[Senate Hearing 113-671]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 113-671
 
                     DOMESTIC CHALLENGES AND GLOBAL 
                  COMPETITION IN AVIATION MANUFACTURING

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

                                HEARING

                               BEFORE THE

       SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY

                                 OF THE
                                 
                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 31, 2014

                               __________

    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 THIRTEENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri           KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK BEGICH, Alaska                  DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut      TIM SCOTT, South Carolina
BRIAN SCHATZ, Hawaii                 TED CRUZ, Texas
EDWARD MARKEY, Massachusetts         DEB FISCHER, Nebraska
CORY BOOKER, New Jersey              RON JOHNSON, Wisconsin
JOHN E. WALSH, Montana
                    Ellen L. Doneski, Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator
                                 ------                                

       SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY

MARIA CANTWELL, Washington,          KELLY AYOTTE, New Hampshire, 
    Chairman                             Ranking Member
BARBARA BOXER, California            ROGER F. WICKER, Mississippi
BILL NELSON, Florida                 ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK BEGICH, Alaska                  TIM SCOTT, South Carolina
BRIAN SCHATZ, Hawaii                 TED CRUZ, Texas
CORY BOOKER, New Jersey              DEB FISCHER, Nebraska
JOHN E. WALSH, Montana               RON JOHNSON, Wisconsin
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 31, 2014....................................     1
Statement of Senator Cantwell....................................     1
Statement of Senator Ayotte......................................     3
Statement of Senator Wicker......................................    37

                               Witnesses

Hon. Mark Kirk, U.S. Senator from Illinois.......................     5
Gerald Dillingham, Ph.D., Director, Physical Infrastructure 
  Issues, U.S. Government Accountability Office..................     6
    Prepared statement...........................................     9
Bertrand-Marc Allen, President, Boeing Capital Corporation.......    21
    Prepared statement...........................................    22
Keith Crane, Ph.D., Director, RAND Environment, Energy, and 
  Economic Development Program; Professor, Pardee RAND Graduate 
  School, Washington Office, RAND Corporation....................    28
    Prepared statement...........................................    30


  DOMESTIC CHALLENGES AND GLOBAL COMPETITION IN AVIATION MANUFACTURING

                              ----------                              


                        THURSDAY, JULY 31, 2014

                               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 10:33 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Maria 
Cantwell, Chairman of the Subcommittee, presiding.

           OPENING STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. The U.S. Senate Committee on Commerce, 
Science, and Transportation Subcommittee on Aviation Operations 
and Safety will come to order.
    I want to thank my colleague Senator Ayotte for helping us 
get this morning's hearing underway, and my colleagues who are 
here, Senator Wicker and especially Senator Kirk from Illinois, 
who is going to be our first witness presenting today.
    I am also pleased that we are going to be hearing from a 
distinguished panel.
    Today's hearing is entitled ``Domestic Challenges and 
Global Competition in Aviation Manufacturing.'' Aviation 
manufacturing is one of America's largest employers, and 
commercial and general aviation industries support over 1.2 
million jobs.
    But these jobs are threatened, if we fail to remain 
competitive. American companies like Boeing and Gulfstream are 
leaders in their respective markets, and they work hard to 
continue to innovate.
    Don't get me wrong, I am all for competition. It drives 
innovation. It creates new models of efficiency. It drives down 
costs to consumers.
    But what we are going to hear about at this hearing today 
are some of the unique challenges American manufacturers face 
as they compete on an international basis, sometimes against 
foreign competitors who are either state-owned or state-
subsidized. And according to one U.S. manufacturer, some of 
these competitions can be as much as up to a 55 percent 
discount on airplanes.
    So while U.S. manufacturers struggle to continue to be 
innovative, they also have to face the fact that sometimes 
these unfair competition issues drag on forever and ever.
    The WTO case against E.U. subsidies of Airbus has dragged 
on now for more than 12 years, and while that time has 
happened, they often face a loss in competitive advantage in 
dealing with various issues.
    According to Ron Kirk, who was the U.S. Trade 
Representative at the time of the WTO ruling on this most 
recent case between Boeing and Airbus, it cost Boeing's market 
share and lost sales of over 342 aircraft.
    So the WTO is unlikely to solve the problem before 
competitors eat into market share or job loss.
    In a recent Finance hearing, Stephen Ezell of the 
Information and Technology and Information Foundation said, 
``When you consider we have lost one-third of manufacturing 
jobs in the prior decade,'' meaning our challenges with the 
downturn of the economy, he said, ``if we don't get our act 
right, we could lose 20 percent to 30 percent more in the 
coming decades. It is not inevitable. It shouldn't happen. It 
doesn't have to happen.''
    That is why we are here today, to talk about everything we 
can do in aviation manufacturing to stay competitive. Because 
of the massive resources required to develop, produce, and 
market commercial airplanes, when we talk about aviation, we 
are often not talking about companies, as far as competition, 
but sometimes talking about actual countries.
    China, as Dr. Crane will tell us in his report, has made 
the creation of national aviation manufacturing a priority and 
has spent billions of dollars to reach that goal.
    Russia is currently selling its own passenger aircraft and 
has signed an agreement with China to develop a wide-body plane 
intended to compete on a global scale.
    Countries like France, Britain, Germany, and Spain, despite 
a WTO ruling in 2012 against the E.U. for giving $18 billion in 
illegal aid, recently continued to support the new Airbus 350 
to the tune of almost $3 billion in launch aid.
    So at a time when everybody is looking at how to compete in 
the marketplace, we have to realize that this marketplace also 
brings a lot of competition that is supported by these 
individual governments.
    The state-owned commercial aircraft corporation of China, 
Comac, enjoys the full support of Chinese government and 
industrial leaders. And next year, Comac's C919, a jet designed 
to compete with the 737, will fly for the first time, with 
delivery starting in 2018.
    While many experts expect the C919 will be behind the 
technology of other products in its class, we know that they 
are going to continue to work on closing the technology gap.
    That is why we need to do everything we can to make sure 
that American aerospace stays competitive. I believe in 
American innovation, but we also need a level playing field.
    We also face our own domestic challenges. We need to 
continue to develop a skilled workforce that manufacturers can 
depend on. We need to make our certification process more 
efficient to allow innovation. We are going to hear from Mr. 
Dillingham about that today. And we also have to make sure that 
while we are improving that certification process, we continue 
our most important mission and focus on safety.
    We also need to continue to make innovation improvements, 
like greener skies and jet fuel issues.
    Finally, we need to reauthorize the Export-Import Bank. 
There are 60 countries across the globe that have credit 
agencies similar to the Export-Import Bank, and many of them 
are more aggressive in the ways that they provide assistance.
    According to a study released this week by the National 
Association of Manufacturers, Japan's credit export agency is 
nearly four times the size of the Ex-Im Bank, while Japan's 
economy is less than half of our size. And over the last 8 
years, China has expanded its export credit authorization by 
867 percent. In 2013, the value of China's export credit 
authorization was five times that of the Ex-Im Bank.
    Now, I want to point out that the United States, because of 
the Export-Import Bank, is part of the Aircraft Sector 
Understanding, an official organization that we will hear more 
about today that really focuses on making sure there is a fair 
focus on cost and expenses, and that they are no more expensive 
than traditional financing. If somehow we got rid of the 
Export-Import Bank, the United States would no longer be a 
participant in the very discussions that some of the critics of 
the Export-Import Bank say that they want to be able on a 
global basis to make sure that there are fair rates competitive 
with the financial ones involved in the financial sector 
overall.
    So I hope that we can address these issues in this hearing 
today.
    I recently visited Gulfstream Manufacturing, and I continue 
to focus on visiting various aerospace manufacturing across the 
United States. This is a very important sector that employs 
many Americans, and we want to keep very competitive in this 
area.
    Now I will turn to my colleague, Senator Ayotte.

                STATEMENT OF HON. KELLY AYOTTE, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Ayotte. I want to thank Chairwoman Cantwell for 
holding this hearing to discuss the challenges facing domestic 
and global competition in aviation manufacturing.
    It is certainly wonderful to see our colleague Senator Kirk 
here today. I look forward to hearing from him, as well as to 
have Senator Wicker here at this hearing.
    According to the Federal Aviation Administration, in 2013, 
the aviation industry supported over 10 million jobs, 
contributed $1.3 trillion to total economic activity, and 
accounted for 5.2 percent of our U.S. GDP.
    Furthermore, air carriers operating in the U.S. airspace 
transported more than 837 million passengers and moved $61.2 
billion revenue ton-miles of freight.
    The FAA released a report earlier this summer stating that 
civil aircraft manufacturing continues to be the top net 
exporter in the United States with a $54.3 billion positive 
impact on our trade balance.
    As someone who strongly supports free trade, I find this to 
be very encouraging for the industry. But we all know that we 
need to continue to be vigilant to ensure that this industry, 
which is so important to our economy, is more competitive in 
this global marketplace with the challenges that we face from 
competitors around the world.
    Clearly, this is an industry that is an important driver of 
our economy in terms of not only the growth of the economy but 
also the creation of jobs.
    In my home state, New Hampshire, we have a very strong 
aviation manufacturing presence. Not only do we have Boeing 
suppliers that create very important jobs for my constituents, 
but we also have four prominent businesses in New Hampshire 
that provide key parts to major aviation companies. I would 
like to highlight them briefly: Cobham Antenna Systems in 
Exeter, New Hampshire; Astronics Corporation in Lebanon; Safran 
Aerospace that has recently opened a plant in Rochester, New 
Hampshire; and GE in Hooksett.
    Each of these companies I have had the pleasure of 
visiting, almost all of them, and they play a very important 
role in terms of what we are seeing. But they have also 
expressed to me, each of them, the challenges they face in 
terms of competition in this country.
    Cobham specializes in air-to-air refueling; audio, video, 
and data communications; defense electronics; and life-support 
and mission equipment. It is a major supplier for the Joint 
Strike Fighter, Boeing 787, and Global Hawk UAV.
    Astronics is a leader in advanced high-performance 
lighting, electronic power, avionics data products, and 
automatic test systems for the global aerospace and defense 
industries.
    Safran is actually a multinational company, and we are 
pleased that they just opened a plant in Rochester, New 
Hampshire, that will really be supporting the aviation 
industry. Safran is going to create 400 new jobs in New 
Hampshire. One of the challenges that Safran has faced that it 
has met in an innovative way is it has partnered with our local 
community college, in terms of getting the trained workforce it 
will need to have these 400 new manufacturing jobs in New 
Hampshire.
    So I think that is a model that we need to look at, too, 
partnering with local colleges to ensure that our workers have 
the training that they need to meet these advanced 
manufacturing jobs that are needed in aviation.
    And, of course, GE's aviation facility in Hooksett is very 
important to our state. They manufacture compressor valves, 
tubes, and airfoils for all GE engine programs, as well as 
build advanced turbo fan engines for the Super Hornet and our 
Growler.
    I had the privilege of touring this facility recently, and 
I very much appreciate what they do in terms of defending our 
Nation.
    As we hear from our panelists today, I will be particularly 
interested in their thoughts regarding what we can do to make 
this industry not only more competitive globally, as we talk 
about things like reauthorizing the Ex-Im Bank, but also to 
understand from you what we can do, thinking about our tax 
code, to ensure that we are more competitive as we compete with 
other countries around the world. The regulatory climate that 
this industry operates in is so important, and ultimately to 
our economy. How that regulatory climate here in the United 
States compares to their global competitors, and how 
competitive that climate is or isn't for the aviation industry 
is so important.
    Finally, I hope that the witnesses will also discuss, 
importantly, the reauthorization of the Export-Import Bank. I 
have previously supported that reauthorization. One thing I 
will say about this reauthorization in and of itself, if every 
government program would return money to reduce the deficit, 
then I think that we would have a lot better time here in terms 
of the trillions of dollars of debt that our Nation is facing.
    I think it would be one thing if other countries around the 
world didn't have an equivalent to the Export-Import Bank, but 
that is not the reality that our companies are facing.
    That said, what I do want to hear from our panelists about 
today, while I support the importance of this reauthorization, 
I would like to hear what types of reforms we do need to 
consider as we debate reauthorizing the Export-Import Bank. And 
one of the things we need to make sure is that our small and 
midsized companies have access to this capital as well to make 
them competitive in the global marketplace, because the reality 
is that many of the businesses in this country are small and 
midsized companies, and we hope that these small and midsized 
companies, if they have more access to capital, will go on to 
be our next generation of larger companies.
    So I would like to hear about that today and what makes 
sense in terms of reforms that can be made to help particularly 
small and mid-sized companies.
    I want to thank all of you for being here today. I look 
forward to hearing from the witnesses.
    And again, I want to welcome our colleague, Senator Kirk. 
It is great to have him here today.
    Senator Cantwell. Thank you very much, Senator Ayotte.
    Senator Kirk, we do welcome you. You come from a very 
important aviation state. Thank you for making time this 
morning in your schedule to talk about how you see aviation 
competition.

                 STATEMENT OF HON. MARK KIRK, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Kirk. Madam Chair, could I deliver my statement 
standing, talking to the board?
    I am surprised that the Senate knows so little about the 
C919. This aircraft is being developed with $29 billion in 
Chinese subsidies for the R&D for the aircraft.
    If you don't recognize this aircraft, it is a competitor to 
the 737, which as Senators, you guys probably always fly, one 
of the best-selling midrange U.S. airliners.
    We want to make sure that just as the C919 hits the market 
in 2018, as we expect, we have an Export-Import Bank to finance 
sales of U.S. aircraft overseas. These days, when you get on an 
airplane for United or American, you are overwhelmingly likely 
to be flying in a made in the USA aircraft. We want to make 
sure that you are not flying China in the future days.
    There are so many jobs associated with civil aviation in 
the United States, as the Chairwoman pointed out. This aircraft 
is now coming on to compete with us. There should actually be 
two aircraft shown on this board. There is a Russian jet coming 
that is called the Superjet that will also compete in the 737 
space.
    I want to make sure that we have the Export-Import Bank to 
take on these competitors to make sure that our U.S. dominance 
of this field is continued.
    So let's keep U.S. aviation going and make sure it is 
always made in the USA. That is very important for Senators who 
are always flying, to make sure you are always in U.S.-built 
and manufactured aircraft that meet U.S. standards. You want to 
make sure that that continues.
    And that concludes my statement. So remember, you guys, the 
C919, it is coming to get us. And this is the time to not stop 
the operation of Ex-Im.
    I will continue for just another moment. These aircraft 
generally sell for between $50 million to $100 million each. 
When we have heard about the discounts that the Chairwoman 
mentioned, sometimes you can get the price down to $50 million 
or $25 million, which would really wipe us out if it is priced 
that low.
    There is a huge supply chain standing behind each one of 
these aircraft. Make sure this is all-American, to make sure 
that we keep going.
    With that, let me conclude my brief on the C919. Thank you.
    Senator Cantwell. Thank you, Senator Kirk.
    Could I just ask you, what do you think the impact is in 
the state of Illinois?
    Senator Kirk. In the state of Illinois, we have about $175 
million in exports, which are funded by Ex-Im Bank, with over 
100 companies.
    Senator Cantwell. Thank you.
    Anybody else, questions for our colleague?
    Senator Kirk. I expect to get your votes, guys.
    [Laughter.]
    Senator Cantwell. As they say, a picture is worth a 
thousand words, so thank you very much. You have painted a very 
precise picture this morning.
    Senator Kirk. Thank you.
    Senator Ayotte. Thank you.
    Senator Kirk. Thanks, guys.
    Senator Cantwell. OK, we will now hear from our second 
panel. We are going to hear from Dr. Gerald Dillingham, Ph.D., 
Director of Civil Aviation for the U.S. Government 
Accountability Office; Dr. Keith Crane, Ph.D., Environmental 
Energy from the RAND Corporation; and Mr. Marc Allen, 
President, Boeing Capital Corporation.
    So if all those witnesses could join us up here, we would 
appreciate it.
    We are going to start with you, Mr. Dillingham.

             STATEMENT OF GERALD DILLINGHAM, Ph.D.,

           DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Dr. Dillingham. Thank you, Madam Chairwoman, Ranking Member 
Ayotte, and members of the Subcommittee.
    We have conducted several reviews examining the efficiency 
of FAA's aircraft certification and approval processes, and 
industry's concern about inconsistent regulatory 
interpretation.
    FAA has implemented several initiatives to address these 
longstanding issues, but these issues persist.
    Congress established requirements in Section 312 and 313 of 
the 2012 FAA Reauthorization Act to spur additional action on 
these items. In response to those requirements, FAA chartered 
two rulemaking committees, one on the aircraft certification 
process and another on the consistency of regulatory 
interpretation.
    Both committees produced a series of recommendations to 
assist FAA in addressing these issues. My statement today 
focuses on, one, FAA's progress in implementing the 
recommendations of the two committees; and two, the challenges 
that could impede the successful implementation of the 
recommendations and how these challenges might be addressed.
    Regarding the certification process recommendations, FAA 
has established 14 initiatives to address these 
recommendations. These initiatives include developing a 
comprehensive roadmap of major change initiatives, improving 
the project sequencing process, and updating the aircraft 
certification regulation.
    Most of these initiatives are scheduled to be completed 
within the next 3 years. However, FAA has established 
performance metrics for only five of the 14 initiatives, and 
has not developed metrics to measure the overall effectiveness 
of the collective efforts. These metrics are essential in 
helping FAA and the industry determine whether these 
initiatives are leading to improvements.
    Moreover, although several initiatives are said to be on 
track, we are concerned that FAA expects to miss milestones for 
two of the most important, critical recommendations due to 
concerns raised by the unions representing inspectors and 
engineers. Missing these milestones increases the risk of 
delays in schedule implementation of the initiatives.
    Turning to the regulatory consistency recommendations, FAA 
has begun implementing these recommendations. In its July 2013 
report to Congress, FAA included a preliminary plan for 
implementing these recommendations.
    FAA has also indicated that its final plan would include an 
implementation strategy, assign responsibilities to individuals 
in offices, and establish milestones and measures of 
effectiveness. This plan is projected to be completed next 
month, which is about 8 months beyond the initial target date.
    Looking ahead to potential recommendation implementation 
challenges, FAA will likely be under increased pressure to 
establish more efficient processes as new aircraft material, 
aircraft types, and NextGen avionics are introduced into the 
national aerospace system.
    FAA could significantly increase its chances of improving 
its processes and successfully adapting to the changes in the 
industry by working to address some key challenges. 
Specifically, FAA should focus on, one, identifying the 
necessary resources to sustain these efforts when faced with 
fiscal pressures; two, managing the cultural shift required to 
implement a risk-based approach in making certain certification 
and approval decisions.
    This shift necessitates buy-in, support, and accountability 
throughout the agency, from the highest FAA management levels 
to the designees and safety inspectors in the field.
    Additionally, FAA must ensure early and continuous 
involvement of industry stakeholders, and establish and use 
performance metrics that measure outcomes rather than outputs 
to help show what is actually being achieved through these 
initiatives, and to hold those responsible for implementation 
accountable for the results.
    Thank you, Madam Chairwoman. That concludes my statement.
    [The prepared statement of Dr. Dillingham follows:]

                         Aviation Manufacturing
Status of FAA's Efforts to Improve Certification and Regulatory 
        Consistency

Why GAO Did This Study
    Among its responsibilities for aviation safety, FAA issues 
certificates for new aircraft and parts, and grants approvals for 
changes to air operations and aircraft, based on federal aviation 
regulations. Various studies, GAO's prior work, and industry 
stakeholders have raised questions about the efficiency of FAA's 
certification and approval processes, as well as the consistency of its 
staff in interpreting aviation regulations. Over time, FAA has 
implemented efforts to address these issues, but they persist as FAA 
faces greater industry demand and its overall workload has increased. 
The 2012 FAA Modernization and Reform Act required FAA to work with 
industry to resolve these issues. In response, FAA chartered two 
committees--one to address certification processes and another to 
address regulatory consistency--which recommended improvements in 2012. 
In 2013, FAA published an implementation plan for addressing the 
certification process recommendations and promised to publish an 
implementation plan for addressing the regulatory consistency 
recommendations at a later date.
    This testimony provides information on FAA's progress in 
implementing the (1) certification and approval process recommendations 
and (2) regulatory consistency recommendations. It also discusses 
future challenges industry stakeholders believe FAA will face in 
implementing these recommendations. This testimony provides the same 
information as GAO-14-728T, which was based on GAO products issued from 
2010 to 2014, updated in July 2014 through reviews of recent FAA 
documents and interviews of FAA officials and industry representatives.
What GAO Found
    The Federal Aviation Administration's (FAA) Aircraft Certification 
Service (Aircraft Certification) is responsible for addressing the 
certification and approval process recommendations, and has made 
progress. Aircraft Certification is implementing and has set milestones 
for completing 14 initiatives, several of which were originally begun 
as part of earlier certification process improvement efforts. The 
initiatives range from developing a comprehensive road map for major 
change initiatives, to improving Aircraft Certification's process for 
prioritizing requests for certifications and approvals (project 
sequencing), to reorganizing the small aircraft certification 
regulation. According to an update prepared by FAA in May 2014, one 
initiative has been completed and most are on track to be completed 
within 3 years. However, according to this update, two initiatives will 
not meet planned milestones, including the one for improving FAA's 
program for delegating authority to organizations to carry out some 
certification activities. Also, a third initiative for improving 
consistency of regulatory interpretation was at risk of not meeting 
planned milestones. Two additional initiatives, while on track for 
meeting planned milestones in May 2014, faced challenges because of 
opposition by FAA's labor unions, including one for improving Aircraft 
Certification's project sequencing process. GAO found in October 2013 
that Aircraft Certification continued to lack performance measures for 
many of these initiatives, a condition that persists. In 2010, GAO had 
previously recommended that FAA develop a continuous evaluative process 
with performance goals and measures. FAA agreed but has not yet fully 
addressed the recommendation. Aircraft Certification officials 
discussed plans to develop metrics in three phases, beginning in July 
2014 and in the future, for measuring (1) the progress of implementing 
the initiatives throughout FAA, (2) the outcomes of each initiative, 
and (3) the return on investment for FAA and the industry resulting 
from implementing the initiatives as a whole.
    FAA's Flight Standards Service (Flight Standards) is responsible 
for addressing the regulatory consistency recommendations, and is 
finalizing plans to do so. FAA has not published a detailed plan with 
milestones and performance metrics, and officials told GAO that they 
intend to publish a plan by August 2014. Flight Standards officials 
said they were making progress in addressing the committee's top 
priority recommendation--mapping all FAA policy and guidance to 
relevant federal aviation regulations and developing an electronic 
system that maintains this information and that is accessible by FAA 
and industry users. As part of this effort, officials told GAO that 
Flight Standards has begun eliminating obsolete guidance and linking 
existing policy and guidance to the regulations.
    Going forward, Aircraft Certification's and Flight Standards' 
efforts may face challenges that could affect successful implementation 
of the committees' recommendations. Many of these recommendations 
represent a significant shift in how FAA normally conducts business, 
and if the workforce is reluctant to implement such changes, FAA's 
planned initiatives for addressing the recommendations could be 
delayed. Also, the fact that FAA has not yet implemented performance 
measures for most of the initiatives is a concern for both GAO and the 
industry. As GAO concluded in October 2013, without performance 
measures, FAA will be unable to gather the appropriate data to evaluate 
the success of current and future initiatives.
                                 ______
                                 
 Prepared Statement of Gerald L. Dillingham, Ph.D. Director, Physical 
      Infrastructure Issues, U.S. Government Accountability Office
    Chairwoman Cantwell, Ranking Member Ayotte, and Members of the 
Subcommittee:

    I appreciate the opportunity to testify today on the status of the 
Federal Aviation Administration's (FAA) efforts to improve its 
certification and approval processes. As you know, FAA is responsible 
for aviation safety, and part of this responsibility entails issuing 
certificates for new aircraft and aircraft parts and equipment and 
granting approvals for such things as changes to air operations and 
aircraft, based on Federal aviation regulations. FAA's current efforts 
to improve these processes are aimed at: (1) improving its decision-
making process for issuing certificates and approvals, (2) keeping pace 
with emerging technology, and (3) enabling industry growth and 
innovation. Studies published since 1980,\1\ our prior work,\2\ 
industry stakeholders, and experts have long raised questions about the 
efficiency of FAA's certification and approval processes and varying 
interpretations and applications of its regulations in making 
certification and approval decisions. More recently, several aviation 
industry groups have asserted that these issues persist, resulting in 
delays and higher costs for their members. These delays have been 
generally attributed to heavy staff workloads and a lack of staff 
resources to begin new work on certifications and approvals. With 
greater industry demand and the introduction of new aircraft, 
equipment, and technology into the national aviation system, FAA's 
workload has increased and is expected to grow further over the next 
decade. We previously concluded that it will be critical for FAA to 
follow through with reforms to its certification and approval processes 
to meet industry's future needs.\3\
---------------------------------------------------------------------------
    \1\ See National Academy of Sciences, Improving Aircraft Safety: 
FAA Certification of Commercial Passenger Aircraft, National Research 
Council, Committee on FAA Airworthiness Certification Procedures 
(Washington, D.C.: June 1980); Booz Allen & Hamilton, Challenge 1000: 
Recommendations for Future Aviation Safety Regulations (McLean, VA: 
Apr. 19, 1996); RTCA Task Force 4, Final Report of the RTCA Task Force 
4 ``Certification'' (Washington, D.C.: Feb. 26, 1999; and Independent 
Review Team Appointed by Secretary of Transportation Mary E. Peters, 
Managing Risks in Civil Aviation: A Review of FAA's Approach to Safety 
(Washington, D.C.: Sept. 2, 2008).
    \2\ See GAO, Aviation Safety: Certification and Approval Processes 
Are Generally Viewed as Working Well, but Better Evaluative Information 
Needed to Improve Efficiency, GAO-11-14 (Washington, D.C.: Oct. 7, 
2010) and GAO, Aircraft Certification: New FAA Approach Needed to Meet 
Challenges of Advanced Technology, GAO/RCED-93-155 (Washington, D.C.: 
Sept. 1993).
    \3\ GAO, Aviation Safety: Status of Recommendations to Improve 
FAA's Certification and Approval Processes. GAO-14-142T (Washington, 
D.C.: Oct. 30, 2013).
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    Over time, FAA has initiated various efforts and initiatives to 
improve its certification and approval processes and interpret 
regulations more consistently, including efforts in response to 
findings and recommendations we made in 2010.\4\ However, to bring 
further attention to these issues and spur additional action, Congress 
included the following requirements for FAA in the FAA Modernization 
and Reform Act of 2012: \5\ (1) work with the industry to assess and 
recommend improvements to the certification and approval processes 
(Section 312) and (2) address the findings from our 2010 report related 
to FAA interpreting regulations more consistently (Section 313). To 
meet these requirements, FAA chartered two aviation rulemaking 
committees in April 2012--the Aircraft Certification Process Review and 
Reform Aviation Rulemaking Committee (Certification Process Committee) 
and the Consistency of Regulatory Interpretation Aviation Rulemaking 
Committee (Regulatory Consistency Committee)--which made 
recommendations to FAA in May 2012 and November 2012, respectively. In 
an October 2013 statement, we made preliminary assessments of the two 
committees' recommendations and FAA's responses,\6\ finding that both 
FAA-chartered committees took reasonable approaches in their work and 
made relevant, clear, and actionable recommendations to FAA. However, 
we also discussed challenges to making further improvements to the 
certification and approval processes, most notably that FAA has not 
developed performance metrics for measuring the outcomes of the 
initiatives.\7\ In 2010, GAO made two recommendations requiring, among 
other things, that FAA develop a continuous evaluative process with 
performance goals and measures for assessing its actions to improve the 
efficiency of its certification and approval processes, and a method to 
track submission approvals.\8\
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    \4\ GAO-11-14.
    \5\ Pub. L. No. 112-95, Sec. Sec. 312 and 313, 126 Stat. 11, 66 and 
67 (2012).
    \6\ GAO-14-142T.
    \7\ GAO-14-142T.
    \8\ GAO-11-14. Specifically, we recommended that FAA develop a 
continuous evaluative process and use it to create measurable 
performance goals for the actions, track performance toward those 
goals, and determine appropriate process changes. We also recommended 
that FAA develop and implement a process in Flight Standards to track 
how long certification and approval submissions are wait-listed, the 
reasons for wait-listing them, and the factors that eventually allowed 
initiation of the certification process. FAA partially addressed the 
first recommendation and fully addressed the other.
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    This testimony discusses FAA's continuing efforts related to its 
certification and approval processes. More specifically, it provides 
information on: (1) FAA's progress in implementing the Certification 
Process Committee recommendations, (2) its progress in implementing the 
Regulatory Consistency Committee recommendations, and (3) future 
challenges that others and we identified that FAA faces in implementing 
these recommendations. We provided this testimony previously, on July 
23, 2014, before the Subcommittee on Aviation, Committee on 
Transportation and Infrastructure, House of Representatives. We were 
subsequently invited to provide testimony on similar issues before this 
subcommittee. Because the issues of concern were the same for both 
subcommittees, this testimony presents the same information as the July 
23, 2014 testimony (GAO-14-728T). This statement is primarily drawn 
from several GAO products issued since 2010.\9\ We have updated the 
information in July 2014 related to our previous work on the 
certification and approval processes through a review of more recent 
FAA and industry documents, including the committees' reports to FAA, 
FAA's reports to Congress in response to the committees' 
recommendations as well as additional government and industry documents 
and reports related to this topic. This review included the May 2012 
Certification Process Committee's and the November 2012 Regulatory 
Consistency Committee's report to FAA; FAA's August 2012 and July 2013 
reports to Congress on the results and plan for implementing 
recommendations made; and FAA's implementation plans to address the 
committees' recommendations. We also conducted interviews with FAA 
officials and industry stakeholders--including Boeing, the largest U.S. 
aircraft manufacturer--and representatives from all eight trade 
associations that participated in the two aviation rulemaking 
committees. Related GAO products are footnoted throughout the 
statement. The reports and testimonies cited in this statement contain 
detailed explanations of the methods used to conduct our prior work. We 
provided a draft of the new information contained in this statement to 
the Department of Transportation (DOT) for technical review and 
addressed its views in the body of our statement where appropriate.
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    \9\ GAO-11-14; GAO, Aviation Safety: Additional FAA Efforts Could 
Enhance Safety Risk Management, GAO-12-898 (Washington, D.C.: Sept. 12, 
2012); GAO, Aviation: Status of DOT's Actions to Address the Future of 
Aviation Advisory Committee's Recommendations, GAO-13-657 (Washington, 
D.C.: July 25, 2013); GAO-142T; GAO, FAA Reauthorization Act: Progress 
and Challenges Implementing Various Provisions of the 2012 Act, GAO-14-
285T (Washington, D.C.: Feb. 5, 2014); and GAO, Aviation Safety: 
Additional Oversight Planning by FAA Could Enhance Safety Risk 
Management, GAO-14-516 (Washington, D.C.: June 25, 2014).
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    The work upon which this testimony is based was conducted in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.
Background
    Located in FAA's Office of Aviation Safety (Aviation Safety), the 
Aircraft Certification Service (Aircraft Certification) and Flight 
Standards Service (Flight Standards) issue certificates and approvals 
for new aviation products to be used in the national airspace system as 
well as for new operators in the system, such as air carriers, based on 
Federal aviation regulations (see fig. 1 below). FAA inspectors and 
engineers interpret and implement these regulations governing 
certificates and approvals through FAA policies and guidance, including 
orders, notices, and advisory circulars. Additionally, FAA also has the 
authority to use private individuals and organizational entities, known 
as designees, to carry out many certification activities on behalf of 
the FAA Administrator in order to enable FAA to better concentrate its 
limited staff resources on safety-critical functions.\10\
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    \10\ Administered under 14 C.F.R. Part 183, FAA has the authority 
to designate private individuals to act as representatives of the 
agency for examining, inspecting, and testing persons and aircraft for 
the purpose of issuing certificates. In 2005, FAA established the 
organization designation authorization program to consolidate all 
existing organizational delegation types into this single program. 70 
Fed. Reg. 59946, Oct. 13, 2005.
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Figure 1: Federal Aviation Administration's Organizational Structure 
        for Processing Certificates and Approvals
        
        
    Source: GAO presentation of FAA information. GAO-14-728T

    Note: The Flight Standards Service's oversight responsibilities 
include air operators (e.g., air carriers and air taxi services) and 
air agencies (e.g., flight schools and repair stations).

    In Aircraft Certification, approximately 880 engineers and 
inspectors issue certifications and approvals to the designers and 
manufacturers of new aircraft and aircraft engines, propellers, parts, 
and equipment, including the avionics and other equipment required for 
modernizing the air traffic control system under the Next Generation 
Air Transportation System (NextGen).\11\ Since 2005, Aircraft 
Certification has used a project sequencing system to nationally 
prioritize certification submissions on the basis of available 
resources. In Fiscal Year 2013, Aircraft Certification issued 3,496 
design approvals, 57 production approvals, and 536 airworthiness 
certificates.
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    \11\ NextGen is a Federal effort to transform the U.S. national 
airspace system from a ground-based system of air traffic control to a 
satellite-based system of air traffic management.
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    In Flight Standards, approximately 4,000 inspectors issue 
certificates and approvals allowing individuals and entities to operate 
in the national airspace system. These include certificates to 
commercial air carriers, operators of smaller commercial aircraft, 
repair stations, and flight training schools and training centers. 
Flight Standards field office managers in over 100 field offices 
initiate certification projects within their offices on a first-come, 
first served basis. In Fiscal Year 2013, Flight Standards issued 259 
air operator certificates and 159 air agency certificates.
    When FAA receives aviation industry submissions for certificates 
and approvals, it must determine whether or not resources are available 
to begin the project. According to FAA, the agency considers its 
highest priority to be overseeing the continued operational safety of 
the people and products already operating within the national airspace 
system. The same staff that provide this oversight are also tasked with 
other oversight activities, such as processing new certifications and 
approvals that FAA considers to be lower priority. FAA wait-lists new 
certification and approval projects when resources are not available to 
begin the work. Flight Standards, in particular, has historically had 
difficulty keeping up with its certification workload across its 
regions and offices, a problem that persists.\12\ FAA has considered 
ways to supplement its annual budget by expanding its sources of 
funding to deal with its increasing workload and staff shortages. 
However, FAA has limited options as it cannot levy fees on its 
customers for most of the services it provides to industry, including 
aviation product certifications and approvals.\13\
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    \12\ According to a recent DOT's Office of Inspector General (OIG) 
report, as of October 2013, Flight Standards faced a significant 
backlog of aviation certification applications, with 138 applicants 
wait-listed for more than 3 years. See DOT OIG, Weak Processes Have Led 
to A Backlog of Flight Standards Certification Applications, Federal 
Aviation Administration, Report Number AV-2014-056 (Washington, D.C.: 
June 12, 2014).
    \13\ Congress has historically prohibited FAA from collecting 
additional funding through the implementation of new aviation user 
fees. The latest prohibition is contained in the Consolidated 
Appropriations Act, 2014, Pub. L. No. 113-76, 128 Stat. 5, 578 (2014).
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    Attempts have been made to provide FAA with additional funding from 
industry stakeholders for processing certifications and approvals. In 
2007, the administration submitted a reauthorization proposal to 
Congress that called for major changes to FAA's funding and budget 
structure. These changes were intended to provide a more stable, 
reliable basis for funding in the long term, in part by allowing FAA to 
impose fees on manufacturers for the various activities and costs 
related to aircraft certification and approval. Congress has previously 
authorized other agencies to charge these types of ``user fees'' for 
services rendered for processing product certification and approval. 
For example, the Medical Device User Fee and Modernization Act of 2002 
authorized the Food and Drug Administration (FDA) to charge and retain 
a fee for providing services related to reviewing medical device 
products.\14\ However, this broad authority has not been granted to 
FAA.
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    \14\ FDA reviews applications from manufacturers that wish to 
market medical devices in the United States. To facilitate prompt 
approval of new devices and clearance of devices that are substantially 
equivalent to those legally on the market, Congress passed the Act to 
authorize FDA to collect user fees from manufacturers. In return, the 
Act requires FDA to meet performance goals tied to the agency's review 
process. Pub. L. No. 107-250, 116 Stat. 1588 (2002).
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Most FAA Initiatives to Improve Its Aircraft Certification and Approval 
        Process Are on Track
    In May 2012, the Certification Process Committee made six 
recommendations to Aircraft Certification to streamline and reengineer 
the product certification and approval processes, improve efficiency 
and effectiveness within Aircraft Certification, and redirect resources 
for support of certification. The Certification Process Committee 
further recommended that FAA develop measures of effectiveness for its 
activities and a means of tracking its progress. In August 2012, FAA 
reported its plan to Congress for addressing the Certification Process 
Committee's recommendations, and, in July 2013, the agency issued an 
implementation plan with 14 initiatives. FAA updated this plan in 
January 2014 and plans to issue further updates on the status of the 
initiatives periodically.\15\
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    \15\ FAA, Detailed Implementation Plan for the Federal Aviation 
Administration Modernization and Reform Act of 2012, Pub. L. No. 112-
95, Section 312, Jan. 31, 2014.
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Most Initiatives Are on Track for Meeting Planned Completion Milestones
    Since the January update, Aircraft Certification has continued its 
efforts to address the recommendations to improve its certification and 
approval processes and is implementing the 14 initiatives. These 
initiatives touch on various aspects of Aircraft Certification's work 
and, according to FAA several predate the committee's recommendations 
and were part of on-going continuous efforts to address long-standing 
certification issues and to improve the certification process. The 
initiatives range from developing a comprehensive road map for major 
change initiatives, to improving the project sequencing process, to 
reorganizing the small aircraft certification regulation.\16\ Figure 2, 
based on an interim May 2014 update that FAA provided to us, summarizes 
FAA's determination of the status of the 14 initiatives.
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    \16\ 14 C.F.R. Part 23. In June 2013, a joint FAA-industry 
committee recommended to FAA changes to part 23. According to FAA 
officials, FAA will devise a plan to implement the recommendations and 
initiate new rulemaking for part 23 in 2015.
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Figure 2: Status of the Federal Aviation Administration's Certification 
        Process Initiatives (Section 312), as of May 2014
        
        
    Source: GAO presentation of FAA information./GAO-14-728T

    Note: Future completion shown in the figure indicates when an 
initiative is planned to be completed.

    a FAA delegates authority to organizations under the 
organization designation authorization program to carry out certain 
functions on behalf of the agency.

    b Instructions for continued airworthiness include such 
things as maintenance manuals and inspection programs for maintaining 
operational safety of aviation products.

    c 14 C.F.R. Part 21 is the regulation under which 
aircraft products and parts are certificated.

    d The validation process is a form of certification to 
establish compliance for airplanes designed outside their countries in 
order to issue a type certificate for these airplanes.

    e No due date has been assigned to this initiative.

    f 14 C.F.R. Part 23 is the regulation under which small 
airplanes are certificated.

    g This initiative is on hold until issuance of the 
implementation plan for addressing recommendations to improve 
regulatory consistency.

    According to the May 2014 update that FAA provided to us, 1 of the 
14 initiatives has been completed, and 10 initiatives are on track for 
completion within planned time frames. FAA deployed a tracking system 
to monitor the implementation of the initiatives in June 2013, but the 
agency indicated it is still finalizing the mechanisms for authorizing 
staff with the appropriate level of review and approval rights in the 
system. Also, ten of the initiatives were on track for meeting their 
planned completion milestones. For example, the initiatives to expand 
the authority for approving aircraft emissions data and noise 
compliance under the organization designation authorization (ODA) 
program are on track to be completed in 2015.\17\ In addition, the 
initiative to expedite rulemaking by, among other things, adopting a 
rulemaking prioritization tool to update airworthiness standards for 
special conditions is scheduled to be completed in September of this 
year.\18\ Further, three of the initiatives were in danger of getting 
off track between 2011 and 2013 and are now back on schedule.
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    \17\ FAA grants ODAs for several types of certifications and 
approvals, including production certificates, parts manufacturer 
approvals, and type certificates. Some companies, such as Boeing, are 
granted ODA status for more than one type of certification or approval.
    \18\ FAA issues special conditions to address new and novel design 
features during the aircraft certification process.
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Some Initiatives Will Not Meet or Are at Risk of Not Meeting Planned 
        Milestones
    Although most initiatives are on track, according to FAA's May 2014 
interim update, 2 of the 14 initiatives will not meet planned 
milestones:

   Improve effectiveness of the ODA program: FAA and two 
        aviation industry groups--the Aerospace Industries Association 
        and General Aviation Manufacturers Association \19\--developed 
        a plan to improve the effectiveness of the ODA process, which 
        is used to authorize organizations to act on behalf of FAA in 
        conducting some safety certification work. In conjunction with 
        the plan, FAA revised the order that outlines the new ODA 
        procedures.\20\ However, this initiative was purposely delayed 
        to provide industry with additional time to adapt to the 
        changes in the ODA procedures. Representatives of three 
        industry associations we interviewed for this testimony 
        supported the use and expansion of ODA by FAA. In contrast, 
        while the Professional Aviation Safety Specialists (PASS) 
        agrees with the concept of ODA, it has concerns related to 
        expanding the program because representatives contend that 
        oversight of the program requires significant FAA 
        resources.\21\ PASS also contends that due to current staffing 
        shortages and increased workload, FAA does not have enough 
        inspectors and engineers to provide the proper surveillance of 
        the designees who would be granted this additional delegation 
        authority. On May 14, 2014, the DOT OIG announced a review of 
        FAA's oversight of the ODA program. The OIG plans to assess 
        FAA's: (1) process for determining staffing levels for ODA 
        oversight and (2) oversight of delegated organizations' program 
        controls.
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    \19\ The Aerospace Industries Association represents major U.S. 
aerospace and defense manufacturers and suppliers, and the General 
Aviation Manufacturers Association represents leading global 
manufacturers of general aviation airplanes and rotorcraft, engines, 
avionics, and components.
    \20\ FAA Order 8100.15B, change 1, Organization Designation 
Authorization Procedures, Feb. 3, 2014.
    \21\ PASS is the labor union that represents some of FAA's 
inspector workforce, among others.

   Update 14 C.F.R. Part 21: FAA chartered another aviation 
        rulemaking committee in October 2012 to evaluate improvements 
        to the effectiveness and efficiency of certification procedures 
        for aircraft products and parts,\22\ along with incorporating 
        new safety management system (SMS) concepts into the design and 
        manufacturing environment.\23\ The committee submitted its 
        report to FAA in July 2014. FAA indicated that the government 
        shutdown in October 2013 delayed some of the actions that the 
        agency had planned to move this effort into the rulemaking 
        process, including submission of the application for 
        rulemaking. According to FAA, however, this delay will have no 
        effect on completion of the final rule, which is planned for 
        2017.
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    \22\ Title 14 of the Code of Federal Regulations Part 21, 
Certification Procedures for Products and Parts, is the basis for 
evaluating and certifying aircraft, engines, and propellers. The steps 
in the certification process include the applicant's conceptual design, 
the application for design approval, definition of the design 
standards, plans to demonstrate the design meets those standards, 
generation and substantiation of compliance data, determination of 
compliance, and issuance of the type certificate.
    \23\ SMS is a formalized process that involves collecting and 
analyzing data on aviation operations to identify emerging safety 
problems, determining risk severity, and mitigating that risk to an 
acceptable level. This approach to aviation safety is becoming the 
standard throughout global aviation industry. See GAO-14-516 and GAO-
12-898.

    According to FAA's May 2014 update, 1 of the 14 initiatives was at 
risk of not meeting planned milestones, which increases the risk that 
FAA will miss its established implementation time frames for the 
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initiative for addressing its associated recommendation.

   Improve consistency of regulatory interpretations: The May 
        2014 interim update also indicated that the initiative for 
        improving the consistency of regulatory interpretation is at 
        risk of getting off track or off schedule. This initiative 
        responds to the Regulatory Consistency Committee's 
        recommendations for improving the consistency of regulatory 
        interpretation within both Aircraft Certification and Flight 
        Standards. However, Aircraft Certification is relying on Flight 
        Standards to complete the implementation plan for addressing 
        the recommendations. Therefore, Aircraft Certification has 
        placed this initiative on hold. (The next section of this 
        statement discusses in more detail FAA's response to the 
        Regulatory Consistency Committee's recommendations.)

    In addition, FAA officials told us that implementation of 2 of the 
14 initiatives, while shown as being on track for meeting planned 
milestones in the May 2014 interim update, face challenges because of 
opposition by FAA labor unions:

   Improve project sequencing process: \24\ According to the 
        interim May 2014 update that FAA provided to us, this 
        initiative was listed as on track. However, FAA officials told 
        us the status for this initiative will change to ``will not 
        meet planned milestone'' in the next revision of the 
        implementation plan expected in July 2014. They explained the 
        change in status is a result of their not expecting to obtain 
        concurrence from the National Air Traffic Controllers 
        Association (NATCA), which represents Aircraft Certification's 
        engineers, among others, on the proposed process changes until 
        December of this year. NATCA has expressed concerns about FAA's 
        plans to change the project sequencing process. The group 
        recommended to FAA that instead of continuing with project 
        sequencing, it should institute a system that manages projects 
        locally on a first-come first-served basis, except for projects 
        that fix an unsafe condition. FAA plans to implement the new 
        process, assess its effectiveness, and modify as necessary, and 
        issue the order for all Aircraft Certification offices' project 
        sequencing by December 2016.
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    \24\ As previously mentioned, Aircraft Certification instituted a 
sequencing program in 2005 to prioritize the processing of all new 
certification and approval applications based on the availability of 
its resources.

   Expand delegation authority for approving instructions for 
        continued airworthiness (ICA) \25\ to ODA: Similarly, in May 
        2014, FAA characterized the initiative as on track for meeting 
        the planned milestones, but FAA officials told us this 
        initiative may face challenges as well. The Certification 
        Process Committee noted that the volume of ICAs is rapidly 
        increasing and that ICA delegation is underutilized, and 
        recommended that FAA delegate some ICA review activity to 
        improve and streamline the certification process. However, in 
        December 2013, PASS presented a white paper to FAA that 
        outlined its concerns and reasons it considers this to be a 
        high-risk area that is critical to maintaining adequate safety 
        and aircraft maintenance. PASS strongly disagreed with FAA's 
        plan to expand delegation of ICAs and the Certification Process 
        Committee's decision for making this recommendation. In 
        response, in April 2014, FAA sent a memorandum to PASS to 
        address the concerns and questions contained in the PASS white 
        paper, as well as justify moving forward on the initiative. A 
        PASS representative we interviewed for this testimony told us 
        that PASS continues to have concerns about FAA'S expansion of 
        the ODA program. FAA considers this issue to be resolved with 
        PASS and has decided to go forward with the initiative.
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    \25\ ICAs include such things as maintenance manuals and inspection 
programs that are necessary for maintaining the continued operational 
safety of aviation products, such as aircraft, and aircraft parts and 
equipment.
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Most Certification Process Improvement Initiatives Lack Measures of 
        Effectiveness
    As of May 2014, FAA had not developed metrics for measuring the 
effectiveness of 9 of the 14 initiatives it has undertaken, nor has it 
determined metrics to measure the effectiveness of its actions as a 
whole. According to FAA officials, they plan to develop these metrics 
in three phases. For the first phase, to be included in the July 2014 
update of its implementation plan, FAA will include metrics to measure 
the progress of the implementation of the initiatives. For the second 
phase, FAA plans to subsequently develop metrics for measuring the 
outcomes of each initiative. For the third phase, working with the 
Aerospace Industries Association, FAA plans to develop metrics for 
measuring the global return on investment in implementing all of the 
initiatives, to the extent that such measurement is possible. We 
believe that this plan for establishing performance measures is 
reasonable.
FAA Has Made Some Progress in Addressing Recommendations to Improve the 
        Consistency of Its Regulatory Interpretations, but Details Are 
        Unclear
    Unlike FAA's efforts to improve the certification process, although 
FAA has made some progress towards addressing the regulatory 
consistency recommendations, the details remain unclear about how FAA 
will structure its efforts. In November 2012, the Regulatory 
Consistency Committee made six recommendations to Aircraft 
Certification and Flight Standards to improve: (1) the consistency in 
how regulations are applied and (2) communications between FAA and 
industry stakeholders. In July 2013, FAA reported to Congress on its 
plans for addressing the regulatory consistency recommendations, and 
included its preliminary plan for determining the feasibility of 
implementing these recommendations. The report also indicated that FAA 
would develop a detailed implementation plan that would include an 
implementation strategy, assign responsibilities to offices and staff, 
establish milestones, and measure effectiveness for tracking purposes. 
We found in February 2014 that FAA expected to publish such a detailed 
implementation plan by late June 2014, more than 6 months after its 
initial target date of December 2013.\26\ In June 2014, FAA officials 
told us that the implementation plan was under review within FAA and 
estimated that the agency would issue its detailed plan in August 2014.
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    \26\ GAO-14-285T.
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    Until this detailed plan is released, the specific initiatives for 
addressing the recommendations are unknown; thus, we cannot analyze 
information on the status of any planned efforts similar to the 
information we provided above for the certification process 
initiatives. Further, FAA's July 2013 preliminary plan does not specify 
how FAA plans to measure the effectiveness of the initiatives. FAA 
indicated that ``although there may not be any baseline for each 
recommendation against which to compare improvements, FAA intends to 
consider: (1) identifying metrics, (2) gathering and developing 
baseline data, and (3) periodically measuring any changes, positive or 
negative, in rates of completion.'' FAA officials provided the 
following information on how the agency is planning to respond to the 
six recommendations.

A Master Source Guidance System

    The Regulatory Consistency Committee recommended that Aircraft 
Certification and Flight Standards: (1) review all guidance documents 
and interpretations to identify and cancel outdated material and 
electronically link the remaining materials to its applicable rule, and 
(2) to consolidate Aircraft Certification's and Flight Standards' 
electronic guidance libraries into a master source guidance system, 
organized by rule, to allow FAA and industry users access to relevant 
rules and all active and superseded guidance material and related 
documents. This recommendation for creating the master source guidance 
system is the top priority of the Regulatory Consistency Committee. FAA 
officials indicated that establishing this system will require two main 
components:

   As a first step, for linking (mapping) all relevant guidance 
        materials to the regulations, FAA plans to determine which 
        ``guidance'' documents exist across regional and field 
        offices--including orders, notices, and advisory circulars--
        outside FAA's electronic guidance libraries, which are being 
        used to answer questions, interpret or analyze regulations, and 
        provide guidance on regulatory matters. In December 2013, 
        Flight Standards sent out a memorandum requesting that staff 
        discontinue using any guidance documents outside those found in 
        the guidance libraries, to be effective January 15, 2014. The 
        memorandum also asked for the staff to submit any unofficial 
        guidance worth preserving to FAA for review. Flight Standards 
        then conducted a review to determine which of the unofficial 
        guidance documents submitted should be added to the guidance 
        libraries. Several members of the Regulatory Consistency 
        Committee responded in an e-mail to FAA to express serious 
        concerns about this approach and stated that the committee did 
        not envision the cancellation of any guidance before FAA 
        developed a methodology to include or exclude such guidance. 
        The committee members further noted that FAA's memorandum 
        provided no method to allow existing certificate holders to 
        retain certifications that were based on any applied guidance 
        that had been cancelled. Further, these members requested that 
        FAA either withdraw the memorandum or address the issues they 
        raised and extend the date for FAA staff to comply with the 
        memorandum. However, two other Regulatory Consistency Committee 
        members we interviewed considered FAA's actions to get staff to 
        discontinue the use of unofficial guidance in the field to be 
        an appropriate first step.

   Second, FAA plans to develop a master source guidance system 
        with the capability to consolidate information from Aircraft 
        Certification's and Flight Standards' electronic guidance 
        libraries as well as legal interpretations from the Office of 
        Chief Counsel into a master guidance system to allow FAA and 
        industry users access. Specifically, the Regulatory Consistency 
        Committee recommended that this system be searchable so that 
        FAA and industry users can easily access relevant rules and 
        find the relevant guidance for the rule. FAA officials assessed 
        the possibility of using the existing Aviation Safety 
        Information Management System, but determined that it is not 
        adequate because: (1) users cannot search for guidance by word 
        and (2) it is not compatible with other FAA data systems. 
        According to FAA officials, with about $750,000 in approved 
        funding for this project, FAA's information technology division 
        is in the process of developing a dynamic regulatory system 
        that should provide the needed capabilities. Officials 
        indicated that when users conduct a search for a particular 
        topic in this system, the search results should bring up 
        multiple entries for specific guidance. Initially, Flight 
        Standards plans to use an Excel spreadsheet for storing the 
        guidance and then transition to the new system once it is 
        deployed. Flight Standards hopes to test out a first version of 
        this system within calendar year 2014. However, the officials 
        were unsure of the total cost of developing and deploying the 
        system.

    Representatives from four of the committee stakeholders we 
interviewed for this testimony acknowledged that creating this system 
is a major effort for FAA because of the volume of FAA guidance that 
potentially exists across regional and field offices, some of which may 
not be in Aircraft Certification's and Flight Standards' electronic 
guidance libraries. Representatives of five industry stakeholders we 
interviewed provided insights on how FAA might devise a plan for 
creating and populating this system. Three of these noted that FAA will 
need to ensure that the various types of guidance--such as orders, 
notices, and advisory circulars--include links to the original Federal 
aviation regulations. One of these stakeholders recommended that FAA 
develop the system to allow a user looking at FAA guidance to also see 
all relevant background information on related decisions, and the past 
actions related to the guidance in question and their relation to the 
original regulation. Because of the large volume of FAA guidance, some 
stakeholders also suggested that FAA begin by first choosing a starting 
date for which any new rules or other new guidance it issues would 
include links to the relevant original regulations. However, one 
stakeholder we interviewed noted that FAA should consider prioritizing 
its effort by first mapping the guidance materials for specific key 
regulations and then the guidance for less significant regulations.

Instructional Tools for FAA Personnel for Applying Policy and Guidance

    The Regulatory Consistency Committee noted multiple instances where 
FAA guidance appeared to have created inconsistent interpretation and 
application, and confusion; the Consistency Committee recommended that 
FAA develop a standardized decision-making methodology for the 
development of all policy and guidance material to ensure such 
documents are consistent with adopted regulations. In interviews for 
this testimony, FAA officials also provided some updates on how the 
agency will respond to the recommendation to develop instructional 
tools for its policy staff. FAA officials told us they had not 
initiated any efforts yet to address this recommendation, but would 
begin by focusing on developing instructions for policy staff to use 
for populating the master source guidance system. In August 2014, FAA 
plans to form an internal work group to establish a document management 
framework and work processes that can be used by Aircraft 
Certification's and Flight Standards' policy division staffs as they 
map existing guidance documents to applicable source regulations in the 
master source guidance system. The officials expected the work group 
would issue an internal directive for FAA personnel on work processes 
to be used in populating the guidance system by June of 2015.

FAA and Industry Training Priorities and Curriculums

    The Regulatory Consistency Committee recommended that FAA, in 
consultation with industry stakeholders, review and revise its 
regulatory training for applicable agency personnel and make the 
curriculum available to industry. FAA officials told us that FAA has 
begun to develop improved training for its field staff--the third 
recommendation of the Regulatory Consistency Committee--so that field 
inspector staffs are better equipped to answer routine compliance-
related questions confidently and in a consistent manner. In addition, 
the officials told us starting in 2015, FAA plans to conduct a gap 
analysis of existing training for all FAA staff who are responsible for 
interpreting and applying certification and approval regulations. For 
this analysis, FAA plans to assess whether existing training can be 
modified to sufficiently address any gaps. FAA also plans to coordinate 
with industry to share the results of this review and analysis by the 
end of 2015.

Regulatory Consistency Communications Board

    The Regulatory Consistency Committee made two similar 
recommendations for FAA to consider: (1) establish a Regulatory 
Consistency Communications Board comprising various FAA representatives 
that would provide clarification on questions from FAA and industry 
stakeholders related to the application of regulations and (2) 
determine the feasibility of establishing a full-time Regulatory 
Operations Communication Center \27\ as a centralized support center to 
provide real-time guidance to FAA personnel and industry certificate/
approval holders and applicants. FAA officials also discussed the 
agency's conceptual approach and plans for establishing a board--likely 
by the end of calendar year 2014--to address these two recommendations. 
The purpose of the board would be to provide a neutral and centralized 
mechanism with a standardized process for addressing and resolving 
regulatory compliance issues between FAA and industry. According to the 
committee, this board would be comprised of representatives from the 
relevant headquarters policy divisions in FAA to help answer complex 
regulatory interpretation issues that arise between FAA inspectors and 
engineers, and industry during the certification and approval 
processes. FAA officials told us the board's process, once established, 
would use a modified version of the agency's current Consistency and 
Standardization Initiative (CSI), a process established as a means for 
industry to appeal FAA decisions and actions.
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    \27\ Under this operations center concept, FAA would establish a 
24-hour/7-day operations center staffed (virtually) by policy and/or 
legal personnel trained and experienced in the regulations, policy and 
guidance associated with flight operations, aircraft maintenance, 
aircraft certification and aircraft production.
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    As we found in 2010, resolution through the CSI can be a lengthy 
process, with the total length of the process depending on how many 
levels of appeal the industry stakeholder chooses.\28\ However, as we 
also found, industry stakeholders have generally been reluctant to use 
CSI for initiating appeals and raising concerns with the local field 
office for fear of retribution. FAA officials told us in interviews 
that the modified process would help address the retribution issue, 
because it would rely instead on multiple sources to raise issues--not 
just solely on industry--and would be the final arbiter for FAA and 
industry in disagreements on certification and approval decisions. 
According to FAA officials, the board could also serve the function of 
the proposed operations center recommended by the committee to be a 
resource for assisting FAA personnel and industry stakeholders with 
interpretation queries and establishing consistency in regulatory 
application. FAA officials indicated that the agency had decided not to 
establish the communications center because: (1) the board could serve 
a similar function and (2) FAA has limited resources available to staff 
a communications center.
---------------------------------------------------------------------------
    \28\ GAO-11-14.
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    Several industry stakeholders we spoke with told us they support 
FAA's preliminary plans to establish the board and modify the CSI 
process as part of this effort. For example, several stakeholders told 
us that they support FAA's plans to modify the current CSI process. One 
of these stakeholders noted that a modified process would be more 
effective if it allowed for industry stakeholders to raise issues 
anonymously. Also, another stakeholder noted the board would not be 
beneficial until after FAA has established the master source guidance 
system because the board should be able to refer to that guidance in 
demonstrating how it makes decisions.

Clarity in Final Rules

    The Regulatory Consistency Committee recommended that FAA improve 
the clarity of its final rules by ensuring that each final rule 
contains a comprehensive explanation of the rule's purpose and how it 
will increase safety. FAA officials told us that this recommendation 
has been addressed through the work of the Aviation Rulemaking Advisory 
Committee's Rulemaking Prioritization Working Group.\29\ The officials 
told us that, as a result of this effort, all final rules, are now 
well-vetted across FAA. The industry representatives we interviewed had 
mixed opinions about whether FAA had addressed this recommendation as 
intended. For example, two stakeholders were in agreement with FAA that 
the agency had addressed it while two other stakeholders noted that 
FAA's new rules are still not as clear as they should be. Two 
stakeholders also said that it is often not the final rules but the 
guidance that accompanies or follows the final rules that is unclear 
and contributes to inconsistent interpretation and application among 
FAA staff.
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    \29\ Specifically, in January 2013, FAA accepted the recommendation 
of the Rulemaking Prioritization Working Group that FAA should adopt a 
prioritization model across its lines of business for prioritizing 
rulemaking projects. In response, as we reported in prior work, FAA 
developed a tool that provides a standardized basis for evaluating and 
prioritizing potential rulemaking projects to be used by each line of 
business. See GAO-13-657.
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Challenges that Could Affect Successful Implementation of the 
        Committees' Recommendations
    In our previous work on organizational transformations, we noted 
that implementing large-scale change management initiatives--like those 
the committees tasked FAA with--are not simple endeavors and require 
the concentrated efforts of both leadership and employees to realize 
intended synergies and accomplish new organizational goals.\30\ People 
are at the center of any serious change management initiative because 
people define the organization's culture, drive its performance, and 
embody its knowledge base. The best approach for these types of 
initiatives depends upon a variety of factors specific to each context, 
but there has been some general agreement on a number of key practices 
that have consistently been found at the center of successful change 
management initiatives. These include, among other things, securing 
organizational support at all levels, developing clear principles and 
priorities to help change the culture, communicating frequently with 
partners, and setting performance measures to evaluate progress.\31\ In 
this final section of this testimony, we discuss challenges for FAA in 
implementing the committees' certification and approval and regulatory 
consistency recommendations that relate to these key practices.
---------------------------------------------------------------------------
    \30\ GAO, Results-Oriented Cultures: Implementation Steps to Assist 
Mergers and Organizational Transformations, GAO-03-669 (Washington, 
D.C: July 2, 2003).
    \31\ GAO-03-669, and GAO, VA Health Care: Additional Efforts to 
Better Assess Joint Ventures Needed, GAO-08-399 (Washington, D.C.: Mar. 
28, 2008).
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Organizational Support
    FAA officials and industry representatives we spoke to noted that 
shifting priorities as well as declining resources may prohibit FAA 
from devoting the time and resources needed for completing the 
initiatives in the planned time frames. They agreed that a primary 
challenge for FAA will be having the dedicated resources that will be 
needed to successfully implement the committees' recommendations. We 
have previously found that successful organizational transformations 
and cultural changes require several years of focused attention from 
the agency's senior leadership.\32\ This lesson is consistent with our 
previous work on organizational transformation, which indicates that 
support from top leadership is indispensable for fundamental change. 
Top leadership's clear and personal involvement in the transformation 
represents stability for both the organization's employees and its 
external partners. Top leadership must set the direction, pace, and 
tone for the transformation. Additionally, buy-in and acceptance among 
the workforce will be critical to successful implementation of the 
initiatives to address the two committees' recommendations.
---------------------------------------------------------------------------
    \32\ GAO, National Airspace System: Transformation Will Require 
Cultural Change, Balanced Funding Priorities, and Use of All Available 
Management Tools, GAO-06-154 (Washington, D.C.: Oct. 14, 2005).
---------------------------------------------------------------------------
    Additionally, as we described in our 2010 report, FAA prioritizes 
ensuring the continued operational safety of the people and products 
already operating in the national airspace system over processing new 
certifications and approvals. We reported in the 2010 report that 
Flight Standards staff had little or no incentive to perform 
certification work under the system in which their pay grades are 
established and maintained.\33\ Other than inspectors involved with 
overseeing air carriers, Flight Standards inspectors are typically 
responsible for a variety of types of certificate holders. Each 
certificate is allocated a point value based on the complexity of the 
certificate or operation, and the combined point value for each 
inspector's oversight responsibilities must meet or exceed the points 
allocated for the inspector's grade. However, not all of the 
inspectors' duties--including certification work--receive points in 
this system, and inspectors are subject to a downgrade if entities in 
their portfolio relocate or go out of business.
---------------------------------------------------------------------------
    \33\ GAO-11-14.
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Commitment to Cultural Change
    FAA and industry representatives also cited FAA's organizational 
culture as a primary challenge for FAA in successfully implementing 
these initiatives. They noted that many of the certification process 
and regulatory consistency initiatives FAA is attempting to implement 
represent cultural shifts for FAA staff in how regulations, policy, and 
guidance are applied, and ultimately how certification and approval 
decisions are made. As we have previously found, the implementation of 
recommendations that require a cultural shift for employees can be 
delayed if the workforce is reluctant in accepting such change.\34\
---------------------------------------------------------------------------
    \34\ GAO-14-142T.
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Communication with Stakeholders
    Further, industry representatives have identified the lack of 
communication with and involvement of stakeholders as a primary 
challenge for FAA in implementing the committees' recommendations, 
particularly the regulatory consistency recommendations. Successful 
agencies we have studied based their strategic planning, to a large 
extent, on the interests and expectations of their stakeholders, and 
stakeholder involvement is important to ensure agencies' efforts and 
resources are targeted at the highest priorities.\35\ However, 
representatives of two industry organizations we interviewed told us 
that FAA did not provide the opportunity for early input and that 
outreach is low regarding the certification process recommendations, 
and representatives of four industry organizations indicated that FAA 
has not sought their input in responding to the regulatory consistency 
recommendations. They reported that FAA had neither kept in contact 
with or advised them of its plans nor engaged the Regulatory 
Consistency Committee participants in the drafting of the detailed 
implementation plan that is expected to be published in August. As an 
example, as previously discussed, when Flight Standards published a 
memo in December 2013 calling for the cancellation of non-official 
guidance, several members of the Regulatory Consistency Committee were 
unaware of the change and expressed surprise and dissatisfaction with 
the action and offered their assistance. Representatives of one 
industry group noted that FAA sought their input on addressing the 
Certification Process Committee's recommendations for subsequent 
revisions of its implementation plan.
---------------------------------------------------------------------------
    \35\ GAO, Executive Guide: Effectively Implementing the Government 
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1, 
1996).
---------------------------------------------------------------------------
Setting Performance Measures
    FAA has not fully developed performance metrics to ensure that any 
initiatives it implements are achieving their intended outcomes. We 
have previously found that agencies that have been successful in 
assessing performance use measures that demonstrate results and provide 
useful information for decision making.\36\ Earlier in this testimony, 
we reported that FAA had not completed developing performance measures 
for either the certification improvement or the regulatory consistency 
initiatives:
---------------------------------------------------------------------------
    \36\ GAO, NextGen Air Transportation System: FAA's Metrics Can be 
Used to Report on Status of Individual Programs, but Not of Overall 
NextGen Implementation or Outcomes, GAO-10-629 (Washington, D.C.: July 
27, 2010).

   FAA had developed performance measures for 5 of the 14 
        certification process initiatives as of May 2014 and plans to 
        further develop measures in three phases. In addition, most of 
        the initiatives are scheduled to be implemented by 2017. 
        Although we have assessed FAA's plan for developing these 
        metrics as reasonable, the agency may miss an opportunity to 
        gather early data for evaluating the effectiveness of its 
---------------------------------------------------------------------------
        actions and making any needed corrections.

   There is no detailed plan for implementing initiatives 
        addressing the consistency of regulatory interpretation 
        recommendations and measuring their outcomes. In recent 
        meetings, FAA officials told us they have had difficulty in 
        determining how to measure the outcomes of its regulatory 
        consistency initiatives and have not been able to determine 
        what specific performance metrics could be used.

    Going forward, it is critically important that FAA develop outcome-
based performance measures to determine what is actually being achieved 
through the current and future initiatives, thereby making it easier to 
determine the overall outcomes of each of the initiatives and to hold 
FAA's field and headquarters offices and employees accountable for the 
results. We are not making any new recommendations because the 
recommendation we made in 2010 for FAA to develop outcome-based 
performance measures and a continuous evaluative process continue to 
have merit related to this issue. To its credit, FAA has initiated some 
efforts and sound planning for addressing the committees' 
recommendations. However, it will be critical for FAA to follow through 
with its initiatives and plans for developing performance metrics to 
achieve the intended efficiencies and consistencies. As we noted in our 
October 2013 statement, however, some improvements to the certification 
and approval processes, will likely take years to implement and, 
therefore, will require a sustained commitment as well as congressional 
oversight.\37\
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    \37\ GAO-14-142T.
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    Chairwoman Cantwell, Ranking Member Ayotte, and Members of the 
Subcommittee, this completes my prepared statement. I would be pleased 
to respond to any questions at this time.

    Senator Cantwell. Thank you, Dr. Dillingham. We look 
forward to asking you questions about the certification process 
and where we need to be to continue to make innovations and 
improvements.
    Mr. Allen, welcome. Thank you very much for being here. We 
look forward to your testimony.

         STATEMENT OF BERTRAND-MARC ALLEN, PRESIDENT, 
                   BOEING CAPITAL CORPORATION

    Mr. Allen. Madam Chairman, Ranking Member Ayotte, thank you 
very much for the opportunity to address the competitive 
landscape with respect to commercial aviation, the U.S. Export-
Import Bank, and our industry's international competition.
    My name is Marc Allen, and I am the President of the Boeing 
Company's product finance and aviation lease unit, Boeing 
Capital Corporation. I am proud to be here on behalf of Boeing, 
our 168,000 employees and more than 15,000 U.S. suppliers that 
support over 1.5 million jobs across the country.
    We are unique in that 80 percent of our commercial airplane 
products are sold overseas, while 80 percent of our 
expenditures, just under $50 billion, are made in the United 
States.
    As a starting point, it is important to understand that 
aerospace is a unique industry on the global stage. Unlike 
other market sectors, it is considered a matter of national 
prestige, national competitiveness, and even national dominance 
for some.
    In aerospace, it is not so much companies that compete as 
it is countries, with all their traditions, aspirations, and 
occasional grievances. Other countries have seen how aerospace 
helped the United States become the dominant economic and 
military power through the 20th century. Likewise, they saw how 
Europe, with massive state support and direction, along with 
three export credit agencies, created and sustained an 
indigenous commercial aviation industry virtually from scratch 
during the 1970s.
    Today, Canada, China, Russia, are all making significant 
efforts in developing new platforms to compete on the large 
commercial airplane market with equally important investments 
being made in regional jet development in Brazil and Japan.
    The Chinese aspiration, like the Europeans during the 
1970s, is to develop a full family of airplanes from regional 
jet to narrow-body to eventually wide-body airplanes. The path 
is undoubtedly a long one. But every element of the Chinese 
government, industry, and national spirit are committed to that 
goal.
    Boeing is very much a partner with China's aviation 
industry, even as we recognize that our airplanes will also 
have to compete against Comac, the Chinese state-owned 
aerospace firm.
    For Boeing, the China model is simple. It is compete and 
collaborate, not one or the other. At Boeing, we don't shy away 
from competition. What we want, just as every competitor wants, 
is a fair chance and an even playing field.
    This brings us to the role of export credit generally, and 
the Export-Import Bank, in particular.
    First, some background on the current regime governing 
export credit assistance. In 2011, a multilateral agreement 
called the Aircraft Sector Understanding was reached, ensuring 
that in aviation, there is no such thing as cheap export 
credit. No such thing. It is a term often employed by Ex-Im 
critics.
    But under the Aircraft Sector Understanding that the 
chairwoman mentioned earlier, interest rates and fees for 
government export credit are set at levels that make such 
credit equal to or usually higher than the cost of commercial 
financing.
    Furthermore, U.S. carriers can borrow money through 
domestic capital markets at even lower rates than their foreign 
competitors can obtain through either export credit or 
commercial finance.
    Ex-Im's critical role as a backstop lender is powerfully 
shown by contrasting the last two economic downturns. My 
submitted testimony discusses in further detail how, because 
Ex-Im was able to fill the liquidity gap after 2008, Boeing 
jobs held strong and deliveries to foreign customers continued. 
In marked contrast, in the aftermath of 9/11, where Ex-Im could 
not engage, U.S. carriers had to abandon deliveries that led to 
more than 30,000 Boeing layoffs.
    If U.S. export credit is in doubt, airplane customers will 
likely hedge their bets by turning to companies like Airbus 
that do have export credit guarantees. And if Ex-Im goes away, 
it is predictable Europe and Airbus will use export credit 
pricing to provide the aerospace industries there an advantage 
over ours, with China, Russia, and other emergent players to 
follow.
    Boeing would then have to offer financing to many customers 
through my group, BCC, effectively transforming ourselves, as 
McDonnell Douglas did 2 decades ago, from an aerospace 
innovation company to a finance company. This is not a scenario 
that would happen immediately, but we would get there 
eventually. And Boeing's workers and the communities we support 
would pay the price.
    Congress has an important decision to make in the coming 
weeks over the position of America and the great global 
aerospace competition already underway. Without the important 
leveling mechanism provided by the Ex-Im Bank, Boeing and its 
extensive U.S. supply chain would be at a significant 
disadvantage in the global commercial airplane markets, which 
we conservatively estimate to be worth $3.6 trillion over the 
next 20 years.
    This Nation wants to build long-term strategic 
relationships with trading partners around the world. We want 
to lead progress toward open markets. Ex-Im is a key tool for 
sitting at the table to do that. Without Ex-Im, the existing 
disciplines will collapse, and we will have no say in it.
    In the end, this Congress and our country have to decide 
together whether it is worth playing the role of leader in this 
space.
    Thank you very much for this opportunity to discuss these 
important issues. I look forward to questions.
    [The prepared statement of Mr. Allen follows:]

         Prepared Statement of Bertrand-Marc Allen, President, 
                       Boeing Capital Corporation
    Thank you for the opportunity to address the competitive landscape 
with respect to commercial aviation, the U.S. Export-Import Bank, and 
our industry's international competition. These interconnected issues 
are of great importance not only to The Boeing Company but, as my 
testimony will show, to America's position as the world's leader in 
aerospace.
    My name is Marc Allen, and I am President of The Boeing Company's 
product finance and aviation leasing unit, Boeing Capital Corporation 
(BCC). At BCC, our mission is to ensure every Boeing customer has the 
financing they need to buy and take delivery of Boeing's great American 
aerospace products. We do that through outreach to the financial 
markets, demonstrating the value of investing in aerospace assets. We 
do that through arranging financing for our customers from third 
parties, such as lessors, commercial banks, capital markets, and yes 
also the very important U.S. Export-Import Bank (Ex-Im). And lastly, we 
also execute our mission by directly providing customers with backstop 
financing commitments and other financing solutions, in effect serving 
as the lender of last resort.
    Before serving at BCC, I had the privilege of serving in Beijing as 
president of Boeing China. And before that, I was Boeing's vice 
president of global law affairs and general counsel to the company's 
international operations. All three of these roles have deeply shaped 
my perspective on the topic of today's hearing. In my general counsel 
role, I led the Company's legal strategy for the United States' WTO 
case against the EU over illegal Airbus subsidies. In my Boeing China 
role, I got to experience firsthand the realities and importance of our 
Collaborate-and-Compete relationships, where engagement with respected 
partners equally blends with emerging marketplace competition. From 
each of these stops, I have developed a very personal awareness of the 
extent to which sovereign national interest is a reality--a high impact 
reality--for the modern world of global aerospace.
    I am proud to be here on behalf of Boeing, our 168,000 employees 
and more than 15,000 U.S. suppliers that support 1.5 million jobs 
across the country. We are unique in that 80 percent of our commercial 
airplane products are sold overseas while 80 percent of our 
expenditures--just under $50 billion--are made within the United 
States. Or, put simply, Boeing is one of the few American companies 
that still employs large numbers of people in this country--at middle-
class wages and benefits--to build things sold in large numbers outside 
this country.
    I know the merits and track record of Ex-Im have been widely 
debated in recent weeks. There is probably little you have not heard on 
the subject. Today, I aim to focus my statement on aspects of global 
export credit assistance that has not received much attention, by:

   Providing broader strategic context about aerospace--and 
        new, well-funded emerging players such as China that should 
        inform your deliberations and decisions about Ex-Im's future;

   Discussing the critical role of the Bank in maintaining a 
        functioning--and fair--market for commercial airplanes; and

   Finally, assessing some of the global consequences--for 
        Boeing and the U.S. aerospace industry--of failing to re-
        authorize the Ex-Im Bank.
A Global, National Competition
    As a starting point it's important to understand that aerospace is 
a unique industry on the global stage. The rest of the world, rising 
economic powers especially, regard aerospace as a matter of national 
interest. Aerospace is not considered just another industry that 
produces goods or services and thus jobs and economic growth. It is 
considered a matter of national prestige, national competitiveness and, 
for some, national dominance.
    Furthermore, countries like Russia, China and Brazil have seen how 
aerospace helped make the United States the dominant economic and 
military power during the 20th Century. Likewise, they saw how Europe, 
with massive state support and direction--along with three export 
credit agencies--created and sustained an indigenous commercial 
aviation industry virtually from scratch during the 1970s. Airbus now 
enjoys the status of commanding up to one-half, or more, of the global 
market for commercial airplanes. This position used to be held by 
McDonnell Douglas, before its commercial airplane business collapsed in 
the 1990s in large part from the pressure introduced by an emergent 
Airbus. It is especially important to note--for those who say 
government export credit isn't needed and doesn't matter--that this 
period of decline coincided with McDonnell Douglas' devoting more and 
more of its dwindling capital to finance customer purchases of its 
aircraft rather than investing in new products. In the decision between 
being a bank or an aerospace innovator, it chose bank, and lost.
    The airline business is part of this, too. Just as it is common 
around the world to see state ownership of aerospace manufacturers, it 
is equally common to see state ownership of aviation businesses, like 
airlines. For many nations, the movement of people and goods into and 
out of their borders is too important not to assure directly, 
regardless of the country's level of economic or rule of law 
development.
    The takeaway is that in global aerospace markets, it is not so much 
companies that compete; as it is countries--and all their traditions, 
aspirations, and occasional grievances. Whether the players on the 
manufacturing side are Canada and Bombardier; Russia and UAC; China and 
COMAC; and on--it is broadly assumed around the world that national 
governments will support their domestic aerospace and aviation 
industries.
    In the realm of national competition against state-sponsored 
aerospace entities--both established and emergent--the United States 
regularly finds itself on a playing field that is constantly subject to 
tilt pressures, in this way and that. The role of the United States 
thus must be, and has been, to lead the way in pressing for an even 
playing field. As a nation and an industry, we have done this by suing 
the European Union successfully in the World Trade Organization over 
the illegal Airbus subsidies. And we have likewise done it by prudently 
deploying Ex-Im for over 80 years now; the use of export credit 
assistance by the U.S. being comparatively minor by our competitors' 
standards. Yet the carefully targeted application of export credit has 
been extremely effective in addressing aspects of the otherwise uneven 
playing field.
The Global Model for Aerospace Competition
    Having seen the economic and employment benefits Europe has 
achieved with aerospace using massive state support over the past four 
decades, several nations are attempting to repeat the playbook. Canada, 
China, and Russia are making significant efforts at developing new 
platforms to compete on the large commercial airplane market, with 
equally important investments being made in regional jet development in 
Brazil and Japan. These emerging players see no reason not to aim for 
the same glide path with their respective development efforts.
    Canada and China are the two most advanced examples of this set, 
with Canada's Bombardier in flight testing for a new 150+ seater, the 
CSeries. China is not far behind Canada, with the first article of its 
similar sized plane, the C919, currently in final assembly. And 
meanwhile, its regional jet offering, the ARJ-21, is in final stages of 
flight testing and certification before a scheduled Entry into Service 
in 2015.
    The development of the C-Series and C919 are important for the 
global aerospace community. The Chinese aspiration, like the Europeans 
during the 1970s, is to develop a full family of airplanes--from 
regional jet to narrow-body to eventually wide-body airplanes that can 
compete with the full range of large commercial airplanes offered by 
Boeing. The path is undoubtedly a long one, as the technological 
barriers are high but hardly insurmountable. But every element of the 
Chinese government, industry, and national spirit are committed to the 
goal.
    In keeping with this type of commitment and aspiration, many of the 
governments of the nations listed above deploy vast resources into and 
coordination across their countries' supply chains, research and 
development, financial systems, and domestic airlines. These efforts 
are all directed towards the ultimate objective of growing their 
domestic aerospace capability, capacity, and market share. We are all 
familiar with the billions that Europe poured into Airbus. We may be 
less familiar with the support that the Canadian government has 
provided Bombardier. And maybe even less familiar with the support the 
emerging competitors in China, Russia, etc. are getting from their 
states, though it too will rate in the tens of billions of dollars.
    The emerging nations, of course, have the advantage today, unlike 
Europe before, of not having to start their programs from scratch. All 
are working hard, and with some success, to leverage the technology 
lessons-learned by Boeing, Airbus, and others. And they are constantly 
looking for global partnerships that can yield progress for them in 
terms of complementary transnational partnerships. So, for example, 
Russia recently signed with China a Memorandum of Understanding to 
forge a partnership to explore joint development of wide-body 
airplanes.
    The complexity of the world we live in could not be made any 
clearer than by the fact that the very nations that aspire to emerge as 
successful aerospace competitors are also some of our most important 
customers and respected partners, whether that is China, Japan, Brazil, 
or Russia. Just as Boeing and McDonnell Douglas before faced the 
challenge of selling into the key market of Europe as Airbus emerged, 
so too will the current manufacturers face the challenge of selling 
into these markets as their own product offerings emerge. Yet, 
successful competition within these markets will be critical, just as 
our ultimate successful competition in Europe has been, to Boeing's 
long term staying power.
    These realities were made real to me during my time living and 
working in China. There, Boeing is very much a partner with China, 
including with COMAC, even as we recognize that over the long term our 
airplanes will also have to compete with COMAC's. We looked for issues 
on which we could, together, make the pie bigger for us all, like 
initiatives on air traffic control and biofuels. For us, the model was 
simple: it was about compete AND collaborate. It was not one or the 
other. It was both. And it is notable that recently the leaders of our 
governments, too, have acknowledged this as the model for our broader 
relations. At July's Strategic & Economic Dialogue in Beijing Secretary 
of State John Kerry said it well, ``We are determined to choose the 
path of peace and prosperity and cooperation, and yes even competition 
but not conflict. When the United States and China work with each 
other, we both stand to gain a great deal and that's why we are 
committed to a new model of relations of great-country relationship; a 
mutually-beneficial relationship in which we cooperate in areas of 
common interest and constructively manage the differences.''
    At Boeing we don't shy away from competition. In fact, we welcome 
it. Competition makes us better and benefits our customer and those 
whom they serve. What we want--just as every competitor wants--is just 
a fair chance and an even playing field. This brings us right to the 
heart of the discussion about the roles of export credit generally and 
the Export-Import Bank in particular.
Role of Export-Credit
    As a company--and as a nation that cares about global 
competitiveness in aerospace--we are fortunate the majority of the 
emerging aerospace competitors have adopted an agreed approach to the 
use of export credit for airplane sales. Through the OECD, and via an 
OECD arrangement known as the Aircraft Sector Understanding (ASU), the 
aerospace nations have been able to agree on the most important 
mechanism for the control of export credit, which is price.
    In 2011, in large part thanks to the good work of the U.S. 
Government, a multilateral agreement was reached that has ensured that 
in aviation there is no such thing as ``cheap export credit,'' a term 
often employed by critics of Ex-Im. Every banker, lessor, or capital 
markets player in-the-know will tell you that thanks to the 2011 ASU, 
export credit for airlines, at every credit level, costs the same or 
more than commercial bank credit. Standard & Poor's said it clearly in 
a recent report on Ex-Im: ``the overall cost of ECA-supported 
financing, particularly for stronger airlines, is now equivalent to, or 
even higher than, that of alternative financing sources.'' And the 
leading independent academic source who conducted blinded bank bids to 
assure real world conditions in measuring price has published data 
showing the same.
    The oft-heard complaints against Ex-Im that it allows foreign 
airlines to buy airplanes with ``cheap credit'' are without merit. In 
prior generations, that certainly may have been the case; but as 
explained above, the 2011 ASU assures it is not today and will not be 
again--the 2011 ASU requires quarterly resets to ensure the rates stay 
at or above the liquid market.
    Since the complaint is also sometimes made that the supposed 
``cheap credit'' gives foreign airlines who fly to the U.S. an 
advantage over U.S. airlines, it bears noting that U.S. carriers can 
and do borrow money domestically through the U.S. capital markets at 
even lower rates than the commercial bank credit at which the 2011 ASU 
is pegged. This provides U.S. carriers millions of dollars in advantage 
over foreign airlines who do not have the benefit of the geopolitical 
security, which a U.S. airline can offer the capital markets in any 
bond issuance.
    Bottom line, there is no such thing as ``cheap export credit'' for 
airplanes.
    So why then is export credit useful and relevant? We do not have to 
look far back in history to answer that question. Just compare what 
happened in our industry following the devastating attacks of 9/11 and 
the more recent global economic recession that began in 2008.
    Taking the more recent first, after the recession, liquidity 
disappeared across all financial sectors. In aviation, many of our 
international airline customers still had strong demand for their 
product--travel. But they could not persuade financial institutions to 
lend to them; for the same reason so many Americans during that time-
frame had a hard time getting a home loan. They had good earnings, 
strong credit histories, and reputable backgrounds; but we faced a 
liquidity crisis, and our banking system was not engaging in business 
as usual. In the midst of that crisis, if our customers had failed to 
show up with money to buy the planes they had agreed to buy from us 5 
or 7 years earlier, U.S. aerospace would have had its own crisis, and 
inevitably, layoffs. Instead, strong U.S. leadership worked as 
intended. In the wake of the crisis, Ex-Im stepped forward, providing 
loan guarantees in support of roughly one-third of our airplane 
deliveries at that time. On those guarantees, Ex-Im made money that 
went to the American taxpayer via the U.S. Treasury.
    Contrast that with what happened in the wake of 9/11. Following the 
attacks, the U.S. airlines faced their own crises. The U.S. Government, 
recognizing our national sovereign interest in aviation, provided U.S. 
domestic carriers with billions of dollars in direct assistance. Yet 
the airlines, facing operational challenges and without liquid 
financing options to see them through, had to walk away from airplane 
deliveries they had previously agreed to take. Boeing in turn had to 
reduce production. More than 30,000 Boeing employees lost their job in 
the resulting layoffs. Countless more did in the supply chain.
    The difference between the episodes is stark and summed up in a 
word: Jobs.
    Returning to the first scenarios, the recent global recession, it 
is important to note that after the liquidity crisis was averted and 
the jobs were preserved, Ex-Im next acted perfectly in line with U.S. 
policy: walking back from aviation just as quickly as it had stepped 
forward during the crisis. This year, Ex-Im deliveries will be down 
from the one-third high water mark of the crisis, to roughly 10 to 15 
percent of deliveries.
    When I talk to the leaders of banks, leasing companies, and capital 
markets players, I hear a resounding message: `This is how it is 
supposed to work.' They not only do not object to Ex-Im's participation 
at the 10 to 15 percent range; they endorse it. They do so for the 
simple reason that they know Ex-Im is good policy that helps them, 
helps growth, and helps stabilize markets. This is hardly the response 
you would expect if Ex-Im were ``crowding out'' commercial players from 
financing airplanes, as Ex-Im critics often contend.
    The result of the 9/11 episode also had a lesson-learned for the 
U.S. airlines. They are now much more likely to demand airplane 
manufacturers provide them backstop lending commitments when they 
execute contracts for airplanes. They no longer just rely on the 
expectation financial markets will be there for them when they get down 
the road 5 or 7 years to the agreed deliveries.
    Boeing, via BCC, can and does provide backstop financing to some of 
our customers--most particularly our U.S. and European customers who 
are not eligible for Ex-Im guarantees. But Boeing cannot provide 
backstop financing to all our customers. Boeing is and chooses to be an 
aerospace innovator, not a bank. We have seen firsthand the risks of 
the other strategy in our own and other industries. Anyone who desires 
the U.S. to maintain its lead in global aerospace should reject it. Our 
focus should be on innovation, not finance.
    This is where Ex-Im comes in. Our U.S. airline customers are not 
the only ones to feel the pinch to have backstop lending commitments in 
place; our foreign airline customers equally feel it. They too need 
certainty that if the financial markets seize up when they come to pick 
up their airplanes in 7 years time there will be a backstop finance 
option for them. Ex-Im takes that concern off the table for them. In 
effect, it is providing them geopolitical risk insurance that no one 
but a sovereign nation can offer in any meaningful and consistent 
fashion.
    This is why Europe has not one, but three, export credit agencies 
in place to support Airbus. Germany, France, and Great Britain all 
stand by to provide backstop ECAs to Airbus buyers.
Role of U.S. Export Import Bank
    Ex-Im is a great and necessary equalizer. Ex-Im allows Boeing and 
thousands of companies in its supply chain to compete on the value of 
its products, rather than forcing important customers to choose between 
the world's most innovative aerospace product or the world's most 
secure backstop lending. When you consider that airplane purchases are 
regularly worth billions of dollars, which can make up a significant 
share of a carrier's market value, an airline CEO must be absolutely 
certain he will not land his company in default on such an obligation. 
And a backstop lending commitment is fundamental.
    Because of the great interest the airlines naturally have in 
securing backstop lending, if the availability of U.S. export credit is 
in doubt, airplane customers can be expected to hedge their bets by 
building preference in their order backlogs to those planes--Airbus--
that do have export credit guarantees. It is for this reason the 
Financial Times recently said an Ex-Im shutdown ``would be a serious 
blow to Boeing and GE and a big boost to Airbus and Siemens . . . It 
would also make it harder for U.S. companies to compete against 
China.''
    The logic is simple. If the U.S. is not at the table to lead 
building partnerships with China and the other emerging producers, the 
effort to expand the current multilateral export credit regimes to them 
will fail; they will use export credit in predictable ways; the playing 
field will tilt.
    Ex-Im is the tool the U.S. must use in order to sit at the table 
and persuade other countries to continue even-playing field habits in 
the use of export credit. The multilateral 2011 ASU agreement tells the 
whole story. By ensuring that export credit for airplanes is not 
``cheap credit,'' it has ensured there is no subsidy in play. It has 
ensured there is no unfair advantage for any country, or for any 
segment of the aviation industry. But that simple and powerful 
mechanism will fail if competitors do not join the multilateral 
agreement; or worse, if they leave it altogether.
    Case in point is a recent letter from a European turboprop 
manufacturer, ATR, to the OECD. It complained China was selling a 
competing product, the MA600, using the Export-Import Bank of China to 
subsidize the sale. ATR's complaint suggests the financing was being 
used to subsidize up to 55 percent of the cost of the plane.
    It is not hard to envision the future when countries with emerging 
airplane manufacturers that carry the aspirations of an entire nation 
enter the market with export credit support like that. The best 
response the U.S. has remains Ex-Im. Through the statutory 
authorizations, Ex-Im has authorities to match subsidization when 
necessary to ensure fairness. More importantly, by simply holding that 
authority, Ex-Im creates the incentive and leverage for other nations 
to enter into the existing multilateral agreements that ensure 
everyone's even playing field.
    Russia is a good example. Though Russia has not yet joined the 
multilateral agreement, to date, it has implicitly been willing to 
abide by ASU terms by entering into working together relationships with 
European export credit agencies. This is and must remain the model for 
engagement. As former Deputy Secretary of Defense John Hamre recently 
noted in a compelling piece on the absurdity of abandoning Ex-Im, ``Our 
domestic dispute over the proper role of government within American 
society is now causing America to retreat on the world stage.'' We 
cannot both retreat from Ex-Im and also lead the emerging aerospace 
economies into a disciplined multilateral order that uses prudent 
policy mechanisms to eliminate subsidies. To lead, we need Ex-Im.
A World Without Ex-Im
    It does not take a creative mind to understand the dangers to an 
Ex-Im retreat are not singular. They are multi-dimensional. Who can 
believe, for example, that after an Ex-Im shut down, the Europeans 
(read: Airbus) will continue to abide by the terms of the 2011 ASU?
    If Ex-Im goes away, it is predictable Europe and Airbus will 
abandon ASU terms and use export credit pricing to provide its 
aerospace industry an advantage over ours. If history is a guide, it 
will do so on its own. But even if Europe resisted the temptation, can 
we believe it would continue to resist in the face of the practices ATR 
is already complaining about from emerging competitors? The slippery 
slope is obvious; and U.S. aerospace interests will suffer as a result.
    Over the span of two decades, illegal European launch aid--some $18 
billion in net advantage according to the WTO--gave rise to Airbus and 
put McDonnell-Douglas out of the commercial airplane business. Consider 
the repeating scenario, as Europe races to protect or expand its market 
share from encroaching new competitors when it comes to export credit 
financing rates; and at the same time the U.S. Export-Import Bank is no 
longer available for American companies.
    Export credit is not an unknown commodity to the world after all. 
Over 60 nations offer such programs. Germany, France, China, India, 
Italy, to name just a few use export credit at a rate that dwarfs U.S. 
usage. They each provide multiples of three to five times more export 
credit as a share of GDP than the U.S. does through Ex-Im.
    In the near term, to make up for Ex-Im's absence, Boeing would have 
to offer financing to many customers, effectively transforming 
ourselves--as McDonnell Douglas did two decades ago--from an aerospace 
innovation company to a finance company. So many workers and so many 
communities across this country that depend on Boeing would pay the 
price. This is not a scenario that would happen immediately--but we 
would get there eventually.
    Already, the political attacks on Ex-Im have taken a toll on our 
customers. Some of whom have made or are considering multi-billion 
dollar commitments to Boeing are telling us they are worried credit 
assistance will not be available down the road. We are telling them not 
to worry; that the U.S. always does the right thing, after exhausting 
every other available alternative. We give them hope because we 
ourselves have hope. We know a majority of members of Congress, in both 
the House and Senate, support Ex-Im. We know that Congress will do the 
right thing. But believe me, there are days this debate makes us all 
wonder whether we will stick to a path of sustain global 
competitiveness, or take an unwarranted and unwise detour towards 
unilateral export credit disarmament.
Conclusion
    Congress has an important decision to make in the coming weeks over 
the position of America in the great global aerospace competition that 
is already underway. This is a campaign among nations, even as it is 
waged by companies. At Boeing, we are not asking for any special 
favors, much less any advantages like those long enjoyed by Airbus, or 
now being enjoyed by our emerging competitors. The U.S. Export-Import 
Bank allows Boeing--as well as other U.S aerospace companies--the 
ability to market and sell our products on their merits in the face of 
state-subsidized competitors. Without this important leveling 
mechanism, Boeing and its extensive U.S. supply chain would be at a 
significant disadvantage in a global commercial airplane market we 
conservatively estimate to be worth $3.6 trillion over the next 20 
years. Mr. Hamre said, ``This is another example where America's 
domestic politics are causing us to retreat as a global leader.'' I do 
not believe it; but only because I am unwilling to allow myself to 
believe it. Mr. Hamre was right: we want the world to buy U.S. 
manufactured goods. We want to build long term strategic relationships 
with trading partners around the world. We want to lead progress 
towards open markets. Ex-Im is such an important tool for all of that. 
In the end, this Congress and our country have to decide together 
whether it is worth playing that role.
    Thank you very much for this opportunity and I look forward to your 
questions.

    Senator Cantwell. Thank you, Mr. Allen.
    Dr. Crane, thank you very much for being here.

        STATEMENT OF KEITH CRANE, Ph.D., DIRECTOR, RAND

         ENVIRONMENT, ENERGY, AND ECONOMIC DEVELOPMENT

        PROGRAM; PROFESSOR, PARDEE RAND GRADUATE SCHOOL,

              WASHINGTON OFFICE, RAND CORPORATION

    Dr. Crane. Thank you, Chairman Cantwell and Ranking Member 
Ayotte, for this opportunity to testify on the competition to 
U.S. aviation manufacturing from China.
    I am going to try to address two different questions. The 
first is exactly what is likely to emerge from China in terms 
of a competitive threat over the next several years. The second 
is what can the U.S. Government do about that.
    As has been mentioned here, the Chinese government has set 
a strategic goal of creating a competitive commercial aviation 
manufacturing industry. Of course, commercial aviation is not 
the only industry in which it has those aspirations. We have 
seen that in solar panels, wind, and high-speed rail, and some 
other industries as well.
    But as part of this, they created Comac in 2008 and 
provided more than $7 billion in launch aid, and have been 
continuing to provide subsidized credit and other financing for 
this manufacturer.
    So what does this effort mean for U.S. commercial aviation 
manufacturing, including Boeing? Almost all the experts we 
interviewed in China and in the States believe that Comac will 
succeed in certifying the C919, that it is flight-worthy.
    Opinions differed, however, in terms of the challenges 
Comac faces in terms of making it a commercial success. By the 
time Comac hits full production, and I think the 2018, 2019 
timeframe is probably quite optimistic, it will be 
technologically outdated. It will be competing against already 
newer Boeing and Airbus models that have already come online, 
as well as competing against cheaper, proven used Boeing and 
Airbus products.
    So Comac has a real problem in the sense that it is not 
just going head-to-head in terms of new aircraft, but also has 
this very large fleet of used aircraft out there that is highly 
serviceable.
    In addition to that, it faces real problems in terms of 
lacking the very extensive post-purchase service and support 
network, financing capability, and, most importantly, 
reputation that Boeing and Airbus have.
    So to become a global competitor, those are very large 
hurdles to overcome.
    One area, however, in which China may become more 
successful, is in general aviation, where they have already 
purchased a manufacturer from my home state of Minnesota, 
Cirrus, and have recently signed a joint venture agreement with 
Cessna to put together the Cessna Citation model.
    It is also making inroads into the component market. All 
the major component manufacturers for global aviation have 
operations in China. Those supplier facilities are in part to 
service the C919 but also to provide parts to other operations.
    Going forward, I would be surprised if these joint ventures 
don't become fully integrated into their international 
operations, and we would see more components coming out of 
China that originally may have come out of other countries.
    So the bottom line here is that I have doubts that China 
can succeed in becoming an original equipment manufacturer 
competitive with Boeing and Airbus, but we do see some real 
potential in terms of expanding its exports and production of 
components, and potential in general aviation as well.
    What should the U.S. Government do about this situation?
    First and foremost, both USTR and the Commerce Department 
and State Department should closely monitor the development of 
the C919 and potential succeeding aircraft like the C29, which 
is supposed to be a wide-body aircraft, and intervene promptly 
with WTO and other bilateral forums if there is a sense that 
they are using subsidies, which they have been in other 
supported foreign markets. I mean, this is an area where, 
usually, the squeaky wheel gets the grease. You may want to be 
a little more proactive.
    Continue to press the Chinese Government in bilateral 
forums and at WTO to really rethink this industry-specific 
industrialization policy, which has been so costly and, in many 
ways, such a failure in so much of the world.
    Ensure that Chinese aircraft components when they submit 
for certification at FAA do not incorporate intellectual 
property. Theft of intellectual property is, of course, a major 
problem, including in this industry.
    And then work with U.S. companies and operations in China 
to have them voluntarily report the pressures they are facing 
from China in terms of making investment decisions.
    I would also engage in bilateral discussions with the E.U. 
to discourage the use of purchases of components, which are 
often called offsets, a marketing tool in the sale of 
commercial aviation products.
    Although I don't see a dramatic change in China's policy of 
national champions likely in the near future, persistent 
efforts to reduce these trade-distorting effects through 
countervailing duties and other measures may serve to mitigate 
some of the effects of these policies.
    Thank you very much.
    [The prepared statement of Dr. Crane follows:]

   Prepared Statement of Keith Crane,\1\ Director, RAND Environment, 
   Energy, and Economic Development Program; Professor, Pardee RAND 
          Graduate School, Washington Office, RAND Corporation
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    \1\ The opinions and conclusions expressed in this testimony are 
the author's alone and should not be interpreted as representing those 
of RAND or any of the sponsors of its research. This product is part of 
the RAND Corporation testimony series. RAND testimonies record 
testimony presented by RAND associates to federal, state, or local 
legislative committees; government-appointed commissions and panels; 
and private review and oversight bodies. The RAND Corporation is a 
nonprofit research organization providing objective analysis and 
effective solutions that address the challenges facing the public and 
private sectors around the world. RAND's publications do not 
necessarily reflect the opinions of its research clients and sponsors.
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          ``The Effectiveness of China's Industrial Policies 
               in Commercial Aviation Manufacturing'' \2\
---------------------------------------------------------------------------

    \2\ This testimony is available for free download at http://
www.rand.org/pubs/testimonies/CT416.html.
---------------------------------------------------------------------------
    Thank you, Chairman Cantwell and Ranking Member Ayotte, for the 
opportunity to testify today on competition to U.S. aviation 
manufacturing from China.
    Although China's government has had a long-standing interest in 
manufacturing commercial aircraft, to date it has not had much success.
    Until recently, China's aircraft manufacturing industry produced 
aircraft almost exclusively for the Chinese military. Consequently, 
almost all of China's commercial aircraft have been imported from 
foreign manufacturers. In 2008, the Chinese government consolidated its 
efforts to develop a commercial aircraft manufacturing industry by 
setting up a new state-owned commercial aircraft manufacturing company, 
the Commercial Aircraft Company of China (COMAC), to build two domestic 
aircraft: a regional jet, the ARJ-21, already under development, and a 
narrow-bodied aircraft, the C919.
    What does this mean for U.S. commercial aviation manufacturing? In 
this testimony I will briefly discuss:

   The effectiveness of the policies and mechanisms the Chinese 
        government has used to create ``national champions'' in this 
        industry;

   The effectiveness of steps taken by foreign manufacturers to 
        increase sales in the Chinese market while seeking to prevent 
        transfers of key technologies to potential future Chinese 
        competitors;

   Policy options for the U.S. and the European Union to 
        effectively respond to Chinese industrial policies; and

   The costs of China's current industrial policies.

    More details on all of these points are in the full RAND report, 
``The Effectiveness of China's Industrial Policies in Commercial 
Aviation Manufacturing'' available on the RAND website free of charge 
at http://www.rand.org/pubs/research_reports/RR245.html. My testimony 
this morning comes directly from that work.
China's Commercial Aviation Manufacturing Industry
    The Chinese government sees designing and manufacturing passenger 
jets as an important indicator of China's technological prowess. 
Aviation manufacturing more broadly is seen as driving economic growth 
and innovation and as providing a key basis for national defense. To 
achieve the goal of creating a globally competitive commercial aviation 
manufacturing industry, the Chinese government has adopted a strategy 
of first engaging in domestic production and assembly using foreign 
designs, then developing its own designs with foreign assistance, 
culminating in the completely independent domestic development of 
commercial aircraft without foreign assistance.
    To create an indigenous commercial aviation manufacturing industry, 
the Chinese government has employed the following policy instruments:

  (1)  Setting up ``national champions'';

  (2)  Providing launch aid;

  (3)  Compelling state-owned airlines to purchase Chinese aircraft;

  (4)  Targeting orders to foreign manufacturers with assembly 
        operations in China or who source from China;

  (5)  Stipulating that foreign suppliers enter into joint ventures 
        with Chinese partners; and

  (6)  Encouraging foreign countries to purchase Chinese aircraft 
        through diplomatic persuasion and the provision of loans.

    China's aviation manufacturing industry is large, although 
primarily focused on the production of military aircraft. The entire 
industry employs over 250,000 people. The smaller, commercial component 
of the industry has more than doubled output between 2005 and 2010. The 
entire industry has also become increasingly technologically 
sophisticated. However, in our view, Chinese government policies 
pursued to support the creation of ``national champions'' in commercial 
aviation manufacturing have not yet borne fruit. Although output of 
components for commercial aviation has grown rapidly over the last 
decade, the shares of China's industry in world exports and in gross 
industrial output in China remain very small and have not markedly 
risen.
    For example, the ARJ-21 is constructed largely if not entirely from 
components manufactured by foreign companies; the C919 will also depend 
on modules manufactured by foreign manufacturers, although these 
modules will be assembled in China. China's industry continues to 
struggle with systems integration: projected dates for the 
certification of the ARJ-21 have been postponed several times; the C919 
is also delayed.
    So what does the future hold for China's efforts?
    The experts we interviewed believe that in the coming years Chinese 
manufacturers will continue to improve the quality and technological 
sophistication of their products. Almost all believe that COMAC will 
succeed in certifying the C919. Opinions differed concerning likely 
numbers of aircraft sold and delivered. One expert noted that current 
sales contracts are quite ``soft'' and that there are several ways by 
which buyers can avoid consummating the final sale, not least by 
cancelling orders due to delays in deliveries.
    Moreover, by the time COMAC hits full production, the C919 will be 
technologically outdated compared to Airbus's and Boeing's new models, 
the A320neo and 737 Max, respectively. Most of those we interviewed 
felt that COMAC will not truly be able to break into the international 
commercial aircraft market until it manufactures its next aircraft, the 
C929, following the C919 and quite possibly, not even then. To develop 
the C929, COMAC will need another round of substantial financial 
support from the Chinese government over a relatively long period of 
time. Even then, many, if not most of the experts we interviewed were 
skeptical that COMAC could compete successfully with Airbus and Boeing.
    In short, COMAC has yet to show that it will be able to produce 
commercially viable aircraft, much less show that it can become a 
commercially competitive aircraft manufacturer. Many of the experts we 
interviewed while conducting this research are skeptical that COMAC 
will be able to compete successfully with Airbus and Boeing.
    However, one area where China is likely to be more successful than 
in commercial aviation is general aviation, smaller aircraft used for 
private, charter, or corporate use. China has been buying its way into 
the international market. CAIGA's, China's state-owned enterprise 
active in general aviation has acquired Cirrus, a U.S. manufacturer. It 
has also recently signed a joint venture agreement with Cessna to 
assemble Cessna's Citation model in China.
Foreign Investment in China
    Despite the limitations of the Chinese commercial aviation industry 
noted above, why are foreign companies engaged in manufacturing 
commercial aviation products in China? There are several reasons:

   Provide support to Chinese customers. China's commercial 
        aircraft fleet currently accounts for 9.6 percent of the global 
        fleet. In light of the size of China's market, aircraft 
        manufacturers and suppliers of major aviation components need 
        to have operations in China to provide service to their 
        customers.

   Benefit from a competitive source of parts. Foreign aircraft 
        manufacturers and their suppliers have also turned to China for 
        competitively priced parts. Chinese suppliers have provided 
        intricately machined components and other technologically 
        sophisticated components, such as parts manufactured from 
        composite materials, at competitive prices.

   Set up assembly operations to generate sales to Chinese 
        airlines. Manufacturers have found that assembly operations in 
        China, such as Airbus's joint venture in Tianjin, facilitate 
        sales of aircraft to Chinese airlines.

   Purchase Chinese components as a marketing tool to encourage 
        Chinese purchases of aircraft.

   Participate in the C919 program. A slew of manufacturers 
        have recently set up joint venture operations in China so as to 
        be eligible to be a supplier for the C919 program.

   Enhance the company's image in China. Foreign companies have 
        found that a manufacturing presence in China provides goodwill, 
        increasing the likelihood that Chinese customers will purchase 
        their products. Setting up manufacturing facilities for high 
        priority projects for the Chinese government, such as 
        commercial aviation manufacturing, is believed to generate 
        goodwill for all of a company's activities in China.

    Most major international commercial aviation manufacturers now have 
joint ventures in China. Foreign companies have set up these operations 
for a variety of reasons, but Chinese pressure for purchases of 
components manufactured in China and stipulations that suppliers for 
Chinese domestic aircraft set up joint ventures in China have 
definitely played a role. It would be surprising if these facilities 
are not eventually fully integrated into the global manufacturing base 
of these companies. Although some facilities, like Airbus's assembly 
operation in Tianjin, may remain dedicated to serving the Chinese 
market, over the course of the next decade we expect to see more 
supplier facilities in China specialize in specific products or modules 
and supply these to the foreign partner's global operations.
    Many of the managers of foreign manufacturers with whom we held 
discussions argued strongly that sales of products manufactured by 
joint ventures in China do not compete with imports from the United 
States or Europe. They argued that the joint ventures serve to create, 
not destroy jobs in their home countries. Sales made by the joint 
venture would not have been made if the joint venture had not existed; 
imports of parts and components for assembly by Chinese joint ventures 
generate employment in the United States or Europe. However, in the 
long-run, in our view more components are likely to be manufactured in 
China.
    Those we interviewed on this topic stated that their Chinese 
partners were becoming more technologically sophisticated, but only a 
few voiced fears of losing their technological edge to Chinese 
companies, as long as their own (foreign) companies continue to 
innovate. Their companies' extensive marketing networks, incorporation 
of their products on aircraft manufactured by Airbus, and Boeing, and 
manufacturing know-how provide them with strong incumbent advantages.
Challenges for Foreign Companies
    Foreign commercial aviation manufacturers, like many companies, 
find investing in China challenging. All of the companies with whom we 
spoke while conducting research for the report had been active in China 
for years and had developed strategies and programs to safeguard their 
intellectual property and technologies. The most common approach is to 
manufacture key components outside of China; the joint venture then 
imports the component for final assembly.
    Another intellectual property safeguard is that materials and 
components used on aircraft must be certified by aviation regulatory 
agencies like the Federal Aviation Administration. This global 
regulatory system for the aviation manufacturing industry helps to 
lessen the theft of intellectual property in China. Because Chinese 
manufacturers must obtain international certification for their 
components even if components are to be used in Chinese aircraft, 
foreign companies that believe their intellectual property rights have 
been injured by Chinese companies are in a position to intervene to 
prevent the certification and hence sale of those products.
    It is worth noting that foreign (non-Chinese) aviation product 
manufacturers underlined the importance of innovation in preventing the 
emergence of Chinese competitors. This is especially important in 
subcomponents where the barrier posed by certification is not as high. 
Many companies now design products specifically for China. A number of 
these companies noted that by focusing on quality, improving 
manufacturing efficiency, and distribution, they have been able to out-
compete their Chinese competitors even at the lower end of the market.
Policy Options for the United States
    Both the United States and the European Union face a conundrum. 
China's leadership appears convinced of the efficacy of industrial 
policies to foster new industries and expand exports. In contrast, the 
United States and the European Union have attempted to move away from 
industrial policies because of cost, lack of efficacy, and in the 
interests of creating a level playing field for international trade.
    In both the United States and the European Union, the ``squeaky 
wheel'' rule reigns. Trade issues are placed on bilateral agendas or 
brought to the WTO only if a domestic company complains. Trade 
negotiators focus on other industries where competition from Chinese 
firms threatens to have immediate consequences rather than markets like 
commercial aviation manufacturing which U.S. and European firms still 
dominate. In a world in which immediate problems are given all the 
attention, what can and should the U.S. Government and the EU do with 
regards to commercial aviation manufacturing? Several recommended 
options include:

  (1)  Push for more transparent tenders for purchases of aircraft by 
        Chinese state-owned airlines;

  (2)  Ensure that Chinese aircraft components submitted for 
        certification by the FAA or EASA do not incorporate 
        intellectual property taken from other companies;

  (3)  Work with domestic companies with operations in China to 
        voluntarily report whether and how investment decisions in 
        China have been influenced by Chinese industrial policies;

  (4)  The U.S. Government should engage in bilateral negotiations with 
        the EU to discourage the use of purchases of components as a 
        marketing tool by Airbus and Boeing;

  (5)  Continue to press the Chinese government in bilateral forums and 
        at the WTO to dispense with industry-specific industrial 
        policies;

  (6)  Monitor the development of the C919 and succeeding aircraft and 
        intervene promptly through the WTO and bilateral forums in 
        response to efforts to use subsidies or other supports to enter 
        foreign markets.

    Without a dramatic change in China's policy of ``national 
champions'' none of these measures are likely to create a level playing 
field in China for Western manufacturers. However, persistent efforts 
to reduce the trade distorting effects of China's industrial policies 
through countervailing duties or other measures may serve to mitigate 
some of the effects of China's policies.
Implications for the Government of China
    In our view, the Chinese government would benefit from a careful 
assessment of its current policies of government support for commercial 
aviation manufacturing and whether this activity is a good use of 
China's resources. China is spending well over $7 billion for the C919; 
the ARJ-21 has also been expensive. Yet many experts we interviewed 
were skeptical that either the C919 or the ARJ-21 will ever be 
commercial successes. In light of the many hurdles facing COMAC, in our 
view this is an opportune time for the Chinese government to rethink 
its investments and policies targeting specific industries. Focusing 
its energies on creating a business environment friendly to all firms, 
private, foreign, and state-owned alike, will be much more likely to 
result in a higher payoff.
    One of the lessons of the post-World War II era has been the 
importance of the free flow of ideas and people for technological 
advances. The rise of the modern multinational corporation has played a 
key role in these advances. These companies are adept at creating 
multinational teams, drawing on talent from across the globe, to 
develop new products and processes. They have developed systems for 
developing and deploying new technologies and products.
    One of the goals of China's leadership has been to put the country 
at the forefront of global advances in science and technology. China 
has talented engineers and scientists and has registered significant 
advances in a large number of industries, including space and 
telecommunications. It also has a number of successful multinational 
companies of its own. However, to the extent foreign companies are not 
given the same treatment as their Chinese counterparts, as has been the 
case in the wind turbine and high speed rail industries, or are afraid 
that their intellectual property rights will not be safe, they will 
remain cautious about what technologies they bring to China.
    If China wishes to become fully integrated into the global 
commercial aviation manufacturing industry, China's government would be 
well advised to change its current policies so as to create a more 
equitable business environment for both foreign and Chinese commercial 
aviation manufacturers. The benefits of such a policy change for China 
would be considerable in terms of better allocation of investment, 
tighter integration into global technology supply chains, and the 
substantial savings of putting funds currently going to support 
``national champions'' to better uses.
    Thank you Chairman Cantwell, Ranking Member Ayotte, and members of 
this Subcommittee for the opportunity to testify before you this 
morning. I look forwarding to answering your questions.

    Senator Cantwell. Thank you.
    I thank the witnesses for their testimony.
    I think to me the issue here, and I think, Mr. Allen, you, 
certainly, described what I call ``co-opetition,'' the 
challenges of the 21st century where you have to compete and 
cooperate at the same time, knowing where you differentiate on 
those issues. And Dr. Crane's testimony, certainly, outlined 
that innovation usually wins the day.
    But obviously, innovation can, certainly, be hampered by 
the level of subsidization that happens. With the WTO, we can 
see that we are still 12 years down the road from the first 
filing of that case. Now we have a WTO decision, but there 
still has been no real remedy in the marketplace. So I think 
that that clearly paints a picture for where we are.
    I had a couple questions for you, Mr. Allen, on this issue 
of how do we continue to work toward private sector financing 
in aviation. So the majority of aircraft financing isn't 
through the Export-Import Bank. You gave testimony to that.
    But there are times, I think you put in your written 
testimony, that the U.S. marketplace, like after 9/11, or in 
the economic downturn, where you really do have to rely on 
those resources for financing. So if you could talk about those 
kinds of economic downturns.
    And, two, you mentioned the Aircraft Sector Understanding. 
So if we didn't have an Export-Import Bank, we would no longer 
be party, is that correct, to the actual discussions of how to 
keep that financing at market-based rates? The rest of the 
participants being more heavily subsidized aviation 
manufacturers, I mean, we are the voice at the table for that 
actual discussion of keeping market-based rates. Is that 
correct?
    Mr. Allen. Ex-Im is the critical tool that gives us, as a 
Nation, the leverage necessary to bring a set of multiple 
nations to the table for negotiations. So without Ex-Im, we 
might have a nameplate and a chair at the table, but we would 
have no influence, no effectiveness. We would have no 
meaningful seat at the table, because the ASU is based on the 
countries staring each other in the eye, recognizing that each 
one has the ability to harm the other through subsidization, 
and coming to an agreement because of that strong-backed 
position to say we need an even playing field.
    How do we make sure that the price mechanism here is fair 
and even across all of industry so that there are no 
subsidizations involved? You only get that when you step 
forward with a match to somebody who is a first mover in 
subsidies.
    Europe has historically been a first mover in subsidies. 
And so has much of the economic development that we have seen 
driven out of Asia. We see subsidies across the world.
    So the USTR and Export-Import Bank are critical tools that 
fight against that. And if we take the bank away, we can expect 
ourselves to be at significant disadvantage, unable to bring 
others to the table.
    Senator Cantwell. And you are not even talking about the 
financing. You are talking about trying to shape the world 
debate about where this should go, a level playing field.
    Mr. Allen. Even on the specific issue of financing, the 
only way we will be able to bring other nations to the table to 
negotiate an even playing field on financing is if we have the 
Export-Import Bank framework that tells them they have no 
advantage to lean forward and subsidize through financing their 
industries.
    Senator Cantwell. And what about in an economic downturn 
like we saw in 2008, 2009? What happened then to private 
financing?
    Mr. Allen. Private financing, as we saw through the global 
recession, can disappear in a minute. We call them liquidity 
crises, where the underlying fundamentals are still there for 
any particular industry or even homebuyer, but the bank is not 
willing to lend, because of its own sense of uncertainty in the 
face of the crisis.
    That is what happened in 2008 and 2009. And the Ex-Im Bank, 
one of its important roles, is to be that backstop lender who 
steps in in a moment of crisis and makes sure that the 
financial markets stay open when the underlying demand is 
there.
    So we saw, for example, great demand for travel out of Asia 
throughout the global recession. It never slowed down. It never 
missed a beat. Those airlines, however, would have been very 
challenged to find financing on the open market during that 
time, just like most U.S. homeowners couldn't get a loan for a 
house during that time.
    So the Ex-Im Bank stepped in and its participation in the 
finance for airplanes increased over that timeframe. It saved 
jobs. It kept the industry smooth. It stabilized things.
    Senator Cantwell. Well, certainly, any numbers that you 
have on what that job loss would have been without that 
financing I think would be helpful. While we hope it never 
happens again, the kind of downturn, I think it just points to 
some things people aren't thinking about, what a tool it is in 
those kinds of environments.
    I will turn this over to my colleague, Senator Ayotte.
    Senator Ayotte. Thank you.
    I wanted to, Dr. Dillingham, ask you about the Ex-Im Bank. 
I know that you are focusing on certification issues, but also 
the GAO has done work on the Ex-Im Bank, looking at it as well. 
Is that right?
    Dr. Dillingham. Yes, we have.
    Senator Ayotte. Because I definitely have some questions 
for you on the certification issue as well. But one thing, as I 
said in my opening statement, I have previously supported the 
Export-Import Bank. But I think an issue that does need to be 
addressed is this issue I raised about support for smaller and 
medium-sized companies and giving them a better chance to 
remain competitive in the global marketplace by obtaining 
credit that is not otherwise available through the commercial 
markets.
    So as I look at the numbers for the Ex-Im Bank, more than 
80 percent of the banks' financing benefits major firms. In 
fact, 10 companies receive 75 percent of the Ex-Im Bank 
financing.
    So what suggestions do you have, if there are reforms made 
as we reauthorize the bank, in a restructure that would make 
this more friendly for smaller and medium-sized companies, 
because right now it seems pretty centered in large companies. 
Not that I am opposed to them being able to be competitive in 
the global marketplace, but I think this is an important 
question, especially in a state like New Hampshire, where we 
have the presence of larger suppliers, but a lot of smaller and 
medium-sized companies as well.
    Dr. Dillingham. Thank you, Ranking Member, for the 
question.
    We did in fact do a report for another Committee of the 
Congress that we published earlier this year. As part of that 
report, much of the information that both you and the 
Chairwoman have provided to date, we had that information in 
our report. We did not make any policy recommendations.
    We talked about the idea that small companies, as well as 
large companies, benefit from the existence of the Ex-Im Bank. 
But we didn't make any more specific policy recommendations 
beyond putting the facts of how it has helped across the 
industry.
    Senator Ayotte. So you have not made any analysis as to how 
we can look to ensure that medium and smaller sized businesses 
also have access to this opportunity for credit that is not 
otherwise commercially available?
    Dr. Dillingham. Not in the particular area of aviation that 
I am working in. But we have a part of GAO that has done that 
kind of work, and I can have them be in touch with you and your 
staff to provide that kind of information.
    Senator Ayotte. I think that is really important, because I 
think that is a question that many of my colleagues often have 
about the Export-Import Bank.
    And I don't know if, Dr. Crane or Mr. Allen, you have any 
comments on those issues?
    Mr. Allen. If I could, thank you very much for the 
question. It is very important.
    No one in our industry works alone. No one works alone. We 
are a small business. Why? Because we have over 15,000 
suppliers in the United States alone. The companies that you 
mentioned in your state are a great example for that.
    So as Export-Import Bank supports the sales of airplanes, 
such as to markets like Kenya, which was the leading borrower 
with Ex-Im guarantees in this current year, what they are doing 
is supporting jobs at the small and medium-size businesses that 
make up the backbone of what it takes to build an airplane.
    So we appreciate the support of the bank because of the way 
it lets us work together in delivering those final integrated 
products. But no one works alone.
    Senator Ayotte. I, certainly, appreciate that there are a 
lot of smaller and medium-size companies that are suppliers to 
Boeing, and appreciate the impact on those suppliers.
    But I am also thinking of the businesses that aren't 
necessarily suppliers, but are on their own seeking financing, 
and how easy are we making it for them to be able to use this 
tool. This is a global marketplace, I think we all acknowledge.
    I don't know if you have any comments on that, Dr. Crane.
    Dr. Crane. No.
    Senator Ayotte. Thanks.
    I did want to ask about the certification process, Dr. 
Dillingham. This has been an issue I have heard a lot from the 
aviation industry about, in terms of concerns that this 
certification process, that we do need to very much improve how 
the FAA handles this process because it makes us less 
competitive, if industry can't get through that process in a 
timely fashion to ensure that they are getting the 
certification they need.
    And so what are the top line, most important things you 
think we can do to really hold FAA more accountable for a 
greater emphasis, to ensure that we are more competitive in 
this certification process?
    Dr. Dillingham. I think the actions that Congress took in 
the 2012 FAA reauthorization, where it mandated that FAA work 
with industry to come up with solutions, and not only work with 
them but come up with solutions, but work with industry to 
actually implement those solutions.
    I think that is the top-line thing that needs to be done, 
that FAA needs to implement those recommendations. They need to 
have the metrics associated with that implementation to show 
what progress has actually been made.
    The point that I was trying to make in my oral statement, 
the difference between output and outcome, not just 
implementing the recommendations, but showing the Congress and 
industry what difference it has made in terms of the 
implementation of the recommendation.
    And in the context of what we are talking about today in 
terms of competition, that is critically important, because, as 
you said, to the extent--and most of these are in fact small 
industries. If they are delayed in their certification or 
delayed in their approval, it costs money, it costs time, it 
does not allow for the quick and efficient export of products, 
because you need that FAA certification before you can start 
moving products offshore, as such.
    So it is very critical that those recommendations be 
implemented, and Congress continue to monitor, as this 
committee is doing, that those recommendations are implemented 
and measured.
    Senator Ayotte. Thank you.
    Senator Cantwell. Senator Wicker?

              STATEMENT OF HON. ROGER F. WICKER, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Wicker. Mr. Allen, more than 60 countries have 
established ECAs, export credit agencies. We are told that the 
elimination of the Ex-Im Bank would amount to unilateral 
disarmament on the part of the United States and U.S. 
manufacturers. I assume you agree with that?
    Mr. Allen. Very strongly.
    Senator Wicker. But let me ask you, is the Ex-Im Bank a 
really good idea, or is it a necessary evil that we have to 
have in terms of government involvement in corporate credit, 
that we would rather not have if the other countries didn't act 
as they do?
    Mr. Allen. For 80 years, the wisdom of the Export-Import 
Bank policy has been ensuring that there are stabilization 
mechanics built into our export economy.
    It has likewise been an important enabler of the 
development of economies that would not otherwise have access 
to capital markets.
    So the essential question, is it a necessary evil or good 
policy tool, I would say it is good policy tool. It is a good 
policy tool. And like every good policy tool, that means its 
implementation is what makes it shine. And so the 
implementation of Ex-Im is industry-specific.
    So we in aviation think about it just a bit more narrowly. 
We think about it in terms of the OECD and the Aircraft Sector 
Understanding. And our fundamental question always is, is the 
ASU doing its work to ensure that this good policy is being 
used to good ends?
    That is why I hammered during my written testimony on this 
important fact that there is no cheap export credit in 
aviation, because if there were, then I could understand the 
barbs and the criticism from the other side. But there isn't, 
precisely because of this multilateral engagement.
    So it is good policy. It is being implemented well. It is 
saving jobs. And in that respect, I don't see how the last 80 
years are anything other than a terrific proof point.
    Senator Wicker. If we didn't have ECAs all over the world, 
you are saying that modern day, 21st century governments would 
invent such things to promote international trade. Is that what 
you are saying?
    Mr. Allen. There is a constant pressure in any government-
managed industrial process to have industrial success. So other 
countries will constantly revert to places of subsidization.
    We have to be able to always have the tools necessary to 
even the playing field. So just on that basis alone, and that 
is a defensive basis, you need the Export-Import Bank. There is 
also this positive basis of developing markets.
    Senator Wicker. Now let me just ask you, we have GE 
Aviation in Mississippi. We are very pleased to have them in 
Batesville and Ellisville. They are a major supplier to Boeing.
    How would the employees of these manufacturing plants in 
Batesville and Ellisville be impacted were the Ex-Im Bank Bank 
to be eliminated?
    Mr. Allen. Well, the single word is ``jobs.'' Madam 
Chairwoman made the great point about how important it is to 
quantify the jobs at stake.
    Well, after the 2001 attacks, 9/11, Boeing suffered roughly 
30,000 layoffs. That scale of layoffs, of course, rippled in 
multiples through our supply chain. A big part of that was 
because the U.S. airlines found themselves unable to take 
delivery of Boeing airplanes, unable to access the markets for 
financing.
    No Ex-Im Bank. No support able to backstop their operation. 
And the result was the need to reduce the production rate and 
the loss of jobs. Those jobs impact the entire supply chain.
    Senator Wicker. Dr. Crane, do you have a position on 
whether the Ex-Im Bank should be reauthorized?
    Dr. Crane. Not my area.
    Senator Wicker. OK.
    And, Dr. Dillingham?
    Dr. Dillingham. No, sir. GAO would not make that kind of 
statement.
    Senator Wicker. OK.
    Are any of the three of you aware, do these other ECAs 
around the globe return funds to their respective treasuries as 
Ex-Im Bank does?
    Mr. Allen. Sir, I don't know that myself.
    Dr. Crane. Some do, so don't. There have been some pretty 
dramatic losses over the course of the years by some of these, 
and others have done like the Ex-Im Bank.
    Senator Wicker. And we have not seen that with Ex-Im Bank. 
Is that correct?
    Mr. Allen. That is correct.
    Senator Wicker. Thank you very much.
    Thank you, Madam Chair.
    Senator Cantwell. Thank you, Senator Wicker.
    Dr. Crane, I wanted to ask you about China's efforts. They 
have made this a national priority. Obviously, sometimes you 
hear people say, you guys have an R&D tax credit. Where would 
you put our R&D tax credit compared to the efforts that you are 
seeing in China?
    Dr. Crane. There has been an interesting debate in China, 
with the advent of President Xi. At the party's Third Plenum, 
there was a statement that they want to use more market means 
to allocate resources.
    What the R&D tax credit does, it doesn't stipulate whether 
you are providing R&D for aircraft or for pharmaceuticals or 
automobiles or food. So it is not a process of picking winners.
    The recent approach in China----
    Senator Cantwell. If you were just going to measure where 
they are and where we are with R&D, what would you say? Are 
they on par?
    Dr. Crane. They are very much into this old style picking 
winners. So Comac is not just one instance, as I mentioned 
before. There is a whole host of industry. If you look at the 
five-year plans, they are targeted. They have had some success 
at times. Other times, they have not had very much success.
    But I think the big difference is between having a policy 
like the R&D tax credit, which really doesn't pick winners, and 
a policy in which someone up at the top does. And I think 
markets have shown that the R&D tax credit is a much better way 
to go.
    Senator Cantwell. I would be interested in a comparison in 
a dollar figure, too. I have a feeling that even though we have 
an R&D tax credit, it is dwarfed by the amount of money that is 
spent in this area. But I am happy to hear data from you on 
that.
    Dr. Crane. On research and development spending?
    Senator Cantwell. Their whole effort in support of aviation 
compared to what a broad policy like R&D might do.
    Dr. Crane. A lot of money spent on aviation, though, is for 
bricks and mortar. And, as Boeing well knows, launch costs are 
incredibly expensive, and only part of that is research and 
development. A lot of it is the whole process of paying people 
to start production.
    Senator Cantwell. Mr. Dillingham, on your recommendation 
list, as you go through, basically saying the FAA needs to 
implement these policies as it relates to certification, one of 
the things that I think we need to deal with is the rate and 
level of innovation.
    So, for example, Boeing built a plane that was 
substantially using composites, the 787. So in that case, the 
FAA created a center for excellence, well before the 
certification process, so they could identify with both the 
public and private sector what the issues were related to that 
huge shift in manufacturing.
    Where do you see that coming into play? What are the tools 
that could best help the FAA understand the rate and level of 
innovation, and stay on top of it? Because obviously, we are 
not going to hire tens of thousands of aviation experts, just 
to be on top of the latest technology at the FAA. We want them 
to have a process to be knowledgeable about it. What is the 
best way to do that?
    Dr. Dillingham. Thank you, Madam Chairwoman. The instance 
that you cite, I think it was related to the Dreamliner, 
Boeing's Dreamliner and it containing more composite material 
than ever before. And that is the way wave of the future, I 
think, both for big aircraft and for smaller aircraft.
    The process that FAA has initiated is the organizational 
delegation or designee program, which allows for industries 
with the appropriate skills and resources and knowledge to act 
in concert with FAA, with FAA oversight, to be able to approve 
those kinds of innovations and to help spur innovation.
    It is part of what the Congress mandated in the 2012 
reauthorization. FAA needs to expand that process to bring in 
more industry partners. They need to make sure the FAA 
oversight of those industry partners of that kind of operation 
is adequate, and that those inspectors that work with industry 
are fully trained.
    As you said, there is no way the FAA can kick all the 
tires. They need the help of industry. That is part of the 
recommendation that the Congress mandated and is part of why we 
say it is a critical and priority effort that they implement 
those recommendations.
    Senator Cantwell. Thank you.
    Mr. Allen, to my colleague Senator Ayotte's focus on small 
business, which I always look at this, since I chair the Small 
Business Committee, that something like 90 percent of the 
transactions at Ex-Im Bank are small business. But because 
aerospace is such an expensive product and some of the other 
manufacturers, whether it is GE when you look at it just from a 
revenue perspective, obviously these bigger industries are a 
larger percentage of the actual dollars spent.
    So do you oppose looking at ways to further incent small 
business or setting goals within the Ex-Im Bank to help small 
businesses?
    Mr. Allen. Not at all. We have watched over the last 
several years as Ex-Im Bank has developed an increasingly 
strong infrastructure to reach out to small business. They have 
been very effective. They are now at over 90 percent of their 
transactions being for small business. So that commitment is 
very much in response to the policy directive that Congress 
established for the bank, and the bank has executed well on it. 
We support it wholeheartedly.
    Senator Cantwell. And there are many people in the supply 
chain who are suppliers to both Boeing and to Airbus. Is that 
correct?
    Mr. Allen. Correct. In the aerospace industry, really, no 
one works alone. So the need to have the integrated supply 
chain all the way down is, A, imperative, but B, for the 
suppliers, they also have to supply on multiple sides to be 
able to continue their own strength.
    Senator Cantwell. And we are interested obviously in more 
innovation all down the supply chain. Is that right? I mean, 
that is what gives us the advantage, to have that supply chain 
continually innovating on their particular production?
    Mr. Allen. Yes. We have worked very hard, especially when 
the 787 is discussed, to look for ways where we can engage with 
our supply partners in the supply chain on elements of 
innovation in the new airplane platform. Innovation normally is 
not contained just in a small bubble. It is normally in a 
broader ecosystem. So we do try to support that.
    Senator Cantwell. I noticed as we were in Yakima, 
Washington, at a GE facility, then the GE facility. And 
somebody was showing us a strand of metal that basically was as 
thin as the hair on your head, that thin. They said, yes, we 
are producing this for Airbus there in Yakima, Washington, 
because they could produce that product more cost-effectively, 
more precise to what the end customer wanted.
    Lots of these industries are also getting support from Ex-
Im Bank. Is that correct?
    Mr. Allen. Yes. And what you describe is a great example of 
how complicated the world has become, because supply chains are 
so integrated and economies are so integrated. But it is one of 
the reasons why it is all the more important that the macro 
level infrastructure, like the disciplines that the Aircraft 
Sector Understanding sets, are maintained, because they become 
the stability in this fast-moving world of great change.
    Senator Cantwell. You mean they are constantly on top of 
the dialog of preventing distortions? Is that what you are 
saying?
    Mr. Allen. That is right.
    Senator Cantwell. Thank you.
    Senator Ayotte?
    Senator Ayotte. Thank you.
    I would ask this question of Dr. Crane and Mr. Allen.
    I know that there was a discussion you just had, Dr. Crane, 
with the Chair about the R&D tax credit. Can you tell me what 
your view is in terms of what our tax rate does, in terms of 
competitiveness for the aviation industry, because we have the 
highest corporate tax rate in the world? What is our overall 
tax rate? Does that impede our competitiveness in a global 
economy when we are competing against countries that have lower 
tax rates?
    Dr. Crane. I think it is more, as an economist speaking, it 
is more the distortions. What an economist would argue would be 
that you want to have a very simplified, clean tax rate, 
because the effective tax rate for companies varies very, very 
widely, as you know. So to establish both a level playing 
field, but also ensure that there are adequate revenues for the 
U.S. Government, the most----
    Senator Ayotte. Simplify.
    Dr. Crane. Simplify.
    Senator Ayotte. There have been a lot of discussions about 
simplifying and lowering, so that it is easier to administer, 
in terms of the government side, but also ensures 
competitiveness on the other side.
    Dr. Crane. It also saves a lot of cost on the corporate 
side. I mean, if you had a very simple, clean tax rate, it 
saves in terms of accounting and legal fees as well.
    Senator Ayotte. Mr. Allen?
    Mr. Allen. Simplified and competitive are really important 
principles. I am not our tax specialist, but I would also be 
delighted to take back the question to the company and make 
sure we come back to you with our thoughts and our ideas, 
because we do believe that we need to keep pushing toward more 
simplification and more competitiveness.
    Senator Ayotte. I would appreciate that, because as we 
think about our competitiveness, I think about where do we 
stand vis a vis other countries in terms of our tax code. I 
also think about the regulatory climate.
    And, Dr. Crane, you had mentioned the issue of 
certification that Dr. Dillingham touched on. You mentioned it 
in the context of China stealing our intellectual property, 
which they have a clear record of doing and in many instances 
where companies, I am sure, like Boeing are always worried 
about that, with their technology, and other U.S. companies.
    So what thoughts do you have in terms of the certification 
process that we should be looking at to make America more 
competitive?
    Dr. Crane. As you well know, FAA, the certification 
process, is extraordinarily important, because almost everybody 
flies. And getting in an aircraft, it is just imperative that 
those aircraft are safe.
    And one of the things FAA has done very constructively has 
worked with the Chinese aviation regulatory industry, so they 
establish the same types of procedures and the same type of 
careful analysis to make sure that everything that goes into 
Chinese aircraft is certified.
    And I think that because of the very high safety issues 
that you have with aircraft, it is really imperative to have a 
very strict regulatory regime.
    Senator Ayotte. How good is their regulatory regime?
    Dr. Crane. Thanks to U.S. Government support and the FAA, 
and I think this is a benefit to everyone in the world, it has 
become, on the aviation side, they have really adopted both 
European and U.S. approaches to this, as compared to food 
quality----
    Senator Ayotte. I was going to say, if their milk is any 
indication, I don't want to fly in a Chinese plane.
    But yes, I think this is obviously a very important issue 
for the safety of our airways.
    But also, what challenges do we face on the intellectual 
property front with the Chinese? We know that this is a big 
challenge for our country, in terms of our developing lots of 
great technology. And often, rather than invent their own 
technology, they are taking ours.
    Dr. Crane. Every Western company we talked to is well aware 
of this with China. What they have done is they have just made 
sure that key components are not manufactured there, precisely 
because of this. It is the only way to protect themselves.
    Companies do take steps. They are not always successful. 
But we have had 35 years now of investment in China since the 
opening in 1978, 1979.
    I think it is good to be vigilant. I am glad the U.S. 
Government has made it a high issue.
    It really damages, long term, the Chinese economy as well. 
I think it is a very shortsighted approach, and I think 
continuing, that your statements and other statements are very 
helpful to kind of hammer that into the Chinese leadership.
    Senator Ayotte. Thank you. I appreciate that.
    I have a question that I am going to submit to you, Mr. 
Allen. It is on an issue that is not directly before this 
committee, but I also serve on the Armed Services Committee.
    I know Boeing is a prime contractor for the A-10 wing 
replacement program, and Congress has previously authorized and 
appropriated funding for replacement of A-10 wings in 2014. It 
is my understanding that the Air Force hasn't obligated any 
funds toward that yet, even though it has been appropriated by 
the Congress to do that.
    Do you know whether or not the Air Force has obligated this 
or whether you are undertaking this? If you don't, if you can 
take this question for the record, I would appreciate it.
    Mr. Allen. Yes, I will take that question for the record. 
That A-10 is a great airplane. I know that we are meeting our 
delivery commitments, because we are midstream on the program. 
But I don't know where the Air Force is on next decisions and 
steps.
    Senator Ayotte. I will submit a full question to you for 
the record, if you can get back to me, I would appreciate it.
    Mr. Allen. Will do.
    Senator Ayotte. Thank you.
    Mr. Allen. We will take it to our defense team.
    [Response from Mr. Allen for the record follows:]

    As of September 22, 2014, the A-10 WRP Program has not received an 
order for the 9 wings that were appropriated in FY 2014.

    Senator Cantwell. Well, I want to thank all the witnesses 
for your testimony today. You certainly have helped us 
illuminate the challenges that we face in aviation and 
certainly provided us with some suggestions on how we meet 
those challenges.
    I appreciate Senator Ayotte being here and arranging the 
schedule so we can have this hearing.
    The Subcommittee is going to continue to focus on what the 
United States needs to do to maintain its competitiveness in 
aviation. We very much get that it is a competitor-partner 
world.
    But we also need these very important tools like the Ex-Im 
Bank and the aircraft sector, the organizing tools to have the 
debate and to make sure we are continually creating a level 
playing field, so we can move forward with our innovation.
    Again, I thank all the witnesses for this testimony.
    If other members who are not here have questions, we will 
have the record open for two weeks and certainly hope that you 
would help us in getting responses in that timeframe.
    We are adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]

                                  [all]

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