    [Senate Hearing 110-1160]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 110-1160

                        IMPROVING AIR SERVICES TO SMALL
                             AND RURAL COMMUNITIES

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

                                    HEARING

                                   before the

           SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY

                                     OF THE

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 17, 2007

                                   __________

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

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           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                       DANIEL K. INOUYE, Hawaii, Chairman
    JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
        Virginia                         JOHN McCAIN, Arizona
    JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
    BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
    BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
    BILL NELSON, Florida                 GORDON H. SMITH, Oregon
    MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
    FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
    MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
    THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
    CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
    AMY KLOBUCHAR, Minnesota
       Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
    Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
       Christine D. Kurth, Republican Staff Director, and General Counsel
       Kenneth R. Nahigian, Republican Deputy Staff Director, and Chief
                                    Counsel
                                     ------

           SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY

    JOHN D. ROCKEFELLER IV, West         TRENT LOTT, Mississippi, Ranking
        Virginia, Chairman               JOHN McCAIN, Arizona
    JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
    BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
    BARBARA BOXER, California            GORDON H. SMITH, Oregon
    BILL NELSON, Florida                 JOHN ENSIGN, Nevada
    MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
    FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
    MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
    THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
    CLAIRE McCASKILL, Missouri
    AMY KLOBUCHAR, Minnesota

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on July 17, 2007....................................     1
    Statement of Senator Dorgan......................................    28
    Statement of Senator Pryor.......................................    40
    Statement of Senator Snowe.......................................    33
    Statement of Senator Stevens.....................................     1
    Statement of Senator Thune.......................................    36
    Statement of Senator Vitter......................................    30

                                   Witnesses

    Courtney, A.A.E., Mark F., Airport Director, Lynchburg Regional
      Airport........................................................    14
        Prepared statement...........................................    16
    Malarkey, Faye, Vice President, Legislative Affairs, Regional
      Airline Association............................................    19
        Prepared statement...........................................    21
    Miller, Hon. Karen, Commissioner, Boone County, Missouri; on
      behalf of the National Association of Counties.................    10
        Prepared statement...........................................    12
    Steinberg, Hon. Andrew B., Assistant Secretary for Aviation and
      International Affairs, U.S. Department of Transportation.......     2
        Prepared statement...........................................     4
    Torgerson, John, Deputy Commissioner of Aviation, Alaska
      Department of Transportation and Public Facilities.............     7
        Prepared statement...........................................     9

                                    Appendix

    Response to written questions submitted by Hon. John D.
      Rockefeller IV to:
        Mark F. Courtney, A.A.E......................................    48
        Faye Malarkey................................................    48
        Hon. Karen Miller............................................    47
        Hon. Andrew B. Steinberg.....................................    46
    Regional Aviation Partners, prepared statement...................    44
    Rockefeller IV, Hon. John D., U.S. Senator from West Virginia,
      prepared statement.............................................    43

                        IMPROVING AIR SERVICES TO SMALL
                             AND RURAL COMMUNITIES

                                  ----------

                             TUESDAY, JULY 17, 2007

                                   U.S. Senate,
      Subcommittee on Aviation Operations, Safety, and
                                              Security,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10:04 a.m., in
    room SR-253, Senate Russell Office Building, Hon. Ted Stevens,
    Vice Chairman of the full Committee, presiding.

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

        Senator Stevens. Other Senators are caught in traffic and
    there was sort of a traffic jam coming in here. I don't know if
    you know if there is something going on in the street out
    there. I had to come around, come up Pennsylvania Avenue
    instead of the regular way.
        But I do thank you all for coming and at Senator
    Rockefeller's request, the Chairman's request, I'm going to
    start this hearing. I do thank them both for holding this
    hearing at my request and I extend a special welcome to my
    great friend, John Torgerson, who is here from Alaska. He is
    the Deputy Commissioner of Aviation for our state and we
    appreciate him coming to testify and his interest in this
    subject.
        Rural air services are a vital component of our
    transportation system in Alaska. We depend upon aviation more
    than any other state. Seventy percent of our cities can be
    reached only by air year-round. Sometimes they can get summer
    travel on rivers but to have transportation on a steady basis,
    year-round, you have to use air to 70 percent of our cities and
    many of the villages can be only reached by air, period. Some
    of them are not on rivers. Instead of cars and buses, we have
    airplanes.
        Maintaining air service to these small and rural
    communities through Essential Air Service is a key product of
    deregulation of the old CAB. This Committee created Essential
    Air Service. In Alaska, we now have 41 communities that are
    served by Essential Air Service. They rely on Essential Air
    Service for access to hospitals, mail service, food, basic
    supplies and to transport teams back and forth to play
    basketball.
        So rural air service funding and reform is an annual
    challenge for the Congress. In addition to finding a solution
    for this funding for the Next Generation Air Traffic Control
    System, the Committee is also looking at innovative reforms to
    the overall Rural Air Service Program. New innovation in the
    marketplace may hold great promise for rural air service and
    there is great interest in the emergence of very light jets.
    These new aircraft may prove to be a unique opportunity for
    small communities of Alaska to maintain and improve access.
        I do thank you all for coming. It is my hope that you will
    help us remain vigilant in funding the Essential Air Service
    Program. It's literally our lifeline and a healthy Essential
    Air Service Program nationally will obviously support a good
    system for our cities.
        Now, we have a series of witnesses today. The first is
    Andrew Steinberg, the Assistant Secretary for Aviation and
    International Affairs at the Department of Transportation and
    let me call on you first, sir.

           STATEMENT OF HON. ANDREW B. STEINBERG, ASSISTANT
        SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS, U.S.
                      DEPARTMENT OF TRANSPORTATION

        Mr. Steinberg. Thank you, Mr. Co-Chairman. I appreciate
    being invited to the hearing. I'd like to ask that my written
    statement be made part of the record.
        Senator Stevens. Well, thank you for reminding me. All your
    statements will appear in the record as so read and we're not
    limiting your testimony but we hope you'll make it short but
    I'm sure the other Senators will be along and we'll be happy to
    have your statement. But all of your statements will be printed
    in full in the record.
        Mr. Steinberg. Thank you, Senator. In light of that, I'd
    like to just focus on three key points, if I could, over the
    next 5 minutes. First, why smaller communities in the U.S. have
    difficulty attracting and retaining commercial airline service;
    second, whether our existing programs, specifically the
    Essential Air Service Program and Small Community Air Service
    Development Program, SCASDP, offer the right approach; and
    third, going to the point you just made, Senator Stevens, how
    can we improve the situation per new, creative solutions?
        So first, the nature of the problem, I think, is actually
    relatively clear. Scheduled air transportation depends on
    predictable demand that produces enough traffic to achieve
    break-even passenger loads on each flight and because point-to-
    point service typically does best on a scheduled basis only in
    very large markets, scheduled airlines can serve smaller
    communities economically, usually only as part of an overall
    network, such as a hub-and-spoke system.
        These systems work because what they do is aggregate demand
    from many spoke cities, if you will and connect passengers at a
    hub to various destinations. What this means is that the most
    profitable hub is the one that can--the most profitable spoke
    city, excuse me, is the one that contributes the most to the
    overall network. In general, cities with fewer passengers are
    the least profitable spokes and importantly I think they are,
    the first to be eliminated when network carriers downsize their
    hubs.
        Cost trends right now for service to smaller airports are
    not favorable. With the shift of regional airlines to larger
    aircraft, the increase in fuel costs and equipage requirements
    created by the FAA's Commuter Safety Rule, service to smaller
    communities has only gotten more expensive. So as legacy
    carriers, particularly in the lower 48, lost some $35 billion
    from 2001 to 2007. They eliminated spokes that contributed the
    least to their networks, many in smaller communities. And as
    you know, as a result of all that, the EAS Program,
    particularly in the lower 48, grew significantly.
        So my first point is really an observation, which is that
    we won't ever have the kind of comprehensive scheduled service
    we'd like to smaller communities unless we have healthy network
    airlines that are growing their systems to go to new places
    rather than shrinking their domestic capacity.
        Second, as to our existing programs, EAS and SCASDP--let me
    say at the outset, whatever should happen with reauthorization,
    we will always administer these programs as effectively as
    possible, recognizing that we're dealing with important
    transportation needs of real people. In fact, the vast majority
    of my staff that works on domestic aviation is already devoted
    to administering these two programs.
        Despite this commitment, I think it's hard to argue that
    certainly outside of places like Alaska, which has special
    circumstances that these programs have been effective in
    addressing the needs of small communities. As you probably
    know, the EAS Program has not changed in a fundamental way for
    three decades, even as the industry, of course, has changed
    quite significantly. So what we have today is an EAS Program
    that really is more of a safety net, if you will, for smaller
    communities and what history tells us is that once a community
    receives a subsidy for air service, it's relatively unusual for
    an air carrier to come in and provide service on an
    unsubsidized basis.
        As to SCASDP, I think it's probably too early to pass a
    final judgment. As you know, we're waiting on a report from our
    Inspector General about its effectiveness. I would note that
    the GAO has found that improvements from SCASDP grants have
    not--have been self-sustaining less than half of the time,
    which is not encouraging.
        The third point I wanted to cover is the issue of whether
    there are solutions that can help improve the level and quality
    of service, and I think any solution has to deal with the
    fundamental problem that I mentioned at the outset and that is
    insufficient demand to support scheduled service purely on
    market terms. As you mentioned, Senator, recent technological
    advances with very light jets represent a breakthrough. They
    are important because they represent a radial reduction in
    aircraft operating economics over the long term.
        Equally important is information technology that allows
    carriers to aggregate demand on a non-scheduled basis over the
    Internet and if you combine the two, you can have, potentially
    a very powerful, on-demand air taxi service developing in some
    of these smaller communities. It's already beginning to happen,
    not with very light jets because those have yet to be
    delivered. But there is a company I'd point out called SATS
    Air, which is based in Greenville, South Carolina and is
    already making air taxi services available across much of the
    southeast U.S. with comfortable, safe turboprop aircraft and
    rates that are quite competitive, certainly with coach, full
    coach fares.
        So let me wrap up there and just say that we are absolutely
    committed to working with this Committee and your staff on ways
    to improve small community service. Thank you.
        [The prepared statement of Mr. Steinberg follows:]

    Prepared Statement of Hon. Andrew B. Steinberg, Assistant Secretary for
     Aviation and International Affairs, U.S. Department of Transportation

        Mr. Chairman, thank you for inviting me to this hearing. I
    appreciate the opportunity to discuss with you and the Subcommittee two
    programs administered by the Department of Transportation that affect
    air service to small communities, namely the Essential Air Service
    (EAS) program and the Small Community Air Service Development Program.
    I can assure you that the Department is committed to implementing its
    small community air service programs in the best and most efficient
    manner and thereby help smaller communities meet the challenges that
    they face in obtaining and retaining air service.
        It is clear that air service in this country has changed
    dramatically over the past several years. Many of these changes have
    been very positive. The growth of low-fare carriers, for example, has
    made affordable air transportation available to millions of people
    across the country. The number of air travelers has expanded
    dramatically, as hundreds of passengers have taken advantage of the low
    fares that have become more widely available. While this is a good
    development overall for consumers, we recognize that it can create new
    challenges for some small communities. With a greater number of service
    choices available, particularly those involving lower fares, many
    consumers are willing to drive to places with a broader array of air
    service options, making it more difficult for some individual airports
    to sustain their own traffic levels. There are, for example, some
    communities receiving EAS assistance within ready driving distance of
    two or three major airports. This can result in a struggling community
    airport, but not necessarily consumers who lack access to the national
    air transportation system. Let me give you an example, just a few years
    ago Utica, New York generated about 24,000 passengers a year and was
    served profitably without EAS subsidy. Then Southwest began flying to
    Albany and JetBlue started service to Syracuse--both of which are near
    to Utica. The number of passengers using Utica airport fell to 3,500,
    and the Federal Government was paying over $1 million in EAS subsidy in
    attempt to compete with low-fare, jet service in nearby cities. The
    subsidy per passenger finally exceeded the $200 statutorily-determined
    ceiling thus ending the community's eligibility for EAS.
        Another challenge is the change in aircraft used by carriers that
    serve small communities. Many commuter carriers have been replacing
    their 19-seat aircraft with 30-seat aircraft, due to the increased
    costs of operating the smaller planes and larger carriers' reluctance
    to offer code sharing on 19-seaters. This trend began at least 10 years
    ago and has continued. There are now fewer and fewer 19-seat aircraft
    in operation as many carriers have upgauged to 30-seat aircraft, and,
    in some cases, even regional jets. As a result, many small communities
    that cannot support this larger size of aircraft are being left without
    air service. Additionally, the rise in the cost of aviation fuel has
    made all carriers more cost-conscious and more selective in initiating
    new service and maintaining service where yields and traffic are low.
    Also, some changes have occurred in response to the terrorist attacks
    of September 11, 2001. Many consumers, leisure and business, have
    changed their travel patterns and carriers have altered the structure
    of their airline services in both large and small markets.
        The recent financial difficulties of the network carriers have
    contributed to the dearth of air service to small communities. As
    network-airlines have worked hard to cut costs and become more
    efficient in order to weather very difficult economic conditions, they
    have resorted to canceling service on their thinnest routes--many of
    which are small communities. Thus in the long-term, an important factor
    for comprehensive air transportation in the United States is the sound
    financial health of network airlines.
        The challenge that we face is one of adjusting the programs, to the
    extent we are able, to account for these changes in an efficient and
    effective manner, giving appropriate and balanced recognition to the
    reasonable needs of the communities, the carriers, the consumers, and
    the taxpaying public at large. Mr. Chairman, I do not use the word
    ``challenge'' lightly. All of us--the Federal Government that manages
    programs affecting service at small communities, as well as the states
    and the communities themselves--need to reexamine the way we approach
    small community air service.
        We at the Department of Transportation have recognized for a while
    now that the way the Federal Government helps small communities has not
    kept pace with the changes in the industry and the way service is now
    provided in this country. For that reason, we have initiated some
    important reevaluations of the programs that we manage. I want to share
    with you today what we have done and are doing to address this issue.
        As you know, the Department administers two programs dealing with
    air service at small communities. The EAS program provides subsidies to
    air carriers to provide air service at certain statutorily-mandated
    communities. The Small Community Air Service Development Program, which
    was established by Congress in 2000 under the AIR-21 legislation,
    provides Federal grants-in-aid to help small communities address their
    air service and airfare issues. While initially established as a pilot
    program, it was reauthorized through FY 2008 in Vision 100.

    Essential Air Service Program
        Let me first address the EAS program. The laws governing our
    administration of the EAS program have not changed significantly since
    its inception 28 years ago, notwithstanding the dramatic changes that
    have taken place in the airline industry. As currently structured, the
    EAS program acts only as a safety net for small communities receiving
    subsidized air service by providing threshold levels of air service.
    While ensuring some service, this approach does little to help
    communities attract self-sustaining unsubsidized air service, as
    evidenced by the fact that once a community receives subsidized air
    service it is rare for an air carrier to come in offering to provide
    unsubsidized air service.
        The goal of our proposed changes to the EAS program is to focus the
    program's resources on the most isolated communities, i.e., those with
    the fewest driving alternatives. Our current proposal to accomplish
    this is quite different from those made in past years. The first change
    we propose is to cap EAS communities at those that currently receive
    subsidized air service. Second, we would rank all the subsidized
    communities by isolation, i.e., by driving miles to the nearest large
    or medium hub airport, with the most isolated getting service first.
    Last, we are proposing a maximum $50 million funding level.
        Congress has also recognized the need for reform and created a few
    pilot programs in Vision 100. One program is the Community Flexibility
    Pilot Program. It allows up to ten communities to receive a grant equal
    to 2 years' worth of subsidy in exchange for their forgoing their EAS
    for 10 years. The funds would have to be used for a project on the
    airport property or to improve the facilities for general aviation, but
    no communities have volunteered for that program. Another program is
    the Alternate Essential Air Service Program. The thrust of this program
    is that, instead of paying an air carrier to serve a community as we
    typically do under EAS, communities could apply to receive the funds
    directly--provided that they have a plan as to exactly how they would
    use the funds to the benefit of the communities' access to air service.
    The law gives great flexibility in that regard. For example, funds
    could be used for smaller aircraft but more frequent service, for on-
    demand air taxi service, for on-demand surface transportation, for
    regionalized service, or to purchase an aircraft to be used to serve
    the community. The Department issued an order establishing that program
    in the summer of 2004, but to date no communities have applied. I
    cannot tell you for sure why, but my guess is that part of it is that
    it is just human nature to resist both risk and change.
        With regard to the EAS program, it is important to note the
    continued growth of the program's size and cost to taxpayers over time.
    As a point of reference, before the terrorist attacks of September 11,
    the Department was paying subsidy for 107 communities (including 32 in
    Alaska). We are now subsidizing service at 145 communities (including
    41 in Alaska). Further, EAS is often viewed as an absolute entitlement
    whether the communities invest any time and effort in supporting the
    service or not. We have proposed reforms to EAS to better focus its
    resources on the most isolated communities.

    Small Community Air Service Development Program
        The Department is now in its sixth year of administering the Small
    Community Air Service Development Program (Small Community Program).
    Under the law, the Department can make a maximum of 40 grants in each
    fiscal year to address air service and airfare issues, although no more
    than four grants each year can be in any one state. Until 2006,
    Congress had provided $20 million in each year for this program. In
    2006, the funding for the program was $10 million, and the Revised
    Continuing Appropriations Resolution, 2007 (Pub. L. 110-5), provides
    the Department with $10 million in Fiscal Year 2007 to administer the
    Small Community Program. On February 26, the Department issued a
    Request for Proposals for 2007 applications and proposals are due April
    27.
        Given the many and varying priorities facing the Department, this
    program was not accommodated within the President's 2008 budget.
    Nonetheless, it is important to note the extensive support that the
    Department provides for small airports in terms of supporting the
    infrastructure that make any service possible. In the last 2 years (FY
    2005 and FY 2006), the FAA has provided over $4 billion in grants for
    small airports, or nearly \2/3\ of the Airport Improvement Program
    (AIP). Furthermore, the Department's reauthorization proposal would
    continue to direct AIP to small airports. The reauthorization proposal
    would also add new AIP eligibility for ADS-B ground stations and
    expanded eligibility for revenue producing projects at small airports
    that will help their financial stability.
        With respect to the Small Community Program, the Department has
    made many awards to communities throughout the country and authorized a
    wide variety of projects, seeking to address the diverse types of
    problems presented and test different ideas about how to solve them.
    Some of these projects include a new business model to provide ground
    handling for carriers at the airport to reduce station costs, seed
    money for a new airline to provide regional service, expansion of low-
    fare services, a ground service transportation alternative for access
    to the Nation's air transportation system, aggressive marketing and
    promotional campaigns to increase ridership at airports, and revenue
    guarantees, subsidies, and other financial incentives to reduce the
    risk to airlines of initiating or expanding service at a community. For
    the most part, these projects extend over a period of two to 4 years.
        This program differs from the traditional EAS program in a number
    of respects. First, the funds go to the communities rather than
    directly to an airline serving the community. Second, the financial
    assistance is not limited to air carrier subsidy, but can be used for a
    number of other efforts to enhance a community's service, including
    advertising and promotional activities, studies, and ground service
    initiatives. Third, communities design their own solutions to their air
    service and airfare problems and seek financial assistance under the
    program to help them implement their plans.
        Over the past 5 years, the Department has made more than 180 grant
    awards. Overall, more than 90 percent of the grant recipients have
    implemented their authorized projects.
        For example, new services have been inaugurated at many
    communities; others have received increased frequencies or service with
    larger aircraft. Several communities have begun targeted and
    comprehensive marketing campaigns to increase use of the service at the
    local airport and to attract additional air carrier service. We have
    been monitoring the progress of all of the communities as they proceed
    with the implementation of their projects. However, because the
    majority of the projects involve activities over a two-to-four-year
    period, and many communities have sought and received extensions for
    their grants, only now are some of them at the point of completion.
        As you know, the Government Accountability Office (GAO) concluded a
    review of the Small Community Program in 2005. GAO too recognized that
    it is difficult to draw any firm conclusions as to the effectiveness of
    the Small Community Program in helping communities address their
    service issues because many grant projects are still in process. Of the
    grant projects that had been completed, the GAO concluded that the
    results were mixed because not all of the grants resulted in
    improvements that were achieved and sustained after the grant funding
    was exhausted.
        In this regard, since the end of March 2007, the Department's
    Inspector General (IG) has been reviewing the outcomes of the limited
    number of projects that have been completed to date. Evaluation of the
    program will consist of two phases including a quantitative and
    qualitative analysis of a selected sample of all completed projects.
        The Federal Government, however, is only one piece of the equation.
    States and communities will also need to review their air service in
    the context of the changed industry structure and service patterns to
    seek fresh, new solutions to maximize their air service potential,
    including regional and intermodal approaches and expansion of public-
    private partnerships to meet these challenges.
        The fundamental problem with air service to many small communities
    is insufficient demand to justify scheduled service purely on market
    terms. However, recent technological advances may offer a new market
    solution to the problems of small community air service. The most
    dramatic innovation is the Very Light Jet (or VLJ) which represents a
    breakthrough in jet aircraft operating economics. Another very
    important innovation is information technology that allows demand for
    air service to be aggregated over the Internet. The combination of VLJ
    with Internet-enabled information technology could potentially
    facilitate the provision of on-demand, jet air taxi service at these
    small communities. Companies such as DayJet have already begun
    operations employing these technologies.
        In that regard, our office looks forward to continuing discussions
    with your staff on finding ways to better enable the marketplace to
    supply air service to small communities. We have discussed a range of
    ideas that carriers could consider, including new per-seat, on-demand
    service business models using the new generation of very light jets
    (VLJ) as well as alternative ways to create market-based incentives for
    airlines to add and sustain service to small communities.
        In closing, Mr. Chairman, let me reaffirm the Department's
    commitment to implementing the DOT's small community air service
    programs in the best and most efficient manner. We look forward to
    working with you and the members of this subcommittee and the full
    Committee as we continue to work toward these objectives. Thank you
    again. This concludes my prepared statement. I will be happy to answer
    any of your questions.

        Senator Stevens. We'll get back and do some questions
    before we conclude. Mr. Torgerson, if I may have your
    statement, please?

     STATEMENT OF JOHN TORGERSON, DEPUTY COMMISSIONER OF AVIATION,
       ALASKA DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES

        Mr. Torgerson. Thank you, Senator Stevens. It's always
    great to see again. You have requested testimony on the U.S.
    Department of Transportation Essential Air Service and its
    effects on Alaska.
        My name is John Torgerson, Deputy Commissioner of Aviation
    for the state. I'd like to first place the size of Alaska in
    perspective. If you were to fly from Washington, D.C. to San
    Diego, California and then from Minneapolis, Minnesota to
    Houston, Texas, that distance crisscrossing America is actually
    less than if you flew in Alaska east to west and north to
    south. Our capital City of Juneau is the only capital city in
    the United States accessible only by plane or boat.
        Twenty-five percent of all Alaskans and 46 percent of all
    Alaskan Natives live in communities of less than 1,000 people.
    To cover this area, we only have 4,732 miles of paved road.
        The State of Alaska owns and operates 258 airports, ranging
    in class from the large international to the small rural
    community class. Of the airports, 47 are paved, 173 are gravel
    of which 72 are less than 3,000 feet. Thirty-seven are seaplane
    facilities and one a heliport.
        I'd like to direct the balance of my testimony to the last
    GAO report on Essential Air Service. The GAO acknowledged that
    the need to make difficult decisions to sustain the Essential
    Air Service Program at the current funding levels. The report
    outlined four recommendations and I'd like to address each of
    those separately.
        Alaskan communities receiving Essential Air Service are the
    most remote in the Nation. Alaska has 40 communities receiving
    EAS. Of those 40, only 6 are connected to a road system. Of
    that 6 on the road system, all are more than 100 miles from a
    hub airport. These 100 miles to the nearest hub airport are not
    on an interstate highway or even a paved two-lane highway but
    mainly narrow gravel roads.
        Thirty-four of the communities receiving the Essential Air
    Service subsidies in Alaska do not even have a gravel road.
    They are completely isolated from the road system and rely on
    air travel as the primary means of transportation and access to
    basic services. In many of our rural communities, air
    transportation is the only viable method of connecting to the
    outside world. Alaska meets and exceeds the remoteness
    recommendations of the GAO report.
        The concept of matching aircraft capacity with community
    use is exemplified in the type of aircraft utilized in Alaska.
    A seven-passenger Grumman Goose, an aircraft last manufactured
    in 1947, provides residents of Akutan in the eastern Aleutian
    Islands with regular Essential Air Service. Other communities
    rely on smaller aircraft, such as the Cessna 185s and the
    Cessna 206s, capable of carrying just three to five passengers.
        Only 6 of the 40 Alaska communities qualifying for EAS are
    served by jets. In these cases, jet service is justified by
    population, freight needs and the distance from medium-sized
    hubs. For example, the island community of Adak has jet service
    to Anchorage, 1,300 miles away. Not one of the six airports
    receiving jet service is connected to the road system. As
    already stated, the remaining communities are served by the
    smallest aircraft in commercial service. Alaska is already
    conforming to this recommendation of matching aircraft capacity
    to communities.
        In Alaska, the idea of consolidating at regional airports
    and using the spoke and hub system is already in place. One
    half of the EAS communities in Alaska are small, remote
    communities with populations of less than 100 residents.
    Alaska's Essential Air Service subsidy already utilizes small
    carrier flying light transport--I lost a page. Pardon me. I
    thought I lost it completely.
        In Alaska, the idea of consolidating these into regional
    spoke and hub methods is already in place. Alaska's Essential
    Air Service subsidy already utilizes small aircraft to
    transport passengers from small, rural communities to regional
    hub airports where passengers can access basic services and
    links to the national transportation system.
        The fourth recommendation is to change carrier subsidies
    through local grants. Of the 40 Alaskan communities currently
    receiving the Essential Air Service, only 11 have formed a
    municipal government. The majority of our communities receiving
    this service have not formed an entity that could apply for,
    administer or provide a local match, making this recommendation
    difficult.
        Alaskans believe the program is working well and request no
    changes of the current funding method. We believe the current
    program is well administered by USDOT and works effectively in
    Alaska.
        Mr. Chairman, the Essential Air Service Program has been
    very successful in our state. Over the last 3 years, the funds
    allocated under this program to air carriers has increased less
    than the general rate of inflation, despite higher fuel costs,
    insurance rates and personnel costs.
        During this same period of time, the total number of
    passengers usually in the EAS in Alaska has increased. I
    believe this is because the Alaska Program already utilizes the
    cost saving measures recommended in the 2002 GAO report. The
    Essential Air Service Program provides a vital link to many
    Alaskan communities that would otherwise not receive air
    service.
        Thank you, Mr. Chairman, for the opportunity to testify and
    I look forward to any questions you might have.
        [The prepared statement of Mr. Torgerson follows:]

    Prepared Statement of John Torgerson, Deputy Commissioner of Aviation,
           Alaska Department of Transportation and Public Facilities
        Good morning, Mr. Chairman and Committee members.

        You have requested testimony on the U.S. Department of
    Transportation's Essential Air Service program and its effects on
    Alaska.
        My name is John Torgerson, Deputy Commissioner of Aviation for the
    Alaska Department of Transportation. I have resided in Alaska since
    1950 as a homesteader, rural resident, businessman, State Senator and
    now as the Deputy Commissioner of Aviation.
        The size of Alaska is better understood if you were to fly from
    Washington, D.C., to San Diego, California, and then from Minneapolis,
    Minnesota, to Houston, Texas.
        That distance crisscrossing America is actually less than if you
    flew across Alaska from east to west and north to south.

       Our capital Juneau is the only capital city in the United
            States accessible only by plane or boat.

       Twenty-five percent of all Alaskans and 46 percent of
            Alaskan Natives live in communities of less than 1,000 people.

       One-quarter of all Alaskans live in communities accessible
            only by boat or aircraft.

       There are only 4,732 miles of paved road in Alaska.

        The State of Alaska owns and operates 258 airports ranging in class
    from the large international to the small rural community class. Of the
    airports, 47 are paved, 173 are gravel (or which 72 runways are less
    than 3,000 feet), 37 are seaplane facilities and 1 is a heliport. The
    airports operated by the state are truly essential because air travel
    is the primary means of transportation to these communities. Air travel
    is not a luxury in Alaska or a convenience; it is a critical
    transportation mode that provides basic day-to-day necessities.

    GAO Findings
        I would like to direct the balance of my testimony to the last GAO
    report on the Essential Air Service program. The GAO acknowledged the
    need to make ``difficult decisions'' to sustain the Essential Air
    Service program at current funding levels. The report outlined four
    specific recommendations, and I will address each of these
    recommendations separately.

    1. Targeting More Remote Communities
        Alaskan communities receiving Essential Air Service are the most
    remote in the Nation. Alaska has 40 communities receiving EAS. Of those
    40, only six are connected to a road system. Of the six that are on the
    road system, all are more than 100 miles from a hub airport. Those 100
    miles to the nearest hub airport are not on an interstate highway or
    even a paved two-lane highway, but mainly narrow gravel roads.
        Thirty-four of the communities receiving Essential Air Service
    subsidies in Alaska do not even have a gravel road. They are completely
    isolated from the road system, and rely on air travel as their primary
    means of transportation and access to basic services. In many of our
    rural communities, air transportation is the only viable method of
    connecting to the outside world. Alaska meets and exceeds the
    remoteness recommendations of the GAO report.

    2. Match Capacity (Aircraft Size) With Community Use
        The concept of matching aircraft capacity with community use is
    exemplified in the type of aircraft utilized in Alaska. A 7-passenger
    Grumman Goose, an aircraft last manufactured in 1947, provides
    residents of Akutan in the eastern Aleutian Islands with regular
    Essential Air Service. Other communities rely on smaller aircraft such
    as Cessna 185s and Cessna 206s, capable of carrying just three to five
    passengers.
        Only six of the 40 Alaskan communities qualifying for EAS are
    served by jet aircraft. In these cases, jet service is justified by
    population, freight needs and the distance from medium-size hubs. For
    example, the island community of Adak has jet service to Anchorage
    1,300 miles away. Not one of the six airports receiving jet service is
    connected to a road system. As already stated, the remaining
    communities are served by some of the smallest aircraft in commercial
    service. Alaska is already conforming to this recommendation of
    matching aircraft capacity to community use.

    3. Consolidate Multiple Communities Into Regional Airports
        In Alaska, the idea of consolidating at regional airports or using
    the spoke-and-hub system is already in place. One-half of the EAS
    communities in Alaska are small, remote communities, with populations
    of less than 100 residents. Alaska's Essential Air Service subsidy
    already utilizes small carriers flying light aircraft to transport
    passengers from these small rural communities to regional hub airports,
    where passengers can access basic services and links to the national
    transportation system.

    4. Change to Local Grant Program
        The fourth recommendation is to change carrier subsidies to local
    grants. Of the 40 Alaskan communities currently receiving Essential Air
    Service funding, only 11 have formed a municipal government. The
    majority of our communities receiving this service are not incorporated
    as a municipal entity that could apply for, administer or provide a
    local match, making this recommendation difficult to implement.
    Alaskans believe the program is working well and request no change to
    the current funding method. We believe the current program is well
    administered by the United States Department of Transportation and
    works efficiently in Alaska.
    Conclusion
        Mr. Chairman, the Essential Air Service program has been very
    successful in Alaska. Over the past 3 years the funds allocated under
    this program to Alaska air carriers has increased less that the general
    rate of inflation--despite much higher fuel costs, insurance rates and
    personnel costs. During this same period of time, the total number of
    passengers utilizing EAS in Alaska has increased. I believe this is
    because the Alaska program already utilizes the cost-saving measures
    recommended in the 2002 GAO report.
        The Essential Air Service program provides a vital link to many
    Alaskan communities that would otherwise not receive air service.
        Thank you for allowing me to testify, and I would be happy to
    answer any questions that the Committee might have.

        Senator Stevens. Thank you--next witness is Karen Miller,
    the Boone County Commissioner of Aviation, representing the
    National Association of Counties from Columbia, Missouri,
    please.

      STATEMENT OF HON. KAREN MILLER, COMMISSIONER, BOONE COUNTY,
                  MISSOURI; ON BEHALF OF THE NATIONAL
                        ASSOCIATION OF COUNTIES

        Ms. Miller. Good morning, Senator Stevens. My name is Karen
    Miller and I am a County Commissioner in Boone County,
    Missouri. I am here representing the National Association of
    Counties known as NACo. I want to thank you for the invitation
    to testify on improving air service to small and rural
    communities.
        Essential Air Service is extremely important to NACo
    members in small and rural communities, to Boone County,
    Missouri and to the approximately 143 other rural communities
    served by EAS in 36 states.
        Columbia Regional Airport, located in Boone County,
    Missouri began receiving Essential Air Service in October 2006
    when Trans States Airlines pulled out of the market. Senator
    Stevens, please note that this occurred not because of a
    decrease in enplanements but because Trans States decided to
    change from turboprop planes to regional, making Columbia not
    economically viable to serve. We have a strong business
    community that is always looking for more employers. Believe
    when I say, one of the first questions we get from businesses
    looking to relocate in our area is, ``how far are you from a
    commercial airport?'' It dramatically improves our
    competitiveness to say 10 miles versus 115 miles to St. Louis
    or 135 miles to Kansas City.
        While having EAS service has been important to our region,
    the result of the change from non-subsidized to subsidized
    service has not been without challenges and we have seen a
    reduction in enplanements--from almost 20,000 in 2005 to 13,673
    in 2006 to a projected level of less than 10,000 in 2007. Until
    July 7, 2007, Columbia received four EAS flights per day during
    the week and two flights per day on the weekends, all provided
    by Air Midwest. The flights were evenly split between Kansas
    City and St. Louis.
        Due to the unreliability of the flights and the schedule,
    we agreed to a change in service. Effective July 8th, all these
    flights now go to Kansas City where Air Midwest has its own
    gate and maintenance operation. We are hopeful that moving all
    flights to Kansas City will improve reliability, making our
    service more attractive and increase enplanements.
        NACo has a number of suggestions for improving the
    Essential Air Service Program. The goal of a number of these
    recommendations is to build up the enplanements in a community
    so that carriers can offer service without an EAS subsidy.
    There needs to be more funding. We applaud the Commerce
    Committee for increasing EAS funding to $133 million.
        Like any other product or service, EAS has to be attractive
    to the customer. Hopefully with more funds, the issues often
    raised by EAS communities concerning frequency, convenience and
    type of aircraft can be addressed.
        We also ask this Subcommittee to help identify an
    additional dedicated or guaranteed source of revenue for the
    EAS program. While the international over flight fee generates
    $50 million annually for EAS, the remainder currently has to
    come from the General Fund and this creates an uncertainty for
    the communities and the air carriers. An additional dependable
    source, such as the Airport and Airway Trust Fund would assures
    communities and air carriers that the program will be fully
    funded, making EAS a stronger program.
        Another option would be to require the Trust Fund to help
    fund EAS to the extent that the over flight fee and General
    Fund contributions failed to reach the fully authorized level.
        We believe the Local Participation Program, currently in
    law but never implemented, which requires a 10 percent match
    requirement in ten communities should be repealed. Many of the
    small and rural communities that would be required to provide a
    local match are not able to find the tens of thousands of
    dollars the match would require.
        Additionally, the $200 subsidy cap should be increased and
    indexed. It has been in place since 1989 and while we are not
    opposed to the concept of a cap, one that hasn't been changed
    in 18 years needs adjustment.
        We believe that there needs to be either an incentive for
    improved service or a penalty for those air carriers who
    provide unreliable service. Section 405 of Senate bill 1300
    moves in the right direction but we would recommend requiring
    the Secretary of Transportation to provide incentives for
    carriers to improve air service, as opposed to this being
    discretionary, and include penalties for poor service.
        There needs to be more marketing of EAS service to the
    community. NACo supports the provision now included in Senate
    bill 1300 requiring airlines who are bidding on EAS service to
    include a funded marketing plan in their proposal.
        One final suggestion to improve EAS service is that we need
    to study approaches to encouraging more airlines to bid on
    providing EAS service. More competition may result in better
    service.
        As I conclude, let me also indicate NACo's support for the
    Small Community Air Service Development Program. This program
    needs to be funded at a level that comes close to meeting the
    demand and the $35 million annual authorized level in Senate
    bill 1300 is a positive step.
        This concludes my testimony and I would be happy to answer
    any questions you may have.
        [The prepared statement of Ms. Miller follows:]

     Prepared Statement of Hon. Karen Miller, Commissioner, Boone County,
          Missouri; on Behalf of the National Association of Counties

        Good morning, Chairman Rockefeller, Senator Lott and members of the
    Subcommittee on Aviation. My name is Karen Miller and I am a County
    Commissioner in Boone County, Missouri. I am here representing the
    National Association of Counties (NACo). I want to thank you for the
    invitation to testify on improving air service to small and rural
    communities.
        Essential Air Service (EAS) is extremely important to NACo members
    in small and rural communities, to Boone County, Missouri and to
    approximately 143 other rural communities served by EAS in 36 states.
    The other EAS communities in Missouri include Fort Leonard Wood,
    Joplin, Kirksville and Cape Girardeau.
        In a nutshell, EAS keeps all these communities connected to the
    rest of America. It provides a link for citizens to travel to the
    larger communities plus a link to the Nation and world through the hub
    airports to which EAS connects. EAS plays a key role in local
    communities by attracting and retaining businesses that depend on
    commercial air service and in healthcare by enabling our citizens to
    more easily access sophisticated healthcare that is often absent in
    rural communities. NACo hopes that the final aviation reauthorization
    legislation will extend EAS and provide an authorized level of funding
    and dedicated source of funding that is adequate for meeting the
    demands and costs of the program and make a number of reforms to the
    program.
        Columbia Regional Airport, located in Boone County, Missouri began
    receiving EAS service in October 2006 when Trans States Airlines pulled
    out of the market. Mr. Chairman, please note that this occurred not
    because of a decrease in enplanements but because Trans States decided
    to change from turbo prop planes to regional jets and that made
    Columbia uneconomic to serve. Columbia Regional Airport serves an area
    of about 428,000 people and includes the University of Missouri and the
    state capital in Jefferson City. We also have a strong business
    community that is always looking for more employers. Believe when I say
    one of the first questions we get from businesses looking to relocate
    to our area is, ``How far are you from a commercial airport.'' It
    dramatically improves our competitiveness to say 10 miles rather than
    115 miles to St. Louis or 135 miles to Kansas City.
        While having EAS has been important to our region, the result of
    the change from non-subsidized to subsidized service has not been
    without challenges and we have seen a reduction in enplanements--from
    almost 20,000 in 2005 to 13,673 in 2006 to a projected level of less
    than 10,000 in 2007. Until July 7, 2007, Columbia received four EAS
    flights per day during the week and two flight per day on the weekend,
    all provided by Air Midwest. The flights were split evenly between
    Kansas City and St. Louis. Due to the unreliability of the flights and
    the schedule, we agreed to a change in service. Many of Air Midwest's
    flights were leaving 1-3 hours late and this lack of reliability was
    driving away passengers. Furthermore, the ability of business travelers
    to complete a one-day return trip was not very practical. The first
    flights out of Columbia to St. Louis left too late for the first round
    of connecting flights from St. Louis and the last flight back to
    Colombia from St. Louis left too early for the connecting returning
    flights, and the last flight from Kansas City created a long wait for
    returning travelers. Effective July 8, all these flights will go to
    Kansas City where Air Midwest has its own gate and maintenance
    operation. We hope moving all flights to Kansas City will improve
    reliability, make our service more attractive and increase
    enplanements.
        NACo has a number of suggestions for improving the Essential Air
    Service Program. The goal of a number of these recommendations is to
    build up the enplanements in a community so that air carriers can offer
    service without an EAS subsidy. There needs to be more funding. It is
    certainly fair to say that the cost of fuel, equipment and operations
    of air service has increased. We applaud the Commerce Committee for
    increasing EAS funding to $133 million. Certainly, the Administration's
    proposal to reduce the program to $50 million and limit EAS to 78
    communities makes little sense as does proposing limiting eligibility
    for EAS to those communities currently in the program. We also need
    more funds so we can subsidize better service. Like any other product
    or service, EAS has to be attractive to the customer. Hopefully with
    more funds, the issues often raised by EAS communities concerning
    frequency, convenience, and type of aircraft can be better addressed.
    In the last Congress, both the House and Senate recognized the
    increasing needs and funded EAS at $117 million only to have the final
    funding reduced to $109 million, the same figure as FY 2006.
        We also ask this subcommittee to help identify an additional
    dedicated or guaranteed source of revenue for the EAS program. The
    Airport Improvement Program has it, the highway program and transit
    program both have it. While the international over flight fee generates
    $50 million annually for EAS, the remainder currently has to come from
    the General Fund and this creates an uncertainty for the communities
    and the air carriers. An additional dependable source, such as the
    Airport and Airway Trust Fund, which assures communities and air
    carriers that the program will be fully funded, would make EAS a
    stronger program. Another option would be to require the Trust Fund to
    help fund EAS to the extent that the over flight fee and General Fund
    contribution failed to reach the fully authorized level.
        We believe the Local Participation Program, currently in law but
    never implemented, which requires a 10 percent match requirement in ten
    communities should be repealed. Many of the small and rural communities
    that would be required to provide a local match are not able to find
    the tens of thousands of dollars the match would require.
        The $200 subsidy cap should be increased and indexed. It has been
    in place since 1989 and while we are not opposed to the concept of a
    cap, one that hasn't been changed in 18 years needs adjustment.
        We believe that there needs to be either an incentive for improved
    service or a penalty for those air carriers who provide unreliable
    service. Carriers get paid for completed service, whether on time or 3
    hours late. Section 405 of S. 1300 moves in the right direction but we
    would recommend requiring the Secretary of Transportation to provide
    incentives for carriers to improve air service, as opposed to this
    being discretionary, and include penalties for poor service.
        There needs to be more marketing of EAS service to the community.
    Marketing funding should be provided directly through the EAS program.
    NACo supports the provision now included in S. 1300 requiring airlines
    who are bidding on EAS service to include a funded marketing plan in
    their proposal.
        One final suggestion to improve EAS service is that we need to
    study approaches to encouraging more airlines to bid on providing EAS
    service. More competition may result in better service.
        As I conclude, let me also indicate NACo's support for the Small
    Community Air Service Development Program. This program needs to be
    funded at a level that comes close to meeting the demand and the $35
    million annual authorized level in S. 1300 is a positive step. Every
    year grant applications exceed the available funding by a substantial
    margin and the $10 million appropriated for FY 2007 is inadequate. In
    particular, small communities need marketing dollars to help them get
    the word out to their residents that airline service is available. We
    also believe the match requirement for this program needs to be
    modified, perhaps to reflect community size.
        This concludes my testimony and I would be happy to answer any
    questions subcommittee members may have.

        Senator Stevens. Thank you very much, Ms. Miller. Our next
    witness is Mark F. Courtney, the Airport Director of
    Lynchburg's Regional Airport in Lynchburg, Virginia. Mr.
    Courtney?

       STATEMENT OF MARK F. COURTNEY, A.A.E., AIRPORT DIRECTOR,
                       LYNCHBURG REGIONAL AIRPORT

        Mr. Courtney. Thank you, Senator Stevens. On behalf of the
    City of Lynchburg and the Lynchburg Regional Airport
    Commission, I would like to thank you for this invitation to
    appear before your Subcommittee to speak on the topic of the
    Small Community Air Service Development Program.
        Now, Lynchburg Regional Airport is classified as a non-hub
    airport and is the primary commercial service airport serving a
    four-county area in central Virginia surrounding Lynchburg,
    Virginia.
        Prior to September 11, Lynchburg enjoyed daily airline
    service by affiliates of three airlines: Delta, United and US
    Airways, with a total of 19 daily departures to four different
    major hub airports. Following the events of September 11th,
    however, Lynchburg, as did many similar sized airports,
    suffered a disproportionate reduction in airline service and
    seat capacity as airlines reduced flight schedules.
        Then, in the Fall of 2001, our United Express affiliate
    announced that it would be withdrawing all service from
    Lynchburg and close its station. Suddenly, Lynchburg was left
    with just 12 scheduled airline departures while suffering a 38
    percent loss of daily seat capacity compared to September 2000.
    The number of local air travelers driving to other airports for
    their air travel needs reached nearly 60 percent. By the end of
    calendar year 2001, Lynchburg's total passenger traffic had
    dropped 42 percent from the prior year.
        In 2002, Lynchburg was fortunate to receive its first grant
    under the Small Community Air Service Development Program in
    the amount of $500,000 that, when combined with $100,000 in
    local funds, made possible a revenue guarantee form of
    incentive for the purpose of upgrading our existing turboprop
    service to regional jets. Delta Airlines subsequently accepted
    our proposal and new service began May 4, 2003 for a 1-year
    period.
        With the introduction of the new jet service and Delta's
    agreement to offer a new, more competitive pricing structure,
    Delta's passenger load factors at Lynchburg jumped from 49
    percent in August of 2003 to nearly 64 percent by October. Even
    more encouraging, Delta's passenger revenues actually went up
    under the new lower pricing structure, despite this decrease in
    airfares.
        By the Winter of 2004, it was evident that the new service
    was a complete success and it was exceeding expectations. By
    April, Delta officials confirmed that they would continue the
    service after the 1-year revenue guarantee period ended.
        Of course, a lot has happened in the airline industry since
    that time. With multiple legacy airline bankruptcies over the
    past few years, further reductions in both domestic flights and
    seat capacity have become the norm. But as our new service
    continued to perform well and grow, the response wasn't to
    increase service, but to increase fares. In fact, from an
    average roundtrip leisure fare of $270 in January 2005,
    Lynchburg's average published fares to our most popular
    destinations have increased an alarming 58 percent. And,
    despite passenger traffic levels that remain amazingly stable,
    fares have continued to escalate, while service has diminished.
        Over the last couple of years, it seems that every time
    that we have seen our load factors improve, the airlines have
    responded not by increasing service to meet the increased
    demand, but by increasing fares. Compared to the same month
    last year, our current leisure fares are up 30 percent and just
    last week Delta Connection announced that it was eliminating
    one of its three daily RJ flights in September. When combined
    with an earlier flight reduction by US Airways, by September,
    Lynchburg will have lost over 19 percent of our daily seat
    capacity just since the beginning of the year.
        In fact, our September seat count will represent the lowest
    number of airline seats offered at this airport in decades. And
    yet, through all this, our passenger enplanements year-to-date
    are actually off just 4.3 percent compared to last year.
        With the past success of our 2002 grant, Lynchburg was once
    again successful in being awarded a similar but smaller DOT
    grant in 2006 to be used to help attract a third carrier back
    to the airport, as well as the return of a northern connecting
    city, particularly a hub city. With nearly a year behind us
    under the new grant, we continue to struggle to gain an airline
    commitment. With regional airline fleets continuing to face
    pressure, high fuel prices and hub and air traffic capacity
    issues placing limitations on flights, our current $405,000
    total incentive package has failed to get much attention from
    an airline. While we are hopeful that we will eventually be
    successful, current airline economics and fleet trends seem to
    be conspiring against small non-hub airports like Lynchburg.
        Now, without a doubt, the current airline operating
    environment has made service to smaller communities even more
    problematic, with the airlines showing very little interest in
    our pleas for better air service and more competitive airfares.
    The airlines' revolving door of raising fares every time our
    load factors improve has created a Catch-22 that keeps us from
    performing to our potential and provides an ongoing excuse to
    reduce service levels further.
        The Small Community Air Service Development Program is
    clearly needed and represents one source that smaller airports
    have to provide airline incentives that would otherwise not be
    possible. But to me, it also seems apparent that higher
    individual grant amounts have become necessary in order to gain
    the attention of an airline. In our case, cash incentives that
    can be offered to offset a new airline's startup costs during
    the first 6 months or so seem to be the most effective but it
    also seems obvious that's only if the incentive is high enough.
    This becomes even more compelling when you consider that the
    mainline carriers are controlling more and more of the regional
    fleet seat capacity directly. The days of independent, code-
    sharing regional partners who make the service and scheduling
    decisions themselves appear to be gone.
        When looked at in the context of 5 years ago, it is clear
    that for Lynchburg Regional Airport, our Fiscal Year 2002 grant
    was a complete success. More recently, however, it has also
    been clear that ongoing challenges in the domestic airline
    industry have created even greater challenges for small
    communities like Lynchburg.
        It just seems that for smaller, non-hub airports like
    Lynchburg Regional Airport that have viable, self-sustaining
    air travel markets, airline deregulation hasn't worked in a
    long time and I fear it's just getting worse.
        I encourage Congress and this Committee to continue
    programs such as this that have a proven record and to focus on
    more attractive financial incentives for those non-hub airports
    that have the greatest monetary need and the greatest chance of
    success. Thank you.
        [The prepared statement of Mr. Courtney follows:]

       Prepared Statement of Mark F. Courtney, A.A.E., Airport Director,
                           Lynchburg Regional Airport

        Chairman Rockefeller, Ranking Member Lott and members of the Senate
    Commerce Committee's Aviation Subcommittee, on behalf of the City of
    Lynchburg and the Lynchburg Regional Airport Commission, I would like
    to thank you for your invitation to appear before your subcommittee to
    speak on the topic of the Small Community Air Service Development
    Program. Lynchburg Regional Airport (LYH) has had the opportunity to
    participate in this program through two separate grants, and today I
    would like to focus on our experiences with this program.

    Background
        Lynchburg Regional Airport (LYH) is classified as a non-hub airport
    and is the primary commercial service airport serving a four-county
    area in central Virginia surrounding Lynchburg, Virginia. With a
    service area population of 221,000, LYH is currently served by the
    regional affiliates of two airlines, Delta and US Airways, and today
    offers a total of seven daily departures to airline hubs in Atlanta and
    Charlotte.
        Lynchburg Regional Airport, like many similar-sized airports, was
    particularly hard hit by the events of September 11, 2001. Prior to
    September 11, LYH enjoyed daily scheduled airline service by three
    airlines (Delta, United and US Airways) with a total of 19 daily
    departures to four different major hub airports. Lynchburg's total
    passenger traffic during a ten-year period preceding September 11
    averaged approximately 180,000 passengers annually, with the local
    market easily supporting daily airline seat capacity in the 500-seat
    range.
        In the immediate days following September 11, LYH, like most
    airports throughout the country, experienced a dramatic decline in
    passenger demand. Then, in the Fall of 2001, United Express carrier
    Atlantic Coast Airlines, one of our three airlines, announced that it
    would be withdrawing all service from LYH and close its station. But,
    unlike many larger airports, LYH suffered a disproportionate reduction
    in airline service and seat capacity as flight schedules were reduced.

    Air Travelers Turn to Other Airports
        Suddenly, LYH was left with just 12 scheduled airline departures
    daily, down from 19, while suffering a 38 percent loss of daily seat
    capacity compared to September 2000. The result was an increase in the
    number of local air travelers who opted to drive to other near-by
    airports to accommodate their travel needs, reaching a point that the
    number of local air travelers driving to other airports reached nearly
    60 percent. As a result, by the end of CY 2001, Lynchburg's total
    passenger traffic had dropped 42 percent from the prior year.

    LYH and the 2002 SCASD Pilot Program
        In 2002 LYH received its first grant under the Small Community Air
    Service Development Program (SCASDP) in the amount of $500,000 that,
    when combined with $100,000 in local funds, made possible a revenue
    guarantee to utilize as an airline incentive to upgrade our existing
    turboprop aircraft to regional jets. Delta Airlines subsequently
    accepted our proposal and new service began May 4, 2003 for a one-year
    period under a revenue guarantee arrangement.
        With the introduction of the new jet service and Delta's agreement
    to offer a new, more competitive pricing structure, Delta's passenger
    load factors at LYH jumped from 49 percent in August 2003 to nearly 64
    percent by October. Even more encouraging, Delta's passenger revenues
    actually went up under the new pricing structure, despite the slight
    decrease in airfares. Overall, Delta's passenger traffic went from
    2,111 total passengers in April 2002, the month before the new CRJ
    service started, to 4,735 by October 2003.
        By the Winter of 2004, it was evident that the new service was a
    complete success, and that it was exceeding expectations. In fact,
    under the formula for the revenue guarantee, in February 2004 total
    revenues actually exceeded the target under the agreement for the first
    time. By April, we exceeded the revenue target by approximately $20,000
    and received confirmation from Delta officials that they deemed the
    program a success and would be continuing the service after it expired
    in May 2004.

    Then and Now
        Of course, a lot has happened since then and much has changed in
    the airline operating environment. With multiple legacy airline
    bankruptcies in the intervening years, further reductions in both
    flights and seat capacity have become the norm. But as our new service
    continued to perform well, the response wasn't to increase service, but
    to increase fares. In fact, from an average roundtrip leisure fare of
    $270 in January 2005, LYH's average published fares to our most popular
    destinations have increased an alarming 58 percent.

        And, despite passenger traffic levels that remain amazingly stable,
    fares have continued to escalate, while service has diminished. In our
    case, over the last couple of years, it seems that every time that we
    have seen our load factors improve, the airlines have responded not by
    increasing service, but by increasing fares. Compared to the same month
    last year, our lowest leisure fares are up 30 percent, and just last
    week Delta Connection announced that it was eliminating one of its
    three daily RJ flights in September. When combined with an earlier
    flight reduction by US Airways, by September LYH will have lost over 19
    percent of our daily seat capacity just since the beginning of this
    year. In fact, our September seat count will represent the lowest
    number of airline seats offered at this airport in decades. And yet,
    through all this, our passenger enplanements year-to-date are off just
    4.3 percent compared to the same period last year.

    Lynchburg's 2006 SCASD Program Grant
        With the past success of our 2002 grant, LYH was once again
    successful in being awarded a similar, but smaller, grant in 2006 to be
    used to help attract a third carrier back to the airport, as well as
    the return of a northern connecting hub city. With nearly a year behind
    us under the new grant, we continue to struggle to gain an airline
    commitment. With regional airline fleets continuing to face pressure,
    high fuel prices and hub and air traffic capacity issues placing
    limitations on flights, our current $405,000 incentive package has
    failed to get much attention from an airline. While we are hopeful that
    we will eventually be successful, current airline economics and fleet
    trends seem to be conspiring against small non-hub airports like LYH.

    Conclusion
        Without a doubt, the current airline operating environment has made
    service to smaller communities even more problematic, with the airlines
    showing little interest in our pleas for better air service and more
    competitive airfares. The airlines' revolving door of raising fares
    every time our load factors improve has created a ``Catch 22'' that
    keeps us from performing to our potential, and provides an ongoing
    excuse to reduce service levels further.
        The Small Community Air Service Development Program is clearly
    needed and represents one source smaller airports have to provide
    airline incentives that would otherwise not be possible. But it also
    seems apparent that higher grant amounts have become necessary in order
    to gain the attention of an airline. In our case, cash incentives that
    can be offered to offset a new airline's start-up costs during the
    first 6 months or so seem to be the most effective, if the incentive is
    high enough. This becomes even more compelling when you consider that
    the mainline carriers are controlling more and more of the regional
    fleet seat capacity directly. The days of independent, code-sharing
    regional partners who make the service and scheduling decisions
    themselves appear to be all but gone.
        When looked at in the context of 5 years ago, it is clear that for
    LYH our FY 2002 grant was a complete success. The program was
    instituted at a very opportune time for our airport, and the timing for
    execution of our proposal was perfect. At the time of the grant offer,
    the airport was significantly underserved, which was compounded by
    inordinately high airfares.
        The implementation of a revenue guarantee program was exactly the
    best way to address our particular program at the time in that it
    provided compensation to the airline during the critical market
    development phase of new service introduction. The result was a steady
    decrease in revenue guarantee payments to the airline, culminating at
    the end of the program in revenues that exceeded goals.
        More recently, however, it has become clear that recent changes in
    the domestic airline industry have created even greater challenges for
    small communities like Lynchburg. For smaller non-hub airports that
    have viable, self-sustaining air travel markets, it seems that airline
    deregulation hasn't worked in a long time, and I fear that it is just
    getting worse. I would encourage Congress to continue programs such as
    this that have a proven record, and to focus on more attractive
    financial incentives for those non-hub airports that have the greatest
    monetary need and the greatest chance of success.

        Senator Stevens. Thank you, Mr. Courtney. Senator Dorgan,
    do you have an opening statement you want to make at this time?
        Senator Dorgan. Mr. Chairman, I'll wait until your
    witnesses have completed their statements.
        Senator Stevens. Senator, do you feel the same way?
        Senator Vitter. Yes, I have questions for the witnesses.
        Senator Stevens. Ms. Malarkey, you are--Faye Malarkey is
    Vice President of Legislative Affairs for the Regional Airline
    Association stationed here in Washington. Ms. Malarkey?

        STATEMENT OF FAYE MALARKEY, VICE PRESIDENT, LEGISLATIVE
                 AFFAIRS, REGIONAL AIRLINE ASSOCIATION

        Ms. Malarkey. Thank you, Senator Stevens. Thank you for the
    opportunity to testify today and for holding this important
    hearing. RAA represents 41 regional airlines that link together
    600 communities in the United States. At more than 70 percent
    of these communities, regional airlines are, as you know,
    providing the only source of scheduled airline service. Nowhere
    is the importance of regional airline service more apparent
    than at the over 140 communities across the country that
    receive air service through EAS.
        As this Committee knows, continuing financial challenges in
    the aviation industry have made air service to smaller
    communities significantly more expensive. In the past 5 years
    alone, 40 communities have been forced onto the EAS roles and
    17 communities have been dropped from the program. The smallest
    airports have seen a 21 percent decline in daily departures.
    Airports with between 3 and 6 daily flights have experienced a
    33 percent decline in departures. Many communities have lost
    air service all together.
        A promise was made to small communities back in 1978 that
    deregulation would not leave them behind. The vehicle for this
    promise has been EAS. We applaud this Committee for upholding
    that promise, for resisting proposals that would dismantle the
    program and for choosing instead to increase funding for the
    EAS Program as part of its reauthorization package.
        One of the greatest factors contributing to small community
    air service reductions is the recent and staggering increases
    in fuel costs. To put this into perspective, EAS contracts
    currently have a 2-year lifespan. A carrier that negotiated a
    competitive contract a year ago would have based cost
    projections on then-current fuel rates of $1.80 a gallon. That
    same carrier would be providing the service today with fuel
    costs of nearly $3.00 a gallon. In other words, climbing fuel
    costs can quickly turn once profitable routes into losses.
        Unfortunately, EAS carriers lack a mechanism to renegotiate
    rates and must instead file 90-day service termination notices
    in order to adjust. Even after filing such notices, as you
    know, carriers are held in at loss rates for 180 days. This
    Committee included a rate index mechanism provision in Vision
    100 that would allow the DOT to make real-time rate adjustments
    in cases of such increased costs. Unfortunately, DOT has been
    unwilling to implement the program.
        RAA therefore respectfully asks this Committee to include
    language in its present FAA bill to require implementation.
    Recently, DOT has stated that the EAS Program is not facing any
    crisis in funding. RAA holds our colleagues at the DOT in the
    highest esteem but we do not agree with this assessment. The
    demonstrability of funding needs and expenditures related to
    the program is closely tied to its management.
        When DOT cuts service levels or eliminates points in order
    to lower program expenditures without reinvesting in the
    program, it generates cash in the EAS coffers. The results of
    this practice are balance sheets that suggest the program is
    over-funded. In order to fully explore this issue, RAA requests
    that Congress require an audit on unspent, obligated funds
    currently retained on the EAS balance sheets.
        As I've mentioned previously, DOT contracts have a 2-year
    life span. Unfortunately, airlines' ability to commit aircraft
    in a diminishing market has grown more difficult. In fact, one
    reason there are so few new-entrant EAS carriers may be
    attributed to the lack of financing for aircraft with short-
    term commitment levels.
        We are therefore pleased that this Committee has expressed
    interest in upgrading EAS contract terms beyond their current
    2-year lengths. By upgrading the EAS contract terms to four or
    5 year service commitments, existing carriers would be better
    able to renew current contracts, a significant barrier to
    market entry would be removed and all carriers would be better
    able to finance aircraft.
        RAA believes the FAA's own reauthorization proposal
    discriminates against passengers from smaller communities.
    Regional airlines provide 14,000 flights daily. To dismiss
    regional airline flights and our passengers as a mere blip on a
    radar screen is to ignore the crucial service we provide in
    smaller communities.
        We share an important goal with this Committee. That goal
    is advancing an FAA reauthorization bill that makes
    modernization of the ATC system a priority. We applaud this
    Committee for its work on the shared objective. As you know, we
    do have concerns about policy impacts stemming from the
    proposed user fee element. We are therefore truly appreciative
    of this Committee's invitation to work with us further to
    address those concerns. We pledge to work hard to find common
    ground. We're willing to pay our fair share for the extremely
    important objective of modernizing our ATC system. We simply
    seek a modest adjustment to the user fee language to ensure it
    treats passengers equally regardless of the point at which they
    access the system.
        We are confident that together with this Committee, we can
    address these specific concerns while moving forward with an
    FAA reauthorization this year.
        Mr. Chairman, thank you for your attention to this
    important issue and for the opportunity to testify today. I
    look forward to responding to your questions at the conclusion
    of the panel.
        [The prepared statement of Ms. Malarkey follows:]

       Prepared Statement of Faye Malarkey, Vice President, Legislative
                     Affairs, Regional Airline Association

        Chairman Rockefeller, Senator Lott, and Members of the
    Subcommittee, thank you for the opportunity to testify before you
    today. I am pleased to testify on behalf of the Regional Airline
    Association. We thank you for holding this important hearing.
        RAA represents 41 U.S. regional airlines transporting 97 percent of
    regional airline passengers. Our member airlines operate 9 to 68-seat
    turboprop aircraft and 30 to 108-seat regional jets and link together
    more than 600 communities in the United States.
        At more than 70 percent of these communities, regional airlines
    provide the only source of scheduled airline service. Nowhere is the
    importance of regional airline service more apparent than at the more
    than 140 rural communities across the country that receive scheduled
    air service through the Department of Transportation's Essential Air
    Service Program (EAS).
    Background
        Because of continuing financial pressures in the post-9/11 aviation
    industry, at least 40 additional communities have been forced onto the
    EAS roles and 17 EAS communities have been dropped from the program
    altogether in the past 5 years. The smallest airports--those with
    between one and three daily departures--have seen a 21 percent decline
    in daily departures between September 2001 and September 2006. Thirteen
    of these airports have lost service altogether. Airports with between
    three and six daily flights in September 2001 have experienced a 33
    percent decline in departures since then, with eight such airports
    losing service altogether.
        As Members of this Subcommittee know, EAS was initially created as
    part of the Airline Deregulation Act of 1978. The program has been in
    effect each year since under various funding proposals. Many members of
    this Subcommittee will remember that, in 1999, DOT issued several
    service termination orders, triggering broad opposition from
    communities and air carriers. This highlighted the need for a
    sufficient and stable funding stream for EAS.
        Thanks in large part to the strong leadership of this Committee,
    EAS has received funding increases which have helped it keep pace with
    changing market realities.

    Department of Transportation and Federal Aviation Administration
            Proposals
        Unfortunately, the proposal contained in the FAA's own
    reauthorization bill this year would severely cut and potentially
    dismantle the EAS program as funding would fall by $59 million from
    current enacted levels, effectively forcing out a third or more of the
    communities that now use the program. The proposal further caps EAS
    subsidies at current levels and prohibits the addition of new EAS
    points for communities that lose air service in the future, telling
    residents of these communities that convenient, reliable air service is
    a luxury, and one they can't have. For the others, DOT would set up a
    tiered system to grant reduced subsidies to communities in descending
    order of distance from nearby hub airports, starting in Alaska and
    continuing until the funding runs out, which is sure to happen long
    before DOT's obligation to EAS communities has been met.
        If enacted, this proposal would jeopardize rural air service in an
    unprecedented way because it fails to reflect the fact that, of 140
    current EAS communities, 85--36 in Alaska alone--are further than 210
    miles away from a medium or large hub airport. Dozens more are further
    than 150 miles away from the nearest medium or large hub airport. Yet,
    under the DOT's proposal, even many remote communities would lose air
    service as the funding level proposed by DOT is simply too low to
    continue the program in any meaningful way.
        Congress promised small communities, back in 1978, that
    deregulation would not leave them behind; rather, communities receiving
    scheduled air service before deregulation would continue to receive
    scheduled air service after deregulation. The vehicle for this promise
    has been EAS, and while we recognize the usefulness of reform, we urge
    Congress to reject proposals that significantly cut, eliminate, or
    undermine this important program.
        Rather than accept proposals to cut the program in half, this
    Committee has elected instead to increase funding by $6 million per
    year in its FAA proposal, bringing authorized appropriations to $133
    million next year. We are deeply grateful for your leadership.

    Carrier Costs and Real-Time Rate Indexing
        One of the greatest factors contributing to diminishing small
    community air service is the continuous and staggering effect of fuel
    cost increases. Turboprop aircraft are among the most fuel efficient
    aircraft for short-haul routes and, like our major airline
    counterparts, regional airlines have sought to minimize fuel burn by
    tankering fuel, lowering cruise speeds, safely altering approach
    procedures, and reducing onboard weight. We are making every effort to
    manage escalating fuel costs with an eye toward conservation.
    Nonetheless, fuel is now the highest cost for many regional airlines.
        As part of the competitive EAS application process, carriers
    negotiate in good faith with DOT on subsidy rates that remain in effect
    for 2 years. In doing so, EAS carriers must project revenues and costs
    over this same two-year time-frame--no easy task in today's volatile
    cost environment. In cases of unexpected cost increases, EAS carriers
    lack a mechanism to renegotiate rates and must instead enter into the
    unpalatable process of filing 90 day service termination notices in
    order to begin the convoluted process of seeking rates that cover
    increased costs. This inevitably causes ill-will between the airline
    and community and fosters a sense of unreliability that undermines
    community trust in and use of the air service.
        One of the fundamental tenets of the EAS program held that no
    carrier should be expected to serve any market at a loss. Yet, in cases
    of unexpected cost increases, carriers are unable to provoke rate
    changes without filing such service termination notices, after which
    each carrier must continue to provide the service, at a loss, for 180
    days while DOT undertakes the competitive bidding process.
        In recent months, crude oil has risen dramatically. For example,
    one EAS carrier, Great Lakes Aviation, has experienced annualized,
    system-wide fuel cost increases of over $4 million. To put these
    numbers into perspective, please consider this: EAS contracts currently
    have a two-year lifetime. A winning carrier who negotiated a
    competitive contract 1 year ago would have based cost projections on
    then-current fuel rates of $1.80 per gallon. That same carrier would
    now be providing the service with fuel costs at nearly $3 per gallon.
    Because EAS carriers are strictly limited to 5 percent profit margins,
    climbing fuel costs can quickly turn once-profitable routes into
    losses.
        Congress has already addressed this issue. In Section 402 of Vision
    100, this Committee worked to include a rate-indexing mechanism where
    DOT could make real-time rate adjustments during periods of
    significantly increased carrier costs. In order to prevent deliberate
    cost underestimation, Congress required carriers to demonstrate
    ``significant increases,'' and defined these as 10 percent increases in
    unit costs persisting for two or more consecutive months.
        DOT has been unwilling to implement the program to date, citing a
    lack of funds. RAA therefore respectfully asks this Committee to
    include language in its FAA bill to require DOT to make these real-time
    rate adjustments.

    Program Management
        Recently, DOT has stated that the Essential Air Service program is
    not facing any crisis in funding. RAA respectfully disagrees. The
    demonstrability of funding needs and expenditures related to the EAS
    program is closely tied to management of the program. When DOT cuts
    service levels or eliminates points in order to lower programmatic
    expenditures without reinvesting in the program, it generates excess
    cash in the EAS coffers. This practice produces balance sheets that
    suggest the program is over-funded. In order to fully explore these
    issues, RAA requests that Congress require an audit on unspent,
    obligated EAS funds currently retained on the EAS balance sheets.
    Further, RAA requests that leftover funds be reinvested in the EAS
    program to raise service levels at more viable routes, thereby allowing
    passengers to best utilize service that has been granted.
        As Congress considers potential eligibility criteria changes, we
    also ask that the same standard is applied. Reforms to the program
    should be aimed at enhancing the program and protecting rural air
    service; not gutting the program.

    Date Certain for Market Exit
        Part of the nature of the Essential Air Service program, as you
    know, is that carriers compete rigorously for contracts. Even in cases
    where an incumbent carrier desires to continue serving a given market,
    DOT has the right to select another carrier. In cases where DOT awards
    service to a new carrier, RAA believes DOT should be required to give
    the incumbent carrier a date certain when it may exit the market,
    without exception.
        The current practice, where DOT holds the carrier in markets in 30
    day increments, is untenable. This practice means a carrier cannot sell
    tickets in the EAS market beyond 30 days, nor can it make plans to
    utilize its aircraft elsewhere. We urge Congress to end this unfair
    situation by mandating that DOT adopt a date certain component for
    incumbent carrier market exits when it selects an alternate carrier to
    serve the market.

    DOT Term Length Upgrade
        As you know, DOT contracts have a two-year lifespan. Post 9/11,
    carriers possessed excess aircraft inventory sufficient to facilitate
    competitive bidding on new EAS routes. With more and more turboprop
    aircraft being sold overseas, there are fewer aircraft available in the
    United States for this type of service.
        Unfortunately, airlines' ability to commit aircraft in a
    diminishing market has likewise grown more difficult. Aircraft
    financing models are ill-suited to short, 2 year-year commitments. In
    fact, one reason there are so few new-entrant EAS carriers, may be
    attributed to the lack of financing for aircraft with short-term
    commitment levels.
        We are pleased that this Committee has expressed interest in
    upgrading EAS contract terms beyond the current, two-year program. By
    upgrading the EAS contract terms to four or five-year service
    commitments, existing carriers would be better able to renew current
    contracts, a significant barrier to market-entry would be removed, and
    all carriers would better able to finance aircraft for longer-term
    obligations.

    Smaller Aircraft and Very Light Jets
        There has been some recent discussion about the use of Very Light
    Jets as rising operating costs of current EAS carriers have translated
    to higher program costs. Ironically, the rising costs in question have
    occurred as a result of compliance with single-level-of safety
    standards imposed on the industry in 1997. While RAA does not advocate
    a return to separate regulatory standards for 19 seat operators, the
    government should not forget that the bulk of increased operating costs
    on these aircraft have resulted from this regulatory change.
        Further, the business models of those smaller aircraft remain
    unproven. The VLJ business models that do exist promise direct, non-
    stop service to destinations that would bypass the hub-and-spoke
    system. They would therefore fail to connect passengers to the existing
    air transportation system in favor of limited service. The fares for
    VLJs are another great unknown, with most advocates acknowledging that
    they are fairly expensive.
        We strongly caution the Congress against advancing this unproven
    technology as a solution to EAS shortfalls. The Congressional
    commitment to rural communities during deregulation was a continuation
    of scheduled air service. It is inappropriate to place the burden on
    passengers and communities to secure air service through expensive,
    untested, and potentially unreliable sources.

    FAA Reauthorization and User Fee Proposals
        The FAA proposal, which treats commercial airline passengers
    differently based on size or type of aircraft, discriminates against
    passengers from smaller communities. Further, the proposal undermines
    the notion of a national system of commercial aviation. Regional
    airlines provide 14,000 flights daily. To ignore the crucial service
    regional airlines provide in smaller communities by dismissing regional
    airline flights and passengers as a mere ``blip'' on a radar screen
    represents more than an oversimplification. With respect to commercial
    air service, one blip can contain 250 cost bearing sources while
    another contains only 19.
        Looking beyond EAS, we share an important goal with this Committee.
    That goal is advancing an FAA Reauthorization bill that makes
    modernization of the ATC system a priority. We applaud this Committee
    for its work on this shared objective.
        As you know, we do have concerns about policy impacts stemming from
    the proposed user fee element, which we believe will prove harmful to
    small and medium-sized communities if not adjusted.
        We are therefore truly appreciative of this Committee's invitation
    to work with us further on those issues and we pledge to work hard to
    find common ground. We are willing to pay our fair share for the
    extremely important objective of modernizing our ATC system. We simply
    seek an adjustment to the user fee language to ensure it treats
    passengers equally, regardless of the point at which they access the
    system. We are confident that, together with this Committee, we can
    address these specific concerns while moving forward with FAA
    reauthorization this year.

    Conclusion
        Mr. Chairman, thank you for the opportunity to testify on this
    important issue today. I look forward to responding to your questions
    at the conclusion of the panel.

        Senator Stevens. Well, thank you very much, Ms. Malarkey.
    You said you wanted to talk about requiring a limitation on
    whom? On the Department of the Treasury or what limitation did
    you mention?
        Ms. Malarkey. I'm sorry, I'm not sure that I understand--
    the limitation that I--I mentioned that we would like to have
    an audit on the unspent funds in the EAS coffers.
        Senator Stevens. Yes, I heard that but you also said
    something about requiring a limitation on the funds? Look over
    your statement and I'll come back to you, OK?
        Ms. Malarkey. OK.
        Senator Stevens. Mr. Secretary, we're delighted to have you
    here. Have you been to Alaska?
        Mr. Steinberg. Yes, I was there about 2 years ago and I got
    a chance to see----
        Senator Stevens. Did you go see some of the places that are
    served by Essential Air Service?
        Mr. Steinberg. I did not see places served by Essential Air
    Service specifically but did have a chance to understand
    personally some of the remote cities and what they have to do.
        Senator Stevens. Well, let me extend to you an invitation
    to come up in August. We might find a little extracurricular
    activity for you in one of the rivers at the same time.
        Mr. Steinberg. That sounds good.
        Senator Stevens. But there is a necessity to understand
    what this is all about. I'm the only surviving Senator now that
    was around when we made, at least on this Committee, created
    this Essential Air Service Program. It was created by Senator
    Cannon of Nevada and me because of the problem in Alaska
    primarily and in a few places in Nevada where they were going
    to lose air service that had been mandated by CAB, at a great
    loss to the industry.
        But we devised a system whereby the community had a right
    to a subsidy sufficient to give them at least the service that
    had been in place before deregulation. In some of our cities
    and villages, that was about three times a week. Now, in other
    places, I'm sure it was daily. But it has, as its genesis, the
    idea of letting the community decide who should continue to
    service it in terms of air transportation.
        One thing that was missing from your statement was
    relevance to cargo. Essential Air Service covers cargo, too,
    where you have seat passengers and cargo and I would hope that
    you would come take a look at that.
        Let me ask the other witnesses--does your Essential Air
    Service in Missouri and in Virginia and generally, Ms.
    Malarkey, do you include cargo service in your what we call
    Con-P planes? Passenger and cargo?
        Mr. Torgerson. Lynchburg is not an EAS point but we do
    combine, of course, freight in our passenger planes because we
    don't have any dedicated cargo except for one carrier.
        Senator Stevens. You're not getting any Essential Air
    Service assistance now at all?
        Mr. Torgerson. No assistance, no. No.
        Senator Stevens. Ms. Miller?
        Ms. Miller. Senator, I can't tell you that. I don't believe
    that we have cargo included in the EAS service that we receive
    now.
        Senator Stevens. I don't--Ms. Malarkey?
        Ms. Malarkey. We do not have all cargo EAS carriers. We
    have EAS carriers, obviously, that do some carriage of mail and
    will do some carriage of cargo but we do not have all cargo
    EAS.
        Senator Stevens. We don't have all cargo service covered by
    EAS either but the Con-P planes are covered and I think it's an
    essential difference between Alaska and what we call the South
    48 in terms of Essential Air Service Program.
        Mr. Steinberg, you mentioned the problem of the new system
    and the way it's growing, particularly now with what I call the
    mosquito jets, the very light jets. They probably won't be Con-
    P capable, as I understand it. They're going to be 9 to 11
    seats, the ones that I've looked at. Have you got any plans at
    all to deal with the areas where they still must have cargo? I
    mean, we don't have roads so as a consequence, not having any
    road money coming to these areas, we provide it through--this
    was Senator Cannon's idea and mine, that we would provide
    assistance through the Essential Air Service for combined
    service of passenger and freight. Now, how is that going to be
    sustained after the mosquito fleet arrives?
        Mr. Steinberg. Well, after very light jets are introduced
    into the system, I think you'll see a couple different things
    happen. There is the potential for more service for passengers
    but as you point out, these planes are pretty small. Actually,
    the ones that are coming on line now, I think, are more like
    six passengers. However, there is another use, of course, for
    these aircraft and that's to carry cargo by itself and in fact,
    one of the things that is encouraging about very light jets is
    the ability to provide, say medical equipment and other things
    that are needed on a real-time basis.
        So ultimately, Senator, it's all a matter of aircraft
    economics and if cargo can be carried profitably by very light
    jets, I'm sure it will be.
        Senator Stevens. Well, I hope you'll come up and take a
    look. I'm an old C7 (1947) and (1946) pilot. They would carry
    everything, right? These new little jets are not going to carry
    everything. You won't be able to get a washing machine in them.
    You won't be able to get any kind of a--even a large boat motor
    and there is no other way to deliver them now. There's no other
    way to get up there at all today. In days gone by, when the
    freight went up the river once a year, they didn't have those
    motors.
        Mr. Steinberg. Well, I think clearly Alaska is a special
    situation because you don't have the road infrastructure that
    you need to deliver cargo by truck and that distinguishes it
    from most other parts of the U.S. so the Essential Air Service
    Program will, I think, continue to be very important to your
    state.
        Senator Stevens. Well, John Torgerson, I hope, Mr.
    Commissioner, you'll join me in inviting our Secretary to come
    up because the transition of this bill--this is going to be a
    transition bill for Essential Air Services, no question about
    it. Other states need to redefine it and we need to redefine it
    so that we're not left out by these very light jets that will
    be primarily supported by Essential Air Services as I see it in
    the future.
        Ms. Malarkey, you said you would like to sit down with the
    staff and talk about changes in this bill?
        Ms. Malarkey. Yes. Yes, we would, very much. In fact, we
    make ourselves available at any time in the coming weeks to sit
    down and discuss. Again, we seek a small, minor adjustment to
    the user fee language to ensure----
        Senator Stevens. Well, would you mind writing us a little
    letter so the members of the Committee will know what you want
    to talk to the staff about? I think that would be a good idea
    that you talk to them but we'd like to see what amendments you
    have in mind.
        Ms. Malarkey. Yes. It would be our pleasure.
        Senator Stevens. Did anyone else have amendments in mind to
    this bill that we should discuss this morning?
        [No response.]
        Senator Stevens. John, do you have any amendments to the
    bill?
        Mr. Torgerson. No sir, I do not.
        Senator Stevens. Ms. Miller?
        Ms. Miller. Senator, I would like to also recommend that
    the NACo staff work with your staff on any amendments that may
    be forthcoming, as they've reviewed Senator bill 1300. I
    personally have not had that opportunity so I can't tell you
    exactly all the pieces that we would like to work with the
    staff to fine tune. But I want to make them available and I
    feel like Bob Fogel will be of big help to your staff in
    understanding our issues.
        Senator Stevens. Mr. Courtney, I think you sort of
    suggested re-regulation, a new CAB. Is that what you're
    suggesting?
        Mr. Courtney. I didn't mean to really suggest re-regulation
    as much as the fact that deregulation does not work for smaller
    communities. We are in a unique situation. We're not an
    Essential Air Service point. We're larger than that but we're
    smaller than many of the smaller airports that have the kind of
    financial wherewithal and they have the kind of community
    support to be able to provide the kind of incentives necessary
    to attract airlines in today's environment. You have to
    remember, we are self-sufficient. We are profitable for the
    airlines. Our problem is not profitability. Our problem is
    competition, high fares and a lack of choices out there among
    the legacy carriers. We cannot attract a low fare carrier
    because of the economics of it and we need something like the
    Small Community Air Service Development Program, even in an
    enhanced form, to be able to give us a tool that we need to be
    able to attract and get the attention of an airline.
        The airline planning staffs today, the mainline carriers
    are calling the shots, at least when it comes to most smaller
    communities like ours that provide service--line service to the
    hub airports. And we need them very, very much and we just
    can't survive without that kind of connection and the planning
    staffs, we just can't get through to them because we're too
    small of a revenue airport or size for the majors who are
    facing all these daunting challenges, fighting back the low
    fare carriers and the majors at other larger airports. So even
    though we're profitable, our frustration remains in not being
    able to attract good quality service and keep it.
        Senator Stevens. It may interest you to know when we
    deregulated the airlines and did away with the CAB, Congress,
    at my request, gave the State of Alaska the right to create its
    own CAB in trial, in Alaska. But we have never utilized that
    authority for the one reason that we prefer to have some
    competition and we depend so much on airline transportation to
    get out of Alaska that we could not regulate. It would not be
    feasible to end up by regulating just in Alaska and not have
    the interstate commerce regulated.
        I do think that we ought to help you find a way to induce a
    little bit more competition into your area and it may be that
    Essential Air Service grants of small amounts would enable an
    airport like yours to offer a little bit of an incentive to
    smaller airlines that are growing to come and grow with your
    traffic. That's what's happened in Alaska to a great extent and
    I'm sure that Commissioner Torgerson will tell you, we have
    sort of vibrant competition now, even in the smaller areas, to
    get the Essential Air Service contribution. So it is something
    that works and I'd like to work with you along that line.
        Mr. Courtney. And Senator Stevens, I might just add that,
    as it was alluded to earlier, that is one of the challenges
    we're facing right now. We're in an industry that for scheduled
    airline service, the domestic route systems of the airlines are
    contracting. They are reducing capacity. It's much more
    difficult, obviously, to compete for added service or even to
    keep what you have when the airlines are continuing to reduce
    service. That's the reason we just lost--or we will be losing
    one of our regional jets to Atlanta.
        Senator Stevens. But--and I'm going to quit here--up our
    way, as that happens, they take under their wing a small
    commuter that becomes a portion of the major airline and deals
    effectively with our local commuter transportation and
    particularly, that's where the population base is a little
    higher than some of the villages. But I do think it would be
    wise to have you all come and take a look and see how it works
    in Alaska because it does work in Alaska and that's what John
    is here for. He's asking for a continuation of the program.
        Senator I've got to go to another meeting. If you would,
    I'd be honored to have to take----

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

        Senator Dorgan (presiding]. Mr. Chairman, because I didn't
    give an opening statement, let me make a couple of comments.
        First of all, I think airline deregulation has imposed an
    unbelievable penalty on rural America. I know regulation is a
    four-letter word in this town but if we could all walk out to
    National Airport this morning and book two flights, one to
    North Dakota and one to Los Angeles, you'll find that it will
    cost twice as much to go half as far. That's an unbelievable
    penalty for people who live in smaller states, smaller
    population states.
        So airline deregulation, in my judgment, has worked
    wonderfully for some. If you are from Chicago or Los Angeles or
    New York, you have multiple choices at competitive prices and
    good for you, you get a heck of a bargain on the airlines. If
    you're from other parts of the country, you're going to be
    facing airline fares that are unbelievably high if, in fact,
    you get the service. And these days, you're going to be faced
    with less service because they're going to reduce frequencies
    on you in most cases and bring in smaller aircraft.
        Let me make a couple of comments about these issues. Mr.
    Steinberg, I've had generally a positive experience working
    with you and Mr. Devaney and others in the Department. I've
    appreciated working with you on EAS issues. I think the
    Essential Air Service Program is very important for many small
    communities.
        I don't believe that we should have to say to--we should
    have a circumstance where a community that has Essential Air
    Service and doesn't lift a finger to make it work, I don't
    believe we should have to be in a situation where we say, you
    can have that service forever. You don't have to do anything.
    You can reduce to one or two passengers a day and do nothing to
    try to promote that service and by the way, we'll just look the
    other way.
        So I think all of us that fund the Essential Air Service
    Program need to say to communities, this is part of your
    responsibility as well. This is not a given forever. If you do
    nothing to enhance that service and you basically ignore the
    presence of that service, you could end up losing that service.
        Having airline service for these small communities is an
    important part of their future economic development
    opportunities so I think there needs to be a partnership here
    between the communities and the Essential Air Service Program.
        With respect to the Small Community Air Service Development
    Program, I want to understand how that's working and whether
    that's working. We had an experience in North Dakota that had a
    startup airline. That's now shut down, as I understand it. I've
    been seeking information about what happened to the money. I'm
    not suggesting we shouldn't be doing all kinds of experiments
    to find out what works and how it works but I think it's
    important for us, because we've committed a lot of money, to
    find out what has been the result of the committing of that
    money in this Small Community Air Service Development Program
    and if we find out what the results have been then we can
    better tailor our future approaches.
        I think there is an inherent conflict going on and it's
    going to get much worse. The conflict is this: We have the
    larger legacy carriers that have a hub-and-spoke system. They
    go out to a spoke--Mr. Courtney, they come to your area as a
    spoke and carry you into a hub and then move you on in their
    system in the hub.
        Then we've had the growth of point-to-point carriers and
    the hub-and-spoke legacy companies have wanted to change their
    business model some and so many of them have gone through
    bankruptcy to strip assets and they're now coming out of
    bankruptcy and are shrinking capacity. They are, I think, one
    of you said that airports with three to six daily flights--
    that's a town of 50,000, maybe 100,000 people, three to six
    daily flights, a 33 percent decline in departures. We're
    experiencing that all across the country with those small
    communities. This isn't EAS. These are other communities that
    are larger than EAS.
        That's a serious problem. And the hub-and-spoke and the
    point-to-point are in basic conflict and if the legacy carriers
    that have created the hub-and-spoke system no longer have a
    commitment to the spoke and want to dramatically reduce
    departures, downsize the aircraft and so on, we will continue
    to see a diminished capability of providing service to smaller
    cities in this country and the inevitable result will be an
    exacerbated problem of parts of this country having wonderful
    air service with great equipment and many different pricing
    capabilities of lower prices and more alternatives with respect
    to schedules and then we'll see a whole tier of other
    communities and I've got them in North Dakota. I mean, Minot
    and Bismarck and other communities--Grand Forks, Fargo, where
    you will see, I think, diminished airline service.
        I know that the carriers will say, no, that's not where
    we're headed but look at the facts. I think the airline system
    in our country is experiencing serious problems in any event.
    This morning, I saw the report that 30 percent of the
    departures on airlines in this country were late departures. I
    believe that was the past month. Mr. Steinberg, do you know
    when that is for?
        But at any rate, 30 percent late. The system is being
    stretched. Air traffic controllers--we've got lots and lots of
    problems and I know that this hearing is about one slice of
    that and that is, the Essential Air Service issue, the Small
    Community Grant Program and what we do to try to make sure that
    continues to work. But I think if we do that in isolation
    without understanding the inherent conflict of what's happening
    between the hub-and-spoke system created by the legacy carriers
    and their need now, to compete with the point-to-point carriers
    and what that's going to mean to communities--we, it seems to
    me, we're going to end up here with quite a mess on our hands.
    So I'm not suggesting I know all of the answers but I certainly
    think we need to confront this basic problem.
        Mr. Courtney, what--is it Lynchburg, Virginia?
        Mr. Courtney. Yes, sir.
        Senator Dorgan. And how big is Lynchburg?
        Mr. Courtney. Our service area, including the four counties
    surrounding Lynchburg is 220,000.
        Senator Dorgan. That market--100,000, 200,000 that market
    is exactly the market that I think is headed toward trouble.
    With increased or I should say, substantially decreased service
    with lesser equipment and fewer frequencies and higher prices.
        We've done study and after study about the pricing. The
    pricing is unbelievable. I've held up charts in this Committee,
    a chart of Salem Sue, the biggest cow in America. It sits on a
    big hill over Salem, North Dakota and a picture of Mickey Mouse
    and said, do you want to go see Mickey Mouse and visit Disney
    World? Well, here's the cost. Want to go see the biggest cow on
    a hill in New Salem, North Dakota? Half as far? It will cost
    you twice as much. I did that just for effect.
        But it is a fact that if you're in Lynchburg or you're in
    Minot or in dozens and dozens and dozens of places in this
    country, in my judgment, you are being cheated with the fare
    system in this country with the airlines that's not fair to a
    substantial number of the American citizens.
        So at any rate, I agree with Senator Stevens. The Essential
    Air Service is very important. It's a very important program
    and we need to get it right. I was the one that offered the
    amendment in this Committee many years ago that provided
    funding outside of the yearly appropriations process by
    connecting it to over flight fees. So, I mean, I've also paid
    my dues in terms of trying to support this program and make
    this program work.
        This Committee has a lot to do to try to draw a line and
    connect the dots between Essential Air Service between those
    mid-size markets and between the robust, aggressive competition
    that's going on in the major markets in this country that offer
    good service at decent prices for people who are fortunate
    enough to live in those areas. Senator Vitter?

                    STATEMENT OF HON. DAVID VITTER,
                      U.S. SENATOR FROM LOUISIANA

        Senator Vitter. Thank you. I want to thank Vice Chairman
    Stevens also for this hearing and for all of his interest and
    others on the panel for their interest. It certainly affects
    Louisiana. We have many small and rural communities. Right now,
    as we speak, none of those participate in the EAS program but
    that can change monthly. So it certainly will in the future.
        I'm a supporter of that program. I voted for the Vision 100
    Reauthorization Act and certainly look forward to continue to
    work to improve and make that program more robust. I'm also a
    big supporter of the Small Community Air Service Development
    Program and certainly, several significant Louisiana airports
    have participated in that grant program in the past. I think
    Lake Charles, Shreveport, Lafayette, Alexandria, Monroe. So
    count me in terms of my interest and my commitment to improving
    this.
        I wanted to ask a very specific question for obvious
    reasons and I'll start with Mr. Steinberg. One very specific
    situation and interest--this can impact on occasion, is
    evacuation during emergencies like hurricanes, like Katrina and
    Rita. In the last couple years since Katrina, Homeland Security
    has done a lot of additional planning about all sorts of
    things, including air evacuation. I think that has been focused
    on big airports, like New Orleans, big planes. Has there been
    any interaction with you and this program with regard to using
    air assets out of smaller facilities?
        Mr. Steinberg. Thank you, Senator. The Department of
    Transportation, of course, is closely involved with DHS in
    preparing for this hurricane season, which so far, of course,
    has mercifully been not too bad yet.
        We have an ongoing discussion with them about air
    evacuation. To my knowledge, we have not discussed smaller
    airports and smaller aircraft, if that's where you're going
    toward. During the Katrina evacuation, there was sort of a mix
    of both large airlines and then sort of on-the-spot smaller
    aircraft helping out as well.
        What I'd like to do is follow up and see what discussions
    have been had with DHS specifically about smaller airports and
    get back to you.
        Senator Vitter. If you could do that and obviously, it has
    to start with big airports and big planes. I'm not begrudging
    that. But I do think there needs to be some discussion and
    planning with regard to smaller airports as well in terms of
    local communities depending on where a particular hurricane,
    for instance, may be going.
        For the whole panel, does anyone have any reaction to those
    sorts of issues with regard to keeping service in smaller
    communities viable? I just invite anybody's comments.
        Ms. Malarkey. From the air carrier perspective, again, one
    of the significant impacts on smaller communities receiving air
    service are the costs and it's not just the sort of the labor
    costs and the fuel costs but it's also, to some extent, some
    government imposed costs. So we always ask that the Congress
    bear in mind that when--anytime there is an increased cost on
    the carriers that that is something that will drive the fares
    up that it makes continuing that small community air service
    ever more expensive and so we ask that cost increases be made
    with those circumstances in mind.
        Senator Vitter. Ms. Malarkey, are you--you may not be aware
    of it but are you aware of specific discussions and planning
    sessions with regard to your member airlines regarding
    evacuation scenarios?
        Ms. Malarkey. No, I'm afraid that's an area I don't know
    too much about but I will commit to get back to you on that.
        Senator Vitter. Right. Thank you very much. Anyone else?
        Mr. Courtney. Well, I guess for Lynchburg, the ongoing
    issue for us seems to be a downward spiral in terms of service
    levels that have been exacerbated by increasingly higher fares.
    We clearly have a capture--we have a marketplace that has
    little competition and as a result, with the legacy carriers in
    particular, with services that are provided by their affiliates
    that the mainline carriers control all the seats, the schedule,
    the flights. We end up, as I said before, being such a
    relatively small revenue piece of the revenue pie for the main
    airline that we can't get enough attention from them. But this
    spiral that we've had of increasing fares because we tend to
    have a high percentage of business travelers but then as we
    have performed better--I'll give you one example. A while back,
    we had a $60 overall average fare differential between
    Lynchburg and Roanoke that was about 50 miles away, about an
    hour's drive and we went to the airline to try to get them to
    provide some parity. We also, at the same time, were realizing
    that our passenger load factors had gone up to 70 percent.
        Well, when we went back to the airlines to try to get them
    to reduce--to add service because of the response of the
    marketplace and increase in service, despite the higher fares,
    they just raised their fares even more. We've seen that over
    and over again.
        And also, I realize there's cost from our standpoint in
    dealing with airline planning departments, costs that are
    always a factor for the airlines. But when it comes to planning
    decisions, I've found that they don't use costs at all when it
    comes to making a decision on whether to provide service to my
    airport because we already tend to be a very high revenue
    airport for them.
        This Catch-22 that we're facing right now is what is really
    frustrating. When we were told by Delta Airlines, the Delta
    Connection that they were going to reduce one of our three
    daily departures, our three daily RJs to Atlanta, despite the
    loads we were generating, they said that we're not generating a
    high enough average of passengers to match what they are doing
    system-wide. For instance, they're doing system-wide load
    factors of 80 percent. Ours are in the upper 60s. But of
    course, we can never attain 80 percent because as soon as we
    get into the 70s, they raise fares and it brings the load
    factor right down so we're caught in a Catch-22 here that
    results in a spiral.
        We'll be down to six flights per day. Now granted, after
    September 11 or before September 11, we had 19 daily
    departures, a lot of 19-seat aircraft. We have RJ service and
    we have 37 to 50 seat turboprop aircraft now, so much better
    quality. But we'll be down to six flights, six daily departures
    as of September. Our seat capacity will be from just under 500
    to 267. We've had such tremendous decrease and I just worry
    that we're going to get in this downward spiral--we can only
    lose so much more before we end up having Delta pull out
    completely and then we'll be stuck with one airline.
        Then, because of equipment challenges, whatever--that we
    may end up going down further. You have to have a basic amount,
    level of service to be able to provide a critical mass of
    service and we're at the bottom now and that's one of the
    reasons I'm here because we need programs like this. We need
    some extra oomph to be able to get the attention. We've had a
    lot of frustration with United Airlines in trying to get
    service to Dulles.
        Under our new grant, $405,000 incentive package, an
    affiliate RA member, Culligan Airways or Culligan Air, has
    expressed interest in taking advantage of that program and to
    add service to Dulles but there has not been sufficient parking
    space at Washington/Dulles Airport.
        And without that space and of course, this is for a 33-
    seat, 30-seat turboprop airplane. When they have constraints on
    parking, it's not going to go to a 30-seat airplane from
    Lynchburg. So we seem to come upon one obstacle after another,
    even though we have a strong, viable, profitable market for our
    size.
        Ms. Miller. Senator, in Columbia, Boone County, Missouri,
    our emergency operation plan does not include the airlines as
    far as evacuation. I also serve on the Senior State and Local
    Advisory Committee for the Department of Homeland Security and
    advise the Department from that perspective and I know Herb
    Kelleher from Southwest Airlines is on the private sector part
    of that. You might want to touch base with him to see what kind
    of interactions have been happening with the Department and the
    airline industry as far as evacuations.
        Senator Vitter. Great. Thank you. OK, thank you. That's all
    I have.
        Senator Dorgan. Senator Snowe?

                  STATEMENT OF HON. OLYMPIA J. SNOWE,
                        U.S. SENATOR FROM MAINE

        Senator Snowe. Thank you and I want thank the panel as
    well. I'm sorry I wasn't able to listen to your testimony here
    this morning because it is a critical issue that we recognize,
    those of us who represent small communities in our rural
    states, that Essential Air Service is absolutely pivotal to
    rural development and to rural economies and even more so
    today.
        As we see the disparities that exist between urban and
    rural areas where we're losing thousands and thousands of jobs
    and that's certainly been true in many manufacturing areas
    where airports become vital.
        We have four Essential Air Service airports in Maine and we
    represent four of the 145 communities across this country. I
    think frankly, there has to be adjustments in our Federal
    policy that's going to make it fairer and reconcile some of the
    issues that I think that will give impetus to growth, economic
    growth in areas and bolstering these local airports. At a time
    in which I think we are seeing a revival in regional jet
    service and very light jets. I mean, we're seeing a revival in
    small aircraft that is going to be central, I think, to the
    economies throughout this country, not just in urban areas.
    Another thing, we should be enhancing and expanding upon it.
        I know this has been a major struggle for a long time that
    as one who has sat on this Committee since I came to the Senate
    in 1995 and even before then, serving in the House for 16
    years, you know, since deregulation and I certainly lived it
    and experienced it since 1978, when I came to the Congress in
    1979. But Essential Air Service was designed to help the rural
    communities to make that transition and so, I think we have a
    responsibility at the Federal level to ensure that we can craft
    Federal policy that's going to help to elevate the under-served
    regions of the country.
        Then as Senator Vitter indicated here today, talking about
    those issues that make a difference and how we can enhance that
    through various initiatives. That's why I'm supporting
    legislation and I'd like to ask you, Mr. Steinberg, because I
    think it is important, to get to some of the specifics about
    these issues that really have handicapped small communities.
        The legislation that I have joined with Senator Bingaman,
    Senator Hagel and Senator Ben Nelson, would provide communities
    with valuable tools that they need to secure their local
    airports. We've seen that the Federal Government has imposed
    passenger caps, subsidy caps through questionable formulas that
    are constantly changing, imprudent cost sharing requirements,
    which we fought consistently. Our bill would eliminate the long
    un-enforced cost sharing requirements and also to inject some
    reality with the passenger subsidy CAB, indexing it to
    inflation, which we think is critical. Recognizing that a $200
    passenger CAB really does inhibit small communities because it
    doesn't adjust for, for example, aviation fuel growth.
        We've seen a lot of the legacy airlines that are
    consolidating and merging, losing their profitability because
    of the soaring costs in aviation fuel. So that certainly is an
    indication to me of the impact it's having even on smaller
    aircraft and smaller airports.
        Also, to solidify the manner in which we deal with the
    communities who must deal with the subsidy cap, with having
    more of a sliding scale other than the fact of you--if you come
    one under the $10,000 enplanement, you get a $150,000. If you
    go $10,000 beyond, you get a million dollar subsidy from the
    Federal Government. It seems to me we should have some type of
    middle ground.
        So, Mr. Steinberg, is the Administration prepared to accept
    any of these types of changes to modify existing laws, since
    for example, on the subsidy CAB, there has been no change since
    1990?
        Mr. Steinberg. Thank you, Senator. I'd like to answer the
    question this way. First, let me start with what our proposal
    was because we, too, have abandoned, if you will, the cost
    sharing proposal that was put forward in prior reauthorization
    packages and our proposal this year was to limit the program
    not by affecting the individual communities through cost
    sharing but by capping the program in terms of the cities that
    are currently in it would be grandfathered and we wouldn't add
    cities. You know, we're 30 years beyond deregulation and so
    it's hard to argue that a city that might lose service, say
    tomorrow, lost service as a result of deregulation in 1978. So
    we think it's appropriate to cap the program.
        The other thing that we've proposed is to rank cities in
    terms of just how isolated they are from large or medium
    airports and to use whatever funds the Congress chooses to
    authorize and appropriate to us by working down the list from
    the most needy, if you will, to the least needy.
        In terms of the idea of indexing the subsidy to inflation,
    I think you make a good point about fuel costs and the legacy
    carriers. But the fact is that we haven't, as a government,
    chosen to subsidize legacy carrier fuel costs and the fuel
    costs going up as much as they did and the inability of the
    legacy network airlines to pass those costs on to their
    customers is--was a major factor in several of the
    bankruptcies. So I think we have to be cautious about
    subsidizing one part of the airline system versus another. A
    lot of subsidies can have unintended consequences.
        I'd also note that the subsidy used to be $300 and Congress
    lowered it to $200, I think in 1989 and so, obviously there was
    some thought at that point that the subsidy did not need to be
    higher.
        Senator Snowe. But you can understand why it would need to
    be changed today?
        Mr. Steinberg. Well, you know, it has a--really, all this
    gets down to basic airline economics. If it's, clearly if the
    subsidy, the cap is increased, our costs will go up. But it's
    also important to note that when costs go down, our subsidy
    payment doesn't go down. That's not the way the program is
    structured. It's a fixed price program. So if fuel were to drop
    dramatically tomorrow, we would not be able to go back to the
    carriers and say, give us some of that subsidy back. So if you
    were going to do that, I think you'd have to really revamp the
    program so the government and taxpayers got the benefit of cost
    reductions as well as having to, if they had to pay for cost
    increases.
        Senator Snowe. So is the Administration prepared to accept
    some changes in the program?
        Mr. Steinberg. I think we clearly indicated our willingness
    to do that by--we tried to put forward a proposal this year and
    like I said, it did not go down the cost sharing route. We
    welcome the opportunity to work with the Congress on something
    that works better. Whatever amount you choose to fund the
    program, we want to make sure it's as effective as possible and
    so, yes. Of course and one other point, if I could, Senator.
        I think several of the witnesses today and Senator Dorgan
    and others on the Committee have talked about the price
    differential between smaller cities and say, Los Angeles, for
    example and that's a fact. I mean, there's no doubt about it.
    But another fact is that as our network airlines have lost so
    much money over the last several years; they had to reduce
    service. So the phenomenon that goes on say, at a Lynchburg
    can't be looked at just in isolation.
        When Congress deregulated the airline industry, it told us
    to do a bunch of things at the same time. One was to lower
    fares. But another was to ensure comprehensive service to small
    communities and a third was to ensure that well managed air
    carriers--and this is a direct quote, ``earn adequate profits
    and attract capitol.'' Well, those things are all interrelated.
    When you have well managed air carriers that don't make
    adequate profits and file for bankruptcy, then of course as
    they go through that process, they start pulling down the least
    profitable service, which very frequently is at smaller
    communities.
        So these problems need to be looked at in a comprehensive
    way. If you just address one part, you're going to inevitably
    mess up another.
        Senator Snowe. The whole idea of the isolated proposal you
    were suggesting with the 210 miles, is it? I mean, that would
    basically eliminate three of our four Essential Air Service
    airports in Maine. I just think that that is discriminatory,
    frankly, in the rural areas. It's in the Federal Government's
    interests to ensure that there is viability of these smaller
    airports.
        Mr. Steinberg. I certainly agree with that.
        Senator Snowe. It's far different than where we were 30
    years ago and 25 years ago, even 10 years ago that we're seeing
    that this service is absolutely crucial to the survival of
    rural regions of this country and I think the Federal
    Government has to make its mind up and is prepared to support
    it. I mean, we're not giving an abundance of support here.
        Mr. Steinberg. I think it's a question of how the support
    is provided and going to the point you made earlier, which I
    thought was very salient. With the smaller aircraft coming
    online, this is something I said in my opening statement, I
    think there is some promise, frankly, for better non-subsidized
    service that meets your needs and the needs of folks that live
    in rural America.
        Senator Snowe. Well, thank you. Thank you, Mr. Chairman.
    Thank you.
        Senator Dorgan. Thank you. Senator Thune?

                     STATEMENT OF HON. JOHN THUNE,
                     U.S. SENATOR FROM SOUTH DAKOTA

        Senator Thune. Thank you, Mr. Chairman and I thank Chairman
    Rockefeller and Senator Lott for holding this hearing. I happen
    to agree that safe, reliable and affordable air service is
    vital for doing business in states all across this country and
    in rural states like South Dakota. Our state's aviation
    industry shortens the long distances from point to point and
    contributes about $52 million annually to our economy and an
    integral part of aviation in my state of South Dakota is
    Essential Air Service Program. We have four communities that
    participate in the EAS Program, Pierre, Huron, Brookings and
    Watertown and that EAS Program hasn't seen any major change
    since its inception after airline deregulation and I know that
    as I said, mine is not the only state that's affected by this
    or would be impacted by any proposed changes.
        I have a couple of questions that I would like to get at
    that are specific to the situation in my state and then maybe a
    couple of questions that are more general.
        But as you may or may not know, I introduced legislation
    earlier this year that was included in the FAA Reauthorization
    that passed out of the Committee. It extends the provision,
    Section 409 of the 2002 FAA Reauthorization, commonly referred
    to as Vision 100. What is does, is the provision ensures that
    certain mileage calculations that determine EAS program
    eligibility are not simply measured by someone here in
    Washington, D.C., but in fact, certified by state Governors.
        There are, of course, budgetary strains, as we all know on
    the Essential Air Service Program but I believe we should be
    focusing on strengthening the program and examining the air
    service it is supporting to make sure it's truly essential and
    today's hearing, of course, is part of that effort. But we
    shouldn't allow people behind a desk in Washington, D.C. to
    surreptitiously use mileage determinations to cut the costs of
    the program and reduce air service in the process.
        The specific example I'm referring to in my state is
    Brookings, South Dakota. It's a community that would more than
    likely have lost its commercial air service if this provision
    was not in place 5 years ago. So I hope that we can get that
    provision extended again in this reauthorization process so
    communities like Brookings don't lose their air service in this
    manner.
        I guess the question I have is if any of the witnesses have
    any comments on the distances used in the Essential Air Service
    Program. As you know, an EAS community must be more than 70
    miles from a large or medium hub airport and if they are more
    than 210 miles, then the subsidy can be over $200 per
    passenger. Do those distances still make sense? Should there be
    any changes? And again, I would come back, hearken back to the
    way this was constructed 5 years ago and that is that the
    Governors would be in a position to certify some of those
    mileages because if it's left to the FAA here in Washington,
    they will find, somehow using back roads and trails, a shorter
    distance from Minneapolis to Brookings to fit under the 210
    mile distance.
        But that being the case, again, I just pose that question
    of our witnesses--comments on the distances, do those distances
    still make sense and could you give us your thoughts on that,
    I'd appreciate it.
        Ms. Malarkey. Senator, I'd like to address your first
    comment about the state determined distances versus the FAA
    determined distances and just thank you for bringing that to
    our attention. You have our support on that. We believe that is
    appropriate and we support you in your efforts to continue that
    provision.
        In terms of the mileage, the distances that determine the
    eligibility, we don't have a position on that, other than to
    say that we realize that the program has not been re-examined
    since its inception and at some point, some redrawing of the
    distance criteria may be appropriate. But in doing so, we want
    to caution that first off, any point that is eliminated, any
    revenues that are saved by that, be put back into the program
    to ensure the revenue neutrality so we don't have politically
    driven reasons of eliminating routes and then just to cut the
    funding for the program.
        Second, we would like to have some sort of a setup like a
    BRAC or something like that, that would ensure the fairness of
    those points.
        But again, we would much rather have sort of an informed
    process that looks at this rather than having DOT cut the
    points by a crisis of funding.
        Senator Thune. Anybody else? Here, come on up.
        Mr. Steinberg. If I could comment on it. We are, of course,
    aware of the situation with Brookings and I just want to point
    out a few things. One is that, of course, the legislation that
    you referred to covered, in effect, not just Brookings but some
    other cities as well and those cities are sometimes held up to
    me as examples of the EAS Program perhaps not being as well
    focused as it should be.
        So for example, Hagerstown, Maryland is covered as a result
    of that legislation--you know, when my wife and I drive there
    to the shopping outlet mall, so it's not all that far from--
    it's a very different situation, if you will, from what you
    have in your state. So I think our concern about that
    legislation is frankly, more directed to other places.
        Generally speaking, we don't actually do this
    surreptitiously that the map is simply a calculation of driving
    distance, shortest driving distance and you can go to Mapquest
    or Google Maps or whatever and it is what it is. It's very
    factual. If you go to a system in which you look at the most
    commonly traveled route, that to me, becomes much more
    subjective and at the end of the day, I think from a consumer
    perspective, most people are concerned about their time as
    opposed to the number of miles that they travel. So as we've
    added new highways and so on and they may be a bit longer but
    they may have shorter driving time.
        Fundamentally, it's up to Congress to decide ultimately
    what the right cutoff should be. By definition, all of these
    cutoffs are arbitrary. So if it's 200 miles, you're going to
    affect some cities. If it's 210, you're going to affect others.
    That really is a--it's a decision that needs to be made by the
    Congress. We've put out a proposal that would stick with the
    210 but again, we're not trying to do this in a surreptitious
    fashion. We've not singled out any specific cities. But
    whatever changes we make, I think, need to go to the
    fundamental issue of what--how many cities do we want to cover
    overall.
        Senator Thune. Anybody else have any comments on that? No?
    That covers the subject?
        Well, I think the concern, of course, that we have is that
    the Governor in 2002--the Governors were given discretion to
    determine whether or not--whether these distances fell within
    the allotted--and I'm not sure how you came up with 210 miles,
    what the magic is behind that but in the Act that we passed in
    2002 and I was a member of the House at the time, the Governors
    had the authority to make judgments about certifying those
    distances and I think the concern is that under a scenario
    where that's not the case that someone here might decide to
    construct a different route between two communities that would
    come up with a different mileage. I think that's what the
    concern obviously is and so, my hope would be that we at least,
    in terms of who makes that determination, would allow the
    Governors to continue to be controlling in determining
    distances and whether or not a particular community is going to
    fall within or outside of the 210 mile limit.
        Let me ask just more generally with regard to the EAS
    Program. There are a number of communities in that program are
    now about 150 and I guess--is that number continuing to grow?
    And as we see more communities coming in to the Essential Air
    Service Program, are we seeing an increase in the number of air
    carriers serving EAS communities? Why or why not and what
    changes could we make to the EAS Program that would increase
    the attractiveness this program would have toward smaller air
    carriers? And I guess Mr. Steinberg, Ms. Malarkey, whoever
    would care to comment on that.
        Ms. Malarkey. I think it's a certainty that in the coming
    years that additional communities will be added to the EAS
    roles. Mr. Courtney discussed the situation--at his community--
    we don't see his community going into the EAS Program in the
    next few years, not to worry. However, his comments did
    illuminate the situation and as I said in my opening statement,
    not just the EAS communities but the smallest communities are
    losing their air service and any community, really, can become
    an EAS, as you all know, simply by getting down to one carrier
    that wants to exit the market. So yes, to answer your first
    question, that is something that we see.
        One of the significant market--the barriers to market entry
    that I talked about in my statement is the inability to finance
    the aircraft. We get a lot of questions from Senators and from
    communities that say, why aren't there any new EAS carriers,
    new entrant EAS carriers and one of the reasons is, a 2-year
    contract is a relatively short contract and when the carriers
    are trying to secure financing for aircraft, that is a
    significant detriment. So that's why we were pleased with the
    initial enthusiasm that this Committee has shown. I think
    there's a statement in the FAA reauthorization that would
    extend those contracts and we think that's quite important.
        Mr. Steinberg. Can I add to that? Senator, it's a good
    question and it's something that troubles us a lot, the growth
    of the program because clearly, the program was intended to be
    a stopgap or safety net after deregulation. It wasn't intended
    originally to be a permanent fixture and the hope was that the
    marketplace would work better than it has worked for smaller
    communities.
        If you exclude Alaska and Hawaii, in the last 10 years or
    so, the program has grown 50 percent in terms of the number of
    cities covered, from about 60 to about 100 and the cost of that
    has quadrupled from about $23 million to about $90 to $100
    million.
        And why has that happened? Again, I think it's the same
    phenomenon I spoke of earlier, which is the service to small
    communities' works when you have large network airlines that
    can profitably serve those spokes, that ultimately what you
    want is not a subsidized service. You want good, commercial
    service at reasonable rates.
        As our network carriers have hemorrhaged money, they've--
    it's not that they don't want to serve smaller communities.
    They just--they do this on a network basis so they look at
    which city contributes the most to the network, which
    contributes the least and the fact is, they can make more money
    or lose less money serving larger markets.
        Probably the single most important thing you could do if
    you wanted to increase service to smaller communities is to
    have a healthy network airline industry. Today, we don't have
    any airline that serves every point in this country, so we
    don't have comprehensive network airlines. We have six or so
    smaller network airlines. So that, to me, is the nub of the
    problem. We'll never get out of this problem that we're in
    until we address that.
        The program has not grown dramatically in the last year. I
    think it's stabilized and we've had several communities
    actually come out of EAS, particularly in Hawaii. So right now,
    it's still about 145 cities. But again, we're now in a
    situation where the airlines are breaking even. Some of them
    are making some money. The next downturn, I think you'll see a
    return to the same situation. That's the problem that needs to
    be addressed.
        In terms of the length of the contract terms, we've
    actually had carriers tell us that they want the shorter terms
    so some of this is driven by what the participants want. The
    downside, if you change the contract terms and say, the
    Secretary shall have 4 year contract terms, yes, you might get
    more bidders on the front end but then if service declines or
    your communities are not happy with the service, it makes it
    harder for us to get some more competition in there. So there
    is a tradeoff if you go to longer-term contracts.
        Senator Thune. Thank you.
        Ms. Miller. Senator? I'd like to say, I believe that if
    there was dedicated funding for this program, guaranteed, it
    would help the market also. It would give other carriers the
    confidence that should they bid in this market, the EAS market,
    that the funding would be there for a long-term program,
    whether it's this community or another community, if this
    community is able to succeed without EAS service.
        I just want to give you an example. When I was President of
    the National Association of Counties, I traveled all the time
    out of Columbia, Boone County. I got home. I was 10 minutes
    from home and now I'm 2 hours from the St. Louis Airport. But--
    and it was $60 round trip, connecting to American Airlines.
    Today, it's $69 one way and they were trying to go to St. Louis
    and it was a different concourse so you had to re-screen to go
    back in through to connect to American so consequently, that
    hurt our enplanements and we have found that we were having an
    hour to 3-hour delay on flights and we're not a destination
    airport and they were going to a hub and when you're trying to
    connect and you're an hour to 3 hours late, you're going to
    lose people that even try to use the service.
        That's why in my testimony, I thought, it's very important
    that we put some incentives in the program for increasing the
    service to those communities so that people can be confident
    when they book in an EAS community like my own right now, that
    that airline is going to meet the demand, they're going to be
    there on time, they're going to get them to their connection.
        And there should be penalties. They should not be paid when
    they are 3 hours late and they miss all the other flights and
    you might even have to spend the night in a lot of places, to
    catch the next flight because there might be only one more out
    of that hub.
        So I think it's really important that we improve the
    service but I also think that a dedicated funding source will
    enhance the opportunity for maybe more airlines to get involved
    in this.
        Senator Thune. Just one last question, quickly, if I could
    and this would be, I guess, to Mr. Steinberg. What is the on
    time, the delay, the cancellation rate for Essential Air
    Service providers, carriers relative to the industry as a
    whole?
        Mr. Steinberg. I don't have that at the tip of my tongue. I
    can tell you, because we did look into this in advance of the
    hearing that there are relatively more complaints from
    passengers on EAS carriers than non-EAS carriers, recognizing
    however, that you're dealing with a very small overall number.
    So roughly--last year, I think there were roughly 60 complaints
    about EAS service, about 8,500 on commercial services. If you
    did the math, it's a much higher ratio of complaints. My guess
    is that given our experience generally with complaints, most of
    them have to do with delays and cancellations. But we can--to
    the extent we have that data, we can get you what we have. Some
    of the carriers are too small to fall under our reporting
    requirements but we do have about five carriers or so that are
    covered. But we can take an IOU and get back to you on that.
        Senator Thune. I'd be interested in knowing. Thank you.
    Thank you, Mr. Chairman.

                     STATEMENT OF HON. MARK PRYOR,
                       U.S. SENATOR FROM ARKANSAS

        Senator Pryor  [presiding]. Thank you. Any other Senators
    have any questions? Any follow-ups?
        We have some Senators who could not attend today because of
    the busy Senate schedule and other committee meetings and other
    conflicts, so we'll give Senators 15 days to submit questions
    in writing. I may submit a few myself. I was late getting here
    but thank you all. I want to thank the witnesses. Your opening
    statements will be included as part of the record and I assume
    if you have any other documentation you want to include,
    without objection, we'll include that as part of the record as
    well. But I want to thank you all. Obviously, Essential Air
    Service is something that is very important to a lot of
    Senators. It's important in my state and you heard just a
    little taste of it today. From what we hear from our
    constituents and from our colleagues about the value of
    Essential Air Service, so I just want to thank you all for
    being here and appreciate your patience and your time. Thank
    you. The meeting is adjourned.
        [Whereupon, at 11:34 a.m., the hearing was adjourned]

                                A P P E N D I X

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

        As we all know, small and rural communities are the first to bear
    the brunt of bad economic times in the aviation industry and the last
    to see the benefits of good times. Unfortunately, we all know, the good
    times in the commercial airline industry have been infrequent and
    short.
        The Government Accountability Office has confirmed that despite the
    return to pre-September 11th levels of passenger traffic at medium and
    large communities small and rural communities have not seen a
    corresponding increase in air service levels.
        The restructuring of the airline industry over the last 5 years has
    forever changed the way we must think about small community air
    service.
        How to address small community air service needs has been a
    pressing question since airline deregulation almost thirty years ago.
    West Virginia, like most of the states represented on this Committee,
    has far less air service today than it did prior to deregulation.
        At present, we rely on two key programs, the Essential Air Service
    (EAS) program, which provided subsidized air service to communities
    under certain conditions and the Small Community Air Service
    Development Program, which I helped create in 2000. This program
    provides grants to communities to develop innovative strategies to
    improve their air service.
        The EAS program has always been a critical air service link for
    small communities since its inception, but it has never really met the
    true needs and expectations of rural air service. Communities that are
    dependent upon EAS have been plagued by high fares and limited service
    options, and in Congress it has been threatened by some Members who
    look at it is a Federal giveaway.
        The Small Community Air Service Development Program has been
    successful in helping communities across the country build and expand
    their air service options. For example, in my state, Greenbrier Valley
    Airport and Raleigh County Airport were able to boost their passenger
    levels by 27 percent after using their Small Community Air Service
    Development grant to initiate innovative marketing strategies to
    attract passengers.
        In the 2003 FAA Reauthorization and again in S. 1300, the Aviation
    Investment and Modernization Act of 2007, Senator Lott and I have
    worked to strengthen our small community air service programs. I am
    pleased that in S. 1300 we were able to find a way to increase funding
    levels for these programs and actually guarantee some of the funding
    increase for the EAS program.
        I know that the DOT believes that new models of providing air
    services such as on-demand or air taxi services may change the way
    small and rural communities receive air service. I know that some of my
    own airports believe this as well.
        I certainly want to foster as many options as I can for small
    community air service and hope that they will transform the way my
    communities access the national aviation system, but we must be
    realistic.
        Right now, these services do not exist for small and rural
    communities. They are not a substitute for scheduled passenger services
    and will not be for some time to come. We need a strong financial
    commitment in the immediate future for our current programs.
        Finally, we must not forget that without a Next Generation Air
    Traffic Control System that allows for increased capacity at our
    Nation's busiest airports, we can never increase access to the Nation's
    aviation system for small communities.
        I have heard unsubstantiated complaints that the $25 fee that was
    included in the FAA Reauthorization bill could hurt small community air
    service, but nothing is farther from the truth. Without it, our
    communities will not have access to the Nation's aviation system. I am
    committed to working with Senator Lott and our colleagues on the
    Finance Committee to develop a fair and equitable financing system that
    will make air travel less expensive for rural consumers.
                                     ______

                Prepared Statement of Regional Aviation Partners
                     Small Community Air Service in Crisis

    Air Carriers Opting to Abandon Essential Air Service Markets Due to
            Unstable and Increasing Jet Fuel Costs and the U.S.
            Department's Failure to Implement Key Provisions of Vision 100
            to Compensate Carriers for Cost Increases
        In 1987, 51 air carriers provided subsidized air service under the
    Federal Essential Air Service (EAS) program, by 1995 the number of
    participating carriers had dipped dramatically to 17, and by 1999 the
    number had been further reduced to 11. While the number of carriers
    serving subsidized markets rose to 16 by 2004, the increase was short
    lived as participating carriers have steadily been exiting the program
    since then, leaving the EAS program with only 8 remaining carriers
    today responsible for serving 102 communities in the continental United
    States.
        The primary reason carriers are choosing to leave the EAS program
    or significantly reduce their exposure to the program, and moreover,
    the programs inability to draw in new carriers, is rooted in the
    inherent risks of serving small markets and the government's failure
    thus far to adequately mitigate those risks. Specifically, today's
    risks involve jet fuel costs which have risen exponentially and
    increased so dramatically that the projected costs used by carriers to
    bid on EAS communities are commonly exceeded by the time the carrier
    initiates service or shortly thereafter.

    Section 402 (Adjustments to Account for Significantly Increased Costs)
            of Vision 100
        In Vision 100,\1\ Congress established Section 402 (Adjustments to
    Account for Significantly Increased Costs) as a means of compensating
    EAS carriers during the contract period for unforeseen and significant
    increases in operating costs primarily based on fuel costs alone.
    However, the DOT has repeatedly stated ``it lacks specific funding and
    guidance from Congress'' to implement the provision. And for the few
    carriers who did apply for the relief, the eligibility criteria
    provided under the provision proved to be illusory, ambiguous and
    unattainable.
    ---------------------------------------------------------------------------
        \1\ Vision 100, The Century of Aviation Reauthorization Act (Pub.
    L. 108-176)
    ---------------------------------------------------------------------------
        One of Section 402's primary faults lies in the provision's
    requirement that carriers demonstrate a [10 percent total unit cost]
    increase over a period of at least two consecutive months. This total
    unit cost increase is measured against those costs included in the
    carrier's bid proposal. While individual unit costs have increased
    significantly, jet fuel for example has risen more than 129 percent,
    from $0.96 per gallon on January 5, 2004 to $2.20 per gallon on July
    31, 2007; \2\ this increase has not translated into an increase in
    total unit costs of 10 percent. Thus, while carriers continue to
    experience significant losses from individual unit cost increases,
    primarily jet fuel costs, the 10 percent total unit cost trigger is not
    met based on the DOT model.
    ---------------------------------------------------------------------------
        \2\ Vision 100 was enacted on December 12, 2003. January 2004
    represents the first full month after which Vision 100 became law.
    January 5, 2004 was the first day in which the U.S. Department of
    Energy recorded a spot price for U.S. Gulf Coast kerosene type jet fuel
    in 2004.
    ---------------------------------------------------------------------------
        This Situation Is Wholly Unacceptable to Air Service Providers--the
    trigger mechanism is virtually unattainable and results in massive
    paperwork challenges for the carrier which serves to deter anyone from
    applying. It is clear this was not the intent of Congress in passing
    the Section 402 language.
        As a direct result of the Department's steadfast reluctance to
    implement Section 402, 8 carriers such as Scenic Airlines have been
    driven from the program. Scenic states in its 90 day termination
    notices of May 16, 2006 for Merced and Visalia, CA, and Ely, NV: \3\
    ---------------------------------------------------------------------------
        \3\ DOT Docket numbers: OST-1998-3521, OST-2004-19916, and OST-
    1995-361.

            ``Scenic's need to terminate service at Merced [Visalia; Ely]
            stems primarily from fuel cost escalations that have undermined
    ---------------------------------------------------------------------------
            the economic viability of the carrier's EAS operations.''

        Allowing DOT to continue its ``discretionary'' authority to
    implement vital changes in legislation has a ``0 percent'' success rate
    and never results in relief for the impacted community or air carrier.

    Ninety-Day Termination Notices as a Means of Seeking Compensation for
            Increased Costs Are Disruptive to Air Carriers and Small
            Communities
        Notwithstanding the passing of Section 402 (Adjustments to Account
    for Significantly Increased Costs) legislation in Vision 100, the DOT
    has stated publicly they do not have the funds to implement the
    provision. Therefore, the only current recourse EAS carriers have in
    regards to halting losses from significant increases in jet fuel costs
    during the contract period is to file a 90-day notice to terminate air
    service at an EAS point. This process is disruptive and burdensome for
    several reasons:

            1. The process exposes the incumbent carrier to the potential
            loss of market(s) as the DOT re-opens the bid process to all
            carriers. As many EAS carriers depend solely on revenues
            derived from their EAS markets to stay in business, these
            carriers are reluctant to file to terminate service even if it
            means operating at a loss in these markets to the point of
            insolvency or even bankruptcy.

            2. The process is lengthy. Once an air carrier files to
            terminate service, the DOT initiates a hold in period during
            which they do not immediately increase the subsidy amount to
            reflect increased costs.

            3. Community support for the air service can be diminished.
            Residents may see a carrier's 90 day termination filing as a
            sign of unreliable air service which could lead them to drive
            to other nearby airports. Furthermore, fewer passengers flying
            out of the EAS airport leads to higher annual subsidy amounts
            and higher per passenger subsidy rates, potentially resulting
            in the termination of air service by the DOT.

    Prior and Current DOT Policies With Regards to Fuel Cost Increases and
            Adjustments
        During the 1980s and into the early 1990s, the Department
    implemented a policy which recognized the detrimental effects increased
    jet fuel cost had on carriers and compensated EAS carriers for these
    costs. For example, Civil Aeronautics Board (CAB) Order 82-5130,
    Selecting Essential Air Service Carriers for Modesto and Stockton, CA
    included the following statement regarding fuel cost adjustments: \4\
    ---------------------------------------------------------------------------
        \4\ The CAB also included in Order 82-5-130 a schedule to be
    completed by the EAS carrier providing detailed information on: billed
    available miles, gallons of fuel used per month, actual cost per
    gallon, rate cost per gallon, monthly fuel costs, and cumulative fuel
    costs in order for the carrier to receive compensation for increases in
    jet fuel prices.

            ``The attached schedule should be submitted by Air Chaparral
            along with each subsidy billing. The carrier should also submit
            a schedule indicating total cost and total gallons used in
            Stockton and Modesto service for the same billing periods so
            that the actual cost per gallon can be verified. Once the
            actual cumulative fuel cost exceeds the cumulative fuel cost
            paid for by the mileage rate, the Board's Air Carrier Subsidy
            Need Division will arrange reimbursement for 85 percent of the
            difference. In the event that the actual cost does not exceed
            that provided for in the rate, an appropriate adjustment
            reflecting 85 percent of the difference will be made to Air
            Chaparral's rate in the last payment of the first and/or second
    ---------------------------------------------------------------------------
            year.''

        Following the tragic events of 9/11, the DOT once again reimbursed
    EAS carriers for significant cost increases. When expressing their
    concern regarding increased costs on EAS carriers, the impact on
    participating EAS carriers, and what would occur should EAS carriers
    continue to leave the program the Department stated:

            ``. . . those carriers that participate in the EAS program do
            not have the flexibility as non-EAS airlines to adjust their
            systems to reflect the shifts in costs, revenue, and traffic.
            Because they remain under contract with the Department to
            provide a prescribed level of service at EAS communities, they
            have very little ability to eliminate service on unprofitable
            routes, reduce frequencies, downsize aircraft, or contract out
            flight operations in order to reduce loses. . . .

            In absence of some immediate reflection of the financial
            consequences stemming from the events of September 11th into
            these carrier's contracts, we estimate that some could be
            forced to cease operations, thereby vitiating the program
            itself. If this were to occur, scores of small, isolated
            communities could lose all their air service. Moreover, the
            loss of service could be permanent for almost all of these
            communities, as the pool of potential replacement carriers has
            drastically declined owing to their transition to larger
            equipment and to service only in large markets.'' \5\
    ---------------------------------------------------------------------------
        \5\ DOT Order 2002-2-13.

        By the DOT's own admission, they have demonstrated a complete
    understanding of the problem but are now electing to ignore their own
    observations, when they have both the legislative and financial tools
    to address funding fuel cost adjustment provisions in Vision 100.
        Lastly, today, on behalf of the United States Postal Service
    (USPS), the DOT has established a mechanism by which subsidized
    carriers delivering passengers and mail under the Alaska Mainline and
    Bush Mail Program receive quarterly fuel cost adjustments. It is no
    less equitable for carriers who provide vital air transportation to
    small communities in the lower 48 states to be compensated for
    adjustments in fuel costs for which they have no control than it is
    fair, equitable and just for air service providers in Alaska.
    Where Do We Go From Here?
        The future of commercial air service to small, rural communities
    unfortunately does not look promising, that is unless Congress acts
    immediately to properly address the matter of mitigating risks to air
    carriers via fuel cost adjustments. Should Congress choose not to act
    and the status quo be allowed to continue, it is our firm belief that
    within a short period of time there will be less than a handful of
    carriers left in the program. Under such a scenario, Congress can
    certainly expect subsidy rates to increase due to little or no
    competition for individual markets while communities may become
    increasingly dissatisfied with the level and quality of air service but
    will have no recourse as there are no other air carriers to turn to.
        The EAS program was established to protect small, rural communities
    after deregulation. Congress recognized that the benefits of commercial
    air service must not be limited only to those in large, urban areas of
    the country. However, the program will be hard pressed to continue
    without the active participation of financially stable carriers willing
    to serve small communities.
        To avoid what will otherwise prove to be a disastrous situation for
    small communities, Congress must include language in the Fiscal Year
    2008 FAA Reauthorization bill which changes the formula by which
    carriers can apply for and receive relief under Section 402 to focus on
    increases in jet fuel costs, not total unit cost increases and Congress
    must also require the DOT to implement this vital provision of the law.
                                     ______

    Response to Written Questions Submitted by Hon. John D. Rockefeller IV
                          to Hon. Andrew B. Steinberg

        Question 1. Your testimony appears to be predicated on reducing the
    Federal Government's financial obligation to small community air
    service programs. I know that inadequate and unreliable service and the
    use of small turboprop aircraft are two reasons why a lot of people do
    not what to fly from EAS communities. Three West Virginia communities
    (Parkersburg, Clarksburg, and Morgantown) have faced a serious decline
    in traffic due to terrible service from the EAS carrier. DOT has since
    rectified that situation, but it will take years for these communities
    to recover. Has the DOT ever examined the impact of providing
    substantially more in resources to the program so that air service
    would be provided on larger aircraft with more frequent service?
        Answer. We do not think this would be a wise course of action. As
    you know, the typical EAS flight is operated with 19-seat aircraft.
    There have been a few situations where the Department has authorized
    additional subsidy for communities to receive service with larger
    aircraft, including at the three communities that you mention. In that
    case, we authorized a half million dollars more for 30-seat aircraft,
    which the communities favored instead of the 19-seat option. There are
    a few communities where larger (30-seat) aircraft could operate
    successfully.
        For the most part, even 19-seaters are probably too big. The
    average subsidized EAS community generates 6-7 passengers a flight,
    resulting in the planes being only about 35 percent full, and many
    communities generate far fewer passengers than that. About 30
    communities average fewer than 10 enplanements a day. In those cases,
    larger aircraft or additional frequencies are clearly not warranted.
    Indeed, if larger aircraft became the norm, the subsidy per passenger
    might end up exceeding the $200 statutory cap, as airline operating
    expenses would go up.

        Question 2. You state in your testimony that the EAS demonstration
    programs that Senator Lott and I included in the 2003 FAA bill have
    been largely unused. You do not have a clear reason why. Could you
    please explain how the DOT implemented these programs? Did you one
    issue a Federal Register notice? Or did you work with various aviation
    associations and local government groups to find communities that may
    have benefited from them?
        Answer. One of the pilot programs to which you refer is the
    Community Flexibility Pilot Program, which allows up to ten communities
    to receive a grant equal to 2 years' worth of subsidy in exchange for
    their forgoing their EAS for 10 years. The other is the Alternate
    Essential Air Service Program under which, instead of paying an air
    carrier to serve a community as we typically do under EAS, communities
    could apply to receive the funds directly to implement a plan that they
    have developed.
        In the summer of 2004, the Department issued separate orders
    establishing both programs, and published them in the Federal Register
    as well. In addition, the programs were covered in the usual trade
    journals. While we received a few phone calls asking for information,
    no communities have applied. In the case of the Flexibility pilot
    program, a community would have to forego 10 years of guaranteed air
    service for funds that would equal just 2 years of the cost of EAS.
    Most communities evidently would rather retain scheduled air service
    for 10 years rather than money to improve their airport's ability to
    handle general aviation flights. With respect to the Alternate program,
    we believe that some communities are resistant to risk and change.

        Question 3. I have heard from my airports and constituents that one
    of the reasons passengers do not use airports with EAS service is
    because that service is often very unreliable. As you know, these
    communities only have three flights a day, and even if one flight is
    canceled, it causes significant disruptions for passengers. Unreliable
    service also makes it difficult for communities to develop a passenger
    loyalty for using a facility. Does the DOT monitor the reliability and
    on-time performance of air carriers who provide essential air service?
    Does DOT require a certain level of performance from these carriers?
    Does DOT sanction carriers who are not providing the level of service
    as required by the government contract?
        Answer. Reliable service is obviously important for any service to
    be successful. When the EAS program was set up at the Civil Aeronautics
    Board in 1978, care was taken to put incentives in place to encourage
    reliable services. Among those that remain in effect today is the ``no
    fly-no pay'' policy. That is, carriers must operate the flight in
    conformance with the contract in order to receive the compensation.
    (There is a small exception for safety reasons in the case of weather
    conditions that are marginal and the pilot in command elects to overfly
    the community even though conditions may be legal.)
        We have debated penalizing carriers for late flights, but that is a
    ``double-edged sword.'' On the one hand, it would seem to create an
    incentive for carriers to operate their flights on time. On the other
    hand, if the EAS carrier lost part of its subsidy it might cancel the
    flight altogether--raising the question as to whether a late flight is
    better than no flight. In addition, many delays are not the fault of
    the EAS carriers. (For example, EAS flights are more likely to be
    ground held at the EAS community if the connecting hub is backed up due
    to ATC delays because they tend to be short-haul flights, which are the
    first to be grounded.) In those situations, it would seem unfair to
    penalize the EAS carrier.
        From a broader perspective, we have all too few carriers willing to
    participate in the EAS program, and further penalties could only
    exacerbate that situation.

        Question 4. What effects would result from changes in the EAS per
    passenger subsidy cap, either increasing or restricting it in some
    cases? How would these changes affect the EAS program as a whole?
        Answer. Increasing the subsidy-per-passenger cap or having it apply
    to fewer communities would result in having more communities in the
    program for a longer time and raising the costs of the program, which
    is why the Department has opposed such proposed changes. Given airfare
    levels, and just generally, $200 per passenger per one-way flight is
    still a significant sum for a Federal operating subsidy (the round trip
    subsidy for a passenger can be nearly $400). Reducing the level of the
    cap or having it apply to more communities would help keep the costs of
    the program in check.
                                     ______

     Response to Written Question Submitted by Hon. John D. Rockefeller IV
                                      to
                               Hon. Karen Miller

        Question. In testimony at an earlier hearing on this issue, the
    Government Accountability Office suggested DOT provide Essential Air
    Service funding directly to communities so that they would have the
    flexibility to secure the air service options that best fit their
    needs. What do you think of this idea? Do you believe that most small
    communities would be able to negotiate with carriers to develop more
    flexible air service plans?
        Answer. I think that could be an option for those EAS communities
    that believe they have the expertise and legal capacity to negotiate an
    agreement with an air carrier. One area that communities may be more
    successful in negotiating is that relating to performance or
    reliability provisions. Finally, we think it would be important that
    even if a community opted to negotiate with an air carrier, the
    community would have the additional option in the case of an impasse of
    agreeing to let USDOT complete the negotiations.
                                     ______

     Response to Written Question Submitted by Hon. John D. Rockefeller IV
                                      to
                            Mark F. Courtney, A.A.E.

        Question. In testimony at an earlier hearing on this issue, the
    Government Accountability Office suggested DOT provide Essential Air
    Service funding directly to communities so that they would have the
    flexibility to secure the air service options that best fit their
    needs. What do you think of this idea? Do you believe that most small
    communities would be able to negotiate with carriers to develop more
    flexible air service plans?
        Answer. As a non-hub airport serving approximately 120,000
    passengers per year, Lynchburg Regional Airport does not qualify for
    DOT funding under the Essential Air Service Program, and as such does
    not have a position on this specific issue.
                                     ______

     Response to Written Question Submitted by Hon. John D. Rockefeller IV
                                      to
                                 Faye Malarkey

        Question. Do you think these technological advances will lower air
    service costs to the extent that it will actually be economically
    feasible, if not profitable, for regional airlines to provide service
    to small communities without EAS subsidies? Do you think that requiring
    large airlines to code-share on EAS flights would help improve air
    service to small communities?
        Answer. (Witness Failed to Respond).