Federal Aviation Administration: Challenges for Transforming Into
a High-Performing Organization (18-MAY-04, GAO-04-770T).	 
                                                                 
Over the last two decades, FAA has experienced difficulties	 
meeting the demands of the aviation industry while also 	 
attempting to operate efficiently and effectively. Now, as air	 
traffic returns to pre- 9/11 levels, concerns have again arisen  
as to how prepared FAA may be to meet increasing demands for	 
capacity, safety, and efficiency. FAA's air traffic control (ATC)
modernization efforts are designed to enhance the national	 
airspace system through the acquisition of a vast network of	 
radar, navigation, and communication systems. Nine years have	 
passed since Congress provided FAA with personnel and acquisition
reforms. However, projects continue to experience cost, schedule 
and performance problems. FAA's Air Traffic Organization (ATO) is
its most current reform effort. Expectations are that the ATO	 
will bring a performance management approach to ATC		 
modernization. This statement focuses on three main questions:	 
(1) What are some of the major challenges and demands that	 
confront FAA? (2) What is the status of FAA's implementation of  
reforms and/or procedural relief that Congress provided? and (3) 
What are some of the critical success factors that will enable	 
FAA to become a highperforming organization?			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-770T					        
    ACCNO:   A10113						        
  TITLE:     Federal Aviation Administration: Challenges for	      
Transforming Into a High-Performing Organization		 
     DATE:   05/18/2004 
  SUBJECT:   Agency missions					 
	     Aviation						 
	     Federal agency reorganization			 
	     Performance measures				 
	     Strategic planning 				 
	     Airport and Airways Trust Fund			 

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GAO-04-770T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Aviation, Senate Committee on Commerce,
Science, and Transportation

For Release on Delivery

Expected at 9:30 a.m. EDT FEDERAL AVIATION

Tuesday, May 18, 2004

ADMINISTRATION

        Challenges for Transforming Into a High-Performing Organization

Statement of JayEtta Z. Hecker, Director Physical Infrastructure Team

GAO-04-770T

Highlights of GAO-04-770T, a report to the Subcommittee on Aviation,
Senate Committee on Commerce, Science, and Transportation

Over the last two decades, FAA has experienced difficulties meeting the
demands of the aviation industry while also attempting to operate
efficiently and effectively. Now, as air traffic returns to pre9/11
levels, concerns have again arisen as to how prepared FAA may be to meet
increasing demands for capacity, safety, and efficiency.

FAA's air traffic control (ATC) modernization efforts are designed to
enhance the national airspace system through the acquisition of a vast
network of radar, navigation, and communication systems. Nine years have
passed since Congress provided FAA with personnel and acquisition reforms.
However, projects continue to experience cost, schedule and performance
problems. FAA's Air Traffic Organization (ATO) is its most current reform
effort. Expectations are that the ATO will bring a performance management
approach to ATC modernization.

This statement focuses on three main questions: (1) What are some of the
major challenges and demands that confront FAA? (2) What is the status of
FAA's implementation of reforms and/or procedural relief that Congress
provided? and (3) What are some of the critical success factors that will
enable FAA to become a highperforming organization?

GAO is making no recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-770T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact JayEtta Z. Hecker at (202)
512-2834 or [email protected].

May 18, 2004

FEDERAL AVIATION ADMINISTRATION

Challenges for Transforming Into a High-Performing Organization

A forecasted increase in air traffic coupled with budgetary constraints
will challenge FAA's ability to meet current and evolving operational
needs. The commercial aviation industry is still recovering from financial
losses exceeding $20 billion over the past 3 years. Many airlines cut
their operating expenses, but FAA's budget continued to rise (see figure).
However, transportation tax receipts into the Airport and Airways Trust
Fund, from which FAA draws the majority of its budget, have fallen by $2.0
billion (nearly 20 percent) since 1999 (in constant 2002 dollars).
Cost-cutting and cost-control will need to be watchwords for FAA from this
point forward.

FAA has implemented many of the reforms authorized by Congress 9 years
ago, but achieved mixed results. Despite personnel and acquisition reforms
the agency contended were critical to modernizing the nation's air traffic
control (ATC) system, systemic management issues continue to contribute to
the cost overruns, schedule delays, and performance shortfalls. FAA's most
current reform effort, the Air Traffic Organization (ATO) --a new
performance-based organization mandated by AIR-21 that is operating the
ATC system - is just now being put in place.

To meet its new challenges, FAA must fundamentally transform itself into a
high-performing organization. The key characteristics and capabilities of
high-performing organizations fall into four themes: (1) a clear, well
articulated, and compelling mission; (2) strategic use of partnerships;
(3) focus on the needs of clients and customers; and (4) strategic
management of people. FAA has taken some promising steps through its new
ATO to restructure itself like high-performing organizations, but still
faces significant and longstanding systemic management challenges. Even
modest organizational and operational changes at FAA can be difficult and
time consuming.

Changes in Air Carrier Operating Expenses vs. FAA Budget (indexed to 100)

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to participate in today's hearing to discuss
the challenges that FAA faces both in the immediate environment and over
the next decade. We all recall that in the summer of 2000, the air traffic
control system lacked the capacity to handle demand efficiently, and
flight delays produced near-gridlock conditions at several U.S. airports.
A combination of factors - the downturn in travel caused by the general
economic slowdown, SARS, and of course the crises instigated by the events
of 9/11 - reduced traffic significantly and reduced pressure on the air
traffic control system.

Passenger traffic and airline operations are slowly returning to previous
levels, making this an appropriate time to re-examine the status of
nation's aviation leadership and infrastructure and its preparations for
the future of air transport over the next decade. FAA's budget request for
2005 provides a starting point from which to review the agency's
direction.

My statement today focuses on three main questions: (1) What are some of
the major challenges and demands that confront FAA? (2) What is the status
of FAA's implementation of reforms and/or procedural relief that Congress
provided? And (3) What are some of the critical success factors that will
enable FAA to become a high-performing organization? Our statement is
based on our past reports on ATC modernization and airline competition
work-updated to reflect important milestones and recent interviews with
key stakeholders in the aviation community, including several current and
former FAA officials. We performed our work in accordance with generally
accepted government auditing standards.

In summary:

Significant external and internal demands will challenge FAA's ability to
meet current operational needs and require it to adapt to meet the
evolving needs of the aviation industry. The commercial aviation industry
is still recovering from financial losses exceeding $20 billion over the
past 3 years. The downturn in travel has affected the Airport and Airways
Trust Fund, from which FAA draws the majority of its budget.
Transportation tax receipts into the Trust Fund fell by a total of $2.0
billion (19.6 percent) between 1999 and 2003. The overall condition of the
Federal budget adds more pressure on FAA's budget. Taken together,
cost-cutting and costcontrol need to be watchwords for FAA from this point
forward. To meet the demands of the aviation industry for safe, secure,
and efficient operations and for additional capacity to meet forecasted
growth, FAA will

need to continue to improve its management controls. Traditionally, FAA's
ability to operate efficiently and effectively - particularly regarding
its air traffic control modernization projects - have been hampered by
inadequate management of information technology and financial management
controls.

Nine years have passed since Congress provided FAA with the personnel and
acquisition reforms the agency contended were critical to successfully
modernizing the nation's air traffic control (ATC) system. Despite these
reforms, systemic management issues, including inadequate management
controls and human capital issues continue to contribute to the cost
overruns, schedule delays, and performance shortfalls that FAA's major ATC
projects have consistently experienced in the past.

o  	Personnel reforms addressed three broad areas: (1) compensation and
performance management, (2) workforce management, and (3) labor and
employee relations. FAA has taken steps to implement a number of reforms
in each of the three areas.1 For example, in the area of labor and

employee relations, FAA implemented initiatives establishing new
partnership forums for union and nonunion employees and a new model work
environment program.2 However, in February 2003, we found that

the agency had not fully incorporated elements that are important to

effective human capital management, including data collection and

analysis, performance goals and measures, and establishing links between

reform goals and program goals.

o  	As part of its procurement reforms, FAA introduced a new acquisition
management system in 1996 to reduce the time and cost to deploy new
products and services. To FAA's credit, our work has shown improvements in
the agency's oversight of investment risk, tracking key information from
the investment selection process in a management information system, and
implementation of guidance for validating costs, benefits, and risks.
However, in estimating the costs of new projects, FAA has not yet
incorporated actual costs from developing related systems. Moreover, the
agency has not yet implemented processes for evaluating projects after
implementation in order to identify lessons learned and improve the
investment management process. These weaknesses have

1FAA's Modernization Efforts-Past, Present, and Future (GAO-04-227T):
October 30, 2003.

2Human Capital Management: FAA's Reform Effort Requires a More Strategic
Approach, GAO-03-156, February 2003.

impeded FAA's ability to manage its investments effectively and make sound
decisions about continuing, modifying, or canceling projects.

o  	FAA's Air Traffic Organization (ATO) is one of its most current reform
effort. Under the leadership of a Chief Operating Officer, the ATO is a
new performance-based organization that is operating the ATC system. While
the ATO holds promise for laying the foundation for much needed and
overdue organizational change, progress has been slow, and the office
still faces significant challenges to implementing reform

To meet the challenges of the 21st century, FAA must fundamentally
transform itself to become a high-performing organization. Our work has
shown that high-performing organizations have adopted management controls,
processes, practices, and systems that are consistent with prevailing best
practices and contribute to concrete organizational results. Specifically,
the key characteristics and capabilities of high-performing organizations
fall into four themes (1) a clear, well articulated, and compelling
mission; (2) strategic use of partnerships; (3) focus on the needs of
clients and customers; and (4) strategic management of people. To
facilitate the transformation of federal agencies to high performing
organizations, we have also recommended that agencies apply the Chief
Operating Officer concept to provide long-term attention and focus on
management issues and transformational change. FAA has begun implementing
this concept. While FAA has taken some promising steps through its new ATO
to restructure itself in a manner consistent with highperforming
organizations, the agency still faces significant and longstanding
systemic management challenges which must be overcome if it is to meet the
demands and match the pace of ongoing changes in the aviation industry and
transform itself into a world-class organization. Our work for more than
two decades has shown that even modest organizational and operational
changes at FAA can be difficult and time consuming, which underscores the
difficult road ahead for FAA's leadership.

Significant External 	FAA faces significant demands that will challenge
its ability to operate both in the current environment and in what it
expects to encounter in the

and Internal Demands coming decade. With the industry still attempting to
recover from the most

Will Challenge FAA's tumultuous period in its history, FAA's funding is
constrained by lowered Airports and Airways Trust Fund receipts and
increased pressure on the Current and Evolving contribution from the
General Fund. To meet its current and future Operations operational
challenges, FAA is facing demands for greater efficiency and

accountability. And it goes without saying that FAA must continue to meet
demands for maintaining safety standards.

The U.S. Commercial Aviation Industry Is Still Recovering From
Unprecedented Financial Chaos

Since 2001, the U.S. airline industry has confronted financial losses of
previously unseen proportions. Between 2001 and 2003, the airline industry
reported losses in excess of $20 billion. A number of factors - including
the economic slowdown, a shift in business travel buying behavior, and the
aftermath of the September 11, 2001 terrorist attacks- contributed to
these losses by reducing passenger and cargo volumes and depressing fares.
The industry has reported smaller losses since 2001, but still may not
generate net profits for 2004.

To improve their financial position, many airlines cut costs by various
means, notably by reducing labor expenditures and by decreasing capacity
through cutting flight frequencies, using smaller aircraft, or eliminating
service to some communities. According to data from the Bureau of
Transportation Statistics, large U.S. air carriers cut their operating
expenses by $7.8 billion from 2000 through 2002. The drop in total large
air carrier operating expenses stands in sharp contrast to increases in
FAA's budget. (See Figure 1.)

Figure 1: Changes in Air Carrier Operating Expenses Compared to Changes in
FAA Budget, 1998 - 2003 (nominal dollars, indexed to 100)

FAA's budget - which has increased from $9 billion in 1998 to $14 billion
in 2004 - will be under pressure for the foreseeable future. Over the past
10 years, FAA has received on average approximately 80 percent of its
annual funding from the Airports and Airways Trust Fund (Trust Fund),
which derives its receipts from taxes and fees levied on airlines and
passengers.3 The downturn in passenger travel, accompanied by decreases

3The Trust Fund was established by the Airport and Airway Revenue Act of
1970 (P.L. 91258) to help fund the development of a nationwide airport and
airway system and to fund FAA investments in air traffic control
facilities. It provides all of the funding for the Airport Improvement
Program, which provides grants for construction and safety projects at
airports; the Facilities and Equipment account that funds technological
improvements to the air traffic control system; and a Research,
Engineering, and Development account, which supports aviation safety,
mobility, and environmental goals. In fiscal year 2002, the Trust Fund
provided 79 percent of the funding for FAA Operations, which represented
almost 50 percent of Trust Fund expenditures. The Trust Fund is supported
by 10 dedicated excise taxes. In fiscal year 2002, the Trust Fund received
about $10 billion in revenue from these taxes and interest.

Budgetary Pressure on FAA Will Increase Over Time

in average yields, has resulted in lowered receipts into the Trust Fund.
On average, domestic yields have fallen since 2000, and are at their
lowest levels since 1987. As a result, the total amount of transportation
taxes that were remitted to the Trust Fund declined by $2.0 billion (19.6
percent) between fiscal years 1999 and 2003 (in 2002 dollars).

Contributions from the General Fund have averaged about 20 percent of
FAA's budget since 1994, but total Federal spending is under increasing
stress because of growing budget deficits. According to the March 2004
analysis from the Congressional Budget Office, the Federal deficit under
the President's fiscal 2005 budget will be $358 billion.

Clearly, a major challenge for FAA both now and into the future will be
cost-cutting and cost control.

o  	Operating costs represent over half of FAA's budget. For 2005, the
Administration has requested $7.8 billion for Operations. Because salaries
and benefits make up 73 percent of that total, restraining the growth in
operations spending will be extremely difficult, even with improvements in
workforce productivity.

o  	Capital expenses (i.e., the Facilities and Equipment account)
represent less than 20 percent of FAA's budget, but virtually none of the
projects requested for funding for 2005 is expected to generate any
savings in the Operations account.

o  	Funds for airports' capital development have more than doubled since
1998, rising from $1.6 billion (18.3 percent of the total) to a requested
$3.5 billion (25.1 percent of the total) in 2005. Current funding levels
are sufficient to cover much of the estimated cost of planned capital
development. However, building new runways is not always a practicable way
to increase capacity. FAA must decide how to increase capacity and
service, as well as improve system efficiency and safety.

Financial Pressure Adds FAA's ability to operate efficiently and
effectively - particularly regarding Premium to Improving its air traffic
control modernization projects - have been hampered over Management
Controls time by inadequate management of information technology and
financial

management controls. FAA's ATC modernization projects have consistently
experienced cost, schedule, and performance problems that we and others
have attributed to systemic management issues.

The effect has been extraordinary cost growth and a persistent failure to
deploy systems. FAA initially estimated that its ATC modernization efforts
could be completed over 10 years at a cost of $12 billion. Two decades and
$35 billion later, FAA still has not completed key projects, and expects
to need another $16 billion thru 2007, for a total cost of $51 billion.
GAO has kept major FAA modernization systems on the watch list of
high-risk federal programs since 1995.

We believe that, in the current budget environment, cost growth and
schedule problems with ongoing modernization efforts can have serious
negative consequences: postponed benefits, costly interim systems, other
systems not being funded, or a reduction in the number of units purchased.

Forecasts of Future FAA recognizes that future U.S. air transport activity
will likely place Aviation Activity Add significant demands on its ability
to keep the system operating. FAA's Further Demands for most recent
forecasts project significant increases in overall system

activity by 2015. Along with increased movements of aircraft andImmediate
Improvements passengers comes an increased workload for FAA, as well as
demands forin FAA Operations more efficient operations and/or an expansion
of capacity. (See Table 1).

Table 1: Forecasted Increase in Commercial Air Passengers, Operations, and
FAA Workload

Percent 2003 2015 (est.) change

          Industry activity measure Enplanements (millions) 641.4 1057.6 65.0 
                                        Large carrier fleet 4,090 5,732  40.1 
                                     Regional carrier fleet 2,672 4,303  61.0 
               FAA workload measure   Instrument operations              
                                                 (millions)              

           26.3 36.8 39.9 Commercial instrument flight 31.9 44.9 40.8

rule aircraft handled at Air Route Traffic Control Centers (millions)

Source: FAA.

Evidence of FAA's inability to meet system capacity demands already exists
from the experience at Chicago O'Hare earlier this year. To reduce flight
delays, FAA asked American Airlines and United Airlines to reduce their
peak scheduled operations by 7.5 percent by June 10. As Secretary Mineta
has already recognized, unless system capacity expands, the nation

  Despite Personnel and Acquisition Reforms, Systematic Management Issues
  Continue to Impede ATC Modernization

will face "...more and more O'Hares as [the] economy continues to grow,
and as new technology and competition bring even greater demand." It seems
clear, however, that FAA's Operational Evolution Plan4, a few additional
runways, and updating more controller workstations with the Standard
Terminal Automation Replacement System (STARS)5 are not the answer to the
system's need for capacity. We cannot pave our way to the year 2025.

Over the years, systematic management issues, including inadequate
management controls and human capital issues have contributed to the cost
overruns, schedule delays, and performance shortfalls that FAA has
consistently experienced in acquiring its major ATC modernization systems.
Historically, some of the major factors impeding ATC acquisitions included
an ineffective budget process and an inability to provide good cost and
schedule estimates. A number of cultural problems including widely
diffused responsibility and accountability, inadequate coordination, and
poor contract management/oversight also slowed the progress of individual
projects. Problems within FAA's acquisition and procurement processes
included an inability to obligate and spend appropriate funds in a timely
manner, a complicated procurement and acquisition cycle, failure to field
systems in a timely fashion, and an inability to field current technology
systems. FAA lacked a means to strategically analyze and control
requirements, and good cost and schedule estimates were often not
effectively developed and integrated into acquisition plans. To address
many of these issues, Congress passed legislation in 1995 exempting FAA
from many of the existing Federal personnel and procurement laws and
regulations and directed the agency to develop and implement new
acquisition and personnel systems. More recently, in 2000, the Congress
and the administration together provided for a new oversight and
management structure and a new air traffic organization to bring the
benefits of performance management to ATC modernization.

4The Operational Evolution Plan is an ongoing 10-year plan developed by
the FAA to increase the capacity and efficiency of the national airspace
system, while enhancing safety and security.

5STARS will replace controller workstations with new color displays,
processors, and computer software at FAA and DOD terminal air traffic
control facilities-within 5 to 50 nautical miles of an airport.

FAA Has Taken Steps to Implement Human Capital Strategies, but Further
Efforts are Needed

According to FAA, burdensome government-wide human capital rules impeded
its ability to hire, train, and deploy personnel and thereby hampered its
capacity to manage ATC modernization projects efficiently. In response to
these concerns, Congress granted FAA broad exemptions from federal
personnel laws and directed the agency to develop and implement a new
personnel management system.

o  	Human capital reforms: Following the human capital exemptions granted
by Congress in 1995, FAA initiated reforms in three primary areas:
compensation and performance management, workforce management, and labor
and employee relations. In the area of compensation and performance
management, FAA introduced two initiatives-a new, more flexible pay system
in which compensation levels are set within broad ranges, called pay
bands, and a new performance management system intended to improve
employees' performance through more frequent feedback with no summary
rating. Both new systems required an exemption from laws governing federal
civilian personnel management found in title 5 of the United States Code.
In the area of workforce management, FAA implemented a number of
initiatives in 1996 through the establishment of agency-wide flexibilities
for hiring and training employees. In the area of labor and employee
relations, FAA established partnership forums for union and nonunion
employees and a new model work environment program. Other human capital
initiatives have included restructuring FAA's organizational culture and
implementing means to provide sustained leadership.

o  	Organizational culture: FAA issued an organizational culture framework
in 1997 that attempted to address some of the vertical "stovepipes" that
conflicted with the horizontal structure of ATC acquisition team
operations. A key piece of this framework included the establishment of
integrated product teams in an attempt to improve collaboration among
technical experts and users. Moreover, integrated teams have not worked as
intended. For example, competing priorities between two key organizations
that were part of the Wide Area Augmentation System's integrated team
ultimately negated its effectiveness and undermined its ability to meet
the agency's goals for the system.

o  	Sustained leadership: Until former Administrator Garvey completed her
5year term in 2002,6 FAA had been hampered by a lack of sustained

6To provide FAA's ATC modernization efforts with needed direction and
stability, the Congress established a 5-year term for the FAA
Administrator in 1994. Former Administrator Garvey was the first to
complete a term of this length in 2002.

leadership at FAA was also problematic.7 During the first 10 years of the
ATC modernization effort, the agency had seven different Administrators
and Acting Administrators, whose average tenure was less than 2 years.
Such frequent turnover at the top contributed to an agency culture that
focused on short-term initiatives, avoided accountability, and resisted
fundamental improvements to the acquisition process. .

Nine years have passed since the agency received broad exemptions from
laws governing federal civilian personnel management. While FAA has taken
a number of steps since personnel reforms were implemented, it is not
clear whether and to what extent these flexibilities have helped FAA to
more effectively manage its workforce and achieve its mission. The agency
did not initially define clear links between reform goals and program
goals, making it difficult to fully assess the impacts of personnel
reform. FAA has not yet fully implemented all of its human capital
initiatives and continues to face a number of key challenges with regard
to personnel issues. In our February 2003 report, we found that the agency
had not fully incorporated elements that are important to effective human
capital management into its overall reform effort, including data
collection and analysis and establishing concrete performance goals and
measures. Currently, the agency is still working to implement tools to
keep accurate cost and workforce data. The new Air Traffic Organization
has announced plans for establishing cost accounting and labor
distribution systems, but they are not yet in place. More comprehensive
cost accounting systems and improved labor distribution systems are
necessary to maximize workforce productivity and to plan for anticipated
controller retirements. More broadly, taking a more strategic approach to
reform will allow the agency to better evaluate the effects of human
capital initiatives, which it sees as essential to its ATC modernization
effort.

ATC Projects Continue to Experience Cost, Schedule, and Performance
Problems

FAA established its current acquisition management system (AMS) in 1996
following acquisition reform. The agency has reported taking steps to
overseeing investment risk and capturing key information from the
investment selection process in a management information system. It has
also implemented guidance for validating costs, benefits, and risks.

FAA has also taken steps to improve the management of its ATC
modernization efforts. For example, it implemented an incremental, "build

7Congress established a 5-year term for the FAA Administrator in 1994.

a little, test a little" approach that improved its management by
providing for mid-course corrections and thus helping FAA to avoid costly
late-stage changes. In the area of management controls, FAA has (1)
developed a blueprint for modernization (systems architecture) to manage
the development of ATC systems; (2) established processes for selecting
and controlling information technology investments, (3) introduced an
integrated framework for improving software and system acquisition
processes, and (4) improved its cost-estimating and cost-accounting
practices. Nonetheless, ATC modernization efforts continue to experience
cost, schedule, and performance problems.

FAA is not yet incorporating actual costs from related system development
efforts in its processes for estimating the costs of new projects.
Further, the agency has not yet fully implemented processes for evaluating
projects after implementation in order to identify lessons learned and
improve the investment management process. Reliable cost and schedule
estimates are essential to addressing some of the ongoing problems with
ATC acquisitions.

In addition to controlling cost and schedule overruns, FAA needs to take
concrete steps to identify and eliminate redundancies in the National
Airspace System (NAS). FAA must review its long-term ATC modernization
priorities to assess their relative importance and feasibility in light of
current economic constraints, security requirements, and other issues. The
ongoing challenges facing air traffic control modernization efforts led
Congress and the administration to create a new oversight and management
structure through the new Air Traffic Organization (ATO) in order to bring
the benefits of performance management to ATC modernization.

Progress in Establishing the New Air Traffic Organization Has Been Slow

The ATO was created by an executive order in 2000 to operate the air
traffic control system. In the same year, Congress enacted legislation
establishing the Air Traffic Services Subcommittee, a five-member board to
oversee the ATO and a chief operating officer to manage the organization.
The ATO was designed to bring a performance management approach to ATC
modernization efforts.

The Air Traffic Services Subcommittee has made some initial efforts with
regard to the establishment of the ATO. They have taken steps to focus on
the structure of the ATC system, including reviewing and approving
performance metrics for the ATO, establishing a budget, and approving
three large procurements that FAA initiated.

However, progress in establishing the organization has been slow, given
that FAA received the mandate to establish the ATO nearly four years ago.
FAA encountered difficulties finding a qualified candidate to take the
position of chief operating officer, and did not fill the vacancy until
June 2003. The final executive positions for the organization including
the Vice-Presidents of Safety and Communications were just filled last
month.

Key tasks for the ATO will include organizational restructuring,
implementing effective financial management and cost-accounting systems,
evaluating day-to-day business practices, and fostering growth with
efficiency. Rapidly changing technology, limited financial resources, and
the critical importance of meeting client needs will present significant
challenges in order for the ATO to truly evolve into a high performing
organization.

  FAA's Future Success Hinges on Several Critical Success Factors

To successfully meet the challenges of the 21st century, FAA must
fundamentally transform its people, processes, technology, and environment
to build a high-performing organization. Our work has shown that
high-performing organizations have adopted management controls, processes,
practices, and systems that are consistent with prevailing best practices
and contribute to concrete organizational results. Specifically, the key
characteristics and capabilities of high-performing organizations fall
into four themes as follows:

o  	A clear, well-articulated, and compelling mission. High-performing
organizations have a clear, well-articulated, and compelling mission,
strategic goals to achieve it and a performance management system that
aligns with these goals to show employees how their performance can
contribute to overall organizational results. FAA has taken its first
steps toward creating a performance management system by aligning its
goals and budgetary resources through its Flight Plan-blueprint for action
for fiscal year 2004 through 2008-and its fiscal year 2005 budget
submission. In addition, the new ATO has published both its vision and
mission statement.

Our past work has found that FAA's ability to acquire new ATC
modernization systems has been hampered by its organizational culture,
including employee behaviors that did not reflect a strong commitment to
mission focus. Given the central role that FAA's employees will play in
achieving these performance goals and overall agency results, it is
critical for them to both embrace and implement the agency's mission in
the course of their daily work. In addition, our work has found regularly

communicating a clear and consistent message about the importance of
fulfilling the organization's mission helps engage employees, clients,
customers, partners, and other stakeholders in achieving higher
performance.

o  	Strategic use of partnerships. Since the federal government is
increasingly reliant on partners to achieve its outcomes, becoming a
highperforming organization requires that federal agencies effectively
manage relationships with other organizations outside of their direct
control. FAA is currently working to forge strategic partnerships with its
external customers in a number of ways. For example, the agency recently
announced a program to create "express lanes in the sky" to reduce air
traffic delays this spring and summer and is in the early stages of
working with selected federal partners to develop a long-term plan for the
national aerospace system (2025) and to leverage federal research funds to
conduct mutually beneficial research. In addition, FAA has ongoing
partnerships with the aviation community to assess and address flight
safety issues (e.g., development of technology to prevent fuel tank
explosions and to reduce the potential for aircraft wiring problems
through development of a "smart circuit breaker").

However, our past work has shown that forging strategic partnerships with
organizations outside of FAA can be difficult and time-consuming. For
example, FAA's efforts to establish voluntary data sharing agreements with
airlines-Flight Operational Quality Assurance Program (FOQA)- spanned more
than a decade, due in part, to tremendous resistance from aviation
community stakeholders who formed a rare alliance to oppose several of
FAA's proposals. In addition, when attempting to increase airport capacity
(e.g., new runways), FAA and airport operators have frequently faced
opposition from the residents of surrounding communities and environmental
groups. Residents are often concerned about the potential for increases in
airport noise, air pollutant emissions, and traffic congestion.

o  	Focus on needs of clients and customers. Serving the needs of clients
and customers involves identifying their needs, striving to meet them,
measuring performance, and publicly reporting on progress to help assure
appropriate transparency and accountability. To better serve the needs of
its clients and customers, FAA published Flight Plan, which provides a
vehicle for identifying needs, measuring performance, and publicly
reporting progress. Flight Plan includes performance goals in the areas of
safety, greater capacity, international leadership, and organizational
excellence, which are linked to the agency's budget and progress monitored
through a Web-based tracking system.

However, over the years, FAA's efforts to meet client and customer needs
have not always been successful, and some have had a long lasting negative
impact. FAA has had particular difficulty fielding new ATC modernization
systems within cost, schedule and performance goals to meet the needs of
the aviation community. Agency promises to deliver new capabilities to
airlines via improvements to the ATC system led some airlines to install
expensive equipment in their aircraft to position themselves to benefit
from expected FAA services; however, when the agency failed to deliver on
those promises, participating air carriers were left with equipment that
they could not use-no return on their investment. In addition, shifting
agency priorities have made it difficult for the aviation industry to
anticipate future requirements and plan for them in a cost-effective
manner (e.g., providing air carriers with adequate lead time to purchase
new equipment and airframe manufacturers with lead time to incorporate
changes into new commercial airplane designs). Furthermore, the absence of
a full-functioning cost-accounting system makes it difficult for FAA to
assess the actual cost of providing services to users of the National
Airspace System.

o  	Strategic management of people. Most high-performing organizations
have strong, charismatic, visionary, and sustained leadership, the
capability to identify what skills and competencies the employees and the
organization need, and other key characteristics including effective
recruiting, comprehensive training and development, retention of
highperforming employees, and a streamlined hiring process. Toward this
end, FAA has hired a Chief Operating Officer (COO) to stand up its new
ATO. Our work on high-performing organizations has recommended use of the
COO concept to facilitate transformational change in federal agencies and
to provide long-term attention and focus on management issues.
Furthermore, FAA has placed 78 percent of its workforce under a
pay-forperformance system8 and implemented a training approach for its
acquisition workforce which reflects four of the six elements used by
leading organizations to deliver training effectively.9 However, it is too

8Inspector General, U.S. Department of Transportation, Key Issues for the
Federal Aviation Administration's FY 2005 Budget, CC-2004-038 (April 22,
2004).

9To deliver training effectively, leading organizations' training
approaches generally include six elements: (1) prioritize initiatives most
important to the agency; (2) demonstrate toplevel commitment and provide
resources; (3) identify those who need training on specific initiatives
and set training requirements; (4) tailor training to meet the needs of
the workforce; (5) track training to ensure it reaches the right people;
and (6) measure effectiveness of training. GAO found that FAA's
acquisition organization has highly developed processes for elements 1, 2,
4, and 5.

soon to know the extent to which these elements of effective training will
be incorporated into the new ATO. Finally, FAA is currently conducting an
Activity Value Analysis, a bottoms-up effort to establish a baseline of
ATO headquarters activities and their value to stakeholders. The results
of this analysis are intended to help FAA's leadership target cost-cutting
and cost savings efforts.

Despite FAA's efforts to date, our past work has found the agency's
strategic management of human capital lacking. For example, organizational
culture issues at FAA (e.g., its vertical, stovepiped structure) have
discouraged collaboration among technical experts and users of the ATC
system and contributed to the agency's inability to deliver new ATC
systems within cost, schedule and performance goals. One of the most
significant early challenges facing the ATO will be negotiating a new
contract with air traffic controllers, which is due to expire in September
2005. The DOT IG has repeatedly noted that despite the importance of
controllers' jobs, that FAA simply cannot sustain the continued salary
cost growth for this workforce, which rose from an average salary of
$72,000 in 1998 to $106,000 in 2003. Given the inextricable link between
FAA's operating costs and its controller workforce, striking an acceptable
balance between controllers' contract demands and controlling spiraling
operating costs will be a strong determinant of the ATO's credibility both
within FAA and across the aviation industry.

While FAA has taken some promising steps through its new ATO to
restructure itself in a manner consistent with high-performing
organizations, the agency still faces significant and longstanding
systemic management challenges. These challenges must be overcome if FAA
is to keep pace with ongoing changes in the aviation industry and
transform itself into a world-class organization. Our work for more than
two decades has shown that even modest organizational, operational, and
technological changes at FAA can be difficult and time consuming, all of
which underscores the difficult road ahead for FAA and its new ATO.

This concludes my statement. I would be pleased to respond to any
questions that you or other Members of the Subcommittee may have at this
time.

  For further information on this testimony, please contact JayEtta Hecker at
     (202) 512-2834 or by e-mail at [email protected]. Individuals making key

contributions to this testimony include Samantha Goodman, Steven Martin,
Beverly Norwood, and Alwynne Wilbur.

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