Certification of New Airlines: Department of Transportation Has Taken
Action to Improve Its Certification Process (Letter Report, 01/11/96,
GAO/RCED-96-8).
Pursuant to a congressional request, GAO reviewed the Department of
Transportation's (DOT) processes for certifying the initial operations
of new airlines, focusing on the: (1) number of applicants that applied
for and received authorization to begin new airlines since 1990; and (2)
cost to certify new airlines and how the cost is distributed between the
government and the applicants.
GAO found that: (1) from January 1990 to July 1995, 180 applicants
applied to begin new airline operations and 90 received authorization to
do so; (2) 33 of the 90 airlines ceased operations prior to July 1995;
(3) the 90 remaining applicants were not authorized to begin airline
operations because they lacked the financial resources necessary to
carry out proposed services or the DOT Office of the Secretary (OST) had
not approved their applications; (4) the Federal Aviation Administration
(FAA) has revised its certification process to prevent applicants
lacking sufficient financial resources from proceeding into the airline
certification process; (5) OST and FAA have established an electronic
communication link to share information about airline applicants, but it
is unknown how much this will reduce the unnecessary expenditure of DOT
resources; (6) applicants pay less than $1,000 to apply for airline
certification, while the government pays up to $150,000 to process each
application; (7) a portion of the government's cost of certifying new
airlines is recouped from ticket and fuel taxes once the applicants
begin operations; and (8) OST and FAA must examine the appropriateness
of certification fees, since certification costs are not recovered under
the fee structure.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-96-8
TITLE: Certification of New Airlines: Department of Transportation
Has Taken Action to Improve Its Certification
Process
DATE: 01/11/96
SUBJECT: Commercial aviation
Airline industry
Licenses
Air transportation operations
Airline regulation
Financial management
Safety standards
Cost control
IDENTIFIER: Airport and Airway Trust Fund
DC-9 Aircraft
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to Congressional Requesters
January 1996
CERTIFICATION OF NEW AIRLINES -
DEPARTMENT OF TRANSPORTATION HAS
TAKEN ACTION TO IMPROVE ITS
CERTIFICATION PROCESS
GAO/RCED-96-8
DOT's Processes for Certifying New Airlines
(341437)
Abbreviations
=============================================================== ABBREV
DOT - Department of Transportation
FAA - Federal Aviation Administration
GAO - General Accounting Office
OST - Office of the Secretary
Letter
=============================================================== LETTER
B-260213
January 11, 1996
The Honorable James L. Oberstar
Ranking Democratic Member
Committee on Transportation
and Infrastructure
House of Representatives
The Honorable William O. Lipinski
Ranking Democratic Member
Subcommittee on Aviation
Committee on Transportation
and Infrastructure
House of Representatives
Since deregulation began in 1978, the airline industry has
experienced significant growth as a number of new airlines start up
each year. According to officials in the Department of
Transportation (DOT), the traveling public has benefited from this
growth through increased competition among the airlines, air
transportation services to more locations, and lower airfares. DOT
recently estimated that new airlines generate about $4 billion
annually in direct savings to the traveling public. This growth,
however, has also increased the government's workload for certifying
new airlines.
Before commencing operations, new airlines must obtain two separate
authorizations from DOT--"economic" authority from the Office of the
Secretary (OST) and "safety" authority from the Federal Aviation
Administration (FAA). Within OST, the Air Carrier Fitness Division
is responsible for assessing whether applicants have the managerial
competence, disposition to comply with regulations, and financial
resources necessary to operate a new airline. This Division then
recommends to the Assistant Secretary for Aviation and International
Affairs whether such applicants should be found "fit" and issued
effective operating authority. At FAA, the Flight Standards Service
is responsible for certifying that the applicants' manuals, aircraft,
facilities, and personnel meet federal safety standards.
Representative Oberstar, in his former role as Chairman of the
Subcommittee on Aviation, House Committee on Transportation and
Infrastructure, asked us to review the efficiency of DOT's processes
for certifying the initial operations of new airlines. As agreed
with the Subcommittee's staff, we are also sending this report to
Representative Lipinski, the Ranking Democratic Member of the
Subcommittee on Aviation. This report addresses the initial
certification of new airlines' operations, focusing on three
questions: (1) How many applicants have applied for and received
authorization to begin new airlines since 1990?\1 (2) What processes
does DOT have in place to certify new airlines? and (3) How much
does it cost to certify new airlines and how are these costs
distributed between the government and the applicants?
--------------------
\1 This report discusses only applications filed with OST and FAA to
begin new services for large transport and commuter air carriers. We
excluded the carriers that provide on-demand services, commonly
called air taxis, because they are exempt from the fitness
requirements in the Federal Aviation Act of 1958.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
From January 1990 through July 1995, 180 applicants applied to OST to
begin new airline operations. Of these, 90 received authorization
from both OST and FAA and actually began operations. Fifty-seven of
these 90 were operating as of July 1995, while 33 had ceased
operations during these 5-1/2 years. The 90 remaining applicants had
not completed either OST's and/or FAA's processes for beginning
operations. Specifically, 33 of the 90 applicants were tentatively
found fit by OST but had not begun or never began operations,
primarily because they were unable to acquire the financial resources
necessary to carry out the proposed services. Another 47
applications had been withdrawn by the applicant or were dismissed or
denied by OST. Ten applications were pending OST's approval.
While OST's and FAA's certification processes are crucial for
ensuring that new carriers meet federal economic and safety
standards, we found that some applicants proceeded far into DOT's
certification processes--resulting in the expenditure of a
significant amount of federal resources--before it became apparent
that they could not acquire the financial resources necessary to
complete the process. Recognizing this problem, FAA revised its
certification process in October 1995 to require applicants to
complete certain steps before its inspectors will expend additional
resources on certification activities. For example, applicants must
provide proof, such as signed contracts or letters of agreement, that
they have purchased or leased the aircraft, facilities, and services
needed to conduct the proposed operations and have been found
tentatively fit by OST before FAA inspectors will begin reviewing the
applicants' operating, maintenance, or training manuals. Also, OST
recently tightened its standards by requiring applicants to submit
third-party verification of their financial plans with their
applications. In addition, in October 1995 OST and FAA established
an electronic communication link to better share information about
the applicants. It is too early to determine how these recent
changes will work in practice and to what extent they will reduce the
unnecessary expenditures of DOT's resources.
The government incurs a substantial financial burden when certifying
new airlines' operations. However, the fees that the applicants
currently pay for certification amount to less than 1 percent of the
government's costs. Specifically, applicants pay less than $1,000
per application to OST for these services and nothing to FAA. In
contrast, the costs to the government can total more than $150,000
per application. While DOT officials recognized that the existing
fees are insufficient to cover the certification costs, they pointed
out that a portion of these costs are recouped from ticket and fuel
taxes once the applicants begin operations. Although OST and FAA
officials recognized that the certification costs are not recovered
under the existing fee structure, they have not yet revisited the
appropriateness of the current fees.
BACKGROUND
------------------------------------------------------------ Letter :2
The Federal Aviation Act of 1958, as amended, gives DOT
responsibility for promoting new airlines' operations, while at the
same time determining whether applicants proposing to provide air
transportation services for compensation or hire meet federal
economic and safety standards before commencing operations. Within
DOT, this responsibility is shared by OST and FAA. All applicants
must obtain separate authorization from both offices before starting
their operations.
OST'S CERTIFICATION PROCESS
---------------------------------------------------------- Letter :2.1
When OST receives an application, it administers a three-part test to
determine whether the applicant is "fit, willing, and able" to
properly perform the proposed services. First, OST assesses whether
the applicant's key personnel\2 and management team as a whole
possess the background and experience necessary to perform the
proposed operations. Second, it reviews the applicant's operating
and financial plans to determine whether the applicant has access to
or a plausible plan for raising sufficient funds to pay all of its
start-up expenses and maintain a working capital reserve equal to 3
months' normal operating costs. Finally, it reviews the applicant's
compliance record to determine whether the applicant or its key
personnel have a history of safety violations or consumer fraud and
may thus pose a risk to the traveling public, or whether other
factors indicate that the applicant would not be likely to comply
with federal rules, laws, and directives.
If OST finds that the applicant meets these criteria, it issues a
"show cause" order tentatively finding the applicant fit to operate.
Interested parties, including competitor airlines and members of the
public, are given an opportunity to raise concerns or objections
about the applicant's fitness to conduct the proposed operation. If
no objections are filed that convince OST that its tentative findings
were incorrect, it will issue a "final" order finding the applicant
fit. Even so, the authority to begin the proposed operation will not
be granted until the applicant submits the required (1) Air Carrier
Certificate and Operations Specifications from FAA; (2) evidence that
it has liability insurance coverage for each of its aircraft; (3)
information on any changes in financing, ownership, key personnel, or
management since the initial determination of fitness; and (4)
verification that it has sufficient funds to meet OST's financial
criteria.
--------------------
\2 "Key personnel" generally refers to the president, vice
presidents, chief executive officer, chief operating officer, general
manager, chief financial officer, chief pilot, and directors of
operations and maintenance.
FAA'S CERTIFICATION PROCESS
---------------------------------------------------------- Letter :2.2
FAA uses a five-phase process to determine whether an applicant's
manuals, aircraft, facilities, and personnel meet federal safety
standards. First, in the preapplication phase, FAA gives the
applicant basic information about the agency's certification process
and assigns a team of inspectors to meet with the applicant to
discuss the proposed operation. Second, in the formal application
phase, the applicant must submit all required documents, including a
letter of application, operations and maintenance manuals, training
curriculums, and personnel r�sum�s documenting key personnel's
managerial and technical skills. Third, in the document compliance
phase, FAA inspectors review the documents to determine whether they
comply with applicable safety regulations and operating practices.
Fourth, in the demonstration and inspection phase, the inspectors
conduct on-site inspections of the applicant's aircraft and
maintenance facilities; observe proposed training programs; review
maintenance, operations, and record-keeping procedures; and review
actual in-flight operations. Finally, in the certification phase,
FAA issues an Air Carrier Certificate and approves the applicant's
operations specifications.
MANY APPLICANTS DO NOT COMPLETE
OST'S AND FAA'S CERTIFICATION
PROCESSES
------------------------------------------------------------ Letter :3
We found that many applicants do not successfully complete OST's and
FAA's certification processes and, therefore, cannot begin flight
operations. From January 1990 through July 1995, 180 applicants
filed with OST to begin new airline operations. Ninety of the 180
applicants successfully completed OST's and FAA's processes and began
operations. Of these 90, 57 were operating as of July 1995, while 33
began flying but ultimately ceased operations for a variety of
reasons, such as insufficient revenues and competition from other
airlines. As shown in figure 1, 33 of the remaining 90 applicants
were tentatively found fit by OST but either never began operations,
primarily because they lacked the financial resources necessary to
carry out the proposed operations, or are still attempting to
complete their financing or finish FAA's certification process before
they can begin operations. Another 47 applicants had withdrawn their
applications or had them dismissed or denied by OST because the
applicants were unable to meet its fitness standards. Ten
applications were pending OST's approval.
Figure 1: Status of New
Airline Applicants From January
1990 Through July 1995
(See figure in printed
edition.)
Source: Based on data obtained from OST.
OST analysts and FAA headquarters officials told us that several
factors determine whether an applicant successfully completes both
offices' processes. These factors include the completeness of the
initial application, the applicant's managerial skills and technical
knowledge about operating an airline, and the applicant's ability to
obtain sufficient funds to meet OST's financial criteria.
Furthermore, the analysts told us that the majority of the applicants
that do not complete the processes or never begin operations do not
acquire the financial resources necessary to cover the start-up costs
for their proposed operations.
OST AND FAA HAVE RECENTLY ACTED
TO IMPROVE THE EFFICIENCY OF
THEIR PROCESSES
------------------------------------------------------------ Letter :4
While OST's and FAA's certification processes are designed to ensure
that new airlines meet federal economic and safety requirements, we
found that the processes contained some inefficiencies that resulted
in spending federal resources on applicants that had little
probability of successfully completing the processes and beginning
operations. Specifically, OST determined some applicants to be
financially fit before they had sufficient funds to complete both
certification processes. Because a significant amount of resources
is spent on applicants that never complete the certification
processes, FAA recently revised its process to require applicants to
complete certain tasks before it will expend resources on other
certification activities. Additionally, OST tightened its financial
standards by requiring applicants to submit third-party verification
of their financial plans with their applications. And together, OST
and FAA have established an electronic communications link to better
share information about applicants.
OST DETERMINES APPLICANTS
FINANCIALLY FIT BEFORE THEY
HAVE RESOURCES ON HAND
---------------------------------------------------------- Letter :4.1
To determine financial fitness, OST requires applicants to submit
financial plans that show they have a plausible plan for raising the
capital needed to conduct the proposed services. Only after the
applicants receive FAA's certification--but before OST gives them the
authority to operate--are they required to verify that they actually
have sufficient funds to meet OST's financial criteria for beginning
and sustaining their proposed operations. OST officials indicated
that they require only a financial plan and not actual funds on hand
because some applicants are unable to obtain funds from financial
institutions or other investors unless they can show that OST has
found them fit. As a result, applications can proceed far into FAA's
certification process before they are terminated or suspended because
of the applicants' inability to raise the needed capital.
Consequently, hundreds of hours of FAA inspectors' time can be
expended on certification efforts before it is known that the
applicants are unable to obtain the needed funds.
According to OST analysts, the primary reason that 33 applicants
tentatively found fit had never begun or had not yet begun operations
was that they were unable or are still trying to obtain the funds
necessary to meet OST's financial criteria and complete FAA's
process. Although the analysts routinely give applicants additional
time to raise money, many still do not acquire the needed funds
because their funding plans fall through or the market conditions
change. For example, OST found an applicant fit on the basis of its
proposal to raise about 98 percent of its capital through state
economic development funds. However, the funds from that prospective
source never became available, and the applicant had to seek
alternative financing. OST granted the applicant four extensions to
allow time to raise the needed capital, but the applicant never
obtained the funds necessary to commence operations. FAA expended
about 650 staff hours, or about $52,000, on certification activities
for this applicant.\3 We could not determine the staff hours, or
dollars, that OST analysts spent on certification activities for this
applicant because, according to the analysts, they do not maintain
records of the staff time spent on individual applicants.
In another case, we found that FAA had to suspend its certification
efforts during the demonstration phase (phase four)--in which FAA
reviews each applicant's aircraft operations--because an applicant
had not acquired its aircraft. Four months after these efforts were
suspended, the applicant withdrew from the process because it was
unable to obtain the funds to purchase or lease any aircraft. In
this case, FAA had spent about 800 staff hours, or about $64,000, on
certification activities.
Even though OST still requires applicants to present only a plan for
raising the necessary capital, OST recently tightened its standards
on what is acceptable as evidence of a funding plan and when such
evidence must be submitted. According to the Chief of the Air
Carrier Fitness Division, all applicants are now required to submit,
with their applications, third-party verification that they are
working with an established brokerage firm, financial institution, or
qualified individuals to raise the necessary capital. Copies of
private placement agreements, debt instruments, or other stock
offerings must be submitted as part of the application before OST
will process it further and issue a show cause order finding the
applicant fit. OST officials said that these changes are an attempt
to reduce the amount of OST's and FAA's resources expended on
applicants that do not have their basic financing plans in place when
they seek OST's authority to begin operations.
--------------------
\3 According to FAA headquarters officials and field inspectors we
interviewed, the cost of performing certification activities, based
on an inspector's hourly rate, is about $80 per hour, including
direct and indirect costs. Using this figure, we calculated that the
certification costs in this case were about $52,000 ($80 times 650
hours).
FAA HAS REVISED ITS
CERTIFICATION PROCESS
---------------------------------------------------------- Letter :4.2
Recognizing that a significant amount of resources is expended on
applicants that do not complete the certification process, FAA
revised its process in October 1995 to make the process more
efficient. FAA officials stated that this action was necessary given
the amount of time and resources devoted to applicants that never
successfully complete the process and given the need to find a way to
reduce the staff resources expended on these applicants. Under FAA's
new process, which incorporates a "gate" system, applicants are
required to complete certain steps--at key points in the
process--before FAA inspectors will expend additional resources on
certification activities. To illustrate, FAA now requires applicants
to have applied for OST's authority during the preapplication phase
(phase one) before FAA assigns a certification team to the applicant.
During our review, we found that one applicant had proceeded to phase
three--the document compliance phase--of FAA's five-phase process
before it submitted an application to OST. Upon reviewing the
application, OST analysts questioned the reasonableness of the
applicant's estimated start-up expenses and operating costs for 3
months. As a result of the analysts' inquiry, the applicant
subsequently withdrew its application. However, by this time FAA had
expended 1,300 hours of inspectors' time, incurring about $104,000 in
certification costs. FAA's new process, if properly implemented,
should preclude the recurrence of this type of problem.
FAA officials told us that in the past, some applicants would wait
until the last moment to purchase or lease the aircraft, facilities,
and services necessary to conduct the proposed operations. Because
some applicants could not raise the needed capital, they delayed
completing or never completed the process, resulting in FAA's
expending significant resources on unsuccessful applications. Under
FAA's revised process, when submitting their formal applications in
phase two, the applicants must provide proof, such as signed
contracts or letters of agreement, that they have purchased or leased
the aircraft, facilities, and services needed for the proposed
operations before FAA will begin reviewing their operating,
maintenance, or training manuals. In addition, by the time the
applicants reach the formal application phase, they must have been
tentatively found fit by OST and a show cause order must have been
issued.
Furthermore, FAA now requires applicants to submit completed general
operating, maintenance, and training manuals at the time of the
formal application. Applicants are encouraged to seek outside
assistance in preparing these documents. FAA inspectors told us that
in the past it was not uncommon for them to spend a significant
amount of time assisting applicants in developing these documents.
For example, although OST had determined that one applicant's key
personnel possessed the technical knowledge and skills necessary to
provide the proposed services, during a subsequent certification
review, FAA inspectors found that the applicant's personnel did not
have the necessary knowledge and skills to develop the required
manuals for the proposed operations. Even after obtaining extensive
assistance from FAA, the applicant submitted maintenance manuals that
included procedures for replacing an aircraft's propellers, whereas
the proposed operations would use only DC-9 jet aircraft. When the
applicant did not obtain certification within 1 year of the date of
the initial determination of fitness, OST granted the applicant an
extension without fully coordinating with FAA. Even with the
extension, the applicant could not produce acceptable manuals, and
FAA eventually terminated its certification efforts. By this time,
however, FAA had expended about 1,800 staff hours, or about $144,000,
processing the application. According to DOT officials, in October
1995 OST and FAA established an electronic communications link to
better share information about applicants, and OST now routinely
contacts FAA before granting any extensions of the 1-year period.\4
--------------------
\4 Under an OST regulation (14 C.F.R. 204.7), an applicant has 1
year from the date of OST's final order finding the applicant fit to
begin operations, or this authority will be terminated for reason of
dormancy. Where good cause can be shown, OST may grant applicants an
extension of this 1-year use-or-lose period to allow them additional
time to complete their financing or FAA certification.
CURRENT APPLICATION FEES DO NOT
RECOUP OST'S AND FAA'S
CERTIFICATION COSTS
------------------------------------------------------------ Letter :5
Applicants currently pay nominal fees to OST but nothing to FAA to
certify their proposed new operations. The fees that applicants
currently pay represent less than 1 percent of what it costs the
government to conduct certification activities. For example, the 90
applicants that completed OST's and FAA's certification processes
paid an average fee of only $760 for certification, or less than 1
percent of the government's average estimated cost of over $150,000
to certify each applicant.
OST officials recognize that the existing fees do not cover a
substantial portion of the costs of certifying new airlines. The
Chief of the Air Carrier Fitness Division estimated that it typically
takes an OST analyst about 80 to 100 staff hours, costing about
$4,000, to certify a new carrier. We could not determine the actual
number of staff hours or dollars OST spent on certification efforts
for applicants from January 1990 through July 1995 because, according
to OST analysts, they did not maintain such data. Nevertheless,
based on the Chief's estimate of $4,000 per applicant, we calculated
that OST spent about $360,000 in certification costs for the 90
airlines that actually began operations, or about $720,000 for the
180 applicants that filed applications during the 5-1/2 years covered
by our review. In comparison, OST officials estimated that the 180
applicants paid a total of only $160,000 in fees.
The Chief of the Air Carrier Fitness Division recognized that OST may
be recouping only a portion of the government's costs for processing
applications through the fees. Nevertheless, the Chief commented
that the regulation setting the application fees paid to OST--which
includes fees for 50 types of applications, including applications to
operate new airlines--has not been reviewed in over 10 years because
of the scope of the undertaking and the limited availability of
staff.
Like OST, FAA could not readily determine the total number of staff
hours spent on the applications received since January 1990 because,
according to both FAA headquarters officials and field inspectors,
they did not have a centralized system for recording this information
for the 5-1/2 years covered by our review. Nevertheless, in May 1995
FAA told us that recent certification efforts have required between
1,200 and 2,700 hours of inspectors' time, for an average of 1,835
hours, to certify a new airline. At the $80 hourly rate for
inspectors, the average cost is about $150,000 per certification. We
estimate that it cost FAA more than $13.5 million to certify the 90
airlines that actually began operations. In October 1995, FAA
estimated the staff time and costs for the applicants that did not
complete its process to be about 800 hours, or $64,000 per applicant.
Nevertheless, FAA does not charge fees for its certification efforts.
We found that, in addition to paying nominal fees for certification,
applicants also can make substantial modifications to their proposed
operations during the certification process without paying additional
fees, even though such actions can significantly increase the
government's costs. For example, during the certification process
one applicant changed the type of aircraft it planned to use. This
action caused FAA inspectors to essentially restart their efforts,
resulting in additional reviews and increased costs.
Title 31, section 9701, of the U.S. Code gives federal agencies the
authority to charge fees for services or benefits provided to
specific beneficiaries. The Office of Management and Budget's
Circular A-25 implements this authority by prescribing guidelines for
imposing charges on users of the government's services. The general
policy is that a reasonable charge should be made to each
identifiable recipient of a government service, privilege, authority,
or certificate from which a special benefit is derived. Section 9701
states that such charges are to be based on the (1) cost of the
service to the government, (2) value of the service to the recipient,
and (3) public policy or interest served. In addition, the statute
establishes a policy that such services should be as self-sustaining
as possible.
Although FAA does not currently charge a fee for its certification
efforts, DOT officials commented that a portion of the certification
costs is recouped from ticket and fuel taxes paid by the operating
airlines and deposited into the Airport and Airway Trust Fund. Even
so, applicants do not pay into the fund until they begin operations;
therefore, applicants that never begin operations never contribute to
the fund. As mentioned earlier, 80 of the 180 applicants that filed
applications with OST between January 1990 and July 1995 (1) were
tentatively found fit but had yet to begin or had never begun
operations or (2) withdrew their applications or had them dismissed
or denied and thus had never contributed to the fund.
OST and FAA officials recognized that the existing fees were
insufficient to cover certification costs but have not reviewed the
appropriateness of the current fee structures. Under legislation
introduced in the Congress in September 1995, FAA would be allowed to
charge fees to support various aviation services. According to the
Deputy Director of Flight Standards Service, FAA plans to examine all
services requiring certificates and the existing fee structures to
determine the extent to which the government's costs have been or
should be recouped. A date for completing this action has yet to be
determined.
CONCLUSIONS
------------------------------------------------------------ Letter :6
DOT's certification processes have resulted in 90 new carriers'
entering the airline industry over the past 5-1/2 years. These new
carriers have benefited the traveling public by increasing
competition among airlines and, in turn, reducing airfares. However,
about half of the applicants that applied to operate new airlines did
not complete the processes, primarily because they could not obtain
sufficient financial resources. In some instances, FAA expended a
significant amount of resources on costly certification activities.
Although OST and FAA recently revised their certification processes
to reduce the amount of resources spent on unsuccessful applications,
it is too early to determine how the revisions will work in practice
and to what extent they will reduce unnecessary expenditures.
The fees that applicants pay for certification allow the government
to recoup only a small portion--less than 1 percent--of its costs for
those applicants that complete DOT's processes. Although the
government recoups some of its certification costs through ticket and
fuel taxes, these funds are collected only from applicants that
successfully begin and sustain their operations. Applicants that
never begin operations do not pay such taxes. Requiring applicants
to pay a greater share of the certification costs could generate
revenue that could help defray these costs--a particularly important
outcome during this period of declining federal budgets. We
recognize that the Congress will ultimately be involved in any
decision to establish fees for various aviation support services.
RECOMMENDATION
------------------------------------------------------------ Letter :7
Given the current reduction in federal resources, we recommend that
the Secretary of Transportation reevaluate the appropriateness of the
Office of the Secretary's increasing its fees and FAA's establishing
fees for services to certify new airlines, taking into consideration
the government's costs, the value of the services to the applicant,
and the public policy or interest served.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
We provided a draft of this report to DOT officials for their review
and comment. We met with Department officials, including OST's Chief
of the Air Carrier Fitness Division and FAA's Deputy Director of
Flight Standards Service, to discuss their comments. The draft
report contained proposed recommendations to DOT to improve OST's and
FAA's certification processes and to reevaluate the existing fees for
certification services.
These officials generally agreed with the findings and conclusions in
the draft report. In commenting, the officials provided a number of
clarifications and updates that have been incorporated into the
report as appropriate. Most significantly, the report has been
updated to recognize a number of actions that OST and FAA have taken
during the course of our review to improve their processes for
certifying new airlines. Specifically, (1) FAA has revised its
certification process to require that applicants complete certain
steps before it will expend additional resources, (2) OST now
requires all applicants to submit, with their applications,
third-party verification that they are working with an established
brokerage firm, financial institution, or qualified individuals to
raise the necessary capital, and (3) OST and FAA have established an
electronic communications link to better share information about
applicants. As a result of these actions, we have deleted our
proposed recommendation to improve OST's and FAA's certification
processes because, if properly implemented, these actions should
mitigate several of the concerns we identified and improve the
efficiency of the process for certifying new airlines.
DOT officials generally agreed with our remaining recommendation,
recognizing that the existing fees do not cover the government's
certification costs. But DOT has taken no action to date to
reevaluate the existing fees. In addition, while legislation
introduced in the Congress in September 1995 would allow FAA to
charge fees for various aviation services, this legislation has not
yet been enacted. Therefore, we continue to believe that DOT should
review the appropriateness of its fees for certifying new airlines,
either as a separate issue or as part of any broader effort to
examine FAA's fees for the services provided to the aviation
industry.
---------------------------------------------------------- Letter :8.1
We conducted our review from October 1994 through December 1995 in
accordance with generally accepted government auditing standards. A
detailed discussion of our objectives, scope, and methodology appears
in appendix I.
Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 10 days after the date of this
letter. At that time, we will send copies to the Secretary of
Transportation; the Administrator, FAA; the Director, Office of
Management and Budget; and other interested parties. We will also
make copies available on request.
Please call me at (202) 512-2834 if you have any questions about this
report. Major contributors to this report are listed in appendix II.
John H. Anderson, Jr.
Director, Transportation and
Telecommunications Issues
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
In August 1994, Representative James L. Oberstar, the then Chairman
of the Subcommittee on Aviation, House Committee on Public Works and
Transportation (now the Committee on Transportation and
Infrastructure), asked us to examine the Department of
Transportation's (DOT) efforts to ensure that new airlines meet
federal economic and safety standards before commencing flight
operations. On the basis of subsequent discussions with the
Subcommittee's office, this report addresses three questions: (1)
How many applicants have applied for and received certification to
begin new airlines since 1990? (2) What processes does DOT have in
place to certify new airlines? and (3) How much does it cost to
certify new airlines and how are these costs distributed between the
government and the applicants?
To address the first question, we obtained from DOT's Office of the
Secretary (OST) a list of all the applicants that applied for new
airline certification between January 1990 and July 1995. The list
identified 180 applicants and gave the status of their applications
as of July 1995. We also asked the Federal Aviation Administration
(FAA) to verify the status of the applications.
To address the second question, we reviewed pertinent federal
statutes and DOT's regulations to identify which DOT units are
responsible for performing certification activities. We also
reviewed OST's criteria, procedures, and other pertinent documents
outlining the requirements for determining an applicant's fitness.
We discussed these issues with the five analysts in OST's Air Carrier
Fitness Division who are responsible for assessing whether applicants
have the necessary skills and resources to operate a new airline. We
also selected a judgmental sample of 40 of the 180 applications filed
with OST from January 1990 through July 1995 for detailed review to
validate how OST's process was implemented. We selected these 40
applicants because they represented a broad mix of categories of
applicants and proposed operations. The 40 applicants selected
included 15 of the 57 operating airlines, 7 of the 33 airlines that
began but ceased operations, 7 of the 33 airlines that were found
tentatively fit but had yet to begin operations or had never
operated, and 11 of the 47 applicants that had withdrawn their
applications or had them dismissed or denied. We did not review any
of the 10 pending applications.
In addition, we reviewed FAA's criteria, procedures, and other
documents used to certify new airlines and discussed them with a
selected sample of 37 FAA inspectors working in the flight standards
district offices we visited. We also conducted detailed reviews of a
judgmental sample of files on 16 of the 57 airlines that began
operations after January 1990 in order to validate how FAA's
certification process was implemented. We selected the 16 airlines
because they represented a mix of carriers, including different types
of airlines, fleet sizes, aircraft, and proposed operations.
While examining OST's and FAA's criteria, documentation, and
procedures for certifying new airlines, we looked for possible
deficiencies in the certification processes. Additionally, we
interviewed analysts in OST's Air Carrier Fitness Division and FAA
inspectors to obtain their views on what deficiencies, if any,
existed in the processes and whether any efforts were under way to
correct the known problems.
To address the third question, we interviewed analysts in the Air
Carrier Fitness Division and FAA headquarters officials and field
inspectors and reviewed OST and FAA documents to determine the number
of staff hours and associated costs required to certify a new
airline. We also discussed with the officials how the costs are
distributed between the government and applicants. In addition, we
reviewed DOT's regulations and the Office of Management and Budget's
guidance on charging fees for services provided by the government and
the collection of fees by OST and FAA to determine the extent to
which the government's certification costs are or should be recouped.
We performed our work at the DOT's Air Carrier Fitness Division
within OST and at FAA headquarters in Washington, D.C. We also
performed work at three of the nine FAA regional offices (Eastern,
Southern, and Western Pacific) and six of FAA's 91 flight standard
district offices (Reno, Nevada; Scottsdale, Arizona; Chantilly,
Virginia; and Orlando, Ft. Lauderdale, and Miami, Florida). We
selected the regional and flight standards district offices to obtain
geographical diversity and because these locations were responsible
for certification efforts for many of the applications that FAA
received between January 1990 and July 1995. We conducted our review
between October 1994 and December 1995 in accordance with generally
accepted government auditing standards.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION
-------------------------------------------------------- Appendix II:1
Charles Barchok, Jr.
Steven N. Calvo
Gerald L. Dillingham
Wanda T. Hawkins
Christopher M. Jones
Ronald E. Thompson
OFFICE OF THE GENERAL COUNSEL
-------------------------------------------------------- Appendix II:2
David K. Hooper
*** End of document. ***