will hear from our last witness
    on this panel, Mr. Jeffrey Hawk, with the Boeing Company.
    Welcome, sir, and you are recognized.
        Mr. Hawk. Good morning, Mr. Chairman and members of the
    Committee.
        On behalf of the Boeing Company and in my capacity as
    Director of Certification, Environment and Government Relations
    on the 787 program, I thank you for the opportunity to address
    the Aviation Subcommittee. I have submitted written testimony
    for inclusion in the record.
        Mr. Mica. Without objection, the entire statement will be
    made part of the record. Please proceed.
        Mr. Hawk. I would like to briefly summarize that material.
        The prepared testimony addresses the demand side of fuel
    consumption. Three areas are covered: the newest Boeing
    airplane, the 787 Dreamliner; secondly, the incorporation of
    continuous improvements in our existing product lines; and
    lastly, our request for Congressional support for the necessary
    improvements in our air traffic control system to enable
    aircraft to move more efficiently in the world's air space,
    thereby saving fuel and time.
        The Boeing Company is committed to continuous improvements
    in the fuel efficiencies of our airplanes. Sine the dawn of jet
    travel, there has been a reduction of more than 60 percent in
    fuel consumption compared to the 707 era aircraft. Our latest
    program, the 787 Dreamliner, is a revolutionary step forward in
    this pursuit. One of the significant features of the 787 is the
    use of carbon fiber composites for the primary structure. This
    material saves weight, thereby saving fuel.
        A new airplane program allows us to use new engines from GE
    and Rolls Royce, new aircraft systems, the latest aerodynamic
    techniques to reduce drag and lightweight composites to produce
    a revolutionary new airplane that burns 20 percent less fuel
    and 20 percent less CO2 than the aircraft it replaces. The 20
    percent fuel savings results in a 10 percent reduction in
    airline operating costs, much needed for their financial
    recovery.
        A fleet of Boeing 787s would save over 3 billion gallons of
    aviation fuel in 20 years. The 787 is the right airplane at the
    right time. The airline response has been exceptional, with 379
    announced orders to date. Our existing products have
    incorporated many changes to ensure fuel efficiency. New and
    derivative engines, more efficient aircraft systems and
    aerodynamic systems, such as winglets and swept wingtips, are
    examples.
        Our newly announced 747-8 family of aircraft will be using
    the same very fuel efficient 787 engines to produce the next
    member of the durable 747 family of aircraft. Our airplanes
    today are equipped with modern navigational equipment. We need
    an air traffic control system that is compatible with this
    capability. Boeing is doing its part to improve fuel
    efficiency. We ask Congress and the Aviation Subcommittee to do
    the same by sponsoring and supporting necessary legislation to
    create the next generation air traffic controlled system.
        The ability of aircraft to fly directly to their
    destination, unimpeded by ATC, will save time and precious fuel
    resources. The future air traffic control system needs to match
    the improvements the industry is making in our airplanes.
        In conclusion, the Boeing Company is pleased to present
    this testimony before your Committee. Our performance and
    demonstrated commitment to improvements in fuel consumption
    will continue.
        Mr. Chairman, thank you for the opportunity to address you
    and the Committee on this subject of our Nation's fuel supply.
        Mr. Mica. Thank you, and now we will get into some
    questions. Mr. Heimlich, what about requiring some sort of jet
    fuel reserve? There are several ways that this can be done. I
    guess in Europe they require the airlines, some of the folks on
    the panel have talked about the oil companies, petroleum
    companies, being saddled with the responsibility, maybe the
    Government. Any ideas?
        Mr. Heimlich. Yes, I think it is an idea worth exploring.
    This is a classic case where the devil is in the details. Would
    the reserves be held in geographically diverse areas? What
    would the fill rate of the reserve be? Would it be filled at
    opportune times, considering market prices, so it would not
    aggravate the price in the marketplace?
        As far as the European situation, I do believe they
    obligate the oil marketers, rather than the airlines, to hold
    the stocks. And there you get into, as Mr. Shages said, a
    control issue. Would the Government have the leeway to release
    the products at will, or as we saw in the hurricanes, when the
    IEA stock release occurred, they allowed, they freed the
    marketers from their obligations and hoped that high prices in
    the U.S. would bring product to the United States, and that in
    case did happen. So I think the punch line is, it is worth
    evaluating further. We don't have definitive position.
        Mr. Mica. And right now we have, Mr. Felmy, what, about a
    one month's supply, did you say, of jet fuel?
        Mr. Felmy. In terms of the inventory level, we have around
    40, at least according to my data, about 43 million barrels in
    inventory. With a consumption of 1.6 million barrels a day that
    puts it roughly at about a one month inventory, just from
    inventories. But remember, please remember that most of the
    supply comes contemporaneously from the refinery operations. So
    it is a little misleading to use those calculations.
        Mr. Mica. What is your viewpoint on having, actually, Mr.
    Heimlich corrected what I think I was saying, that the burden
    would fall on the airlines in Europe. It is actually on the
    petroleum companies. What do you think about that?
        Mr. Felmy. Well, again, as Mr. Heimlich has pointed out, it
    is clearly a devil in the details issue. Philosophically, I
    believe we have adequate inventories. We faced a once in a
    century impact from Hurricanes Katrina and Rita, and we did
    have a challenge in terms of meeting supplies.
        But it was also the case that we had a huge surge in
    imports, as was mentioned earlier, by a doubling of them. We
    also saw a dramatic drop in exports, which are small to begin
    with. And that was because the pricing was such that the spot
    prices in September, October and November for jet fuel were
    higher in the United States in the three major harbors than
    they were in Singapore or Rotterdam.
        So I think we have a functioning system. I think the other
    issues that have to be addressed in terms of mandating higher
    minimum inventories than we have right now are one of cost and
    where is the product going to come from. We are already running
    the refineries at very high levels of utilization. There isn't
    a lot of excess capacity worldwide. So you have the potential
    of trying to mandate higher inventories, of potentially driving
    up costs.
        Mr. Mica. Mr. Heimlich, what percentage now is fuel of the
    cost, of your cost for commercial passenger service?
        Mr. Heimlich. I think it has exceeded 20 percent for most
    of the carriers. The historical range was probably 10 to 15,
    now we are talking in the 20 percent range, maybe 25.
        Mr. Mica. Again, I think others have testified, I think my
    testimony also indicated that it is really sort of the
    backbreaker, right now of the industry, the fuel costs. I guess
    that is a correct assumption. You have tackled some of the
    labor issues mainly by going into bankruptcy, those costs. And
    you have cut back.
        Most of the legacy carriers are now some version of a
    discount carrier. Fuel seems to be the nut that you have to
    crack as far as staying on top of prices. I think we had
    information that last year you raised your fares about 10
    times, something like that, 10 or 12 times and maybe once
    already this year. What is the problem with keeping up with
    those costs and passing them on to the consumer?
        Mr. Heimlich. Well, we keep trying, and fortunately, we
    have seen some modest progress in the last few months in the
    willingness of the customer to pay. High fuel prices have
    interestingly forced some capacity reduction on the part of the
    carriers, supporting a little better pricing environment. The
    difficulty is in, I had mentioned that our fuel prices doubled
    over the last couple of years from $16 billion to $33 billion.
    It is difficult to pass through $17 billion in fare increases
    over a two year period.
        So it is really the magnitude of the increase, can it all
    be passed through fares. We are making some modest progress,
    but of course, if we could pass all our costs through, we would
    never lose money. So it is a continual battle.
        Mr. Mica. I have a question relating to, I don't know if
    anybody can answer it, maybe we will go back to you. The
    Europeans are now considering some sort of a fuel tax because
    of jet fuel or airplane fuel pollution effects on the
    environment. Are you following that at all, Mr. Heimlich?
        Mr. Heimlich. Yes. We have some folks who are very engaged
    in international environmental matters and we do not support
    that tax. As I said, we have a tremendous built-in incentive,
    being price, to be as conservation oriented as possible. I
    think the best thing for us would be to hope that other
    industries can follow our lead in that regard.
        Mr. Mica. Finally, Mr. Hawk, you have increased the fuel
    efficiency of some of your aircraft. Maybe you could give us
    some idea where your latest models stand. Of course, one of the
    things that I think anyone in the market for acquiring
    commercial aircraft would look at is your fuel efficiency. How
    do you stand in competing in the international market maybe
    with your latest product?
        Mr. Hawk. We have seen a trend since 1990 of the average
    size of jet transports getting smaller. Part of the reason for
    that is the demand for airlines to move point to point, from
    city of origin to final destination without making an
    intermediate stop, the classic hub and spoke environment.
        We were developing technology in the late 1990's originally
    aimed at increased speed. That is where the origin of more
    extensive use of composite materials was envisioned, and also
    new engines. That was known as the sonic cruiser program.
        Because of the exogenous shocks of 9/11 and the significant
    increase in cost of aviation fuel, and the request of the
    airlines, we migrated that efficiency originally aimed at
    speed, about a 20 percent increase in speed, to be specifically
    targeted at fuel efficiency, essentially traded at 20 percent
    increase in speed for 20 percent reduction in fuel consumption.
    That is brought about by using new engines that are more
    efficient, a higher bypass engines, operates by passing more of
    the air around the outside of the engine. That is good for fuel
    efficiency.
        Lightweight materials, as cited previously, were the
    composites. The latest in aerodynamics to reduce the drag of
    the airplane and lightweight, efficient systems that again, in
    interaction and integration with the engines, to not exact hot,
    high pressure bleed air from the engines. The classic airplane
    systems that had previously been powered by that bleed air on
    the 787 will be powered electrically. The integration of all
    four of those are what achieved the 20 percent reduction in
    fuel consumption, compared to, say, today's 767 aircraft.
        Mr. Mica. OK, thank you.
        What we will do is, I will yield now to Mr. Larsen. I may
    get back with a couple of questions.
        Mr. Larsen. Thank you, Mr. Chairman.
        Mr. Heimlich, you didn't mention in your oral testimony the
    issue of hedging. It is in your written testimony. I won't ask
    you to define for us, I think we have a good idea what it is
    about. But what is interesting about the hedging policies are
    the various airlines, because they are all over the map. There
    is no consistent policy. We talked about a lot of solutions, a
    lot of ideas.
        One idea we haven't explored is what the airlines do
    themselves and sometimes do to themselves by having a good
    hedging policy or a terrible hedging policy. Can you explain to
    us exactly what kinds of choices airlines go through to decide
    on their hedging policy?
        Mr. Heimlich. Absolutely. Let's start off by remembering
    that hedging is a gamble. And you win some, you lose some. In
    the past, there have been some charter airlines or smaller
    airlines that have hedged themselves into bankruptcy by locking
    in at prices that were too high. I think few would have
    foreseen the very high prices we see today.
        Having said that, the individual airlines look at hedging
    as one, a matter of financial planning to limit volatility, so
    they know exactly what they are going to pay, even if sometimes
    they bet wrong, they bet too high. And some of them look at it
    as a luxury, if they have the cash wherewithal to do it. Today
    if you go in the market and you do find a willing counter
    party, you are not going to get someone to give you the $26 a
    barrel price----
        Mr. Larsen. Not any more.
        Mr. Heimlich.--that Southwest had a couple of years ago.
    And even their positions are eroding. I think the other thing
    to recognize is, there were carriers like United that had hedge
    positions and were forced to rescind those contracts as part of
    bankruptcy. Delta had, in early 2004, had to liquidate its
    hedge positions to free up cash for immediate obligation.
        So basically, the airlines and their treasury groups have,
    they look at their cash capability, what the market will offer,
    a projection of what the energy prices will be, and then see if
    there is a counter party willing to do it. You are absolutely
    right, that some look at those more as strategic financial
    planning rather than bets. But in the end, it does come back to
    a gamble for them.
        Mr. Larsen. In testimony, you mentioned fuel prices varying
    in different parts of the Country. Can you explain why?
        Mr. Heimlich. Yes. We do pay very different prices in
    different regions of the Country, as we do throughout the
    world, as Mr. Felmy also mentioned, Singapore and some other
    areas. It has a lot to do with the quality of the physical
    infrastructure, the pipeline network, trucking capability
    across mountains, the percent that comes in from overseas. So
    those things tend to make the West Coast higher with a limited
    trucking and refining capability, compared to the East where
    you have three or so major pipelines, you can move things by
    far in a probably more competitive area.
        So we do, because of that reason, some economic tankering,
    where sometimes even if there is not a hurricane, we might
    ferry fuel, let's say, from Baltimore-Washington International
    to the West Coast on a transcontinental flight if the price is
    sufficiently cheaper.
        Mr. Larsen. So for the same reasons that Whatcomb County in
    my district, home of two refineries, has the highest price at
    the pump of any county in the State of Washington, the same
    principle applies to jet fuel? It doesn't matter where the
    source is, it is how it gets there, the different ways you can
    get oil to the pump?
        Mr. Heimlich. That is absolutely correct. Supply and demand
    at the local level and the transport costs associated with
    getting it there are critical to the ultimate price to the
    consumer.
        Mr. Larsen. Mr. Felmy, I have a question here about where
    the major refinery questions are located. That is more of a set
    of questions. I will just jump through it. Of the five
    refineries in Northern California, on the West Coast, four of
    them are in my district. The fifth one is U.S. Oil and just
    serves the two bases in Puget Sound.
        So we have these refineries, four refineries in the
    district. In your testimony you mentioned that refineries
    overall have operated at more than 90 percent capacity for
    nearly two-thirds of the time, and 85 percent for nearly 90
    percent of the time. My question to you is, what stops them
    from operating at, say, 95 percent two-thirds of the time and
    95 percent 90 percent of the time? What stops them from getting
    closer to 100 percent more of the time?
        Mr. Heimlich. Several things. The statistics you have, of
    course, are affected by the hurricanes. So in terms of some of
    those impacts, that is clear as was mentioned earlier, 25
    percent of the refining capacity was affected by the
    hurricanes. Secondly, we regularly have maintenance that has to
    be done. Also significant upgrades in terms of producing new
    fuels. You can't run the refineries at the same time that
    you're adding pieces of equipment and so on and so forth.
        That refinery utilization is very high, as compared to
    other industries, which is more in the 80 percent area. But the
    key thing that dominates why you don't run them harder than we
    are is health and safety concerns. You have to do required
    maintenance, and on a twice a year basis, you typically have to
    go through a turnaround or maintenance schedule, just to be
    able to make sure these high temperature, high pressure
    facilities are operating safely.
        Mr. Larsen. OK. I will have further questions on a second
    round, but if I could, for Mr. Hawk, welcome to Washington,
    D.C. and I hope you get to fly home tomorrow, if not sooner.
    Can you talk about the migration of composite technology to the
    747-8 program, and from 787 to other, you talked about the
    engines, but can you talk about the composite technology?
        Mr. Hawk. We have actually seen an interesting growth of
    the use of composites throughout the jet aviation program. The
    first generation of aircraft back in the late 1950's, early
    1960's, used about 1 percent of the air frame in various forms
    of composites. Aircraft of the 1980's used about 3 percent, 777
    from 10 years ago used about 11 percent of the air frame weight
    in composite materials.
        The 787 makes a more fundamental step forward, where about
    half of the structural rate is the carbon fiber composite
    material. We see this as an appropriate emerging trend. We
    think new aircraft will continue that same technology. The 747-
    8 is a derivative of the current 747 family, so there will not
    be a significant change in the percentage of composite use,
    other than its current application and flaps and spoilers and
    areas like that on the air frame.
        But we expect new aircraft from virtually all manufacturers
    to make much more extensive use of this lightweight, low
    corrosion, low key characteristic, very durable material.
        Mr. Mica. I thank the gentleman.
        Mr. Moran?
        Mr. Moran. Mr. Chairman, thank you very much.
        You indicated in your testimony that 25 percent of the
    refining capacity was affected by the hurricanes of the Gulf
    Coast. Has that capacity now been fully restored, and has the
    price consequence of that lack of refining capacity for that
    period of time been taken into account? Are prices now no
    longer affected by the hurricanes of the Gulf Coast?
        Mr. Felmy. First, we have still some lingering damage from
    refineries. There are a couple that are still offline. We are
    going through some level of restarts, so that there still is
    some lingering damage.
        In terms of the price impacts across the fuels, what we saw
    after the hurricanes, even with the capacity offline, we saw
    prices spike up, markets function, huge surges in imports, and
    demand was affected. So you have seen prices come down
    dramatically where jet fuel is now, well, in New York Harbor, I
    guess it is around $1.79 a gallon from the previous highs that
    you were experiencing back in the post-hurricane impact.
        So there still are some lingering impacts in terms of
    supply, but fortunately, we had imports which have come in to
    help fill the gaps that have been there.
        Mr. Moran. Is jet fuel refined at specific refineries or is
    it refined at a broad array of refineries? If you are a
    refinery, do you specialize in jet fuel?
        Mr. Felmy. It is refined in many refineries. Virtually all
    refineries have, I guess, the capability to be able, but it
    depends on whether or not you take the cut that goes out of jet
    fuel from either the middle distillate pool. So some don't
    produce any jet fuel. But most do, which is an interesting
    point, because one of the unfortunate rumors that was floating
    around after Katrina was that the one refinery, one of the
    refineries that was severely impacted was the sold provider of
    jet fuel in the Country. And that was simply wrong.
        Mr. Moran. The complaint in Kansas is often diesel fuel,
    Mr. Felmy, that the price consequence of Katrina and supply and
    demand has been reduced for gasoline consumption and the
    automobile, you are telling me somewhat, or jet fuel. But the
    one that seems to linger the highest, particularly in my
    agriculture communities, is the continued concern that diesel
    fuel has not responded subsequent to Katrina.
        Mr. Felmy. Well, it has responded some. It has come down
    from somewhere, I forget exactly what the peak was, but it is
    now around $2.58 nationwide, something like that. Diesel fuel
    market has been fundamentally different from gasoline, as you
    note. It is because one, you have had much stronger demand for
    diesel, where you saw, for example, diesel demand in 2005 was
    up 2.1 percent, whereas motor gasoline was only up .4 percent.
        But a lot more importantly in the case of diesel fuel, we
    did not see the surge in diesel imports that you saw in the
    case of gasoline. Gasoline imports surged to almost 1.5 million
    barrels a day from an average of 1, whereas diesel was up a
    little but not that. At the same time, you had post-hurricanes,
    you had right the timing for harvest demand and also a lot of
    construction demand for rebuilding and so on. So fundamentally
    two different markets.
        Mr. Moran. Why the difference in imports between jet fuel
    and diesel?
        Mr. Felmy. As near as I can figure out, it is because
    Europe continues to, I guess you would say, diesel-fy its motor
    fleet where consumers there are buying a much larger share of
    diesel engines than motor gasoline. So you have gasoline, they
    have gasoline to export, but not as much diesel.
        Mr. Moran. One of the things that I guess I should know
    before I came to Congress, and having been her a while now is
    that there is a set of principles, of laws, of supply and
    demand, and perhaps what we need to often remember is that we
    can't overcome those laws of supply and demand. They exist, as
    much as Congress would like to change the consequences. Have
    you seen any policy steps that the Federal Government has taken
    that fundamentally would affect supply and demand, the supply
    of jet fuel, demand for jet fuel, or just energy in general?
    Are we doing anything right or wrong?
        Mr. Felmy. Well, I think the Energy Policy Act of last
    year, signed on August 8th, was a first step. It had provisions
    in there for conservation, renewables, it had quite a bit of
    provisions for coal, for nuclear power, electric transmission
    and some natural gas distribution lines. It had very little for
    oil and gas, however. So what remains to be done is still
    policies that can help us open up and explore for more oil and
    gas in this Country. You can also improve conservation and
    energy efficiency to help that, and improve the infrastructure.
        So we still need more policies in that area to help
    American consumers.
        Mr. Moran. Thank you, sir. Thank you, Mr. Chairman.
        Mr. Mica. Thank you. Mr. Pascrell?
        Mr. Pascrell. Thank you, Mr. Chairman.
        Mr. Felmy, the largest ten refiners of oil operating in the
    United States have control over 78 percent of the domestic
    refining capacity. The oil industry has indicated that jet fuel
    supply will be limited indefinitely because of difficulties
    getting permits to expand or build domestic refineries, adding
    to a pre-existing shortage of refineries due to the under-
    investment in the 1990's.
        The crack spread, as it is called, for jet fuel hit an all
    time high of $42.23 in late September of 2005. It remains at
    $11.88. The historical average has been $5. According to the
    Congressional Research Service, in 2004, the largest net income
    increases were in the independent refining and marketing
    segments, which rose a whopping 190 percent. The simultaneous
    occurrence of these circumstances could be interpreted in many
    ways, including the appearance of collusion or price gouging on
    jet fuel.
        Aside from the given fact of high crude oil prices for all
    sectors of the petroleum industry, how do you explain this? How
    do you explain this?
        Mr. Felmy. Markets at work, sir.
        Mr. Pascrell. What did you say?
        Mr. Felmy. Markets at work.
        Mr. Pascrell. Markets at work?
        Mr. Felmy. That's correct.
        Mr. Pascrell. Would you explain that? What do you mean by
    that?
        Mr. Felmy. What we had was fundamentally tight markets. As
    indicated earlier, you had a huge shift to the supply chain and
    in order to be able to allocate scarce supplies, you have price
    movements, which do that in a market economy. In terms of the
    concentration that you mentioned, yes, our industries are in
    that range. But that puts them along with many other consumer
    industries in terms of the concentration ratios that serve
    consumers. You have to be large and have scale to be able to
    cost effectively serve consumers.
        In terms of adjustments, as I said, you have seen increases
    in imports as a result of those price signals. You have had
    some alleviation of demand and you have seen a decline in
    prices as a result. But it is fundamentally markets at work,
    moving prices around.
        Mr. Pascrell. Markets at work I find to be a fascinating
    term. It was the same term used by the Enron folks in 2000 and
    2001 out in California, the markets are at work. The industry
    is moving forward. And you can wonder, I guess you don't, I
    think you understand why there is question about all of these
    things coming together at the same time. Circumstances are
    unusual. And I am not so sure it is the markets at work. I
    believe in the free market. I believe in an open market. I
    believe in competitive systems.
        But at the same time, I think the very parts of the market
    at work bring about just the opposite situation, markets
    controlled. I am not so sure these outlandish increases, I
    mean, 190 percent is just unbelievable. How do you explain that
    in terms of market operations or market activity?
        Mr. Felmy. It is fundamentally a function of the price
    determination of the buyers and sellers who are in the product
    markets. Comparing 190 percent is a misleading number, because
    you have to look at what the returns to the refinery industry
    were for a very long time.
        Mr. Pascrell. Well, tell us about them.
        Mr. Felmy. They were very low, very low returns for much of
    the 1990's. Going back 20 years, we have had low rates of
    return. You had an improvement in that sector over the past
    couple of years, but you still don't have a great rate of
    return in terms of some of the refiners, if you look at their
    margins. And if you look at the overall industry, our profit
    rate, our earnings rate, is only about 8, 8 and a half cents on
    the dollar.
        That is less than many other industries. It is slightly
    above the national average for all industries. But it is well
    below other markets, other industries, such as pharmaceuticals,
    banks, computer companies, software, and so on.
        Mr. Pascrell. What is the influence, specific influence of
    demand on those prices?
        Mr. Felmy. Demand is a very powerful influence. We saw that
    specifically in the gasoline market and as was mentioned
    earlier, the difference with the diesel market. Gasoline demand
    was down post-hurricanes, and that combined with an increase in
    imports, restoration of production, you saw prices come down
    dramatically. In the case of diesel, demand continued high
    because of the harvest and because of construction demand and
    continuing economic growth. Demand is very, very important to
    markets.
        Mr. Pascrell. Can I ask one elemental question, Mr.
    Chairman? I am interested in the subject of demand. The
    argument is that the increase in demand keeps the price
    elevated. I would conclude from that, then, the problem being
    that if you had an increase in, if you lowered the price, there
    would be an increase in demand. Correct?
        Mr. Felmy. That is correct, sir. An economist can believe
    nothing else.
        Mr. Pascrell. Oh, really? You know what I think? I think,
    Mr. Chairman, and I apologize for being late, I had three
    hearings at the same time. I think, Mr. Chairman, when one
    looks at the machinations of the market, in a so-called free
    market, when one looks at the machinations of this market
    economy, there are a lot of questions. The consumer is a victim
    most of the time. We are all victims. You are a victim
    yourself. We are all victims.
        But I don't think it is the economists that you claim are
    not so sure about what brings rise to the prices. Demand is one
    part of it, no question about it. But there are many other
    factors that are involved. What you consider to be below
    average earnings in the 1990's, you could take a look at that
    also. We don't have the time here today.
        But these numbers are not acceptable. The numbers I
    presented to you are legitimate numbers. I didn't make them up.
    You understand that, correct?
        Mr. Felmy. Yes.
        Mr. Pascrell. Thank you.
        Mr. Mica. I thank the gentleman.
        Are there other questions from any of our members? Mr.
    Larsen, I will let you go again.
        Mr. Larsen. Mr. Hawk, in your testimony you talk about, in
    your oral testimony you touched on improvements to the air
    traffic control system. Your written testimony goes into a
    little more detail. Can you tell us why Required Navigation
    Performance, tailored arrivals and trajectory based operations
    would help the efficiency of the system? Then could you tell us
    if those things were in place, what our current ATC system
    would have to do to accommodate that?
        Mr. Hawk. The capability of modern aircraft allows much
    greater navigation precision than what we saw in place 20 plus
    years ago. So an aircraft can be properly positioned in space
    and time as directed by the air traffic control system.
        Ideally, you would like an aircraft to move from the gate
    to the departure end of the runway and take off without an
    undue hold. So the ability to move more aircraft through our
    congested airspace today is fundamental to that desired
    efficiency. The aircraft are ready. The somewhat antiquated air
    traffic control system is a bit of a hindrance there.
        An example was cited by the FAA in panel one, referring to
    something called continuous descent approaches. That four-
    dimensional navigation capability that could be enabled with a
    revision to the air traffic control system would allow an
    aircraft about 150 miles out to have a programmed path that
    would allow the aircraft to descend at idle power from the
    cruise altitude and make a turning descent to the runway, and
    not do what we typically see today, which is an intermediate
    step descent using increased power. That consumes more fuel and
    time.
        So a continuous descent allows aircraft to move in from the
    side to approach ends of the runway. That is one example.
        Required Navigation Performance is consistent with what was
    also cited by the FAA, the RVSM, the reduced vertical
    separation system. The airplanes are ready. We just need the
    air traffic control system in place to position those aircraft
    in time and space in the most efficient manner.
        Mr. Larsen. Mr. Felmy, as I understand refineries, and I
    took a tour of one of the refineries in my district a couple
    weeks back, and they showed me the chart, how the crude oil
    comes in and gets separated out into various lines and refined
    into various products, including jet fuel, in this particular
    refinery, and diesel, and of course the basic product that most
    of us use.
        Given the ultra-low sulfur diesel requirements that are
    coming on, do you anticipate, does the industry anticipate that
    squeezing out refining capacity, replacing refining capacity,
    say on jet fuel or any of the others? Or is the industry doing
    everything it can do to accommodate those requirements, so that
    you are still getting 1.6 million barrels of jet fuel a day,
    plus whatever else you need?
        Mr. Felmy. First of all, the industry is doing a lot on
    this program. It is an enormous challenge, going from roughly
    300 parts per million sulfur to 15 parts per million. We are
    investing on the order of $8 billion in terms of meeting those
    requirements. Not all refiners will choose to produce that
    fuel, so they could produce other things. One of the things
    they could produce is more jet fuel, because that is an
    alternative, or a more high sulfur heating oil, something along
    that line, or offer a diesel, things like that.
        It depends on the individual refiner. The smaller ones have
    more of a challenge in terms of the investments they have to
    put in place to produce those fuels.
        But the ultra-low sulfur diesel program is an enormous
    change and it has enormous challenges. I believe we have
    invested, required to produce sulfur levels in the refineries
    at well below 15 parts. But as was mentioned earlier in the
    discussion, when you transport it through long distances, you
    can have the fuel pick up more sulfur throughout. So we are
    working closely with EPA to have the appropriate policies and
    regulations and practices and trying to make certain that we
    introduce this change as smoothly as possible.
        Mr. Larsen. You don't anticipate any squeezing out of any
    other products?
        Mr. Felmy. Well, the one change that we are just uncertain
    about is that high sulfur jet kerosene is used for other
    applications, both as thinning diesel fuel, to keep it from
    gelling in the winter, and for some heating and so on. With the
    introduction of the ultra-low sulfur diesel, you will not be
    able to add that high sulfur thinning agent to the diesel fuel.
        So the individual companies are looking at how do they have
    a product to be able to market to meet those needs. I can't say
    with any confidence what the impacts would be, but it is
    something we are looking at very carefully.
        Mr. Larsen. Mr. Heimlich, a quick question. I don't know
    how quick the answer will be. One point six million barrels per
    day now, what is the projection per day over the next five
    years?
        Mr. Heimlich. I don't have that without the calculator. Our
    current run rate is 19.5 billion gallons a year. As volumes
    grow, I see that expanding a bit. Granted, that 1.6 is
    demanded. My figure for 19.5 billion is for U.S. airlines
    operating worldwide. So we also buy some fuel outside the 1.6
    overseas and foreign carriers and miliary carrier also buy some
    of their jet fuel in the U.S. So we could get back to you with
    a more precise figure.
        Overall, I expect the U.S. airlines total to probably grow,
    but grow at a lower rate thanks to fuel efficiency.
        Mr. Larsen. Thank you.
        Mr. Mica. Any other members? Mr. Pascrell.
        Mr. Pascrell. Thank you, Mr. Chairman.
        Mr. Felmy, according to the Congressional Research Service,
    in 2004, there was 25 percent profit among the independent oil
    refineries. That is what the Congressional Research Service
    says. My question is this. Does that jive with your numbers,
    Mr. Felmy? And number two, should there ever be any limit on
    profits? Two questions.
        Mr. Felmy. The first number I believe is a return on
    investment, which is a different measure than a gross return
    that I had given you earlier. So yes, they are absolutely
    consistent. If you look at the refiner's profit rate, if you
    will, it is probably even now only on the order of, I believe
    the last quarter was around 4 or 5 cents on the dollar. So
    there are two fundamental different measures of rates of
    return.
        In terms of limitations on profit, philosophically no. I
    think it is the marketplace that disciplines that. It is the
    marketplace that determines what supply and demand factors come
    together to yield a rate of return. The market giveth, the
    market taketh away.
        Mr. Pascrell. So whatever the profit is, and what sounds
    outlandish to me, this is simply a result of a free market
    system, granted there is a free market?
        Mr. Felmy. Yes, sir. And it is, from our perspective, it is
    a competitive market with, you mentioned 10 competitors with a
    70 percent rate. That is a competitive market. If you look at
    other industries, they have much higher concentrations of
    market concentration than our industry. In fact, if you look at
    the most concentrated industries, microprocessors, you have two
    competitors and they beat each other's brains out.
        Mr. Pascrell. I am familiar with some of the other
    industries, Mr. Felmy. But I can't come to grips with, I find
    it difficult to come to grips with your conclusion that
    whatever the industry, and we are talking about a very specific
    industry now, that whatever the markets will bear the markets
    will bear, and that even in tough times, even in difficult
    times, even if it means high costs to users, whatever you can
    get, you should try to get. I mean, this is a, in your
    interpretation, a free and open market system. There are no
    limits to profit.
        Mr. Felmy. Yes, sir. It is the marketplace that determines
    what are the prices. It is the management of the firms that
    determine what their costs of operations are. It is a
    combination of those factors. It is a combination of market
    operations and management.
        Mr. Pascrell. But when you have a product, Mr. Felmy, that
    the public needs, and if the public doesn't have it, it can't
    conduct business, and you choose to continue to increase the
    cost of that product, knowing quite well that demands have
    increased, knowing quite well that the consumer has no other
    place to turn, simply because you can get it at that particular
    moment, is that part of the free market system, Mr. Felmy?
        Mr. Felmy. It is the free market system that determines the
    outcome in price of the products that are delivered. The costs
    of fundamentals of our business is crude oil costs, which are
    determined by international market forces. As I said, the
    market giveth, the market taketh away.
        The alternative to not letting the market work is the
    disasters we faced in the 1970's with long gas lines,
    allocation scenes and the complete disaster of energy
    performance.
        Mr. Pascrell. Well, there was a number of reasons for that,
    Mr. Felmy. You know that. There were a number of reasons, not
    just one reason. And I am not an advocate of price controls. I
    am not talking about that. We want a market system. See, I want
    to make that market system more open, more transparent, more
    open so that we know where dollars are going and the reasons
    why prices are increasing. The average American, the average
    Congressman does not understand why certain prices increase
    when particular demand is not accelerating to that degree.
        And we have every right to ask about profits in a country
    where we not only believe in the free market system, we believe
    in fairness. That's what makes us different than the bad guys.
    So I am no so sure I can accept your definition of the open
    market or the free market.
        But I must say this: the President of the United States
    agrees with your definition. I noticed his response when we
    talked about Exxon's profits last year. I think that this is an
    absolute disgrace.
        Mr. Felmy. Sir, the marketplace determines what these
    prices are. If you look at our earnings as compared to other
    industries, we are above average, but we are well below other
    industries that do it. It is a fair rate of return for all the
    risk that we have to----
        Mr. Pascrell. I understand. I understand your position, and
    I have mine. I respect your position, I hope you will respect
    mine. Thank you, Mr. Chairman.
        Mr. Felmy. Yes, sir, I do.
        Mr. Moran. [Presiding] Mr. Pascrell, thank you.
        Mr. Heimlich, the privately held airport operating in
    London Heathrow International Airport recently began rationing
    jet fuel at Heathrow due to supply shortage due to a an
    explosion and fire at a major depot.
        Mr. Heimlich. Yes, sir.
        Mr. Moran. And there was some concern about discrimination
    for U.S. airlines. Can you bring us up to date on the status of
    that issue?
        Mr. Heimlich. Yes, thank you, it is a very important issue.
    I think it highlights that issues of supply disruption and
    their consequences are by no means limited to the United
    States. The Bunsfield fire outside of the Heathrow area in
    December did erase about 30 percent of supplies there. The
    supply situation really has not ameliorated and does not seem
    to be going to be fixed any time soon.
        BIAA, the airport authority, did impose a rationing scheme.
    ATA strongly opposes any rationing scheme. Our carriers bore
    the brunt of tankering in and cost to respond to hurricanes.
    The international carriers did not suffer at all. A similar
    thing happened outside of Sydney, when this happened in
    Australia, Qantas bore the brunt.
        The situation at Heathrow now, they have, well a physical
    fix is available. There is very little pressure to make one
    happen, which is frustrating. The degree of discrimination in
    the rationing scheme has abated somewhat, but a gap remains,
    particularly if fuel supplies on any given day fall below a
    certain level. So they basically, and the discrimination is by
    the flag of the airline. So it is home based carriers on long
    haul routes versus visiting carriers on long haul routs, and a
    similar scheme on short hall.
        The key is for us, it is a matter of principle. We don't
    want this to be thrown back in our face at any airport any time
    in the future. It flies in the face of what we experienced in
    the hurricanes.
        Mr. Moran. Is this the only instance in which this has
    occurred or is occurring?
        Mr. Heimlich. To our knowledge, yes. Every other precedent,
    I mentioned Australia and all through the hurricanes, we have
    had shortages elsewhere. We have always seen a cooperative
    effort between the airport operator, the suppliers, the oil
    suppliers and the airlines to work it out. There was just a
    natural expectation that those who were most operationally
    capable of bearing the brunt were those who took the lead. So
    yes, Heathrow's situation is unique in the history while I have
    been in this business.
        Mr. Moran. We will see if we can end this hearing on a
    positive note. Yesterday, the price of crude was less than $60
    a barrel for the first time this year. Is that an aberration or
    is there a signal in the market that jet fuel and other energy
    prices will be more stable or lower in 2006?
        Mr. Felmy. It is going to be very much a function of, as
    economists love to say, the supply and demand conditions to go
    into the price. Fortunately, we have had a mild winter,
    although Punxsatawney Phil had a forecast for a longer amount
    of winter.
        It is also going to be very much a function of the supply
    hot spots around the globe, which we have been watching for
    several years now, whether it be the latest being Iran, Iraq,
    Nigeria, Venezuela and so on. There is one thing that we can
    always hope, that markets will respond and we will see an
    improvement in the conditions.
        Mr. Moran. I think you took me back to my words earlier
    about supply and demand.
        Anything else?
        Mr. Felmy. No, I appreciate it. I would just add that the
    price, I usually like to wait two or three months before I call
    anything a trend. We have seen, as some alluded to before, a
    speculation about $80 or $90 or $100 a barrel. So we will wait
    and see. But the last couple of days are positive.
        Remember that jet fuel prices can sometimes stay high, even
    as crude falls down. Mr. Pascrell alluded to the crack spread
    earlier.
        And I would like to emphasize that any solution for us
    needs to consider both the elements of supply and demand, and
    that conservation in any refined product of crude oil or for
    crude itself has an ultimate flow-through to jet fuel prices.
    So when we are talking about alternatives or conservation, it
    shouldn't focus just on the demand for jet fuel itself. It
    should look at other products.
        Mr. Moran. Thank you. I thank the panel very much.
        Mr. Larsen, anything further?
        Mr. Larsen. No, thank you.
        Mr. Moran. I would ask unanimous consent that we leave the
    record open for 10 days for additional comments and responses
    from the witnesses at today's hearing. With that, the
    Subcommittee on Aviation is adjourned.
        [Whereupon, at 12:02 p.m., the subcommittee was adjourned.]

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