Aviation Fees: Review of Air Carriers' Year 2000 Passenger and	 
Property Screening Costs (18-APR-05, GAO-05-558).		 
                                                                 
The Aviation and Transportation Security Act (ATSA) authorized	 
the Transportation Security Administration (TSA) to impose an	 
Aviation Security Infrastructure Fee (ASIF) on air carriers to	 
help pay for the costs of aviation security services. To impose  
the ASIF, TSA issued an Interim Final Rule (IFR) and required air
carriers to report their passenger and property screening costs  
incurred in 2000 on an attachment to the IFR referred to as	 
Appendix A. The 2000 screening costs reported by air carriers	 
were going to be used to establish the ASIF. Based on industry	 
estimates of $1 billion, TSA had estimated that the costs	 
incurred by air carriers in 2000 were $750 million, but the	 
amounts reported by air carriers totaled $319 million,		 
significantly less than expected. To provide the Congress with an
independent assessment, the Department of Homeland Security	 
Appropriations Act, 2005 required GAO to review the amount of	 
passenger and property screening costs incurred by air carriers  
in 2000.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-558 					        
    ACCNO:   A21918						        
  TITLE:     Aviation Fees: Review of Air Carriers' Year 2000	      
Passenger and Property Screening Costs				 
     DATE:   04/18/2005 
  SUBJECT:   Aviation security					 
	     Baggage screening					 
	     Cost analysis					 
	     Counterterrorism					 
	     Fees						 
	     Homeland security					 
	     National preparedness				 
	     Reporting requirements				 
	     Financial analysis 				 
	     Airline regulation 				 
	     Airlines						 
	     Cost estimates					 
	     Passengers 					 
	     Aviation Security Infrastructure Fee		 

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GAO-05-558

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

April 2005

AVIATION FEES

    Review of Air Carriers' Year 2000 Passenger and Property Screening Costs

                                       a

GAO-05-558

[IMG]

April 2005

AVIATION FEES

Review of Air Carriers' Year 2000 Passenger and Property Screening Costs

                                 What GAO Found

We estimate at a 95 percent confidence level that the amount of passenger
and property screening costs incurred by air carriers in 2000 for the 3
major cost components were between $425 million and $471 million, with a
midpoint estimate of $448 million. The difference between our midpoint
estimate and what the air carriers reported on the Appendix A and
subsequently paid to TSA is $129 million, as shown in the table.

GAO Estimate of 2000 Passenger and Property Screening Costs

Dollars in millions

                                           Air carrier's       GAO 
                         Cost component Appendix A costs estimatea Difference 
                      Private screening             $293      $334        $41 
                    contractors costs b                            
                          Airport costs                5        80         75 
           Air carriers' internal costs               21        34         13 
                                  Total             $319      $448       $129 

Source: GAO analysis.

aSee app. I, table 9, for confidence intervals.
bIncludes airline employee costs if they performed the screening function
directly.

Determining exact cost amounts was not feasible and assumptions were
required for several reasons including the following: (1) 5 years have
passed since the costs were incurred, (2) the air carriers' accounting
systems were not designed to capture specific passenger and property
screening costs, and (3) certain cost categories required the application
of assumptions to identify, categorize, or allocate cost. We focused on
estimating for 2000 the three primary screening cost components listed
below.

o  	Costs associated with the use of private screening contractors (or
airline employees if they performed the screening function directly)-these
were the most significant costs to the air carriers in 2000. Air carriers
typically contracted with private screening companies to perform screening
on their behalf, and the rates charged combined costs such as background
checks, training, and uniforms. We estimated that air carriers incurred
$334 million for this cost component, compared to $293 million reported by
air carriers on the Appendix A.

o  	Airport costs related to passenger and property screening-the two
major screening-related cost categories that airports charged air
carriers, were costs for law enforcement officers and real estate costs
for security checkpoints. Based on information obtained from a sample of
airports, we estimated that air carriers incurred $80 million for this
cost component, compared to $5 million reported on the Appendix A.

o  	Air carriers' internal costs-these include, among other things,
installation, operation, maintenance, and testing of screening equipment;
ground security coordinators; security program management and contract
administration; and legal and accounting support. Based on an analysis of
the Appendix A and on information obtained through interviews, we
estimated that the air carriers incurred $34 million in screening costs,
compared to $21 million reported in the Appendix A.

                 United States Government Accountability Office

Contents

    Letter                                                                  1 
                                  Results in Brief                          3 
                                     Background                             5 
              Overall Estimate of Passenger and Property Screening Costs    7 
                                     Conclusion                            14 
                        Recommendation for Executive Action                14 
                                  Agency Comments                          14 

Appendixes

Appendix I: Scope and Methodology

Develop an Understanding
Design of Analytical Framework
Data Collection and Cost Estimation
Project Work Plan
Confidence Intervals
Limitations to the Analysis

17 17 18 18 19 25 26

Tables Table 1:

Table 2:

Table 3:

Table 4:

Table 5:

Table 6: Table 7:

Table 8: Table 9:

GAO Estimate of 2000 Passenger and Property Screening
Costs 4
Comparison of 2000 Passenger and Property Screening
Costs Reported in the Appendix A to GAO Estimate 8
Costs Associated with the Use of Private Screening
Contractors 9
Airport Costs Related to Passenger and Property
Screening 10
Air Carrier Internal Costs Related to Passenger and
Property Screening 13
Air Carrier Groupings 13
Screening Company Billings and Number of Screeners
Prior to September 11, 2001 19
Number of Airports in Stratified Sample 22
Summarization of Cost Estimate Point Estimates and
Confidence Intervals 25

Contents

Abbreviations

ASIF Aviation Security Infrastructure Fee
ATA Air Transport Association of America, Inc.
ATSA Aviation and Transportation Security Act
CAPPS Computer Assisted Passenger Prescreening System
CEO Chief Executive Officer
DHS Department of Homeland Security
DOT Department of Transportation
FAA Federal Aviation Administration
GSC Ground Security Coordinator
IFR Interim Final Rule
O&D Origin and Destination
OIG Office of Inspector General
SH&E Simat, Helliesen & Eichner, Inc.
TSA Transportation Security Administration

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

April 18, 2005

Congressional Committees

The terrorist attacks of September 11, 2001, revealed serious
long-standing weaknesses in the nation's aviation security system and
underscored the need for improvements in order to restore public
confidence in air travel and to protect our homeland from future potential
threats. Prior to September 11, 2001, providing aviation security was the
responsibility of air carriers and airports as part of their cost of doing
business. However, after September 11, 2001, aviation security changed
substantially in the United States and the responsibility for passenger
and property screening shifted to the federal government.

In an effort to make improvements to the aviation security system,
President Bush signed the Aviation and Transportation Security Act (ATSA)1
on November 19, 2001. ATSA created the Transportation Security
Administration (TSA) whose duties included assuming responsibility for the
certain aviation security functions previously performed by air carriers.
To help pay for the costs associated with providing these functions, ATSA
required TSA to impose a uniform fee on passengers. ATSA limited the
passenger fee, known as the September 11th Security Fee, to $2.50 per
passenger enplanement to a maximum of $5.00 for a one-way trip. To the
extent collections from the passenger fee did not cover TSA's costs to
provide specified aviation security services, ATSA authorized TSA to
impose a fee on air carriers, called the Aviation Security Infrastructure
Fee (ASIF).2 However, ATSA3 required TSA to determine a statutory cap for
the ASIF in the aggregate equal to the total amount air carriers had paid
for passenger and property screening during calendar 2000, the last full
calendar year prior to September 11, 2001.4

1 Pub. L. No. 107-71, 115 Stat. 597 (Nov. 19, 2001).

2 49 U.S.C. S: 44940(a)(1), (2)(A).

3 49 U.S.C. S: 44940(a)(2)(B)(i).

4 For purposes of this review and the calculation of the ASIF, property is
defined as mail, cargo, carry-on and checked baggage and any other
articles transported by an air carrier excluding property transported
under the "Known Shipper Program."

To establish the ASIF, TSA issued an Interim Final Rule (IFR)5 in
February 2002, requiring air carriers to complete and submit an attachment
to the IFR, titled "Calendar Year 2000 Costs Paid for Passenger and
Property Screening" (referred to as Appendix A), in which they were to
itemize costs incurred for passenger and property screening during 2000.
TSA planned to use the information from Appendix A to assist it in
determining the statutory cap for the ASIF in the aggregate. TSA also
planned to use the information to establish each air carrier's fee, which
air
carriers were required to remit to TSA each month beginning in 2002.

At the time the IFR was being developed, TSA forecasted that total airline
incurred industry costs for passenger and property screening for calendar
year 2000 would be $750 million. This estimate was based on information
that the Air Transport Association of America, Inc. (ATA)6 and other
airline
industry representatives provided to the Congress and GAO in 2001. That
information indicated that before September 11, 2001, the airline industry
was spending approximately $1 billion annually on all airline security.
However, when TSA reviewed the cost information submitted by air
carriers on Appendix A, the sum of the airline reported costs totaled
approximately $319 million, significantly less than what TSA had expected.

Today, funding for aviation security programs remains a central issue
because passenger and air carrier security fees are not sufficient to
fully
cover TSA's costs to provide aviation security. TSA's fiscal year 2004
appropriations for aviation security provided over $3.7 billion for civil
aviation security services, of which over $3.1 billion was for screening
activities.7 By contrast, TSA only collected about $1.8 billion from
passenger security fees and the $319 million from the airlines that was
credited to the appropriation, meaning the federal government funded the
remaining $1.6 billion out of general revenues. In order to provide the
Congress with an independent assessment of calendar year 2000 costs paid
for passenger and property screening, the Department of Homeland
Security (DHS) Appropriations Act, 20058 required that we review the

5 Aviation Security Infrastructure Fees, 67 Fed. Reg. 7926 (Feb. 20,
2002).

6 ATA is the largest trade organization of U.S. air carriers, representing
23 U.S airline members and 5 foreign-based airlines in 2000.

7 Department of Homeland Security Appropriations Act, 2004, Pub. L. No.
108-90, 117 Stat. 1137, 1141 (Oct. 1, 2003).

8 Pub. L. No. 108-334, 118 Stat. 1298, 1303 (Oct. 18, 2004).

amount of passenger and property screening costs incurred in calendar year
2000 by domestic and foreign carriers departing from U.S. airports and
report on the results of our work within 6 months of the passage of the
act.

To assist us in evaluating these costs within this time frame, we
contracted with Simat, Helliesen & Eichner, Inc. (SH&E), a consulting firm
with significant aviation industry expertise, through a competitive award
process. SH&E subcontracted with PricewaterhouseCoopers LLP for additional
accounting and finance expertise and with Abt Associates for additional
statistical capabilities. To provide a basis for the contractors' work, we
developed an audit strategy to independently determine a reasonable
estimate of the 2000 passenger and property screening costs incurred by
the airlines. We oversaw the project and worked closely with contractors
as they planned and executed their work. To ensure a sound approach to the
study, we reviewed the contractors' work plans, sampling plans,
questionnaires, and workpapers. We participated in significant meetings,
provided continual oversight and feedback, and received periodic briefings
from the contractors. We performed our work in accordance with generally
accepted government auditing standards from October 2004 through April
2005. Additional details regarding our scope and methodology are in
appendix I.

Results in Brief	We estimate at a 95 percent confidence level that
passenger and property screening costs in 2000 for the major cost
components were between $425 million and $471 million, with a midpoint
estimate of $448 million. The difference between this midpoint estimate
and the amount the air carriers reported on the Appendix A and
subsequently paid to TSA is $129 million, as shown in table 1.

      Table 1: GAO Estimate of 2000 Passenger and Property Screening Costs

Dollars in millions

                                           Air carrier's       GAO 
                         Cost component Appendix A costs estimatea Difference 
          Private screening contractors             $293      $334        $41 
                                 costsb                            
                          Airport costs                5        80 
           Air carriers' internal costs               21        34 
                                  Total             $319      $448       $129 

Source: GAO analysis.

aSee app. I, table 9, for related confidence intervals.
bIncludes airline employee costs if they performed the screening function
directly.

During our review, we considered certain prior estimates of total security
costs that had been made by ATA and other airline officials. These
estimates suggested that annual security costs totaled approximately $1
billion prior to September 11, 2001. ATA stated that the amounts were
generalized estimates for all domestic and international industry security
costs, not just passenger and property screening. ATA further explained
that they were "best guesses" that reflected security costs for functions
in addition to passenger and property screening. We determined that there
was no documented basis for these estimates and instead developed our
estimate for 2000 based on a review of the three primary cost components
for passenger and property screening shown in table 1.

We are recommending that the Secretary of Homeland Security direct the
Assistant Secretary, TSA to consider the analysis and estimates in this
study in determining the limitation on the aggregate air carrier fee
consistent with ATSA (49 U.S.C. S: 44940(a)(2)(B)(i)).

TSA indicated from reviewing a draft of this report that it will consider
the analysis and estimates in our study, as we recommended.

Background	ATSA established TSA as an agency within the Department of
Transportation and transferred responsibility for civil aviation security
from the Federal Aviation Administration (FAA) to this newly created
agency. As mandated by ATSA, TSA is responsible for security in all modes
of transportation, including conducting the day-to-day operations related
to security screening for passenger air transportation previously
conducted by air carriers.

Prior to the creation of TSA, air carriers were responsible for conducting
passenger and property screening at U.S. airports. Typically air carriers
carried out the screening function through contracts with security
companies. The screening process in place at that time included
identifying certain passengers for more intense scrutiny with the use of
Computer Assisted Passenger Prescreening System (CAPPS). In addition,
passengers were asked a series of questions, such as whether they packed
their own bags, to help prevent attacks in which passengers unknowingly
carry dangerous items onto an aircraft. At the security checkpoint,
passengers were screened by walk-through metal detectors and with
metal-detecting hand wands if the walk-through metal detectors' alarms
were activated. Passenger carry-on baggage was screened with X-ray
equipment. Other procedures that were sometimes performed included
screening checked baggage for bulk quantities of explosives using X-ray
computed tomography equipment and the use of positive passenger-bag
matching to remove bags not owned by those aboard the aircraft.

According to data provided by FAA, prior to September 11, 2001, screening
procedures were performed at U.S. airports by approximately 19,500
screeners. Passenger and property screening was one of the most
substantial aviation security responsibilities assumed by TSA with the
passage of ATSA. ATSA required that screening of individuals and property
at U.S. airports be conducted by federal employees and companies under
contract with TSA. In February 2002, the agency assumed the responsibility
for passenger and property screening at all U.S. commercial airports,
except at five airports participating in a pilot program, which would
operate with private security contractor personnel. To continue the daily
operations until a federal screener workforce was hired, trained, and
deployed, TSA contracted with incumbent screener companies. On March 1,
2003, pursuant to the Homeland Security Act of 2002,9 TSA began

9 Pub. L. 107-296, 116 Stat. 2135 (Nov. 25, 2002).

to perform its transportation security functions as an agency of the
Department of Homeland Security.

Prior to September 11, 2001, we were conducting work at the request of the
Subcommittee on Aviation, House Committee on Transportation and
Infrastructure, to assess the screening operations of air carriers and to
determine who should be responsible for screening.10 One of the areas
under evaluation was the cost of passenger and property screening under
various alternatives, including how much it would cost to have the federal
government take over screening functions. In April 2001, we contacted ATA
to obtain information on screening costs incurred by air carriers. ATA
contacted member carriers and requested that they provide information on
their costs associated with the security screening of passengers and
checked baggage. Based on the information it said was provided by its
members, ATA sent us a memo dated August 22, 2001, stating that "ATA
believes that the estimated costs of implementing federal security
requirements and conducting required security programs amounts to nearly
$1 billion per year for the entire industry." In addition, the memo
included some detail on the direct security costs incurred by ATA members
annually, which reportedly totaled $511.8 million.

During a congressional hearing held on September 19, 2001, Delta's then
Chief Executive Officer (CEO) corroborated the $1 billion security cost
estimate when he stated in response to a question raised by a member of
Congress that "relative to the security measures, we as an industry
probably spend on the order of a billion dollars or so per year now on
security."11 Subsequently, responding to TSA's proposal to increase the
ASIF, ATA stated that the amounts cited by airline executives were
generalized estimates for all domestic and international industry security
costs; not just passenger and property screening. ATA further explained
that the estimates were "best guesses" that reflected security costs for
functions in addition to passenger and property screening.

10 GAO, Aviation Security: Weaknesses in Airport Security and Options for
Assigning Screening Responsibility, GAO-01-1165T (Washington, D.C.: Sept.
21, 2001).

11 Statement of Leo F. Mullin, Chairman and CEO of Delta Airlines at
congressional hearing held on September 19, 2001, before the House
Committee on Transportation and Infrastructure, H.R. 2891, To Preserve the
Continued Viability of the United States Air Transportation System.

When we requested documentation supporting this estimate as part of our
current review, ATA responded that the estimate provided in its August
2001 memo to us was a rough estimate of security costs based on limited
information provided by a handful of air carriers in response to a
less-thanrigorous survey. ATA added that it did not have and could not
obtain detailed and consistent cost data due to the various ways in which
air carriers provided security services. Further, ATA stated that air
carriers were not consistent in recording and accounting for the
security-related costs in their internal systems. The substantial
difference between costs reported earlier by the aviation industry and
those reported by air carriers in their Appendix A submissions
precipitated the legislative mandate that GAO review passenger and
property screening costs. Details of our review and our estimate of
calendar year 2000 passenger and property screening costs follow.

Overall Estimate of Passenger and Property Screening Costs

With the assistance of our contractors, we estimate at a 95 percent
confidence level that the airline industry's costs to provide passenger
and property screening in calendar year 2000 for the 3 major cost
components was between $425 million and $471 million, with a midpoint
estimate of $448 million. This amount is $129 million more than the $319
million reported and paid by the air carriers to TSA.

We found that determining exact cost amounts was not feasible for several
reasons, including the following:

o  Five years had passed since the costs were incurred.

o 	The air carriers' accounting systems were not designed to capture
specific passenger and property screening costs at the level of detail TSA
had requested.

o 	Certain cost categories required the application of assumptions to
identify, categorize, or allocate cost.

Given this, we focused on estimating for 2000 the 3 primary screening cost
components covered in Appendix A: (1) costs associated with the use of
private screening contractors (or airline employees if they performed the
screening function directly), (2) airport costs related to passenger and
property screening that were passed on to air carriers, and (3) air
carrier internal costs associated with screening functions. Our estimate
of each of these costs components is shown in table 2.

Table 2: Comparison of 2000 Passenger and Property Screening Costs
Reported in the Appendix A to GAO Estimate

                              Dollars in millions

                                           Air carrier's       GAO 
                         Cost component Appendix A costs estimatea Difference 
          Private screening contractors             $293      $334        $41 
                                 costsb                            
                          Airport costs                5        80 
           Air carriers' internal costs               21        34 
                                  Total             $319      $448       $129 

Source: GAO analysis.

aSee app. I, table 9, for related confidence intervals.
bIncludes airline employee costs if they performed the screening function
directly.

In 2000, air carriers were responsible for providing and paying for the
costs associated with screening passengers and property prior to boarding
aircraft. Air carriers typically contracted with private companies to
perform these services on their behalf. Airports were required to restrict
access to the preboarding sterile area and to provide law enforcement
officers to respond to potential incidents at the screening checkpoints
within a certain time frame. To varying degrees, such airport-incurred
costs were passed on to air carriers through airport rates and charges. In
addition, air carriers incurred certain internal costs in carrying out
these functions, such as the costs of managing and providing legal support
for the security company contracts.

Costs Associated with the Use of Private Screening Contractors

    Table 3: Costs Associated with the Use of Private Screening Contractors

                              Dollars in millions

Calendar year 2000 cost Air carrier's GAO
component Appendix A costs estimatea Difference

               Private screening contractors costsb $293 $334 $41

Source: GAO analysis.

aSee app. I, table 9, for related confidence intervals.
bIncludes airline employee costs if they performed the screening function
directly.

Labor costs associated with screening passengers and property were the
most significant screening-related cost to the air carriers in 2000. Air
carriers typically contracted with private screening companies to perform
these services on their behalf, and the rates charged combined many costs,
such as background checks, training, and uniforms. In some instances, air
carrier employees performed the screening. We estimate at a 95 percent
confidence level that the costs associated with the use of private
screening contractors (or air carrier employees if they performed the
screening function directly) during 2000 were between $313 million and
$355 million, with a midpoint estimate of $334 million. This is about $41
million more than the $293 million reported on Appendix A by the air
carriers for this cost component.

To estimate these direct screening costs, we identified the major
companies providing screening services in 2000 and requested their billing
records. Over 70 companies provided screening services in 2000, with 10
companies representing over 80 percent of the industry and 2 companies
comprising almost half of the industry. We asked the top 10 companies how
much they had billed for screening services by air carriers and received
usable information from 9 of them. Although we received over 7,000
invoices from the remaining and largest company during 2000, the data were
incomplete and could not be used to project estimates for the remaining
companies. For the 9 companies that did provide useable data, we
determined that they had billed the air carriers approximately $208
million for screening-related services in 2000. These companies also
provided numerous non-screening-related services (for example, wheelchair
assistance and skycap service), which we excluded from our

estimate. Using a regression analysis12 from the useable data, we estimate
total screening company costs are $334 million. We performed two other
tests on the data to assess whether our overall assumptions used to
estimate these costs were reasonable. Both of these methods yielded
results that were within the range provided by the regression analysis.

Airport Costs Related to Passenger and Property Screening

Table 4: Airport Costs Related to Passenger and Property Screening

                              Dollars in millions

Calendar year 2000 cost Air carrier's GAO
component Appendix A costs estimatea Difference

                            Airport costs $5 $80 $75

Source: GAO analysis.

aSee app. I, table 9, for related confidence intervals.

Regarding the second cost category-airport costs related to passenger and
property screening that were passed on to the air carriers-we estimate at
a 95 percent confidence level that air carriers incurred costs between $71
million and $89 million, with a midpoint estimate of $80 million. This was
well above the $5 million reported by the air carriers.

12 Regression analysis is a statistical method of measuring the extent to
which variations in one variable are associated with variations in other
variables.

The two major cost categories that airports charged to the air carriers as
screening-related costs were costs for law enforcement officers and real
estate costs associated with security checkpoints. To estimate these
airport costs, we selected a representative sample of the approximately
430 U.S. airports that screened passengers in 2000 and extrapolated13 the
information obtained to the whole industry. The stratified sample included
the 20 airports with the largest number of estimated screened passengers
plus an additional 50 airports. The 70 sampled airports accounted for
approximately 75 percent of the total estimated 530.4 million screened
passengers during 2000 at U.S. airports.

For each airport in the sample, we attempted to interview the appropriate
airport officials and collect (1) specific screening-related costs charged
to or incurred by the air carriers, (2) airport rate-making methodologies,
and (3) air carrier use agreements. We used the information obtained to
estimate total airport charges and believe that our methodology and
underlying data provide a reasonable basis for our estimate. Fifty-nine of
the 70 airports, including 19 of the 20 largest airports, and 40 of the 50
additional airports, provided data that we used to extrapolate to the
remaining airports.

Costs for Law Enforcement Based on the review of information from the 59
airports, we estimate at a

Officers	95 percent confidence level that air carriers incurred costs for
law enforcement officers with screening-related responsibilities between
$56 million and $76 million, with a midpoint estimate of $66 million. This
is significantly higher than the $1.5 million reported by the air
carriers. According to the air carriers, they did not report these costs
for two main reasons: (1) information on law enforcement officers' costs
and time spent completing specific duties was not readily available; thus
many air carriers did not attempt to estimate these costs and (2) they
contend that they are still paying law enforcement officers' costs.

The estimate for this cost component would have been even higher if all
airports had passed on law enforcement officers' charges to the air
carriers. For example, at Los Angeles International Airport, the largest
U.S. airport in terms of screened passengers, none of the costs associated
with providing law enforcement officers were passed on to the air
carriers. These costs were covered by nonairline revenues, such as
concession

13 See our scope and methodology in app. I for an explanation on how we
extrapolated the results of our sample evaluation.

revenues. In contrast, at Dallas Fort Worth and many other airports, 100
percent of law enforcement officer costs associated with checkpoint
security were directly billed to the air carriers. In these cases, 100
percent of the charge was used in calculating our estimate. Other sampled
airports combined law enforcement officers' costs with other terminal
costs and varied in how they passed costs on to air carrier tenants. If
the airport allocated a portion of its airportwide law enforcement
officers' budget to the terminal cost center, we estimated the share of
terminal law enforcement officer costs related to passenger and property
screening, and then included in our estimate only the share of such costs
that was passed on to the airlines based on the airports' rates and
charges methodology.

Costs for Security Checkpoint Airport charges for the leased space where
screening checkpoints were

Space	located varied greatly among the sampled airports. However, we
observed some general tendencies. If the checkpoint was located in space
that was rented by air carrier tenants, we calculated the real estate cost
based on square footage and the applicable rental rate. On the other hand,
if the checkpoint was located in airport space for which air carrier
tenants were not directly charged, we estimated the cost based on the
airport's rate structure. Specifically, if the costs for public space were
absorbed by the airport or were not factored into the cost pool used to
determine air carrier space rental rates, we did not assign any cost to
the airlines to calculate our estimate. Whereas, if the costs for public
space were rolled into the cost pool to determine airline rental rates,
then the air carrier indirectly paid for the space and we included the
cost in our estimate. Based on the sample of 59 airports, we estimate at a
95 percent confidence level that air carriers incurred security real
estate costs between $11 million and $15 million, with a midpoint estimate
of $13 million compared to the $3.4 million reported on Appendix A by the
air carriers.

Air Carrier Internal Costs Related to Passenger and Property Screening

Table 5: Air Carrier Internal Costs Related to Passenger and Property
Screening

                              Dollars in millions

Calendar year 2000 cost Air carrier's GAO
component Appendix A costs estimatea Difference

                    Air carriers' internal costs $21 $34 $13

Source: GAO analysis.

aSee app. I, table 9, for related confidence intervals.

Air carrier internal costs include, among other things, installation,
operation, maintenance, and testing of screening equipment; ground
security coordinators; security program management and contract
administration; and legal and accounting support. To estimate the air
carrier internal costs, we first grouped the air carriers into categories
based on types of operations as shown in table 6.

                         Table 6: Air Carrier Groupings

Type     Description                           Examples                    
Legacy   Major hub and spoke carriers            American, Delta, United   
Low cost Primarily nonhub carriers             Southwest, JetBlue          
Regional   Carriers operating regional jet and    Comair, Mesa, Skywest    
                                commuter aircraft 
Foreign  Non-U.S. airlines                     Air Canada, British Airways 
Other    Niche carriers                             Hawaiian, U.S. Airways 
                                                                      Shuttle 

Source: GAO analysis.

We then reviewed and analyzed the air carrier Appendix A cost submissions,
interviewed 12 air carriers that together account for 63 percent of total
estimated screened passengers in 2000. In addition, we reviewed workpapers
prepared by independent auditors as part of the audit of certain air
carriers' Appendix A submissions. Based on the information obtained from
these sources, we designed cost-estimating methodologies and applied them
to air carriers based on their grouping, relying on the assumption that
air carriers of the same type would have similar cost structures. For
example, legacy carriers with major hubs would likely incur certain costs,
such as operational maintenance of screening equipment,

which other regional or low-cost carriers might not typically incur. This
estimation resulted in approximately $13 million more in air carrier
internal costs in our estimate than the air carriers reported in the
Appendix A.

Conclusion	We estimate that passenger and property screening costs
incurred by air carriers in calendar year 2000 for the major cost
components were $448 million, resulting in a difference of $129 million
from air carrierreported costs of $319 million. As such, TSA is not
obtaining all of the proceeds of the ASIF authorized by ATSA.

Recommendation for 	We are making one recommendation for executive action
that will allow TSA to more fully collect the ASIF, as authorized by ATSA.
Specifically, we

Executive Action	recommend that the Secretary of Homeland Security direct
the Assistant Secretary, Transportation Security Administration, to
consider the analysis and estimates in this study in determining the
limitation on the aggregate air carrier fee consistent with ATSA (49
U.S.C. S: 44940(a)(2)(B)(i)).

Agency Comments 	We requested comments on a draft of this report from the
Secretary of Homeland Security or his designee. TSA indicated that it will
consider the analysis and estimates in our study as we recommended. TSA
also provided us with techincal comments, which we incorporated where
appropriate.

We are sending copies of this report to the Secretary of Homeland Security
and the Assistant Secretary, Transportation Security Administration. We
will also make copies available to others upon request. In addition, the
report is available at no charge on the GAO Web site at
http://www.gao.gov.

Should you or your staff have any questions on matters discussed in this
report, please contact me at (202) 512-6906 or [email protected] or Casey
Keplinger, Assistant Director, at (202) 512-9323 or [email protected].
Other major contributors to this report were Sharon Byrd, Heather Dunahoo,
Jeff Jacobson, Carla Lewis, Gloria Medina, Zakia Simpson, and Bethany
Smith.

McCoy Williams Director, Financial Management and Assurance

List of Congressional Committees

The Honorable Judd Gregg
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Subcommittee on Homeland Security
Committee on Appropriations
United States Senate

The Honorable Conrad Burns
Chairman
The Honorable John D. Rockefeller IV
Ranking Minority Member
Subcommittee on Aviation
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Harold Rogers
Chairman
The Honorable Martin Olav Sabo
Ranking Minority Member
Subcommittee on Homeland Security
Committee on Appropriations
House of Representatives

The Honorable John L. Mica
Chairman
The Honorable Jerry F. Costello
Ranking Democratic Member
Subcommittee on Aviation
Committee on Transportation and Infrastructure
House of Representatives

Appendix I

                             Scope and Methodology

To assist us in evaluating passenger and property screening costs incurred
by air carriers in 2000, we contracted with Simat, Helliesen & Eichner,
Inc. (SH&E), a consulting firm with significant aviation industry
expertise, through a competitive award process. SH&E subcontracted with
PricewaterhouseCoopers LLP for additional accounting and finance expertise
and with Abt Associates for additional statistical capabilities. To
provide a basis for the contractors' work, we developed an audit strategy
to independently determine a reasonable estimate of the 2000 passenger and
property screening costs incurred by the airlines. We oversaw the project
and worked closely with contractors as they planned and executed their
work. To ensure a sound approach to the study, we reviewed the
contractors' work plans, sampling plans, questionnaires, and workpapers.
We participated in significant meetings, provided continual oversight and
feedback, and received periodic briefings from the contractors.

Develop an Understanding

To develop an understanding of the passenger and property screening
process and the issues involved in measuring associated costs, we
conducted numerous interviews and informational meetings with key
stakeholders, including representatives of the Transportation Security
Administration (TSA); the Department of Transportation's (DOT) Office of
Inspector General (OIG); the Department of Homeland Security's (DHS) OIG;
and the Air Transportation Association of America, Inc., as well as
current and former Federal Aviation Administration (FAA) security
officials. We also interviewed subject matter experts, current and former
airline officials with security-related responsibilities at both the
corporate headquarters and airport station levels, finance and operations
officials at major airports, and other individuals.

We reviewed numerous documents that were publicly available or made
available to us for the purposes of this study. These included public and
airline industry comments on the imposition of the Aviation Security
Infrastructure Fee; regulatory documents concerning FAA requirements for
passenger and property screening in calendar year 2000 and other
regulatory documents; prior studies and testimonies on passenger and
property screening; TSA analyses of passenger and property screening
costs; and the workpapers of the DHS OIG, which was conducting a separate
review of airline passenger and property screening costs in 2000.

We thoroughly reviewed and analyzed cost data that had been submitted by
airlines on Appendix A submissions to understand the types of costs that
were identified, the relative magnitude of those costs, and how the costs

                        Appendix I Scope and Methodology

were determined. We also used the Appendix A submissions to perform an
initial benchmarking analysis to identify obvious outliers and potential
gaps in certain cost categories.

Design of Analytical 	We determined the primary cost drivers for providing
passenger and property screening services in 2000 and designed an approach
to measure

Framework	these costs. Based on the understanding of the screening process
acquired during the planning stage of our review, we identified three
primary cost components:

1.	Costs associated with the use of private screening contractors (or
airline employees if they performed the screening function directly).

2. Airport costs related to passenger and property screening.

3. Internal airline costs.

Data Collection and Cost Estimation

A database of screened passengers by airport and airline in calendar year
2000 was prepared to provide the basis for developing unit cost rates for
use in the expansion of sampled results to an overall U.S. system total.
These data were estimated using publicly available airline passenger
traffic data sources, including the DOT Passenger Origin-Destination
Survey; the DOT T-100 Flight Segment database; the DOT Part 298C Passenger
Data; and origin-destination passenger data as adjusted by Database
Products, Inc.

We determined that an origin and destination (O&D) measure was the most
appropriate metric for use in the analysis, since other traffic measures,
such as enplanements, include a substantial number of connecting
passengers at hub airports who do not pass through screening. However, we
did include inbound international passengers who connect to domestic
flights and are re-screened at U.S. gateway airports. The screened
passenger estimates also include certain domestic to international
connecting passengers who require a second screening because they change
terminals when connecting to their international flights. The database
identifies calendar year 2000 screened passengers by airport, airline, and
traffic category. As possible, the database was validated by analysis and
reconciliation with other data sources. The screened

                        Appendix I Scope and Methodology

passenger database was used as a basis for expansion of sample data in
each of the three primary cost analyses.

Project Work Plan	Our project work plan included three major work elements
designed to independently quantify the costs incurred by airlines within
each of three identified primary cost areas, which are explained below.

Screening Industry Cost We compiled and classified billing records from
nine private screening

Analysis	companies that generated over $200 million in calendar year 2000
screening revenues and represented approximately 62 percent of the overall
U.S. passenger and property screening market. We assumed that companies
provided full billing records and could not independently verify the data.
A summary of these data is provided in table 7.

Table 7: Screening Company Billings and Number of Screeners Prior to
September 11, 2001

               Screening company           Billings       Screening employees 
                               1    $67,151,628                         4,201 
                               2         41,975,478                     2,833 
                               3         57,312,687                     2,426 
                               4          9,606,700 
                               5          8,196,675 
                               6          3,334,114 
                               7          7,528,050 
                               8          6,961,848 
                               9          6,318,085 
                           Total    $208,385,265                       12,075 

                             Source: GAO analysis.

Appendix I Scope and Methodology

Using the data collected for the nine screening companies, we used a
regression model to estimate total screening costs. The basic form of a
simple linear regression model is as follows:

^^  ^Yi  =b0  +b1  xi

where :

Y	^  i  = the i th  value of the Variable to be estimated ^b0  = the
estimated value of Y when x = 0

^b1  = the slope of the line (the increase in Y when x = 1)

xi  = the ith  value of the predictor Variable

Since it is reasonable to assume that a company with zero employees would
have zero screening costs, we have used a model that assumes the intercept
term (beta zero) is zero.1 Based on the data for the nine screening
companies, the estimated beta 1 parameter is 17,014. In other words, for
every employee, the model predicts $17,014 in screening costs.

Thus, screening costs can be estimated through the following:

Screening costs per company = $17,014  * number of screening employees

This model shows a strong correlation between the number of screening
employees and the screening costs per company and provides a statistically
significant relationship between the number of screening employees and
screening costs per company. A comparison of the predicted values and the
actual values shows a difference of about 1.4 percent for the 9 screening
companies. In addition, model diagnostics indicate that the model provides
a reasonable fit to the data.

Using this model, we calculated a predicted value for each of the 10
screening companies with no billing data and the remaining screening
employees not identified within the top 19 screening companies.

1 We considered a regression model including an intercept parameter;
however, the estimated parameter is not statistically significant from
zero.

                        Appendix I Scope and Methodology

A 95 percent confidence interval around the estimate ranges from $313
million to $355 million.

We considered several options for estimating total screening costs, such
as a simple ratio of billings to employees and a regression model based on
number of passengers rather than number of employees. However, we used the
regression method based on number of employees because it provided the
most precise estimate (i.e., the narrowest confidence interval).

Airport Cost Analysis	We interviewed, collected financial data, and
analyzed screening-related costs at 59 U.S. airports, including 19 of the
20 largest airports and a cross section of other airports of different
sizes. These 59 airports accounted for approximately 70 percent of total
U.S. screened passengers in 2000. Through the interviews, we collected
information on airport rate-making methodologies, airline use agreements,
and specific screening-related costs that were recovered from the airlines
in calendar year 2000. The data obtained were used to quantify screening
costs at the sample airports and then extrapolated to the total U.S.
airport system. An overview of the approach to estimating airport costs is
summarized below.

o 	Developed an understanding of airport responsibilities for passenger
and property screening and identified the types of screening-related costs
were incurred at airports that may have been passed on to the airlines.

o 	Conducted informational interviews with senior officials at selected
airports.

o  Designed a stratified sample of U.S. airports.

o  Developed interview protocol and guidelines.

o  Scheduled interviews with airport officials.

o  Conducted interviews.

o  Obtained backup documentation and clarification.

o  Quantified costs by airport and calculated unit cost rates.

o  Extrapolated sample results to U.S. airport system total.

                        Appendix I Scope and Methodology

The stratified sample of airports used to develop our estimate was drawn
from the 400 largest U.S. airports, based on outbound O&D passengers,2
which represented 99.9 percent of total estimated screened passengers at
U.S. airports in calendar year 2000. The 400 airports were divided into 5
strata based on the volume of outbound O&D passengers. Because the 20
largest airports accounted for approximately one-half of total U.S. O&D
passengers, all 20 of these major airports were included in the airport
sample.

Fifty airports were randomly sampled from strata 2 to 5. The sample
contained 20 airports from Stratum 2, and 10 airports each from strata 3
to 5. Airports in strata 2 to 5 were then divided into 10 groups, each
with 5 airports from the various strata, to ensure that a representative,
unbiased sample would be interviewed, even if there were not enough time
to interview all of the sample airports. However, interviews were
ultimately attempted with all sample airports in strata 2 to 5 as shown in
table 8.

                Table 8: Number of Airports in Stratified Sample

Stratum Estimated screened     Percentage of      No. of            Sample 
           passengers                 total         airports         airports 
      1             270,557,510             51.0%            20            20 
      2             136,932,121             25.8%            27            20 
      3              69,321,908             13.1%            34            10 
      4              33,284,409              6.3%            60            10 
      5              20,305,673              3.8%           289            10 
    Total           530,401,621            100.0%          430a 

Source: SH&E.

aAfter the sample design was completed, a complete list of airports that
had passenger and property screening in 2000 was provided by former FAA
officials now with TSA. That list identified 430 airports, compared to the
400 airports from which the stratified sample was drawn. The additional 30
airports accounted for only 0.1 percent of estimated screened passengers.

The goal of the airport survey was to collect cost information for at
least 50 of 70 sample airports (including Stratum 1 airports) in order to
extrapolate the results to the total population of U.S. airports. We
interviewed representatives from 59 of the 70 sample airports. Airports

2 Outbound O&D passengers were used as a proxy of screened passengers to
develop the airport sample, which proceeded in parallel with the
estimation of the number of screened passengers in calendar year 2000.

                        Appendix I Scope and Methodology

whose representatives were not interviewed were generally unable to
participate because of schedule issues. For two airports, we relied on DHS
OIG workpapers, in lieu of a study team interview.

The estimated airport screening costs borne by airlines were correlated
with airport size. Our sampling and analysis strategy was designed to use
this relationship to obtain the highest possible precision from the sample
airport observations. Sixty of the 68 airports we attempted to contact
provided usable responses within the time limits of this study. Across the
strata, response rates ranged from 70 percent to 95 percent. Accordingly,
we assigned each responding airport a sampling weight equal to the number
of airports in its stratum (N) divided by the number of responding
airports (n) to extrapolate to the total airport population.

Airline Internal Cost Analysis

The objective of the airline internal cost analysis was to prepare an
independent estimate of airline internal costs related to passenger and
property screening that were not captured through the separate analyses of
contract screener industry costs and airport costs. To develop an
understanding of airline responsibilities for passenger and property
screening and to identify internal cost functions, we reviewed FAA
regulations and the Air Carrier Standard Security Plan for calendar year
2000. We also interviewed airline officials who had been in
security-related positions in calendar year 2000.

The analysis is based on several sources of information, including the
airline Appendix A submissions and accompanying notes. We relied on
information obtained from interviews that were conducted with officials
from 12 airlines that accounted for 63 percent of total estimated calendar
year 2000 screened passengers at U.S. airports. Finally, we reviewed and
relied upon workpapers prepared by the airlines' independent auditors and
information compiled by the DHS OIG during its recent review.

The airline internal cost analysis focused on 11 cost categories from
Appendix A:

o  Line 16-Screening Equipment Installation

o  Line 17-Operating, Maintenance and Testing of Screening Equipment

o  Line 24-Ground Security Coordinators

Appendix I Scope and Methodology

o  Line 25-Security Program Management

o  Line 26-Security Contract Administration and Oversight

o  Line 28-Legal Support

o  Line 29-Accounting Support

o  Line 30-Other Administrative Support

o  Line 31-Insurance

o  Line 34-Fees for Oversight of Consortium Contracts

o  Line 35-Other (includes fines)

In performing the analysis, airlines were classified into five groups to
identify potential differences in operating and cost characteristics:

o 	Legacy: Major hub and spoke carriers (e.g., American, Delta, and
United).

o  Low Cost: Primarily nonhubbing carriers (e.g., Southwest and JetBlue).

o 	Regional: Carriers operating regional jet and commuter aircraft (e.g.,
Comair, Mesa, and Skywest).

o 	Foreign: Non-U.S. airlines (e.g., Air Canada, British Airways, and
Mexicana).

o 	Other: Niche carriers (e.g., Hawaiian, Midwest Express, and US Airways
Shuttle).

We developed two analytical approaches for estimating airline internal
costs. The first approach applies to 6 of the Appendix A costs categories
(Lines 16, 17, 25, 26, 28, and 29) and utilizes information reported in
Appendix A and the accompanying footnotes to estimate total industrywide
airline internal costs. Airline interviews and auditor workpaper reviews
indicated that the air carriers that submitted costs for these six line
items generally followed reasonable and logical methodologies to develop
their estimates. Therefore, we relied on average unit cost rates for
airlines that did identify these line item costs and applied those to
nonreporting and

                        Appendix I Scope and Methodology

nonfiling carriers within individual carrier groupings to estimate the
unreported costs.

A separate bottom-up approach was used to estimate costs for Line
24-Ground Security Coordinators (GSC) and Line 35-Other Costs (including
FAA fines). Costs for GSC functions were developed from study team
estimates of the total number of qualified GSCs in 2000, applicable
training requirements, the total number of checkpoints at U.S. airports in
2000, the average amount of time spent on monthly checkpoint audits and
daily tasks, and an average fully burdened wage rate for GSC airline
employees. For Line 35-Other Costs (including FAA fines), we used the
midpoint of Appendix A costs, which were known to be understated, and FAA
Quarterly Enforcement Reports to estimate industry costs for this
category.

Independent estimates were not prepared for 3 costs categories (Lines 30,
31, and 34), since it was concluded that the amounts reported in Appendix
A were representative of overall airline industry costs.

Confidence Intervals	The confidence intervals for each of the
statistically derived estimates referred to throughout the report are
presented in table 9.

Table 9: Summarization of Cost Estimate Point Estimates and Confidence
Intervals

Dollars in millions

          Cost estimate         Point estimate   Confidence interval at a 95% 
                                                        confidence level +(-) 
        Private screening                 $334                            $21 
        contractors costsa                     
          Airport costs                     80 
     Law enforcement officers               66 
    Security checkpoint space               13 
Air carriers' internal costs             34                              0 
       Overall estimate and                    
       confidence interval                     
    of passenger and property                  
            screening                          
              costs                       $448                            $23 

Source: GAO analysis.
Note: Numbers may not add due to rounding.
aIncludes airline employee costs if they performed the screening function
directly.

                        Appendix I Scope and Methodology

Limitations to the Analysis

In preparing the cost estimates, we generally relied upon representations
and information provided by air carriers, government agencies, airports,
and screening companies. Procedural limitations were encountered related
to (1) the amount of time that has passed since calendar year 2000, (2)
access and availability of cost or accounting records, (3) access and
availability of individuals due to employee turnover, (4) corporate
structural changes (i.e., bankruptcy, acquisitions, etc.), and (5) record
retention policies. Certain cost categories required the application of
assumptions to identify, categorize, or allocate cost due to the
structure, limitations, or both of the air carrier, airport, or screening
company accounting systems. While nearly all entities contacted were
cooperative, the following information or documents requested were not
provided consistently from all air carriers and other stakeholders: (1)
air carrier calendar year 2000 Section 108 Security Plans, (2)
identification or allocation of time and expense related to ground
security coordinators, (3) full and complete billing records and
supporting documentation for all screening companies, and (4) full and
complete information on airport rates and charges structures at individual
airports and records on airport rental payments received from airlines.

We also identified certain security-related functions for which we were
not able to measure the cost given the lack of available information and
the limited time frame to complete the work. Examples of such costs
include (1) security-related real estate costs for airline-owned
terminals; (2) costs associated with Computer Assisted Passenger
Prescreening System (CAPPS); and (3) costs related to Positive Passenger
Bag Match. Although analyzing the costs of these additional functions
would likely increase our estimate, we were unable to determine costs
associated with these functions within our time frame and believe that we
have captured the primary cost components.

We requested comments on a draft of this report from the Secretary of
Homeland Security or his designee, as discussed in the Agency Comments
section.

We performed our work in accordance with generally accepted government
auditing standards from October 2004 through April 2005.

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