Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms
of Underlying Structural Issues (30-SEP-05, GAO-05-945).	 
                                                                 
Since 2001 the U.S. airline industry has lost over $30 billion.  
Delta, Northwest, United, and US Airways have filed for 	 
bankruptcy, the latter two terminating and transferring their	 
pension plans to the Pension Benefit Guaranty Corporation (PBGC).
The net claim on PBGC from these terminations was $9.7 billion;  
plan participants lost $5.3 billion in benefits (in constant 2005
dollars). Considerable debate has ensued over airlines' use of	 
bankruptcy protection as a means to continue operations. Many in 
the industry have maintained that airlines' use of this approach 
is harmful to the industry. This debate has received even sharper
focus with pension defaults. Critics argue that by not having to 
meet their pension obligations, airlines in bankruptcy have an	 
advantage that may encourage other companies to take the same	 
approach. At the request of the Congress, we have continued to	 
assess the financial condition of the airline industry and	 
focused on the problems of bankruptcy and pension terminations.  
This report details: (1) the role of bankruptcy in the airline	 
industry, (2) whether bankruptcies are harming the industry, and 
(3) the effect of airline pension underfunding on employees,	 
airlines, and the PBGC. DOT and PBGC agreed with this report's	 
conclusions. GAO is making no recommendations.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-945 					        
    ACCNO:   A38917						        
  TITLE:     Commercial Aviation: Bankruptcy and Pension Problems Are 
Symptoms of Underlying Structural Issues			 
     DATE:   09/30/2005 
  SUBJECT:   Airline regulation 				 
	     Airlines						 
	     Bankruptcy 					 
	     Commercial aviation				 
	     Financial analysis 				 
	     Losses						 
	     Pensions						 
	     Transportation industry				 
	     Economic analysis					 

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GAO-05-945

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

September 2005

COMMERCIAL AVIATION

  Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues

                                       a

GAO-05-945

[IMG]

September 2005

COMMERCIAL AVIATION

Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues

                                 What GAO Found

Bankruptcy is endemic to the airline industry, owing to long-standing
structural challenges and weak financial performance in the industry.
Structurally, the industry is characterized by high fixed costs, cyclical
demand for its services, and intense competition. Consequently, since
deregulation in 1978, there have been 162 airline bankruptcy filings, 22
of them in the last five years. Airlines have used bankruptcy in response
to liquidity pressures and as a means to restructure their costs. Our
analysis of major airline bankruptcies shows mixed results in being able
to significantly reduce costs-most but not all airlines were able to do
so. However, bankruptcy is not a panacea for airlines. Few have emerged
from bankruptcy and are still operating.

There is no clear evidence that airlines in bankruptcy keep capacity in
the system that otherwise would have been eliminated, or harm the industry
by lowering fares below what other airlines charge. While the liquidation
of an airline may reduce capacity in the near-term, capacity returns
relatively quickly. In individual markets where a dominant carrier
significantly reduces operations, other carriers expand capacity to
compensate. Several studies have found that airlines in bankruptcy have
not reduced fares and rival airlines were not harmed financially.

The defined benefit pension plans of the remaining airlines with active
plans are underfunded by $13.7 billion, raising the potential of more
sizeable losses to PBGC and plan participants. These airlines face an
estimated $10.4 billion in minimum pension contribution requirements over
the next 4 years, significantly more than some of them may be able to
afford given their continued operating losses and other fixed obligations
(see figure). While spreading these contributions over more years would
relieve some of these airlines' liquidity pressures, it does not ensure
that they will avoid bankruptcy because it does not fully address other
fundamental structural problems, such as other high fixed costs.

Comparison of Legacy Airline Cash Balance with Future Fixed Obligations 20
In billions of dollars

Cash at end of 2004

15	Other obligations Operating leases

Capital leases

10

Long term debt

5 Pension obligations

0 2004 2005 2006 2007 2008

Source: PBGC data and SEC 10K filings.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Bankruptcy Is a Response to the Airline Industry's Structural

Challenges No Evidence That Bankruptcy Protection Harms the Industry or
Hurts Competitors Airlines Have Shed Billions in Pension Obligations, but
Structural

Cost Problems Remain Concluding Observations Agency Comments

1 2 4

12

27

37 59 60

Appendixes                                                              
                Appendix I:             Scope and Methodology              63 
                             Case Studies Describing Market Responses to   
               Appendix II:                    Airline                     
                                             Withdrawals                   65 
                             Colorado Springs: Western Pacific Moved Its   
                                            Operations to                  
                                                Denver                     66 
                              Columbus: America West Eliminated Its Hub    68 
                               Greensboro: Continental Lite Service Was    71 
                                              Dismantled                   
                               Kansas City: Vanguard Ceased Operations     74 
                                 Nashville: American Dismantled a Hub      76 
                                   St. Louis: American Acquired TWA        79 
              Appendix III:   Comments from the Pension Benefit Guaranty   
                                             Corporation                   82 
              Appendix IV:      GAO Contact and Staff Acknowledgments      84 

  Related GAO Products

     Tables        Table 1: Airline Bankruptcy Filings Since 2000          13 
               Table 2: Cost Reductions Achieved during Major Airline   
                                    Bankruptcies                           19 
                    Table 3: Recent Examples of Airline Financing          33 
               Table 4: Case Examples of Markets' Response to Airline   
                                     Withdrawals                           34 
                       Table 5: Bankruptcy Filings, 1978-2004              36 
                 Table 6: Costs of Terminating Airline Pension Plans       54 

                                    Contents

Table 7: Estimated Benefit Cuts for United Airlines Active

Employees 56 Table 8: Estimated Benefit Cuts for United Airlines Retirees
56 Table 9: 2006 Estimated Deficit Reduction Contribution Payments

under Different Amortization Periods 58

Figures Figure 1:

Figure 2: Figure 3:

Figure 4: Figure 5:

Figure 6:

Figure 7:

Figure 8:

Figure 9:

Average Annual Spot Price for Gulf Coast Jet Fuel,
1998-2005
Percentage Change in Passenger Yields Since 2000
Difference in Unit Costs between Legacy and Low Cost
Airlines, 1998-2004
Airline Operating Profits and Losses, 1998-2004
Comparison of Airline and Overall Business Failure
Rates, 1984-1997
Average Duration of Bankruptcies, by Industry,
1980-2004
Comparison ofAirlines' and Other Industries'Bankruptcy
Outcomes, 1980-2004
Growth of Airline Industry Capacity and Major Airline
Liquidations
Return on Capital Invested, 1992-1996

Figure 10: Operating Profits, 2000-2001 Figure 11: Funded Status of Legacy
Airline Defined Benefit Plans,

1998-2004 Figure 12: Pension Funding Status, 1998-2004 Figure 13: Legacy
Airlines' Projected Minimum Contribution

Requirements, 2005-2008 Figure 14: Legacy Airlines' Pension Assets and
Returns, 1998-2004 Figure 15: Corporate and 30-Year Treasury Bond Yields,
1977-2005

Figure 16: Legacy Airlines' Maximum Allowable Pension Contributions,
Actual Pension Contributions, and Operating Profits, 1997-2002

Figure 17: Legacy Airline Pension Assets as a Percent of Liabilities,
1998-2003 Figure 18: Comparison of Legacy Airlines' Year-end 2004 Cash
Balances with Fixed Obligations, 2005-2008 Figure 19: Percentage Change in
Colorado Springs Capacity and Total Traffic Figure 20: Number of
Destinations Served from Colorado Springs

                                      6 7

                                      8 9

17

24

26

29 31 32

39 40

42

44

45

47 49 53 67 68

Contents

Figure 21: Percentage Change in Columbus Capacity and Total

Traffic 70 Figure 22: Number of Destinations Served from Columbus 71
Figure 23: Percentage Change in Greensboro Capacity and Total

Traffic 72 Figure 24: Number of Destinations Served from Greensboro 73
Figure 25: Percentage Change in Kansas City Capacity and Total

Traffic 75 Figure 26: Number of Destinations Served from Kansas City 76
Figure 27: Percentage Change in Nashville Capacity and Total

Traffic 77 Figure 28: Number of Destinations Served from Nashville 78
Figure 29: Percentage Change in St. Louis Capacity and Total

Traffic 80 Figure 30: Number of Destinations Served from St. Louis 81

Abbreviations

ASM Available seat mile
ATSB Air Transportation Stabilization Board
BTS Bureau of Transportation Statistics
CASM Cost per available seat mile
DOT Department of Transportation
DRC Deficit Reduction Contributions
FAA Federal Aviation Administration
PBGC Pension Benefit Guaranty Corporation
PFEA Pension Funding Equity Act
RLA Railway Labor Act
SEC Securities and Exchange Commission

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

September 30, 2005

Congressional Committees

Since 2001, the U.S. airline industry has confronted financial losses of
unprecedented proportions. From 2001 through 2004, legacy airlines (i.e.,
generally, those network airlines whose interstate operations predated
deregulation) incurred operating losses of $28 billion. Since 2000, four
of the nation's largest legacy airlines-Delta Air Lines, Northwest
Airlines, United Airlines and US Airways--have gone into bankruptcy.1
Together, these airlines provided over 40 percent of the available
passenger seating capacity operated by all U.S. airlines during the second
quarter of 2005. Under bankruptcy protection, United and US Airways
terminated their pension plans and passed the unfunded liability to the
Pension Benefit Guaranty Corporation (PBGC).2

In recent years, considerable debate has ensued over legacy airlines' use
of chapter 11 bankruptcy protection as a means to continue operations,
often for years. Some in the industry and elsewhere have maintained that
legacy airlines' use of this approach is harmful to the airline industry
as a whole because it allows inefficient carriers to stay in business,
creating overcapacity and allowing these airlines to potentially
underprice their competitors. This debate has received even sharper focus
since US Airways and United defaulted on their pensions. Without their
pension obligations, critics argue, US Airways and United enjoy a cost
advantage that may encourage other airlines sponsoring defined benefit
plans to take the same approach.

Last year, we reported on the industry's poor financial condition, the
reasons for it, and the need for legacy airlines to reduce their costs if
they

1Two other smaller carriers-ATA Airlines and Aloha-are also in bankruptcy
protection. Hawaiian Airlines emerged from bankruptcy protection in June
of this year.

2Through its single-employer insurance program, PBGC insures certain
benefits of the more than 34 million worker, retiree, and separated vested
participants of over 29,000 privatesector defined benefit pension plans.
Defined benefit pension plans promise a benefit that is generally based on
an employee's salary and years of service, with the employer being
responsible to fund the benefit, invest and manage plan assets, and bear
the investment risk. A single-employer plan is one that is established and
maintained by only one employer. It may be established unilaterally by the
sponsor or through a collective bargaining agreement.

are to survive.3 At the request of Congress, we have continued to assess
the financial condition of the airline industry and, in particular, the
problems of bankruptcy and pension plan terminations. Accordingly, this
report details (1) the role of bankruptcy in the airline industry, (2)
whether bankruptcies are harming the industry, and (3) the effect of
airline pension underfunding on employees, airlines, and PBGC.

To help answer these questions, we relied on a variety of data sources. To
assess the financial status of airlines, including bankrupt airlines, we
used airline financial and operating data reported to the U.S. Department
of Transportation (DOT). To assess the reliability of these data, we
reviewed the quality control procedures that the Department and its
contractors use in collecting and maintaining these data. To analyze the
impact of airline bankruptcies, we relied on two different but
complementary databases: Professor Lynn M. LoPucki's Bankruptcy Research
Database and New Generation Research's bankruptcydata.com. We assessed the
reliability of these data by comparing key elements from the two data
sources and also by comparing key elements with corporate filings with the
U.S. Securities and Exchange Commission (SEC). To assess the effect of
underfunding airline pensions, we relied on PBGC data, supplemented by
public financial reports filed with SEC. We determined that the data we
used were sufficiently reliable for the purposes of this report. For our
work, we also reviewed academic studies, met with airline and trade
association representatives, government experts, and industry and legal
analysts. Additional information on our scope and methodology is available
in appendix I. We performed our work from August 2004 through September
2005 in accordance with generally accepted government auditing standards.

Results in Brief	Bankruptcy is endemic to the airline industry, owing to
long-standing structural challenges and weak financial performance in the
industry. Airlines have used bankruptcy in response to liquidity pressures
and as a means to restructure their costs. However, our analysis of major
airline bankruptcies shows mixed results in reducing costs while under
bankruptcy. For example, Continental Airlines was able to reduce costs
significantly during its first and second bankruptcies, while TWA was far
less successful and saw its unit costs rise faster than the rest of the

3GAO, Commercial Aviation: Legacy Airlines Must Further Reduce Costs to
Restore Profitability, GAO-04-836 (Washington, D.C.: Aug. 11, 2004).

industry's during its first bankruptcy. Since deregulation in 1978, there
have been 162 airline bankruptcies, 22 of them in the last 5 years. While
most of these bankruptcies affected small airlines that eventually
liquidated, four of the more recent bankruptcies (Delta, Northwest,
United, and US Airways) are among the largest corporate bankruptcies ever,
excluding financial services firms. The airline industry is characterized
by intense competition, high fixed costs, cyclical demand, and
vulnerability to external shocks. As a result, airlines have performed
worse financially and are more prone to failure than most other
industries. For airlines in bankruptcy, the process, while well developed,
can be contentious as the numerous stakeholders, such as airline employees
and creditors, fight for pieces of a diminishing pie. We found some
indication that airline bankruptcies differ from those in many other
industries: for example, they tend to last longer and are more likely to
terminate in liquidation.

There is no clear evidence that airlines in bankruptcy harm the industry
by contributing to overcapacity or underpricing their competitors. We
found that although an airline's liquidation may reduce capacity in the
near-term, capacity returns relatively quickly. Even when a dominant
carrier retreats from an individual market because it has liquidated or
changed its business strategy (by, for example, dropping a hub city),
other carriers quickly expand capacity to compensate with little or no
increase in fares. For example, in Nashville, after American Airlines
dismantled their hub there, other airlines increased their capacity and
total origin-and-destination capacity actually increased. Several studies
have also found that airlines in bankruptcy have not reduced fares and
rival airlines were not harmed financially. Furthermore, bankruptcy is not
a panacea for airlines, and few have emerged from it.

While bankruptcy may not harm the financial health of the airline
industry, it has become a considerable concern for the federal government
and legacy airline employees and retirees because of the recent
terminations of pension plans by US Airways and United Airlines. These
terminations resulted in claims on PBGC's single-employer program of $9.7
billion, and plan participants (employees, retirees, and beneficiaries)
are estimated to have lost more than $5.3 billion in benefits that were
not covered by PBGC. At termination in May 2005, United's pension plans
were underfunded by $9.8 billion; while the plans promised $16.8 billion
in benefits, they were backed by only $7 billion in assets. PBGC
guaranteed $13.6 billion of the promised benefits, resulting in a net
claim on the agency of $6.6 billion and an estimated loss of $3.2 billion
in benefits to participants. The defined benefit pension plans of the
remaining legacy airlines with active plans are

underfunded by approximately $13.7 billion (according to data from SEC),
raising the potential for additional sizeable losses to PBGC and plan
participants. Since Delta and Northwest declared bankruptcy on September
14, 2005, PBGC released estimates stating that their plans are underfunded
by a combined total of $16.3 billion on a termination basis, of which PBGC
estimates it would be liable for $11.2 billion. Legacy airlines face an
estimated minimum of $10.4 billion in pension contributions over the next
4 years, significantly more than some of them may be able to afford given
continued losses and their other fixed obligations. If the remaining
legacy airlines with defined benefit plans were to spread their
contributions over more years, as some airlines have proposed, they would
relieve some of the liquidity pressure but would not necessarily stay out
of bankruptcy because this approach does not fully address their
fundamental cost structure problems.

In its written comments on a draft of this report, PBGC generally agreed
with our findings and conclusions. PBGC noted that the report makes a
strong case for pension funding reform, demonstrating the possible
consequences of the weak funding rules now in place. DOT did not provide
any written comments. Both PBGC and DOT provided technical comments and
suggestions that we incorporated as appropriate.

Background	In 1978, under the Airline Deregulation Act, the United States
deregulated its domestic airline industry. The main purpose of
deregulation was to remove government control and open the air transport
industry to market forces. Previously, the Civil Aeronautics Board
regulated all domestic air transport, controlling fares and setting
routes. In this regulated market, airlines competed more through
advertising and onboard services than through fares. When the industry was
deregulated, "legacy" airlines carried over the cost structures that had
been protected by price regulation. Similar to other highly regulated
industries, the airline industry was heavily unionized, with a highly
trained and stable workforce. By contrast, carriers that started
operations after deregulation sought to attract passengers from legacy
network carriers and to stimulate new passenger traffic-and did

so-by offering lower fares. These airlines generally paid less for labor,
on a unit cost basis, which helped them keep their overall operating costs
low.4

In August 2004, we reported on the financial condition of the airline
industry. High-end demand for air travel had begun weakening in 2000
because of an economic turndown, and demand dropped significantly
following the September 11, 2001, terrorist attacks; the war in Iraq; and
the outbreak of SARS.5 We found that in response to changing market
conditions, legacy airlines had reduced costs, but mostly by reducing
capacity and not nearly enough to be competitive with low cost airlines.
Low cost airlines experienced significant growth and a fall in their unit
costs as measured by cost per available seat-mile (CASM), whereas legacy
airlines' unit costs did not improve. In addition, we found that neither
legacy nor low cost airlines possessed much pricing power and suffered
declining unit revenue. As a result of their weak financial performance
and mounting losses, legacy airlines saw their financial liquidity and
solvency seriously deteriorate even as their debt and pension obligations
mounted. Since our 2004 report was issued, losses have continued to mount
for airlines even though traffic levels have returned to pre-9/11 levels.
One of the primary culprits has been record fuel prices, nearly doubling
since 2003 (see fig. 1).

4Despite variation in the size and financial condition of the airlines in
each of these categories, there are more similarities than differences for
airlines in each group. Each of the legacy airlines adopted a
hub-and-spoke network model that can be more expensive to operate than a
simple point-to-point service model. Low cost airlines have generally
entered the market since 1978, are smaller, and generally employ the less
costly point-to-point service model. The seven low cost airlines (AirTran,
America West, ATA, Frontier, JetBlue, Southwest, and Spirit) have had
consistently lower unit costs than the seven legacy airlines (Alaska,
American, Continental, Delta, Northwest, United, and US Airways).

5Severe acute respiratory syndrome.

Figure 1: Average Annual Spot Price for Gulf Coast Jet Fuel, 1998-2005

In dollars per gallon 1.6

$1.52

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0 1998 1999 2000 2001 2002 2003 2004 2005

Source: U.S. Department of Energy, Energy Information Administration.
Note: 2005 prices reflect average through August 16.

Low fares have affected revenues for both legacy and low cost airlines.
Yields, the amount of revenue airlines collect for every mile a passenger
travels, fell for both low cost and legacy airlines from 2000 through 2004
(see fig. 2). However, the decline has been greater for legacy airlines
than for low cost airlines. Only during the first half of 2005 has
stronger demand allowed airlines to increase fares sufficiently to boost
their yields.

Figure 2: Percentage Change in Passenger Yields Since 2000

Percentage change 0

-2

-4

-6

-8

-10

-12

-14

-16

-18 2000 2001 2002 2003 2004

Legacy airline yields

Low cost airline yields Source: GAO analysis of Department of
Transportaion (DOT) Form 41 data.

Legacy airlines, as a group, have been unsuccessful in reducing their
costs to become more competitive with low cost airlines. Unit-cost
competitiveness is essential to profitability for airlines after years of
declining yields. While legacy airlines have been able to reduce their
overall costs since 2001, they have done so largely by reducing capacity
and without improving their unit costs as compared to low cost airlines.
Meanwhile, low cost airlines have been able to maintain low unit costs by
continuing to grow and maintaining high productivity. As a result, low
cost airlines have been able to sustain a unit-cost advantage over their
legacy rivals (see fig. 3). In 2004, low cost airlines maintained a 2.7
cent advantage per available seat mile over legacy airlines. This
advantage is attributable to lower overall costs and greater labor and
asset productivity. Thus far in 2005, airlines have been able to trim most
of their nonfuel-related costs, but high fuel prices and debt interest
charges have kept airlines' costs from falling.

Figure 3: Difference in Unit Costs between Legacy and Low Cost Airlines,
1998-2004

In dollars per available seat mile 0.12

0.11

0.10

0.09

0.08

0.07

0.06

0.00

Source: GAO analysis of DOT Form 41 data.

Note: "Other" costs include costs of aircraft, supplies, and facilities.

Weak revenues and the inability to realize greater unit-cost savings have
combined to produce unprecedented losses for legacy airlines. At the same
time, low cost airlines have been able to continue producing modest
profits (see fig. 4). Legacy airlines have incurred a cumulative $28
billion in operating losses since 2001. Despite a modest recovery for some
airlines during the first half of 2005, analysts predict the industry will
lose another $5 billion to $9 billion in 2005.

           Figure 4: Airline Operating Profits and Losses, 1998-2004

In billions of dollars

                       1998 1999 2000 2001 2002 2003 2004

                                 Legacy airline

                                Low cost airline

                   Source: GAO analysis of DOT Form 41 data.

Owing to continued losses, legacy airlines built cash balances not through
operations but by borrowing. Legacy airlines have lost cash from
operations and compensated for operating losses by taking on additional
debt, relying on creditors for more of their capital needs than in the
past. In doing so, several legacy airlines have used all, or nearly all,
of their assets as collateral, potentially limiting their future access to
capital markets.

Airlines (and other businesses) that are unable to operate profitably over
time may seek recourse under the U.S. Bankruptcy Code.6 In general, two
major provisions of the bankruptcy code govern actions taken by airlines
and other businesses:

o 	Chapter 7 of the code governs liquidation of the debtor's estate and is
often referred to as a "straight bankruptcy." A trustee is appointed to
sell off available assets to repay creditors.

611 U.S.C. S: 101 et seq.

o 	Chapter 11 of the code governs business reorganizations. This chapter
is designed to accommodate complicated reorganizations of publicly held
corporations. Among other things, it allows companies, with court
approval, to reject agreements made under collective bargaining and
renegotiate contracts with other creditors. With the approval of the
bankruptcy courts (which administer the bankruptcy laws), companies may
also modify retiree benefits.

Airline bankruptcies7 typically include a large number of stakeholders.
The primary stakeholder is the airline itself, known as the
debtor-in-possession. Federal stakeholders include the bankruptcy judge,
who presides over the administration of the case and decides contested
aspects, and the U.S. Trustee,8 whose duties include ensuring the
integrity of the process and approving the retention of professionals
(e.g., bankruptcy attorneys).9 During this most recent round of airline
bankruptcies, two additional governmental entities have become major
stakeholders in airline bankruptcies: the Air Transportation Stabilization
Board (ATSB), which was formed after September 11 to administer a $10
billion loan guarantee program for airlines, and PBGC, which insures
defined benefit pension plans. Both agencies have taken ownership stakes
in bankrupt and nonbankrupt airlines through ATSB's loan guarantees and
PBGC's taking over defined benefit pension plans terminated in
bankruptcy.10 The entities that provide the financing while an airline is
in bankruptcy (known as debtor-in-possession financing) and upon its exit
(exit financing) are also major stakeholders, as are airline employees,
many of whom are

7Henceforth, unless otherwise specified, references to airline
"bankruptcies" will mean bankruptcies filed under chapter 11 of the
bankruptcy code.

8Currently, bankruptcy cases in Alabama and North Carolina are not within
the jurisdiction of the U.S. Trustee Program.

9U.S. Trustees, upon order of the bankruptcy court, may also appoint a
private trustee to run the airline if it is determined that the airline's
current management has operated fraudulently or incompetently, or if such
action is deemed to be in the interests of the creditors. A private
trustee was appointed in the March 2003 Hawaiian Airlines bankruptcy case.

10ATSB ultimately provided $1.608 billion in loan guarantees to 6 airlines
(Aloha, World, Frontier, US Airways, ATA, and America West).

represented by labor unions.11 Other secured and nonsecured creditors and
shareholders are also stakeholders in an airline bankruptcy. The interests
of unsecured creditors (including labor) and shareholders are represented
in the process by committees appointed by the U.S. Trustee.

Among the largest cost elements for both legacy airlines and low cost
airlines are those associated with employee compensation and benefits. As
part of the retirement benefits offered, legacy airlines have tended to
offer "defined benefit plans" and supplemental defined contribution plans,
whereas low cost airlines tend to provide only "defined contribution
plans."

o 	Defined benefit plans typically provide participants with an annuity at
retirement-a series of periodic payments over a specified period of time
or for the life of the participant. As designed, defined benefit plan
annuities are generally based on a participant's retirement age, number of
years of employment, and salary. As of December 31, 2004, nine major
airlines sponsored defined benefit plans for their employees: Aloha,
Alaska, American, Continental, Delta, Hawaii, Northwest, US Airways, and
United. These airlines generally offered different pension plans for
different groups of employees-pilots, machinists, and flight attendants,
for example-with varying levels of promised benefits.

o 	Defined contribution plans base pension benefits on the contributions
to and investment returns on individual accounts. Contributions may
consist of pretax or after-tax employee contributions, employer matching
contributions that require employee contributions, and other employer
contributions that may be made independent of any participant
contributions. In a defined contribution plan, the employee bears the
investment risk and often controls how the individual account assets are
invested.

11Since 1936, airline employees have fallen under the jurisdiction of the
Railway Labor Act (RLA), 45 U.S.C. section 151, et seq. Under RLA,
collective bargaining agreements do not expire; they instead become
amendable. The act provides for a lengthy process before employees are
allowed to strike and even at the point of a strike, a presidential
intervention could preclude a strike. In recent airline bankruptcy cases,
airlines gained permission from the courts to abrogate collective
bargaining agreements and unions have threatened strikes in response.
There is uncertainty as to whether a strike by airline employees whose
contract has been abrogated in bankruptcy would violate RLA.

PBGC was established to encourage the continuation and maintenance of
voluntary private pension plans and to insure the benefits of workers and
retirees in defined benefit plans should plan sponsors fail to pay
benefits.12 However, if a pension plan's assets are insufficient to pay
accrued benefits, the plan can be terminated under certain conditions, and
PBGC then assumes responsibility for paying retiree pensions. PBGC may pay
only a portion of the benefits originally promised to employees and
retirees. For 2005, the maximum statutory limit of annual benefits
guaranteed by PBGC is $45,613.68 per participant, for retirement at age
65. The amount paid decreases at earlier retirement ages.

Bankruptcy Is a Response to the Airline Industry's Structural Challenges

Bankruptcy filings are prevalent in the U.S. airline industry because of
longstanding economic structural issues that have led to historically weak
financial performance for the industry. Structurally, the airline industry
is characterized by high fixed costs, cyclical demand for its services,
intense competition, and vulnerability to external shocks. As a result,
airlines have been more prone to failure than many other businesses, and
the sector's financial performance has continually been very weak.
Airlines frequently seek bankruptcy protection because of severe liquidity
pressures, but while bankruptcy may provide some immediate protection from
creditors, airlines in bankruptcy have not always been able to reduce
their costs or avoid liquidation. Owing to the long history of airline
bankruptcies, the process is well developed, and the code includes
provisions applicable just to airline bankruptcies. Even so, the process
can be lengthy and contentious-for example, United is in its third year of
bankruptcy, and its process to date has included litigation over aircraft
repossessions as well as employee pensions.

Bankruptcies Are Endemic to the Airline Industry, and Airlines Fail at a
Higher Rate Than Most Other Industries

Since the 1978 economic deregulation of the U.S. airline industry, airline
bankruptcy filings have become prevalent in the United States, and
airlines fail at a higher rate than companies in most other industries.
This has been particularly true for small, new entrant carriers. Since
1978, there have been 162 airline bankruptcy filings in the United States,
22 of them since

12The Employee Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Code of 1986 set forth standards and requirements that
apply to defined benefit plans.

2000.13 Most of these bankruptcies were chapter 11 filings by small,
newentrant airlines that eventually liquidated. Only 24 of the filings
were by airlines with over $100 million in assets; however, 12 of these
large bankruptcies were filed after 2000 (see table 1).

                 Table 1: Airline Bankruptcy Filings Since 2000

Filing date       Airline        Chapter filed           Outcome           
    2/29/2000       Tower Air                  11      Ceased operations      
    5/1/2000        Kitty Hawk                 11   Emerged from bankruptcy   
    9/19/2000        Pro Air                   11      Ceased operations      
    9/27/2000   Fine Air Services              11   Emerged from bankruptcy   
    12/3/2000    Legend Airlines               11      Ceased operations      
    12/6/2000   National Airlines              11      Ceased operations      
                                                    Ceased operations in 2002 
                 Midway Airlines               11 before filing for chapter 7 
    8/13/2001                                                              in 
                                                             2003             
11/10/2001  Trans World Airlines            11    Acquired by American     
                                                           Airlines           
                                                7      Liquidated; new owners 
    1/2/2002   Sun Country Airlines               acquired assets and resumed 
                                                          operations          
    7/30/2002   Vanguard Airlines              11      Ceased operations      
    8/11/2002       US Airways                 11  Emerged but later refiled  
    12/9/2002    United Airlines               11     Still in bankruptcy     
    3/21/2003   Hawaiian Airlines              11   Emerged from bankruptcy   
10/30/2003    Midway Airlines                7      Ceased operations      
    1/23/2004      Great Plains                11      Ceased operations      
                     Airlines                     
               Atlas Air/Polar Air             11                             
    1/30/2004         Cargo                         Emerged from bankruptcy

9/12/2004       US Airways                 11     Merged with America West 
10/26/2004      ATA Airlines               11 Still in bankruptcy          
12/01/2004      Southeast Airlines          7 Ceased operations            
12/30/2004      Aloha Airlines             11 Still in bankruptcy          
9/14/2005       Delta Air Lines            11 Still in bankruptcy          
9/14/2005       Northwest Airlines         11 Still in bankruptcy          

Sources: Air Transport Association, Department of Transportation, Lynn M.
LoPucki's Bankruptcy Research Database, and media reports.

Note: Bold indicates airlines with over $100 million in assets.

13This number includes repeat filings (e.g., US Airways in 2002 and 2004)
as well as filings by different incarnations of airlines (e.g., Pan Am in
1991 and 1998).

Airline Bankruptcies Are the Result of Long-Standing Structural Issues and
Weak Financial Performance

Structural Issues Hinder the Airline Industry

Because of certain structural characteristics, including its
susceptibility to external shocks and historically weak financial
performance, the airline industry is more prone to failure than many other
types of businesses. Airlines have high fixed costs and are subject to
highly cyclical demand and intense competition. Compounding these other
structural problems is the industry's vulnerability to external
shocks-such as terrorist attacks or war-that decrease demand and increase
costs. The result is that the airline industry has had the worst financial
performance of any major industry.

Structural characteristics of the airline industry have resulted in
repeated cycles of boom and bust as its high fixed costs and particular
sensitivity to seasonal and business cycle changes strain declining
revenues. External shocks such as the Iraq War and the SARS epidemic have
exacerbated the situation. Operating an airline requires expensive
equipment and facilities as well as large numbers of people to operate
them. Aircraft are very expensive-for example, the 2005 list price for a
Boeing 777 ranges from $171 million to $253 million-and, therefore,
airlines use outside financing to acquire a fleet. In the United States,
airlines typically use operating leases, loans, or public financing
instruments to fund their aircraft. Servicing these leases or debt
instruments requires considerable and regular cash payments regardless of
how extensively the aircraft are used. Airlines also rely on specialists
like pilots and mechanics who cannot be easily replaced, making labor
force adjustments to changes in demand more difficult. In addition, the
workers of many carriers, particularly those of the legacy carriers, are
covered by multiyear collective bargaining agreements. While such
agreements may provide important protections to employees, they may limit
carriers' ability to respond quickly to cyclical changes in demand, much
less unanticipated shocks like the September 11 attacks or SARS. Together,
these characteristics result in long-term high fixed costs for an industry
whose fortunes fluctuate with the business cycle.

The airline industry is very competitive and has become increasingly so
with the emergence of low cost airlines and the relative ease with which
new airlines gain access to capital and enter the industry. It is
difficult for airlines to reduce their capacity because of the high fixed
costs and low variable costs of providing service. Capacity increases by
individual airlines are frequently matched by competitors. Low cost
airlines grew over the last 5 years, from 10.8 percent of domestic
capacity in 1998 to 17.5 percent of domestic capacity in 2004. Low cost
airlines have been able to maintain their low costs by continuing to grow.
Finally, despite historic losses in the industry, new airlines are still
willing to enter the market. As of July 2005, seven carriers were
obtaining operating certificates, while at least one other had obtained
its operating certificate but was not yet operating. It is uncertain if
and when these carriers will actually begin service. These carriers plan
to provide domestic and international scheduled and charter service.14
These new airlines are indicative of the willingness of capital providers
to finance aircraft despite the industry's continued losses.

Demand for air travel is closely tied to the business cycle and is subject
to external shocks. So while airlines' most prominent costs-for aircraft
and labor-are locked into fixed payments and multiyear contracts, airline
revenues fluctuate because demand is cyclical. External demand shocks can
have a devastating impact on airline finances. For example, beginning in
2000, an economic downturn precipitated a decrease in high-end demand for
air travel, while the terrorist attacks of September 11, the Iraq War, and
the outbreak of SARS compounded that trend. These events contributed to
the 22 airline bankruptcy filings since 2000.

The Airline Industry's Financial The structural issues discussed in the
previous section have contributed to

Performance Has Historically the airline industry's historically poor
financial performance and higher-

Been Poor	than-average industry failure rate. This performance is
illustrated by the industry's weak revenues and lack of profitability. In
particular, legacy airlines in aggregate have experienced operating losses
in all quarters but one since September 11, 2001. A return to
profitability that some financial analysts expected for legacy airlines in
2004 and 2005 has not materialized, in large part because of historically
high oil prices.

14Additional applicants are requesting certification to provide cargo,
charter, and helicopter services.

One way to measure the inherent instability of the airline industry is to
compare its operating ratio with that of other industries. The operating
ratio is the ratio of a company's operating expenses to its operating
revenues. One study found that from 1983 through 2001, the airline
industry had the highest risk in relation to return of any industry sector
when measured using this ratio.15 This study found that the airline
industry had an operating ratio of 97 percent, well above the average of
83.5 percent for all other industries.

Evidence of the volatility and weak financial performance of the airline
industry can also be found by comparing airline failure rates with overall
U.S. business failure rates. For 1997, the last year in which Dun &
Bradstreet produced these data, the overall U.S. business failure rate was
0.9 percent, while the failure rate for the airline industry was three
times greater, at 2.9 percent. Although we do not have overall business
failure rates for more recent years, there is no reason to believe that
the disparity between the rates has changed significantly since 1997 (see
fig. 5).

15Richard D. Gritta et al., "The Instability of the Profitability of the
Major U.S. Domestic Airlines: Risk and Return Over the Period 1983-2001-A
Comparison to Other Industrial Groups," Credit and Financial Management
Review, Vol. 11, No. 1 (Spring Quarter 2005).

 Figure 5: Comparison of Airline and Overall Business Failure Rates, 1984-1997

Failure percentages

14.9%

1.1%

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year

                              Overall failure rate

                              Airline failure rate

Source: GAO analysis of DOT and Dun & Bradstreet data.

         Note: Dun & Bradstreet data were available only through 1997.

Airlines Seek Bankruptcy as a Means to Restructure, but Are Not Always
Successful in Reducing Costs

Bankruptcy has played a prominent role in the U.S. airline industry since
deregulation because many carriers have used the bankruptcy code in an
effort to restructure their operations and cut costs-by, for example,
terminating defined pension benefit plans and rejecting high-cost aircraft
leases. These carriers have met with varying degrees of success. Prominent
examples include US Airways, which has entered chapter 11 twice since 2002
and has merged with America West Airlines, which itself went through
bankruptcy 11 years before; United Airlines, which is hoping to emerge
from bankruptcy in 2006 after more than 3 years in bankruptcy; and TWA,
which entered bankruptcy three times before its assets were eventually
acquired by American Airlines in 2001.

Generally, major airlines have been able to reduce their costs during
bankruptcy. Reductions in operating expenses were generally achieved
through reductions in wages and in capacity. In eight of the nine largest
airline bankruptcies over the last 25 years, operating expenses and
capacity were reduced (see table 2).16 The exception was the first
Continental Airlines bankruptcy, when the airline's capacity doubled but
expenses rose by only one-third. Typically, cost savings were achieved
disproportionately by cutting wages-in six of the nine cases, reductions
in wages were greater than the overall reduction in operating expenses.
Most critically, however, unit costs were reduced in only five of the nine
cases, and in two cases (TWA 1 and US Airways 1) unit costs went up and by
more than the industry average, perhaps explaining why those airlines
filed for bankruptcy again within 2 years.

16Excluding Delta and Northwest Airlines, both of which filed for chapter
11 just before this report was issued.

 Table 2: Cost Reductions Achieved during Major Airline Bankruptcies Change in
                               operating expense

Change in capacity (ASM)a

                          Change in unit costs (CASM)b

Date Change in wages

  Airline                                                                               
bankruptcy  Entered Emerged  Airline Industry Airline Industry Airline Industry Airline Industry 
Continental 9/24/83 6/30/86       1%      18%     31%      16%    103%      30%    -35%     -11% 
     1                                                                                  
  Eastern    3/9/89 Failed c    -34%      19%    -17%      34%     -9%      13%     -9%      19% 
Continental 12/3/90 4/27/93      -1%       2%    -20%      -4%     -3%       9%    -18%     -12% 
     2                                                                                  
  America   6/27/91 8/25/94     -23%       9%    -20%      10%    -12%       9%     -9%       1% 
West                                                                                 
TWA 1    1/31/92 11/3/93     -23%       2%    -18%       2%    -22%       1%      5%       1% 
TWA 2    6/30/95 8/23/95     -22%       2%    -11%       2%    -10%      -5%      0%       7% 
US Airways  8/11/02 3/31/03      -2%     -13%     -3%      -7%    -13%     -10%     12%       4% 
     1                                                                                  
  United    12/9/02 Currentd    -45%     -19%     -7%      14%     -7%       4%      0%      10% 
 Airlines                                                                               
US Airways          Current     -23%      -8%     -7%       0%     -3%      -5%     -5%       6% 
     2      9/12/04    d                                                                

Source: GAO analysis of Department of Transportation data.
aASM = available seat mile.
bCASM = cost per available seat mile.
cChange measured through fourth quarter of 1990, the last quarter for
which data were reported.
dChange measured through first quarter of 2005.

The Airline Bankruptcy Process Is Well Developed and Understood

Airlines Typically File for Chapter 11 Reorganization

Most airlines file to reorganize their operations and finances under
chapter 11 of the bankruptcy code, some sections of which will change
under the new bankruptcy law that comes into effect in October 2005. Given
the number of airline bankruptcies that have occurred over the last 20
years, the process is well developed and understood by those involved, but
it can still be quite contentious.

Most U.S. airlines that are in financial distress and choose to file for
bankruptcy protection file under chapter 11 of the U.S. bankruptcy code.
Chapter 11 provides protection from creditors and allows a company to
reorganize itself and become profitable again. Management-as the
debtorin-possession-continues to run the airline, but all significant
decisions must be approved by the bankruptcy court. In a chapter 7 filing,
the airline stops all operations and a trustee is appointed to sell the
assets to pay off the debt. According to SEC, most publicly held companies
will file under chapter 11 rather than chapter 7 because they can still
run their business and control the bankruptcy process. For airlines, 148
of the 162 bankruptcy filings since 1978 were chapter 11 filings.

Several sections of the bankruptcy code have played a prominent role in
airline bankruptcies. Section 362-the automatic stay provision-gives an
airline breathing room from its creditors by stopping all collection
efforts and foreclosure actions and permitting the debtor to attempt to
develop a repayment plan.17 Under section 1121, the airline's
management-or the private trustee if one has been appointed-currently has
the exclusive right to file a reorganization plan for 120 days following
the filing of the bankruptcy petition; this period may be extended for
cause. Other partiesin-interest may file a plan if 120 days have elapsed
without the debtor's filing a plan or if 180 days have elapsed and the
debtor's plan has not been accepted by each class of creditors. This
period may also be extended for cause. Other sections of the code govern
actions an airline might take to restructure its operations and lower its
costs in order to emerge from bankruptcy. For example, section 1113
governs the rejection of labor contracts and requires that the airline
complete certain steps before requesting that the court abrogate
contracts. Section 1110 gives an airline 60 days to accept or reject
aircraft leases, which allows the airline to continue to operate without
fear that its chief assets will be repossessed. Additionally, several
subsections of section 365 currently relate to airline leases of aircraft
terminals and gates. For example, an airline that leases more than one
terminal or gate may not assume or assign the leases unless it assumes or
assigns all of them to the same entity, which limits the ability of an
airline to realize the full value of its leases. To emerge from
bankruptcy, the airline devises and obtains approval of a reorganization
plan from the bankruptcy court and obtains exit financing, which is used
to operate the company once it is no longer within the jurisdiction of the
bankruptcy court.

Airline Bankruptcies Follow a The airline bankruptcy process has been
honed over the past 27 years as

Well-Practiced but at Times carriers, large and small, have built on prior
experiences and expertise. We

Disputed Process	interviewed numerous industry experts (attorneys,
consultants, analysts, and current and former airline officials), many of
whom have had experience in more than one airline bankruptcy.
Additionally, several of these experts confirmed that the case law and
documents produced by each bankruptcy case provide a body of expertise
available for subsequent filers. They indicated that this documentation
serves as precedent that is useful even though each bankruptcy case is
unique.

1711 U.S.C. Sec. 362(a). Under certain circumstances, however, secured
creditors, governmental bodies, and other interests can obtain relief from
the automatic stay.

The process can also be contentious as the various stakeholders compete
for their share of a dwindling pie. In recent airline bankruptcies, labor
groups have disputed airlines' right to cancel collective bargaining
agreements and terminate defined benefit pension plans while airlines have
challenged creditors. For example, United Airlines has been involved in
litigation with its flight attendants over its termination of their
pension plan and with a group of aircraft lessors over their aircraft
repossessions during its current bankruptcy.

Changes under New Bankruptcy On October 17, 2005, the first major overhaul
of the nation's bankruptcy

Law Might Affect Future Airline laws in 9 years will become effective.
Many provisions of the Bankruptcy

Filings	Abuse Prevention and Consumer Protection Act of 200518 apply to
consumer bankruptcies, but several important provisions apply to corporate
bankruptcies. Some of these provisions may induce distressed airlines to
seek bankruptcy before the new law takes effect while other provisions may
provide more advantages to airlines in bankruptcy. The mid-September Delta
and Northwest bankruptcy filings may be an indication that these carriers
were seeking to avoid some portions of the new bankruptcy law.

First, the 2005 law limits the "exclusivity period" for the debtor to file
a reorganization plan to 18 months after the bankruptcy filing. Currently,
the debtor has the first 120 days to file a plan, and can obtain numerous
extensions. The new limit will not force liquidations but will give other
parties an opportunity to file a competing plan somewhat sooner, thereby
limiting the debtor's "exclusive period" of control of the business. One
bankruptcy expert we spoke with indicated that this change would not
affect the majority of business bankruptcies, since most are concluded
within 180 days. However, because airline bankruptcies tend to take longer
than those in many other industries, this change may induce airlines
considering bankruptcy to file before October 17, 2005.

Second, the new law eliminated two subsections of the code-365(c)(4) and
365(d)(5)-(9)-that limited bankrupt airlines' options when assuming or
assigning terminal and gate leases. This change in the law will favor
airlines that control gates and leases, because they will have the
potential to realize greater value from these assets when in bankruptcy.

18P.L. 109-8.

Third, the 2005 act increases the time limits on assuming or rejecting
unexpired commercial and real property leases but limits extensions. Under
the current code, the debtor has 60 days from the commencement of the case
to assume or reject commercial real property leases, and this time is
often extended by the bankruptcy court. The 2005 act increases the initial
decision period to 120 days but allows for only one extension (of up to 90
days) after that. Therefore, debtors will have a maximum of 210 days from
the commencement of the bankruptcy case to make a decision on these
leases. The court may grant a subsequent extension only upon prior written
consent of the lessors in each instance.

In addition, the new law expands the grounds on which a chapter 11 case
may be converted to chapter 7 and increases the circumstances under which
a chapter 11 trustee may be appointed. The act also encourages fasttrack
chapter 11 cases by making it easier for debtors to implement prearranged
plans. Finally, the new law regulates the circumstances for approval of
key employee retention plans and related severance payments by requiring
that (1) the debtor establish that the bonus is essential to retain the
employee, (2) the employee have a bona fide job offer, and (3) the debtor
prove that the employee's services are essential to the survival of the
company. Additionally, these bonuses and severance packages are linked to
those that are paid to nonmanagement employees. This provision also might
induce pre-October 17, 2005, airline bankruptcy filings.

Airline Bankruptcies Can Airline bankruptcies can differ notably from
bankruptcies in other Differ Significantly from industries along a number
of dimensions. However, it is hard to determine Bankruptcies in Other
whether the differences are directly attributable to the unique sections
of

the bankruptcy code specific to airlines or are the result of factors
uniqueIndustries to the airline industry.

Airline bankruptcies can take a long time to resolve. According to our
analysis of the Bankruptcy Research Database,19 airline bankruptcies
ranked fifth in overall duration (averaging 714 days), behind bankruptcies
in such industries as water transportation and petroleum refining, and
lasted significantly longer than the average for bankruptcies in all of
the industries in the database, which was 518 days. (See fig. 6).

19For this comparison, we relied on two different but complementary
databases: Professor Lynn M. LoPucki's Bankruptcy Research Database and
New Generation Research's bankruptcydata.com. The Bankruptcy Research
Database contains data-for such factors as duration, number of employees,
and assets--on the chapter 11 filings of public companies with assets over
$100 million that are required to file a form 10-K (annual report) with
SEC. Bankruptcydata.com provides information on public companies with more
than $50 million in assets that file for bankruptcy.

Figure 6: Average Duration of Bankruptcies, by Industry, 1980-2004

Industry

                                                           Heavy construction
                                                     Primary metal industries
                                                         Water transportation
                                                           Petroleum refining
                                                           Air transportation
                                                     Apparel & other finished
                                                           Building materials
                                                   General merchandise stores
                                                 Holding & investment offices
                                                         Miscellaneous retail
                                                  Miscellaneous manufacturing
                                                  Home furniture, furnishings
                                                    Electric, gas, & sanitary
                                          Measuring and controlling machinery
                                                       Lumber & wood products
                                                              Health services
                                                     Transportation equipment
                                                                  Real estate
                                                         Oil & gas extraction
                                                   Apparel & accessory stores
                                            Industrial & commercial machinery
                                                Building construction general
                                                            Personal services
                                                      Paper & allied products
                                                   Engineering and accounting
                                                  Chemicals & allied products
                                                Electronic & other electrical
                                               Stone, clay, glass, & concrete
                                              Rubber & miscellaneous plastics
                                              Amusement & recreation services
                                                              Motion pictures
                                                     Construction contractors
                                                           Insurance carriers
                                                              Wholesale goods
                                               Printing, publishing, & allied
                                                    Local & surburban transit
                                                     Eating & drinking places
                                                  Wholesale trade-non-durable
                                                         Furniture & fixtures
                                                        Textile mill products
                                                            Business services
                                                                  Food stores
                                                 Motor freight transportation
                                                               Communications
                                                                 Metal mining
                                                    Fabricated metal products
                                                   Automotive repair services
                                                              Social services
                                           Non-depository credit institutions
                                                      Food & kindred products
                                                 Security & commodity brokers
                                                       Mining of nonmetallics
                                                Hotels, rooming houses, camps
                                                                  Coal mining
                                                              Overall average

0 115 230 345 460 575 690 805 920 1035 1150

Average number of days

             Source: Lynn M. LoPuck's Bankruptcy Research Database.

Airlines in bankruptcy also appeared to retain assets better than other
industries, but at the cost of much greater debt; however, a limited
number of observations precludes firm conclusions. According to available
data for 19 of the top 50 bankruptcies since 1970,20 which involved 3
airlines and 16 other companies, the airlines' assets were 0.8 percent
lower on average after bankruptcy, while the other companies' assets were
47.2 percent lower on average. At the same time, the airlines' liabilities
decreased 32.1 percent while the liabilities of companies in the other
industries decreased 56.9 percent.

Outcomes also differed for airline and other industry bankruptcies,
according to Bankruptcy Research Database. The airlines were more likely
than the other industries in our analysis to liquidate. (See fig. 7.)
However, airlines are also more likely than other industries to start
bankruptcy in chapter 11, which may account for their greater tendency to
liquidate once in chapter 11. For each group, a majority of the companies
had reorganization plans confirmed by the court (i.e., the companies had
exited or emerged from bankruptcy), though for airlines this majority was
smaller because of the larger percentage of liquidations.

20PricewaterhouseCoopers' 2004 Phoenix Forecast: Bankruptcy Barometer.
Comparable data for assets and liabilities before and after bankruptcy
were not available for 31 of the 50 companies (2 airlines and 29 other
companies).

Figure 7: Comparison of Airlines' and Other Industries' Bankruptcy
Outcomes, 1980-2004

                                Percent of cases

                                      78%

Company liquidated

                   Plan confirmed Case dismissed Case pending

                                    Airlines

                                     Others

            Source: Lynn M. LoPucki's Bankruptcy Research Database.

Note: "Company liquidated" means that the company sold its assets either
in chapter 11 or chapter 7; "plan confirmed" means that the company
obtained approved of a reorganization plan from the bankruptcy court;
"case dismissed" means that the bankruptcy case was rejected by the
bankruptcy court; and "case pending" means that the case is still in
progress.

Our analysis of the Bankruptcy Research Database also revealed no
discernable difference between airlines' and other industries' likelihood
of reentering bankruptcy within 5 years. The rates at which airlines and
other industries filed again for bankruptcy were just under 15 percent.
However, these rates should be accepted with some caution and perhaps
viewed as conservative because the database captured only refilings that
occurred within 5 years and excluded companies with assets of less than
$100 million.21 As a result, filings by companies not meeting one or the
other criterion were not counted.

21As measured in 1980 dollars.

No Evidence That Bankruptcy Protection Harms the Industry or Hurts
Competitors

There is no clear evidence that airlines in bankruptcy are harming the
industry or their rivals or that bankruptcy is a panacea for airlines
seeking an easy path to profitability. Some have asserted that protecting
airlines in bankruptcy, rather than forcing liquidation, contributes to
overcapacity in the industry. They further contend that bankrupt airlines
underprice their rivals, hurting the financial well-being of healthier
competitors. We found no evidence to support either contention and some
evidence to the contrary. For example, despite many airline liquidations
since deregulation in 1978, some of which were quite large, industry
capacity has continued to grow unabated thanks to the growth of existing
airlines and new entrants, often using the just-liquidated airline's
planes. We also found that capacity rebounded quickly in individual
markets that experienced the liquidation or retreat of a significant
airline, as other carriers quickly expanded capacity to compensate with
little or no increase in overall average fares. Several studies have also
found that airlines in bankruptcy have not reduced fares and did not harm
rival airlines financially. Bankruptcies are not a panacea for airlines,
as some might believe. Bankruptcy entails significant costs, loss of
management control, and damaged relations with employees, investors, and
suppliers. Of the 162 airlines that have filed for bankruptcy, 142 (88
percent) are no longer in operation.

No Evidence That Bankruptcy Protection Contributes to Overcapacity or
Lower Fares

Contrary to some assertions, we found no evidence that bankruptcy
protection has led to overcapacity and lower fares that have harmed
healthy airlines, either in individual markets or in the industry overall.
In 1993, a national commission to study airline industry problems cited
bankruptcy protection as a cause for the industry's overcapacity and fare
problems.22 Airline executives have also cited bankruptcy protection as a
reason for industry overcapacity and low fares. However, we found no
evidence to support these views and some evidence to the contrary.
Notably, both in individual markets and industrywide, the liquidation of
major airlines has had only a very temporary or negligible effect on
capacity, as other airlines have quickly replenished capacity. In part,
this short-term effect can be attributed to the fungibility of aircraft
and the notion that industry capacity is determined by the entire aviation
supply chain and not solely by individual airlines. Finally, separate
academic

22The National Commission to Ensure a Strong Competitive Airline Industry,
"Change, Challenge and Competition: A Report to the President and
Congress," August 1993.

studies have found that airlines in bankruptcy have not lowered their
fares or harmed the financial standing of their rivals.

Both a national commission and airline executives have asserted, but
without specific evidence, that bankruptcy protection allows airlines to
avoid liquidation, thus contributing to industry overcapacity and
underpricing that harms bankrupt carriers' rivals. According to a 1993
report by the National Commission to Ensure a Strong Competitive Airline
Industry, one of the causes of the industry's financial problems was
bankrupt airlines. Industry executives and some publications have gone
further, stating that bankrupt airlines damage the entire industry.23 For
example, a former Chairman of American Airlines asserted that bankrupt
airlines contribute to industry overcapacity and are able to underprice
rivals by virtue of their bankruptcy protection. However, very little
evidence has been cited in any of these claims. In 1993, we testified that
claims and counterclaims concerning the underpricing of bankrupt airlines
had not been substantiated or considered in a larger context.24

There is little evidence that bankruptcy protection has contributed to
industry overcapacity, at least in the long term. If it did, then some
evidence that liquidation permanently removes capacity from the market
should also exist. All indications are that this has not occurred. For
example, industry capacity, as measured by available seat miles (ASM),
grew two and one-half times from 1978 through 2004. Growth has slowed or
declined just before and during recessions, but not as a result of large
airline liquidations (see fig. 8).

23"[B]ankrupt carriers severely damage the economic health of the entire
airline industry. They transmit their financial condition to other,
solvent carriers much like a virus is transmitted from the sick to the
healthy" Aviation Week & Space Technology, 3, May 1993, p.

66.

24GAO, Airline Competition: Industry Competitive and Financial Issues.
GAO-T-RCED93-49 June 9,1993.

Figure 8: Growth of Airline Industry Capacity and Major Airline
Liquidations

                                      2004

Quarter

Recession Source: Bankruptcy filings, SEC filings, National Bureau of
Economic Research media reports, and DOT Form 41 data.

Note: Figure does not show liquidations of smaller airlines.

Capacity has continued to grow despite liquidations for a variety of
reasons, including the fungibility of aircraft and the ease of entry, but
ultimately capacity in any industry can be traced to the flow of capital
into and out of the industry. For the airline industry, in which the chief
asset (aircraft) is easily resold (fungible) and heavily leveraged,
capital flows have supported the continued expansion of capacity even
during industry downturns. Except for government subsidies to airlines or
manufacturers, capital would flow to airlines only if the providers of
that capital received a return on their investments. Evidence suggests
that capital providers have profited and helps explain why airlines in
bankruptcy continue to receive substantial capital support from other
members of the value chain. Experts have espoused the notion of the value
chain in understanding the

role of companies in an industry.25 In the airline industry, the value
chain includes aircraft and engine manufacturers, such as Boeing, General
Electric, and Airbus; lessors, such as GE Commercial Aviation Service and
International Lease Finance Corporation; global ticket distribution
systems, like Sabre and Worldspan; credit card companies; airports;
suppliers; and others. There is considerable evidence that these other
members of the value chain have earned a good return on capital while
airlines have not (see figs. 9 and 10). Those companies further up the
value chain face less competition and are able to impose higher costs on
airlines. Accordingly, these companies have a vested interest in ensuring
that airlines survive and that capacity not leave the industry.

25The value chain is based on the process view of organizations, the idea
of seeing a manufacturing or service organization as a system made up of
subsystems, each with inputs, transformation processes, and outputs. The
inputs, transformation processes, and outputs involve the acquisition and
consumption of resources - e.g., money, labor, materials, equipment, and
management --and how the value chain activities are carried out determines
costs and revenues. Airlines, to adopt Porter's terminology, can be seen
as being at the end of a chain of vertical linkages that supply the
ultimate air transport service. Michael E. Porter, "Competitive Advantage:
Creating and Sustaining Superior Performance" and Kenneth Button, "Wings
Across Europe: Towards An Efficient European Air Transport System."

                Figure 9: Return on Capital Invested, 1992-1996

Percentage

Globaldistribution

                                   g Catering

tsAirpor

                                  Airlinesaft

t

Airporsercompanies handling

rc

Airsystemsmanufacturin

rcAirleasing

                                   aft vices

Industry

                               Source: McKinsey.

Percentage

Globaldistribution

                                       s

tsAirpor

                                    Airlines

t

vicesser

rc

Airsystemsmanufacturer

Airtranspor

                                      aft

Industry

Source: Airline Business.

Data from sources of financing to airlines that are in bankruptcy or
financial trouble provide some evidence of the vested interests of value
chain members in keeping troubled airlines alive. Table 3 lists some of
the major injections of capital into airlines since 2004.

Table 3: Recent Examples of Airline Financing

Dollars in millions

              Airline             Amount Year             Sources             
             US Airways            $740  2002  Retirement Systems of Alabama  
               Delta              1,100  2004 American Express, GE Commercial 
                                                            Aviation Services 
             US Airways            140   2004 GE Commercial Aviation Services 
          Independence Air            20 2005 GE Commercial Aviation Services 
                                      60                  Airbus              
                                         2005 Regional airline, Airbus, hedge 
US Airways/America West merger 1,500       funds, credit card              
                                                         companies            
              Hawaiian             $60   2005           RC Aviation           

Source: Airline and media reports.

Our research indicates that the departure or liquidation of a carrier from
a market does not necessarily lead to a long-term decline in local traffic
(i.e., that which originates at or is destined for the particular airport)
for that market. We contracted with InterVISTAS-ga2, an aviation
consultant, to examine traffic to and from six cities that experienced the
departure or significant withdrawal of service of an airline (see table
4). In most cases, while total capacity and passenger traffic decreased,
the reduction was largely attributable to the loss of connecting passenger
traffic from the departing carrier. There was little diminution in local
passenger traffic for most of these markets because other carriers
increased their capacity to replace the departing carrier's capacity. This
research provides further evidence that demand drives capacity and that
the departure of a carrier due to bankruptcy or a change in market
strategy does not lead to a longterm decline in capacity. Appendix II
contains additional detailed information on each case study.

Table 4: Case Examples of Markets' Response to Airline Withdrawals

        Market       Year        Airline         Effect on passenger traffic  
                          Continental Lite         Other airlines' traffic    
                     1995 dismantled                increased. Origin and     
    Greensboro, NC                                   destination traffic      
                                service.                 decreased.           
                          American Airlines        Other airlines' traffic    
                     1995 eliminated                increased. Origin and     
     Nashville, TN                                   destination traffic      
                                  hub.                   increased.           
                                                Other airlines' traffic       
Colorado Springs, 1997 Western Pacific moved decreased. Origin and         
          CO                                    destination traffic           
                          operations to Denver.          decreased.           
                                                   Other airlines' traffic    
                     2001 TWA acquired by        decreased. Little change in  
     St. Louis, MO        American                       origin and           
                                Airlines.           destination traffic.      
                                                       Little change in other 
                     2002                           airlines' traffic. Little 
    Kansas City, MO         Vanguard Airlines            change in origin and 
                           suspended service.       destination traffic.      
                              America West         Other airlines' traffic    
                     2003      eliminated        increased. Little change in  
     Columbus, OH                                        origin and           
                                  hub.              destination traffic.      

Source: InterVISTAS-ga2 and Department of Transportation.

Note: "Little change" means that origin and destination traffic increased
or decreased less than 10 percent. Changes in passenger traffic are
measured from 4 quarters before to 8 quarters after the airline's
departure.

A major study of airline bankruptcies' effects on air service also found
that bankruptcy generally does not harm individual airline markets. This
April 2003 study examined all major chapter 11 bankruptcies from 1984
through 2001 to determine if and how they affected air service.26 The
study found that the effect of bankruptcies on large and small airports
was insubstantial and not separable from normal fluctuations in air
traffic. However, for medium-sized airports, the study found the
bankruptcy of an airline with a significant share of flights reduced
service by amounts that were statistically significant.

26Severin Borenstein and Nancy L. Rose, Do Airline Bankruptcies Reduce Air
Service?, National Bureau of Economic Research Working Paper 9636, April
2003.

Two major academic studies have found that airlines under bankruptcy
protection do not lower their fares or hurt competitor airlines, as some
have contended. A 1995 study found that an airline typically reduces its
fares somewhat before entering bankruptcy.27 However, the study found that
other airlines do not lower their fares in response and, more important,
do not lose passenger traffic to their bankrupt rival and therefore are
not harmed by the bankrupt airline. Another study came to a similar
conclusion in 2000, this time examining the operating performance of 51
bankrupt firms, including 5 airlines.28 Rather than examine fares as did
the 1995 study, this study examined the operating and financial
performance of bankrupt firms and their rivals. The study found that the
performance of a bankrupt firm deteriorates before the firm files for
bankruptcy and its rivals' profits also decline during this period.
However, once the firm is in bankruptcy, its rivals' profits recover.

Bankruptcies Are Not a With very few exceptions, airlines that entered
bankruptcy did not emerge

Panacea and Few Airlines from it. Many of the advantages of bankruptcy
stem from the legal

Have Emerged Successfully 	protection afforded the debtor airline from its
creditors, but this protection comes at a high cost in loss of control
over airline operations and damaged relations with employees, investors,
and suppliers.

Bankruptcy Involves Costs	Bankruptcy involves many costs for airlines that
file. The financial costs include the consultant and legal fees of
managing a lengthy bankruptcy. For example, United, which filed for
bankruptcy in December 2002, had spent nearly $260 million in legal fees
as of June 2005. A study of bankruptcy fees found that large companies
generally spend an average of 2.2 percent of their assets on legal fees
while in bankruptcy.29 The fees for United are high for a company of its
size, and they are rising as the company continues to operate under
chapter 11. These fees, thus far, make United's bankruptcy the seventh
most costly bankruptcy of all time. Bankruptcy also wipes out

27Severin Borenstein and Nancy L. Rose, Do Airlines in Chapter 11 Harm
Their Rivals?: Bankruptcy and Pricing Behavior in U.S. Airline Markets,
National Bureau of Economic Research Working Paper 5047, February 1995.

28Robert E. Kennedy, "The Effect of Bankruptcy Filings on Rivals'
Operating Performance: Evidence From 51 Large Bankruptcies," International
Journal of the Economics of Business; February 2000; pp. 5-25.

29Lynn M. LoPucki and Joseph W. Doherty, "The Determinants of Professional
Fees in Large Bankruptcy Reorganization Cases," UCLA School of Law, Law &
Econ Research Paper No. 3-14, Journal of Empirical Legal Studies, Vol. 1,
January 2004.

shareholders' equity, which may mean significant losses for the original
owners, and leaves them without a financial interest in the company.
Finally, airlines in bankruptcy do not immediately receive all the cash
from credit card ticket sales because credit card companies protect
themselves against liquidation by withholding a large percentage of
receipts until travel is actually taken. For the cash-flow-intensive
airline business, this wait is difficult.

In addition to financial costs, there are many negative factors to be
considered by firms filing for bankruptcy. Notably, airline officials told
us, loss of control over the airline's operations can be significant,
because the courts must approve important changes, such as sales of assets
or significant changes in fare structures or schedules. Rival airlines are
able to learn of strategic changes well before they may occur. There may
also be damage to public and customer perceptions of the airline. Finally,
bankruptcy damages, sometimes permanently, relations with employees if
they are made to bear a significant portion of the bankruptcy costs. In
other cases, an airline may suffer a "brain drain" when its most talented
employees seek employment elsewhere.

Very Few Airlines Have Very few airlines have emerged from bankruptcy and
are still operating. Emerged Successfully from Many others have gone out
of business through liquidation or merger. Of Bankruptcy the 162 airline
bankruptcy filings by 142 different airlines since 1978, 148

were for chapter 11 reorganization and 14 were for chapter 7 liquidation
(see table 5). Of the 148 chapter 11 reorganization filings, in only 18
cases does the airline still hold an operating certificate from the
Federal Aviation Administration (FAA).

                     Table 5: Bankruptcy Filings, 1978-2004

                      Filing for chapter 7 liquidation 14

                    Filing for chapter 11 reorganization 148

o  Airline no longer certificated by FAA 112

o  Airline refiled for bankruptcy and is no longer certificated by FAA 18

o  Airline is still certificated and operating 18

                               Total filings 162

Source: Air Transport Association and Department of Transportation.

Airlines Have Shed Billions in Pension Obligations, but Structural Cost
Problems Remain

Market factors, management-labor decisions, and pension law provisions
have played a role in airline pension underfunding of approximately $13.7
billion, with an estimated $10.4 billion in minimum funding requirements
due from 2005 through 2008 as a result. These pension obligations
contribute to the liquidity problems faced by legacy airlines that still
operate pension plans, and may help cause additional airlines to declare
bankruptcy. Remaining airline pensions expose PBGC to $23.7 billion in
unfunded pension obligations and would result in significant benefit
reductions to participants if their pension plans are terminated. PBGC has
taken over a combined $24.9 billion in pension obligations from US Airways
and United within the last 3 years, at a cost of over $9.7 billion to the
agency. While eliminating or easing pension plan obligations may help ease
legacy airlines' immediate liquidity pressures, they do not eliminate the
structural cost imbalance between legacy and low cost airlines, or
guarantee that the legacy airlines will avoid bankruptcy. Pension reform
proposals-including extending payment time frames, changing premium rules,
and using a yield curve to calculate liabilities-would have differential
effects among airlines and implications for PBGC.

Pension Underfunding Will Require Airlines to Contribute a Minimum of
$10.4 Billion to Plans between 2005 and 2008

Airline defined benefit pensions are underfunded by approximately $13.7
billion, according to airline financial reports filed with SEC.30 This
underfunding is down from $21 billion at the end of 2004 as a result of
the termination and transfer of US Airways' remaining pension plans and
all of United's pension plans to PBGC. Under existing law, minimum pension
contribution requirements for the remaining legacy airlines that still
operate plans are estimated to be at least $10.4 billion from 2005 through
2008. These minimum contribution requirements contribute to airline
liquidity problems. Estimates suggest the combined costs of the minimum
pension contribution requirements, long-term debt, capital leases, and
operating leases will exceed available cash.

30Exact pension underfunding varies daily because pension assets change
with market factors, and liabilities change with, among other things,
market factors and changes to labor agreements. This underfunding estimate
is based on year-end 2004 SEC filings, and does not include pension data
from United and US Airways because their plans have been or are being
terminated.

Overfunded in 1999, Legacy Airlines' Pensions Were Underfunded by $21
Billion at the End of 2004

The magnitude of legacy airlines' future pension funding requirements is
attributable to the size of the pension shortfall that has developed since
2000. As recently as 1999, airline pensions were overfunded by $700
million, according to SEC filings; by the end of 2004, legacy airlines
reported a deficit of $21 billion (see fig. 11), despite the termination
of the US Airways pilots' plan in 2003. Since these filings, the total
underfunding has declined to approximately $13.7 billion, in part because
of the termination of the remaining US Airways plans and all of the United
plans.31

31SEC data and PBGC data on the funded status of plans can differ because
they serve different purposes, provide different information, and are
calculated differently. Corporate financial statements show the aggregate
effect of all of a company's defined benefit pension plans on its overall
financial position and performance. These data show airline defined
benefit plans were underfunded by $21 billion at the end of 2004;
excluding the US Airways and United plans lowers this figure to $13.7
billion. The PBGC data focus, in part, on the funding needs of each
pension plan. The two sources may also differ in the rates assumed for
investment returns on pension assets, how these rates are used, and the
rates used to calculate the values of pension liabilities. As a result,
the information available from the two sources often may appear to be
inconsistent. According to data filed on Form 4010 with PBGC ("4010"
data), airline pension plans were underfunded by $33.2 billion at the end
of 2004; excluding the data for US Airways and United plans lowers this
figure to $23.7 billion. For more information on which agency's data we
used in different sections of this report, see app. I. See also GAO,
Private Pensions: Publicly Available Reports Provide Useful but Limited
Information on Plans' Financial Condition, GAO-04-395 (Washington, D.C.:
Mar. 31, 2004) and GAO, Pension Benefit Guaranty Corporation:
Single-Employer Pension Insurance Program Faces Significant Long-Term
Risks, GAO-04-90 (Washington, D.C.: Oct. 29, 2003).

Figure 11: Funded Status of Legacy Airline Defined Benefit Plans,
1998-2004

In billions of dollars

5

0

-5

-10

-15

-20

-25

1998 1999 2000 2001 2002 2003 2004

Source: GAO analysis of SEC filings.

Note: The termination of the United Airlines and remaining US Airways
defined benefit pension plans in 2005 reduced the total shortfall to
approximately $13.7 billion, according to 2004 year-end data. The SEC
liability data used in this report may include some pension plans not
guaranteed by PBGC.

Extent of Pension Underfunding The extent of pension underfunding varies
significantly by airline. At the

Varies Significantly by Airline	end of 2004, before terminating its
pension plans, United reported underfunding of $6.4 billion, an amount
equal to over 40 percent of its total operating revenues in 2004. In
contrast, Alaska reported pension underfunding of $303 million at the end
of 2004, equal to 13.5 percent of its operating revenues. Since United
terminated its pension plans, Delta and Northwest have the most
significant pension funding deficits-over $5 billion and nearly $4
billion, respectively-which represent about 35 percent of each airline's
2004 operating revenues (see fig. 12). PBGC released estimated after Delta
and Northwest declared bankruptcy on September 14, 2005, stating that on a
termination basis Delta's defined benefit plans were underfunded by $10.6
billion, while Northwest's underfunding totaled $5.7 billion.

In billions of dollars 2

1

0

-1

-2

-3

-4

-5

-6

-7 1998 1999 2000 2001 2002 2003 2004

Alaska American Continental

Delta

Northwest United

US Air

Source: GAO analysis of SEC 10K filings.

Note: Funding status is based on projected benefit obligation data and
aggregates all plans sponsored

by an airline into one measure.

Over $10 Billion Needed to Meet Minimum Pension Contribution Requirements
over the Next 4 Years

Under current law, companies whose pension plans fail certain funding
benchmarks and are underfunded by more than 10 percent on a current
liability basis must make deficit reduction contributions (DRC), in
addition to other contributions, to remedy the underfunding.32 Minimum
contribution requirements, including DRCs, are estimated to total a
minimum of $10.4 billion from 2005 through 2008.33 These estimates assume
the expiration of the Pension Funding Equity Act (PFEA) at the end of this
year.34 PFEA permitted airlines to defer the majority of their DRCs in
2004 and 2005. If this legislation is allowed to expire at the end of
2005, payments due from legacy airlines will significantly increase in
2006. According to PBGC data, legacy airlines are estimated to owe a
minimum of $1.5 billion this year, nearly $2.9 billion in 2006, $3.5
billion in 2007, and $2.6 billion in 2008 (see fig. 13).

32If a single-employer plan is at least 90 percent funded on a current
liability basis, the sponsor is not required to make any contributions
because of a "full funding limit" exemption. If the value of plan assets
is less than 90 percent of the sponsor's current liability, a plan may be
subject to a deficit reduction contribution. However, a plan is not
subject to this requirement if the value of plan assets (1) is at least 80
percent of current liability and (2) was at least 90 percent of current
liability for each of the 2 immediately preceding years or for each of the
second and third immediately preceding years. To determine whether the
additional funding rule applies to a plan, the Internal Revenue Code
requires sponsors to calculate current liability using the highest
interest rate allowable for the plan year. See 26 U.S.C. 412(l)(9)(C). See
GAO, Private Pensions, Recent Experiences of Large Defined Benefit Plans
Illustrate Weaknesses in Funding Rules, GAO-05-294 (Washington, D.C.: May
31, 2005).

33These estimates are based on 4010 filings and include data only for
legacy airlines that currently sponsor defined benefit pension plans and
reported their estimated pension obligations to PBGC. Pension law
provisions prohibit publicly identifying the airlines and other plan
sponsors that have reported 4010 information.

34Pension Funding Equity Act of 2004 (P.L. 108-218, Apr. 10, 2004). A
provision of this act changed the interest rate used to calculate future
liability from the 30-year Treasury bond rate to a corporate bond rate,
which effectively reduced the measured value of future liabilities.

Declines in pension plan assets from investment losses and low interest
rates have been significant factors in current pension underfunding.
Airline pension asset values dropped nearly 15 percent from 2001 through
2004 because of the decline in the stock market, while future obligations
have steadily increased because of (1) declines in the yields on the
fixed-income securities used to calculate the liabilities of plans, and
(2) new benefit accruals. Management and labor decisions increased pension
obligations in profitable years, but much less was contributed to the
pension funds than could have been. In addition to these factors, pension
funding rules have not prevented plans from becoming significantly
underfunded. Even though U.S. Airways and United Airlines were in full
compliance with the minimum funding rules for pension plans prior to
bankruptcy, their plans, in aggregate, were underfunded by nearly $15
billion at termination.

Market Factors, Management-Labor Decisions, and Pension Law Provisions
Have Played a Role in Airline Pension Underfunding

Asset Declines Have Contributed to Pension Underfunding

Pension asset values for legacy airlines reached a high in 2000 of $35.8
billion. Investment returns turned negative in 2001 and caused the value
of airline pension assets to decline. By 2002, the value of legacy airline
pension assets dropped to $26.2 billion-a loss of over $9 billion (26.7
percent). By 2004, pension asset values recovered to $30.4 billion, about
15 percent below the high in 2000 (see fig. 14). If PBGC takes over an
underfunded plan after it has been terminated, the plan's liabilities and
assets are transferred to PBGC. If the plan's assets are insufficient to
cover the plan's liabilities, PBGC, and sometimes plan participants, must
assume the loss. While the Employment Retirement Income Security Act35
provides some standards of conduct for the plan sponsor's investment
practices, the sponsor's chosen plan fiduciary has discretionary control
over the management of plan assets. We did not examine the investment
practices of airlines or other companies; however, one union has suggested
that airline investment practices may have contributed to plan failure and
has requested that PBGC conduct an audit to ensure the integrity of asset
investment practices. PBGC, however, does not have the authority to
conduct this type of audit; this responsibility falls under the authority
of the Department of Labor.

3529 U.S.C. Sec. 1104.

Falling Interest Rates Have Increased the Value of Pension Liabilities

Figure 14: Legacy Airlines' Pension Assets and Returns, 1998-2004

Pension asset value in billions of nominal $

Return on investment

40 30

25 35 20

30 15

25 10

5 20 0

15 -5

-1010

-15 5 -20

0 -25 1998 1999 2000 2001 2002 2003 2004

Pension asset value

Return on pension investment Return on S&P 500 Source: SEC 10K filings.

The decline in key interest rates compounded the loss in asset value by
increasing the value of pension liabilities. Interest rates are critical
factors in calculating the level of plan assets needed today in order to
fulfill promised benefits. When interest rates are lower, projected
returns on assets are lower, requiring more money to be invested today to
finance promised future benefits. At a 6-percent interest rate, for
example, a promise to pay $1 per year for the next 30 years has a present
value of $14. If the interest rate is reduced to 1 percent, however, the
present value of the promise to pay $1 per year for the next 30 years
increases to $26.

Bond yields underpinning the interest rates used to calculate pension
liabilities on a current liability basis have been trending lower since
the early 1980s, causing the value of future liabilities to grow. Until
2004, the interest rate used to calculate liabilities on a current
liability basis was based on the 30-year Treasury bond rate. PFEA changed
the basis of this interest rate from the 30-year Treasury bond rate to a
composite index of high-grade corporate bonds for years 2004 and 2005. As
figure 15 shows,

the two rates track each other fairly closely, but the 30-year Treasury
rate is lower.

Figure 15: Corporate and 30-Year Treasury Bond Yields, 1977-2005

Bond yields

14

12

10

8

6

4

2

0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
1999 2000 2001 2002 2003 2004 2005

Management and Labor Decisions Contributed to the Size of Underfunding

Moody's AA

30 Year Treasury Source: Federal Reserve Bank, and Moody's.

In addition to market forces, decisions made by management and labor have
increased pension liabilities. Although management and labor unions have
agreed to a number of changes to collective bargaining agreements that
have limited pension and other benefits in recent years, labor agreements
have also increased pension liabilities in a number of instances since the
late 1990s. In some instances, pension benefits increased beyond what
financially weak airlines could reasonably afford. For example, in the
spring of 2002, United's management and mechanics reached a new labor

agreement that increased the mechanics' pension benefit by 45 percent, but
the airline declared bankruptcy the following December.36

In addition, legacy airlines have funded their pension plans far less than
they could have, even during the airlines' profitable years. PBGC examined
101 cases of airline pension contributions from 1997 through 2002 and
found that while airlines made the maximum deductible contribution in 10
cases, they made no contributions in 49 cases when they could have
contributed.37 When airlines did make tax deductible contributions, the
contributions were often far less than permitted. For example, in 2000,
the airlines PBGC examined could have made a total of $4.2 billion in
taxdeductible contributions, but they contributed only about $136 million
despite recording profits of $4.1 billion (see fig. 16).38

36The increase in benefits was not fully guaranteed by PBGC because PBGC
phases in benefit increases made through plan amendments over 5 years.
PBGC guarantees the greater of 20 percent of the benefit increase or $20
per month of the increase on the anniversary of the date the increase was
effective. For example, if the plan was terminated more than 3 years but
less than 4 years after the benefit increase, then PBGC would guarantee
the greater of 60 percent of the increase or $60 per month in increased
benefits. The exact date of the termination may not be important for the
phase-in except to the extent that it affects the guaranteed benefit
amount.

37These 101 cases covered 18 pension plans sponsored by five airlines.

38Pension funding rules permit sponsors to choose the interest rate used
to measure the plan's current liability from a specified range of interest
rates. The interest rate, in conjunction with other factors, determines
the maximum deductible pension contribution. Currently, the interest rate
must be chosen from an interest rate "corridor" that is based on an index
of investment-grade corporate bonds. In calculating the maximum deductible
contribution, a higher interest rate produces a lower liability value and
a lower deductible contribution limit. The maximum deductible
contributions referred to in this paragraph and in figure 16 are
calculated using the lowest interest rate permissible from the interest
rate corridor.

Figure 16: Legacy Airlines' Maximum Allowable Pension Contributions,
Actual Pension Contributions, and Operating Profits, 1997-2002

In billions of dollars

1997 1998 1999 2000 2001 2002 Fiscal year

Contributions made Maximum possible contribution Profit (losses) Source:
PBGC.

Pension Funding Rules Have Not Prevented Pension Underfunding

PBGC has taken over a number of pension plans that have been substantially
underfunded even though their sponsors were in full compliance with the
minimum funding requirements. Existing laws governing pension funding and
premiums have not protected PBGC from accumulating a significant long-term
deficit and have not minimized the impact of PBGC's exposure to the moral
hazard39 arising from insuring pension plans. The minimum funding rules
depend on the plan sponsor being in good financial health and continuing
operations indefinitely; the rules do not ensure that the plan sponsor
will have the means to meet the plan's benefit obligations if the plan
sponsor meets financial distress. Meanwhile, in the aggregate, premiums
paid by plan sponsors under the pension insurance system have not
adequately reflected the financial risk to which PBGC is exposed.
Accordingly, defined benefit plan sponsors, acting within the rules, have
been able to turn significantly underfunded plans over to PBGC, thereby
creating PBGC's current deficit. This section addresses three aspects of
the rules-the current liability measure, the use of credit balances in
meeting funding requirements, and PBGC's premium structure.40

o 	The current liability measure, which measures the value of a plan's
accrued liabilities to date for funding purposes, may provide an overly
optimistic picture of a plan's financial status and the sponsor's ability
to fulfill its obligations. Such a picture is possible because the current
liability measure tacitly assumes, among other things, that the plan and
its sponsor are financially healthy, viable entities. For a plan whose
sponsor is in financial trouble, a more conservative measure, the
termination liability, is likely to present a more realistic picture of
the liabilities the plan has accrued to date.41 From 1998 through 2002,
airline pensions were consistently funded above 90 percent on a current
liability basis. By that measure, the plan sponsors were not required to

39Moral hazard emerges when the insured parties-in this case, plan
sponsors and participants-engage in behavior that they would not otherwise
have engaged in had they not been insured against certain losses. In the
case of the pension insurance system, such behavior might include the
willingness of parties to enter into agreements that increase pension
liabilities, rather than taking wage increases.

40An ongoing body of GAO work addresses these and other related issues
more comprehensively. See, for example, GAO, Private Pensions, Recent
Experiences of Large Defined Benefit Plans Illustrate Weaknesses in
Funding Rules, GAO-05-294, (Washington, D.C.: May 31, 2005).

41The termination liability measures the value of accrued benefits using
assumptions appropriate for terminating a plan.

make contributions because the "full funding limitation" exemption
applied. In contrast, the funding status of airline pensions on a
termination basis during this time was under 90 percent in each year
except 2000, with a spread of more than 25 percent between the two
measures in 2003. Figure 17 illustrates the difference in aggregate
funding status shown by each measure.

Figure 17: Legacy Airline Pension Assets as a Percent of Liabilities,
1998-2003

In billions of dollars

110

100

90

80

70

60

50

40

0 1998 1999 2000 2001 2002 2003

Fiscal year

Current liability SEC data Termination liability

Source: PBGC data and SEC 10K filings.

The result is that pensions often are significantly more underfunded when
plans are terminated than the current liability measure indicates. US
Airways' and United Airlines' recent pension plan terminations illustrate
this point. When these airlines terminated their pension plans, the plans'
combined benefit liability was $24.9 billion. Combined assets in the funds
totaled $10 billion-a 60 percent shortfall.

o 	The ability of sponsors to use funding credits to fulfill minimum
contribution requirements has also contributed to pension plan
underfunding. Plan sponsors accumulate funding credits when they
contribute more than the minimum contribution requirement in a plan year
or when the plan's actual experience, including investment returns on
assets, exceed expectations; these credits can then be substituted in
later years for cash contributions. In this way, funding credits can act
as a buffer against potentially volatile funding requirements and allow
sponsors flexibility in managing their annual level of pension
contributions.

If the market value of a plan's assets declines, however, the value of
funding credits may be significantly overstated. This overstatement occurs
because credits are not measured at their market value and are credited
with interest each year. For example, a sponsor can accrue a $1 million
credit by making a $1 million contribution above the minimum contribution
requirement. Even if the $1 million in assets loses all value in the
following year, the $1 million credit balance remains and may be used as a
credit toward the plan's minimum contribution requirement. In addition,
the sponsor would have to report only a portion of that lost $1 million in
asset value as a plan charge the following year because of smoothing rules
that allow losses to be amortized over multiple years.

Over the past 5 years, airlines have used funding credits to fulfill
minimum contribution requirements despite significant levels of pension
underfunding. For example, starting in 2000, United used funding credits
to avoid making cash contributions to its pilots' plan, even though the
true funded status of the plan had deteriorated. The plan was only 50
percent funded at termination. Similarly, US Airways avoided contributing
cash to its pilots' plan by applying funding credits to fulfill its
minimum contribution requirements. At termination, this plan was only 33
percent funded.

o 	Finally, the premium structure in PBGC's single-employer pension
insurance program does not reflect the agency's exposure to financial
risk. Although PBGC premiums may be partially based on plan funding
levels, they do not consider other relevant risk factors, such as the
economic strength of the sponsor or the plan's asset investment
strategies, benefit structure, or demographic profile. The current premium
structure relies heavily on flat-rate premiums, which are unrelated to
risk. PBGC also charges plan sponsors a variable-rate

premium based on the plan's level of underfunding; however, underfunded
plans are not required to pay this premium if they satisfy the full
funding limit or another exemption.

In addition, current pension funding and pension accounting rules-
especially those that permit assets to be smoothed rather than valued at
their market rate-may encourage sponsors to invest in riskier assets and
potentially benefit from higher expected long-term rates of return. In
determinations of funding requirements, a higher expected rate of return
on pension assets means that a plan needs to hold fewer assets to meet its
future benefit obligations. Under current accounting rules, the greater
the expected rate of return on plan assets, the greater the plan sponsor's
operating earnings and net income. However, higher expected rates of
return require riskier investments that lead to greater investment
volatility and risk of losses.

Airline Pension Underfunding Contributes to Airline Liquidity Problems,
Threatens Employee Retirement Benefits, and Is Costing PBGC Billions

Estimated minimum pension contribution requirements of $10.4 billion over
the next 4 years, combined with other fixed obligations, threaten the
liquidity position of the remaining legacy airlines with pension plans. As
a result, some airlines have suggested they will be forced to declare
bankruptcy and terminate their pension plans if they are not granted some
form of pension relief. Pension plan terminations often result in
significant benefit cuts to participants and cost PBGC billions. When
United and US Airways terminated their pension plans and transferred $19.6
billion in pension obligations to PBGC, participants lost a total of $5.3
billion in benefits, and PBGC incurred costs of $9.7 billion to cover the
gap between guaranteed benefits and available assets. Remaining airline
pension plans expose PBGC to an additional $23.7 billion in unfunded
benefit obligations.42 Although pension plan terminations provide airlines
with significant liquidity relief in the near term, these terminations
alone will not make legacy airlines cost competitive with low cost
airlines, which offer 401(k)-type defined contribution plans.

42These estimates include only legacy airlines that currently sponsor
defined benefit pension plans and reported their estimated pension
obligations to PBGC. Pension law provisions prohibit publicly identifying
the airlines that have reported 4010 information.

Pensions Obligations Contribute The size of legacy airlines' future fixed
obligations (including pensions, to Airlines' Liquidity Problems,
long-term debt, and capital and operating leases) relative to their
financial but Terminations Alone Do Not position suggests these airlines
will have trouble meeting their various Solve Legacy Airlines' Structural
financial obligations, regardless of whether they terminate their pension
Cost Disadvantage plans. Legacy airlines' fixed obligations in each year
from 2005 through 2008 significantly exceed the total year-end 2004 cash
balances of these same legacy airlines. Legacy airlines carried a combined
cash balance of just under $10 billion going into 2005 (see fig. 18) and
have used cash to fund their operating losses. These airlines' fixed
obligations are estimated to be over $15 billion in both 2005 and 2006,
over $17 billion in 2007, and about $13 billion in 2008. Fixed obligations
exceed total year-end 2004 cash by an average of $2.7 billion during this
time even when pension obligations are not included. While cash from
operations can fund some of these obligations, continued losses and the
size of these obligations put these airlines in a sizable liquidity bind.
Fixed obligations in 2008 and beyond will likely increase as payments due
in 2006 and 2007 may be pushed out and as new obligations are assumed. If
these airlines continue to lose money this year, as analysts predict,
their position will become even more tenuous. Nor will easing required
pension contribution requirements fix the legacy airlines' underlying
structural cost disadvantage. Pension costs, while substantial, are only a
small portion of legacy airlines' overall unit costs. The cost of legacy
airlines' defined benefit plans accounted for approximately 0.4 cent per
available seat mile, a 15 percent difference between legacy and low cost
airline unit costs (see fig. 3). The remaining 85 percent of the unit cost
differential between legacy and low cost airlines is attributable to
factors other than defined benefit pension plans. Furthermore, even if
legacy airlines terminated their defined benefit plans, this portion of
the unit cost differential would not be fully eliminated because,
according to PBGC staff and industry labor officials we interviewed, other
plans would replace the defined benefit plans.

Airline Pensions Have Cost The cost to PBGC and participants of defined
benefit pension plan
PBGC Billions and Expose the terminations has grown in recent years as the
level of pension
Agency to $23.7 Billion in Benefit underfunding has deepened (see table
6). When Eastern Airlines defaulted
Liabilities on its pension obligations of nearly $2.2 billion in 1991, for
example, the net

claim against PBGC totaled $701 million.43 By comparison, US Airways' and
United's pension plan terminations cost PBGC $9.7 billion in combined
claims against the agency.

Table 6: Costs of Terminating Airline Pension Plans In millions of constant 2005
                                    dollars

                   Date of                               Net          Cost to 
                                                        claim   
     Airline   termination     Benefit         PBGC    on PBGCc participantsd 
                              liabilitya    liabilityb          
     Eastern          1991           $2,228     $2,080     $701          $148 
    Airlines                                                    
     Pam Am           1991            1,674      1,602      995 
       TWA            2001            1,885      1,836      728 
US Airways   2003, 2005            8,085      6,022    3,062         2,062 
     United           2005           16,800     13,600    6,600         3,200 
    Airlines                                                    
      Total                         $30,671    $25,140 $12,086         $5,531 

Source: PBGC.

Notes: Bureau of Economic Analysis GDP price indexes were used to
calculate constant dollars.

aThe full value of the benefits promised to participants prior to
termination.

bThe amount of the original benefit insured by PBGC after agency limits
are imposed.

cThe difference between the PBGC liability and the assets transferred at
termination.

dThe difference between the original benefit and the amount insured by
PBGC that the participants lose when PBGC takes over a plan.

The remaining legacy airlines' defined benefit plans expose PBGC to
billions more in potential losses. At the end of 2004, these legacy
airlines reported $23.7 billion in total termination liabilities for their
defined benefit plans, with assets to cover 48 percent of these
obligations.

Effect of Pension Plan When US Airways and United terminated their pension
plans, active and Terminations on Airline high-salaried employees
generally lost more of their promised benefits than Employees Varies did
retirees and low-salaried employees because of statutory limits. For

example, PBGC generally does not guarantee benefits above a certain

43This dollar figure and other data in this section have been converted to
constant 2005 dollars.

amount, currently $45,614 annually per participant retiring at age 65.44
For participants who retire before age 65, the guaranteed benefit amounts
are less; for instance, participants who first receive benefits from PBGC
at age 60 are guaranteed benefits of $29,649. Commercial pilots often end
up with substantial benefit cuts when their plans are terminated because,
according to PBGC, their benefits generally exceed PBGC's maximum
guaranteed amount. In addition, if they elect to begin receiving benefits
from PBGC at age 60-the age at which FAA requires pilots to retire from
operating commercial service flights-their benefits are cut further. While
the loss of a defined benefit plan can be substantial for pilots, they
typically have additional and sometimes sizable retirement plans, such as
401(k) plans, that supplement their pension plans. Nonpilot retirees are
not as often affected by the maximum payout limits. For example, at US
Airways, fewer than 5 percent of the retired mechanics and flight
attendants faced benefit cuts when their pension plans were terminated.
Retirees generally fare better than active employees because they receive
higher priority when PBGC allocates existing assets at plan termination.
For example, PBGC estimates that the pension benefits of all United's
active ground employees will be cut, with 71 percent of these employees
facing estimated cuts of between 1 percent and 25 percent. Of United's
retired ground employees, an estimated 39 percent will face benefit cuts;
of these retired employees, an estimated 93 percent will see reductions of
between 1 to 25 percent. Tables 8 and 9 summarize the expected cuts in
benefits for different groups of United's active and retired employees.

44This guarantee level applies to plans that are terminated in 2005. The
amount guaranteed is adjusted actuarially (1) for the participant's age
when PBGC first begins paying benefits and (2) if benefits are not paid as
a single-life annuity. Because of the way the Employee Retirement and
Income Security Act of 1974 (ERISA), as amended, allocates plan assets to
participants, certain participants can receive more than the
PBGC-guaranteed amount.

 Table 7: Estimated Benefit Cuts for United Airlines Active Employees Extent of
                                  benefit cuts

Plan

                 Active employees in plan Actives employees with benefit cuts

                                   1% to <25%

25% to < 50%

50% or more

Management,
administrative, and
public contact
employees 20,784 19,231 1,696 15,885 1,650

               Ground employees 16,062 16,062 11,448 3,441 1,173

               Flight attendants 15,024 11,109 1,305 7,067 2,737

                      Pilots 7,360 7,270 3,927 2,039 1,304

Source: PBGC.

Note: Estimates calculated using January 1, 2005, PBGC data.

 Table 8: Estimated Benefit Cuts for United Airlines Retirees Extent of benefit
                                      cuts

Plan

Retirees in plan

Retirees with benefit cuts

                                   1% to <25%

25% to <50%

50% or more

Management,
administrative, and
public contact
employees 11,360 2,996 2,816 104

Ground employees 12,676 4,961 4,810 121

Flight attendants 5,108 29 27 1

                        Pilots 6,087 3,041 1,902 975 164

Source: PBGC.

Note: Estimates calculated using January 1, 2005, PBGC data.

In addition to reducing pension plan benefits, airlines have made
significant cuts to active employees' health care benefits. For example,
American Airlines increased its active pilots' monthly contributions for
family health care coverage by 162 percent and began to require
contributions by disabled pilots for health care coverage. Before 2003,
United's ramp service employees did not have to make monthly contributions
for family health care coverage; however, these employees now must
contribute $173 a month for their coverage. While active

employees' health benefits have been cut, retirees' health care plans have
not changed significantly. Union officials said that reductions in
retirees' health care benefit would not produce the savings sought by the
airlines and were not considered foremost during contract negotiations.

Congress Is Currently Considering Various Pension Reform Proposals

The decline of PBGC's financial condition, the expiration of PFEA at the
end of the year, and pension plan terminations at US Airways and United
have prompted congressional consideration of various reform proposals for
defined benefit pensions. Currently, the three most prominent proposals
are the administration's plan; H.R. 2830, "The Pension Protection Act of
2005;" and S. 219, "The National Employee Savings and Trust Equity
Guarantee Act of 2005."45 All three are broad reform proposals that seek
to strengthen the defined benefit pension system in the long term and
attempt to resolve fundamental problems with the system, as highlighted in
this report and other GAO reports.46 For example, all three proposals
contain, among others, provisions that a) modify the measurement of
pension assets and liabilities, b) increase the premiums paid to PBGC, c)
restrict lump-sum distribution provisions, and d) adjust disclosure
requirements.

From the airlines' perspective, an important difference among the bills
concerns the length of time over which they can amortize the large minimum
contribution requirements currently due over the next 4 years. The
administration's proposal and H.R. 2830 would use a 7-year payment period.
According to a document issued by the Joint Committee on Taxation, S. 219
would extend the amortization payment period to 14 years, but only for
airlines that "freeze" their defined benefit plans.47 Table 9 suggests how
this provision could significantly reduce the airlines' minimum
contribution requirements in 2006. Amortizing these obligations over 14
years would have an immediate impact on the airlines' liquidity.

45According to a Senate Finance Committee press release (9/27/05),
agreement has been reached on a compromise bill, the "Pension Security and
Transparency Act", which would include elements of S. 219, including a
special provision for airlines that would extend the amortization period
for paying unfunded pension liabilities to 14 years.

46See list of GAO reports in appendix V.

47See Joint Committee on Taxation, Modifications To The Senate Finance
Committee Chairman's Mark Of The "National Employee Savings And Trust
Equity Guarantee Act Of 2005" (JCX-57-05), July 26, 2005.

Table 9: 2006 Estimated Deficit Reduction Contribution Payments under
Different Amortization Periods

Dollars in millions

Amortization period Alaska American Continental Delta Northwest Total

               4 years       7   149         156      936      562      1,810 
               7 years       4    85          89      535      321      1,034 
              15 years       2    40          42      250      150        483 
              20 years       1    30          31      187      112        362 
              25 years       1    24          25      150       90        290 

Source: Bear Stearns.

Note: Bear Stearns' report did not include estimates for the 14-year
amortization period proposed for the airlines in S. 219.

The rationale for extending the amortization period is that unless
airlines receive funding relief, existing minimum contribution
requirements may have such an adverse effect on their liquidity that they
will be forced into bankruptcy. The airlines then could terminate their
pension plans and transfer billions in obligations to PBGC. To prevent
such terminations, according to the Joint Committee on Taxation, S. 219
would decrease the required annual contribution by allowing the airlines
to extend their payments over a longer period. Requiring the airlines to
"freeze" their existing plans is designed to limit PBGC's exposure in case
the airlines cannot recover financially and terminate the plans before
fully funding them over the 14-year period.

Although extending the amortization period would provide some liquidity
relief to the remaining legacy airlines with defined benefit plans, it
would not solve those airlines' overall financial problems, and the extent
to which it would limit PBGC's exposure to additional pension liabilities
is unclear. As shown in figure 18, pension obligations are only part of a
much larger set of fixed obligations through 2008. Given these other fixed
obligations and persistent high fuel prices, pension relief alone will not
solve those airlines' financial problems, nor can it guarantee that
airlines will not declare bankruptcy in the future. Furthermore, there is
no assurance that PBGC's financial exposure will be limited. According to
a summary by the Joint Committee on Taxation, S. 219 requires pensions to
be frozen for the extended amortization period to apply; however,
liabilities could still increase. For example, liabilities may increase
with salary increases for existing participants because pension benefits
are based on participants' salaries. Even if liabilities are frozen, a
plan's assets could decrease, leaving

PBGC with fewer assets to cover obligations. In the short term, extending
the amortization period might prevent airline pension plan terminations,
allow employees to collect more benefits than they might otherwise
collect, and allow PBGC to avoid taking over plans that are significantly
underfunded. In the long term, however, special treatment of airlines
could potentially expose PBGC to even greater costs.

Concluding Observations

After 27 years, deregulation continues to affect the structure of the
airline industry. Dramatic changes in the level and nature of demand for
air travel, combined with an equally dramatic evolution in how airlines
meet that demand, have forced a drastic restructuring of the industry.
Airlines have experienced greatly diminished pricing power since 2000.
Profitability, therefore, depends on which airlines can most effectively
compete on cost. This development has created inroads for low cost
airlines and forced wrenching change on legacy airlines that long competed
using a high-cost business model.

The historically high number of airline bankruptcies and liquidations is a
reflection of the industry's inherent instability. However, these events
should not be misinterpreted as a cause of the industry's instability.
There is no clear evidence that bankruptcy has contributed to the
industry's economic ills, including overcapacity and underpricing, and
there is some evidence to the contrary. Equally telling is how few of the
airlines that have filed for bankruptcy protection are still doing
business. Clearly, bankruptcy has not afforded these companies a special
advantage.

Bankruptcy has become a well-traveled path by which some legacy airlines
are seeking to shed some of their costs and become more competitive.
However, the termination of pension plan obligations by US Airways and
United Airlines has had substantial and widespread effects on PBGC and on
thousands of airline employees, retirees, and other beneficiaries. The
recent filings by Delta Air Lines and Northwest Airlines only exacerbate
these concerns. Liquidity problems, including $10.4 billion in near-term
pension contributions, may force additional legacy airlines to follow
suit. Some airlines are seeking legislation to allow more time to fund
their pensions. If their plans are frozen so that their liabilities do not
continue to grow, allowing an extended payback period may reduce the
likelihood that these airlines will file for bankruptcy and terminate
their pension plans in the coming year. However, unless these airlines can
reform their overall cost structures and become more competitive with low
cost competition, this change will be only a temporary reprieve.

We have previously reported that Congress should consider broad pension
reform that is comprehensive in scope and balanced in effect.48 Revising
plan funding rules is an essential component of comprehensive pension
reform. For example, we recently testified that Congress should consider
the incentives that pension rules and reform may have on other financial
decisions within affected industries. Under current conditions, the
presence of PBGC insurance may create certain "moral hazard"
incentives-struggling plan sponsors may place other financial priorities
above "funding up" their pension plans because they know PBGC will pay
guaranteed benefits. Furthermore, because PBGC generally takes over
underfunded plans of bankrupt companies, PBGC insurance may create an
additional incentive for troubled firms to seek bankruptcy protection,
which in turn may affect the competitive balance within the industry.

Agency Comments	We provided a draft of this report to DOT and PBGC for
their review and comment. DOT and PBGC officials provided some technical
and clarifying comments that we incorporated as appropriate. DOT declined
to provide written comments, and PBGC's written comments appear in
appendix III. We also provided selected portions of a draft of this report
to the Air Transport Association to verify the presentation of factual
material. We incorporated their technical clarifications as appropriate.

We are providing copies of this report to the Secretary of Transportation,
the Executive Director of PBGC, and other interested parties and will make
copies available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov. If you
have any questions about this report, please contact me at 202-512-2834,
or [email protected]. Contact points for our Offices of Congressional
Relations

48See GAO-04-90; GAO-05-108T; GAO, Pension Benefit Guaranty Corporation:
Single-Employer Pension Insurance Program Faces Significant Long-Term
Risks, GAO-03-873T (Washington, D.C.: Sept. 4, 2003); Pension Benefit
Guaranty Corporation: Long-Term Financing Risks to Single-Employer
Insurance Program Highlight Need for Comprehensive Reform, GAO-04-150T
(Washington, D.C.: Oct. 14, 2003); Private Pensions: Changing Funding
Rules and Enhancing Incentives Can Improve Plan Funding, GAO-04176T
(Washington, D.C.: Oct. 29, 2003).

and Public Affairs may be found on the last page of this report. Other key
contributors are listed in appendix IV.

JayEtta Z. Hecker Director, Physical Infrastructure Issues

List of Congressional Committees

The Honorable Ted Stevens
Chairman
The Honorable Daniel K. Inouye
Co-Chairman
Committee on Commerce, Science, and Transportation
United States Senate

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

The Honorable Don Young
Chairman
The Honorable James L. Oberstar
Ranking Democratic Member
Committee on Transportation and Infrastructure
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 examine the role of bankruptcy in the airline industry, we drew on
information from a variety of sources. We interviewed airline officials,
representatives of airline trade associations, representatives of law
firms with significant experience in representing different parties
involved in airline bankruptcies, credit and equity analysts, academic
experts, and private consultants. We reviewed relevant research obtained
from these and other sources. We interviewed government experts from the
Department of Transportation (DOT) and its agencies-the Federal Aviation
Administration (FAA) and the Bureau of Transportation Statistics (BTS). To
determine the financial state of the airlines and the extent to which
airlines were able to reduce costs during bankruptcy, we analyzed DOT Form
41 data. We obtained these data from BACK Aviation Solutions, a private
contractor that GAO has contracted with to provide DOT Form 41 and other
aviation data. To assess the reliability of these data, we reviewed the
quality control procedures applied to the data by DOT and BACK Aviation
Solutions and subsequently determined that the data were sufficiently
reliable for our purposes. To examine the prevalence and length of airline
bankruptcies and make comparisons with other industries, we obtained data
from two databases: New Generation Research's bankruptcydata.com and
Professor Lynn M. LoPucki's Bankruptcy Research Database. To assess the
reliability of these data, we reviewed the quality control procedures
applied to each data source and subsequently determined that the data were
sufficiently reliable for our purposes.

To assess whether bankruptcies are harming the airline industry, we
reviewed relevant research, interviewed experts, and analyzed historical
data on bankruptcies. We interviewed airline officials, representatives of
airline trade associations and law firms with significant experience in
representing different parties involved in airline bankruptcies, airline
industry credit and equity analysts, academic experts, and private
consultants. We also reviewed relevant research obtained from these and
other sources. In addition, we interviewed government experts from DOT,
FAA, and BTS. We also contracted with InterVISTAS-ga2, a private
consulting firm, to analyze changes in air service and fares at six hub
cities where an airline exited or significantly reduced its service. The
cities were Colorado Springs, Colorado; Columbus, Ohio; Greensboro, North
Carolina; Kansas City, Missouri; Nashville, Tennessee; and St. Louis,
Missouri. InterVISTAS-ga2's analysis included an examination of changes in
capacity (as measured by available seat miles, a common measure of the
available capacity in a market) and in passenger traffic (from 4 quarters
before to 8 quarters after the airline left a given market or
significantly reduced its operations there). InterVISTAS-ga2 used DOT
airline data for this analysis;

Appendix I Scope and Methodology

we reviewed the quality control procedures InterVISTAS-ga2 and DOT applied
to these data to assess their reliability and determined that they were
sufficiently reliable for our purposes.

To assess the effect of airline pension underfunding on employees,
airlines, and the Pension Benefit Guaranty Corporation (PBGC), we relied
on a variety of sources. We drew on an extensive body of work that we have
completed on private pension issues. We also interviewed airline
officials, representatives of airline trade associations and airline labor
unions, airline industry credit and equity analysts, academic experts, and
officials from PBGC, DOT, FAA, and BTS. We reviewed relevant research
obtained from these and other sources. To examine the current and
historical financial status of airline pensions plans, we reviewed data
from PBGC (from Forms 5500 and 4010) and Securities and Exchange
Commission (SEC) filings, including funding contributions, funding status,
and estimated future funding contribution requirements. To examine the
effect of pension funding requirements on the financial status and cost
competitiveness of airlines, we analyzed DOT Form 41 data obtained from
BACK Aviation Solutions. To assess the reliability of these data, we
reviewed the quality control procedures applied to the data by DOT and
BACK Aviation Solutions and subsequently determined that the data were
sufficiently reliable for our purposes.

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

Appendix II

Case Studies Describing Market Responses to Airline Withdrawals

For more in-depth information on what has occurred at hubs when carriers
have significantly reduced their presence, we contracted with
InterVISTASga2,1 an aviation consulting firm, to collect and analyze data
on changes in capacity, as measured in available seat miles (ASM),2 and
traffic, including both local (origin and destination) and total traffic.3
During preliminary analysis and consultations, we screened out cases older
than 10 years and eliminated others for which sufficient data were not
available (thereby excluding, for example, the actions taken by US Airways
at Pittsburgh in the latter half of 2004, because not enough time had
passed to review these actions' possible effects on the market).
Consequently, we selected the following six cases for examination:

o 	Colorado Springs, Colorado-Western Pacific moved its operations to
Denver (1997).

o  Columbus, Ohio-America West eliminated its hub (2003).

o 	Greensboro, North Carolina-Continental Lite service was dismantled
(1995).

o  Kansas City, Missouri-Vanguard Airlines ceased service (2002).

o  Nashville, Tennessee-American Airlines eliminated its hub (1995).

o  St. Louis, Missouri-TWA was acquired by American Airlines (2001).

To eliminate the effects of seasonality, changes were measured from 4
quarters before to 8 quarters after an event for a total of 12 quarters of
data. We asked InterVISTAS-ga2 to provide us with benchmark industry data
for the same periods.

1InterVISTAS-ga2 is an aviation consulting firm specializing in policy,
regulatory, and economic analysis and planning.

2Available seat miles are the number of seats offered by an airline
multiplied by the number of scheduled miles flown. This is a typical
measure of capacity in the airline industry.

3Origin and destination traffic is local traffic that originates at or is
destined for a particular hub but does not connect through the hub. Total
traffic is the combination of a carrier's enplanements and deplanements
and thus includes passenger traffic that connects to another flight at the
airport.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

To determine changes in capacity and traffic, InterVISTAS -ga2 used data
reported by airlines to DOT. InterVISTAS-ga2 calculated 4-quarter averages
for each data element and determined percentage changes in these averages
1 and 2 years after the event. Because dehubbing, or withdrawing from a
market, might occur over a period of time, however, there was no single
"bright line" when the withdrawal occurred for most of these cases, so
InterVISTAS -ga2 determined that the effective quarter of the withdrawal
was generally the quarter with the greatest downturn in traffic.

To determine whether a destination received service from a hub, we
obtained and reviewed the number of departures reported to DOT for the
first 4 quarters and the last 4 quarters of the period under review for
each hub city and for each carrier. If a destination received at least 80
departures in a quarter from any one carrier (roughly the equivalent of
daily service, allowing for less service on weekends), we counted it as
having received service. To determine whether small community destinations
suffered losses of service when these hub cities were deemphasized, we
assigned hub sizes to community airports on the basis of the Federal
Aviation Administration's (FAA) hub designation list for the corresponding
calendar year. We defined small community airports as small and nonhub
airports that are not located in major metropolitan areas.4

Colorado Springs: Western Pacific Moved Its Operations to Denver

Colorado Springs served as the hub for Western Pacific Airlines, a low
fare airline that flew medium-haul routes from April 1995 to June 1997. By
June 1995, the airline was flying an average of 14 departures daily.
Western Pacific chose Colorado Springs because it believed the airport
could be an effective alternative to Denver International. In June 1997,
Western Pacific, which was then operating 32 departures daily from
Colorado Springs, left Colorado Springs to establish a hub at Denver.
However, the airline filed for chapter 11 bankruptcy protection on October
5, 1997, and shut down in February 1998.

4The categories of airports-large hub, medium hub, small hub, and
nonhub-are defined by statute. Small hubs and nonhubs are defined in 49
U.S.C. 41731. The categories are based on the number of passengers
boarding an aircraft (enplanements) for all operations of U.S. carriers in
the United States. A small hub enplanes 0.05 to 0.249 percent of all
passengers, and a nonhub less than 0.05 percent. In 2003, the latest year
for which FAA had data, there were 68 small hubs and 236 nonhubs.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Western Pacific's departure from Colorado Springs in June 1997 resulted in
significantly lower capacity and traffic. When Western Pacific left, a
significant amount of capacity was taken from the market, resulting in
decreased total traffic. (See fig. 19.) Local traffic also decreased
significantly, by 43.6 percent. No small communities had received nonstop
service out of Colorado Springs during this period, so none were directly
affected by Western Pacific's move to Denver. (See fig. 20.)

Figure 19: Percentage Change in Colorado Springs Capacity and Total
Traffic Percent change 0

-20

-40

-60

-80

-100

-100 -100

Capacity Total traffic

Western Pacific United Other airlines Overall Source: InterVISTA-ga2.

Note: Percentage changes are calculated for the year beginning the third
quarter of 1996 compared with the 2-year period beginning the third
quarter of 1997.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

                             Destinations 35 33 30

                                       25

                                       20

                                       15

                                      10 5

            0 Before After Before After Western Pacific All carriers

                                     Total

Large hubs

                                  Medium hubs

Small hubs

Non-hubs

      Source: GAO analysis of DOT T-100 segment and FAA enplanement data.

Note: We defined the period "before" Western Pacific's withdrawal as the
third quarter of 1996 through the second quarter of 1997. The period
"after" includes the third quarter of 1998 through the second quarter of
1999.

Columbus: America America West began service at Columbus, Ohio, in
December 1991-6

months after its June 1991 chapter 11 bankruptcy filing5-with 5 dailyWest
Eliminated Its departures. During February 2003, America West announced
its plans to Hub eliminate the Columbus hub operations. At that time,
America West

5America West emerged from bankruptcy on August 25, 1994.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

mainline was operating 9 daily departures out of Columbus.6 The airline
reported the hub had lost $25 million annually and indicated that the
elimination of the hub was part of America West's response to difficult
economic conditions. By February 2004, America West mainline was operating
4 daily departures from Columbus.

The elimination of America West's hub operations at Columbus, Ohio, had
little effect, since the carrier's mainline had captured less than 15
percent of total traffic before it withdrew. Therefore, decreases in
capacity and increases in total traffic were negligible. Total traffic
increased slightly overall because Southwest was increasing its capacity.
(See fig. 21.) However, this increase did not offset the 4.2 percent
decline in local traffic. No small communities were served nonstop out of
Columbus by America West mainline. (See fig. 22).

6Although America West Express also provided service out of Columbus
during this time, we did not include Express capacity, traffic, and
departure data in this analysis.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Percent change 30

                                      25.1

20

10

0

-10

-20

-30

-40

-50

-60 -56.9 -56.4 Capacity Total traffic

American West Southwest Other airlines Overall Source: InterVISTA-ga2.

Note: Percentage changes are calculated for the year beginning the first
quarter of 2002 compared with the 2-year period beginning the first
quarter of 2003.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

                            Destinations 35 32 31 30

                                       25

                                       20

                                       15

                                      10 5

             0 Before After Before After America West All carriers

                                     Total

Large hubs

                                  Medium hubs

Small hubs

Non-hubs

      Source: GAO analysis of DOT T-100 segment and FAA enplanement data.

Note: We defined the period "before" America West's hub elimination as the
first quarter of 2002 through the fourth quarter of 2002. The period
"after" includes the first quarter of 2004 through the fourth quarter of
2004.

Greensboro: Greensboro was one of the focus cities for Continental's
point-to-point,

short-haul, no-frills, low-fare "Continental Lite" (CALite) service
initiated inContinental Lite the eastern United States in October 1993.
Continental quickly ramped upService Was service from 3 departures per day
to a high of 74 per day by September Dismantled 1994. However, after
operational problems and financial losses,

Continental decided to dismantle the CALite service in 1995. In June 1995,
the airline was offering 52 daily departures from Greensboro. By June
1998, Continental had reduced that number to 6.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Dismantling the CALite service resulted in less overall capacity and
traffic at Greensboro.7 Greensboro's overall capacity decreased despite
capacity increases by other airlines. Total traffic decreased nearly 30
percent with the reduction of the CALite service. (See fig. 23.) Local
traffic decreased 10.7 percent.

Figure 23: Percentage Change in Greensboro Capacity and Total Traffic

Percent change

40

26.3

20

0 -20 -40 -60 -80

-84

-100 Capacity Total traffic

Continental life Other airlines

Overall Source: InterVISTA-ga2.

Note: Percentage changes are calculated for the year beginning the third
quarter of 1995 compared with the 2-year period beginning the third
quarter of 1996.

7Continental Express capacity and traffic changes out of Greensboro are
not included in this analysis.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Continental served 21 markets nonstop before it dismantled the Greensboro
hub; four of these were small community markets.8 After the airline
decreased its capacity at Greensboro, it continued nonstop service to its
three hubs but cancelled nonstop service to the small communities. (See
fig. 24.)

Destinations

             28 Before After Before After Continental All carriers

Total

Large hubs

                                  Medium hubs

Small hubs

Non-hubs

      Source: GAO analysis of DOT T-100 segment and FAA enplanement data.

Note: We defined the period "before" Continental's dismantling of CALite
service in Greensboro as the third quarter of 1995 through the second
quarter of 1996. The period "after" includes the third quarter of 1997
through the second quarter of 1998.

8Continental Express, then Continental's wholly owned regional affiliate,
also provided service out of Greensboro, and its destinations are included
in the tallies for Continental.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

Kansas City: Vanguard Ceased Operations

Vanguard Airlines began operating in 1994 as a low fare carrier and
eventually operated a hub in Kansas City, Missouri, with 2 departures
daily. Vanguard eventually served 13 percent of the passengers in Kansas
City. On July 30, 2002, the airline ceased operations and filed for
chapter 11 bankruptcy protection after being denied a federal loan
guarantee by the Air Transportation Stabilization Board. When the company
stopped operating, it had been flying 33 departures daily out of Kansas
City.

When Vanguard abruptly exited the Kansas City market, overall capacity and
thus traffic declined somewhat. Vanguard had a 13 percent market share to
Southwest's 36 percent share, and Southwest had cut its capacity out of
Kansas City during the same period while overall other carriers had
increased their capacity slightly. (See fig. 25). Local traffic decreased
6.8 percent. Vanguard served only one small community at the time it
exited Kansas City, and during the period of our review no other carriers
served that community from Kansas City, so one small community lost air
service to Kansas City as a result of Vanguard's demise. (See fig. 26).

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Percent change 20

                                     10.7%

0

-20

-40

-60

-80

-100

-100% -100%

Capacity Total traffic

Vanguard Southwest Other airlines Overall Source: InterVISTA-ga2.

Note: Percentage changes are calculated for the year beginning the third
quarter of 2001 compared with the 2-year period beginning the third
quarter of 2002.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

           Figure 26: Number of Destinations Served from Kansas City

                             Destinations 60 51 50

                                       40

                                       30

                                       20

              10 0 Before After Before After Vanguard All carriers

                                     Total

Large hubs

                                  Medium hubs

Small hubs

Non-hubs

      Source: GAO analysis of DOT T-100 segment and FAA enplanement data.

Note: We defined the period "before" Vanguard's demise as the third
quarter of 2001 through the second quarter of 2002. The period "after"
includes the third quarter of 2003 through the second quarter of 2004.

Nashville: American Nashville was one of six American Airlines hubs. The
airline opened the hub in April 1986, and at its peak in January 1992, it
operated 135 dailyDismantled a Hub departures out of Nashville.9 In
December 1994, just before it started dismantling the Nashville hub, it
reduced daily departures to 80. By

9American Eagle, the regional subsidiary owned by American's parent
company, AMR Corp., also provided service out of Nashville, and its
traffic, capacity, and destinations are included in the tallies for
American.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

December 1996, American had further reduced its service at Nashville to 22
daily departures.

When American dismantled its Nashville hub, overall capacity and total
traffic declined. Other airlines increased their capacity and their
traffic substantially when American decreased its service. However,
because American had been so dominant at Nashville, a small decline in
overall traffic occurred. (See fig. 27.) Local traffic, however, increased
28 percent. Southwest increased its share of Nashville's traffic from 13
percent the year before American pulled out to 33 percent 2 years later.

Figure 27: Percentage Change in Nashville Capacity and Total Traffic

Percent change 200

150.4

150

100

50

0

-50

-70.8 -69.5

-100

Capacity Total traffic

American Southwest Other airlines Overall Source: InterVISTA-ga2.

Note: Percentage changes are calculated for the year beginning the first
quarter of 1994 compared with the 2-year period beginning the first
quarter of 1995.

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

When American Airlines dehubbed at Nashville, few small communities were
among those receiving service. As a result of the carrier's actions, fewer
total destinations-and just one small community-received nonstop air
service from that city. American and American Eagle had served 32 of the
44 total nonstop destinations out of Nashville, and 2 years later,
American served 7 of 34 total destinations. In the year before American's
dehubbing at Nashville, eight small hubs were served out of Nashville,
five of which were served by American and American Eagle. Two years later,
American and American Eagle had eliminated their small community service
from Nashville; another carrier maintained service to one small community.
(See fig. 28).

Figure 28: Number of Destinations Served from Nashville

Destinations 50

                                       44

40

30

20

10

0 Before After Before After American All carriers

Total Large hubs Medium hubs

Small hubs Non-hubs Source: GAO analysis of DOT T-100 segment and FAA
enplanement data.

Note: We defined the period "before" Continental eliminated its hub as the
first quarter of 1994 through the fourth quarter of 1994. The period
"after" includes the first quarter of 1996 through the fourth quarter of
1996.

                                  Appendix II
                    Case Studies Describing Market Responses
                             to Airline Withdrawals

St. Louis: American Acquired TWA

When Trans World Airlines (TWA) filed for bankruptcy protection for the
third time on January 10, 2001, the airline had been operating a domestic
hub out of St. Louis and offering 324 departures daily. By the end of that
year, TWA-which had reduced its daily departures to 281-had been acquired
by American Airlines. American departures out of St. Louis in 2001
decreased from 17 daily in January to 4 daily in December. In January
2002, American departures increased to 286 daily with the acquisition of
TWA.10

With American's takeover of TWA, capacity rose slightly in St. Louis while
total traffic decreased. The decrease in total traffic occurred in spite
of American's dramatic increase in traffic as it took over TWA. (See fig.
29.) Local traffic, meanwhile, declined 6.1 percent overall.

10TWA capacity, traffic, and destinations served before its acquisition
and American destinations served after it acquired TWA, includes service
by TWA's and, later, American's regional partner, Trans States Airlines."

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Percent change 200 194.5%

150

100

50

0

-50

-100

-100.0% -100.0%

Capacity Total traffic

TWA

American

Southwest

Overall Source: InterVISTA-ga2 and GAO analysis of DOT Form 41 data.

Note: Percent changes are calculated for the year beginning the third
quarter of 2001 compared with the 2-year period beginning the third
quarter of 2002.

While TWA served a total of 27 small communities before the acquisition,
11 of these were also served by American Airlines. Of the 16 markets that
TWA served alone, American maintained service to 13 after the acquisition.
Overall, however, more small communities received nonstop service from St.
Louis after American acquired TWA. (See fig. 30).

Appendix II
Case Studies Describing Market Responses
to Airline Withdrawals

Destinations

100 92

80

60

40

20

0 TWA American All carriers TWA American All carriers

Before After

Total Large hubs

Medium hubs

Small hubs Non-hubs Source: GAO analysis of DOT T-100 segment and FAA
enplanement data.

Note: We defined the period "before" American's acquisition of TWA as the
third quarter of 2001 through the second quarter of 2002. The period
"after" includes the third quarter of 2003 through the second quarter of
2004. The number of nonhubs served by all carriers after the acquisition
includes 8 nonprimary airports. Nonprimary airports are commercial service
airports enplaning 2,500 to 10,000 passengers annually. Primary airports
(nonhubs, small hubs, medium hubs, and large hubs) have more than 10,000
enplanements annually and receive federal Airport Improvement Program
funds.

Appendix III

Comments from the Pension Benefit Guaranty Corporation

Appendix III
Comments from the Pension Benefit
Guaranty Corporation

Appendix IV

                     GAO Contact and Staff Acknowledgments

GAO Contact JayEtta Z. Hecker (202) 512-2834

Acknowledgments	In addition to those named above, Joseph Applebaum, Paul
Aussendorf, Barbara Bovbjerg, Anne Dilger, David Eisenstadt, Charles J.
Ford, David Hooper, Charles A. Jeszeck, Ron La Due Lake, Steven Martin,
Scott McNulty, George Scott, Richard Swayze, Roger J. Thomas, and Pamela
Vines made key contributions to this report.

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