[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).

                                  
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