[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
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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\
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\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.
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\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.
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\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.
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\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).
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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.
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\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\
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\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.
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\35\ GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1,
1996).
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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:
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\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
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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\
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\2\ This testimony is available for free download at http://
www.rand.org/pubs/testimonies/CT416.html.
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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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