Aviation: Issues Associated With the Theft of Stock Used to Create
Airline Tickets (Letter Report, 07/30/1999, GAO/RCED-99-219).

Pursuant to a congressional request, GAO provided information on issues
associated with the theft of stock used to create airline tickets,
focusing on: (1) the number and value of the airline ticket stock stolen
annually; (2) financial implications associated with the use of stolen
ticket stock; (3) issues that are potentially associated with the use of
stolen ticket stock; and (4) technological interventions and other
initiatives designed to detect the use of stolen ticket stock.

GAO noted that: (1) definitive information on the amount and value of
airline ticket stock stolen annually does not exist; (2) however, from
1989 through 1998, worldwide suppliers of ticket stock reported 11.3
million pieces of stolen ticket stock to Aeronautical Radio,
Incorporated; (3) the Airlines Reporting Corporation reported the
majority of these losses--8.2 million pieces; (4) the Corporation, for a
variety of reasons, tracks only 27 percent of the stock it reported and,
based on this information, identified over 447,000 pieces of its stock
that were stolen in 1997 and 1998; (5) in the event that all of this
stolen ticket stock is used, GAO estimates the potential value (loss)
attributable to the Corporation's ticket stock could range between $116
million to $302 million, depending on the number of pieces of stock used
to create each airline ticket; (6) the airlines bear the financial risk
for most situations involving the theft of ticket stock; (7) for the
airlines, however, the losses are relatively small compared with their
total annual revenue and their losses from other airline-related fraud;
(8) in contrast, the losses incurred by travel agencies that did not
adequately safeguard the Airlines Reporting Corporation's ticket stock
can result in serious financial hardships; (9) if all of the
Corporation's ticket stock stolen in 1997 and 1998 were used for travel,
which is unlikely, GAO estimates that the airline and travel agency
industries could lose about $151 million each; (10) in practice,
however, travel agencies would likely incur significantly smaller losses
because airlines frequently settle for far less than the amounts the
travel agencies owe; (11) U.S. tax officials believe that the financial
consequences to the federal government from the use of stolen ticket
stock are minor and of limited interest for auditing purposes compared
with higher-risk tax issues; (12) the travelling public does not appear
to be at any greater risk from individuals who use tickets created from
stolen ticket stock than they are from individuals who travel on
legitimate tickets; (13) federal law enforcement and intelligence
officials and airline officials were unaware of any individual who had
travelled on stolen ticket stock to conduct terrorist activities; (14)
the airline industry's centralized database on fraudulent ticket stock
is the principal means for detecting the use of stolen stock; and (15)
while this database is an effective tool, many airlines do not subscribe
to it because the time required to manually query it delays passenger
processing.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-219
     TITLE:  Aviation: Issues Associated With the Theft of Stock Used
	     to Create Airline Tickets
      DATE:  07/30/1999
   SUBJECT:  Losses
	     Fraud
	     Airline industry
	     Commercial aviation
	     Data bases
	     Internal controls
	     Larceny
	     Inventory control
	     Travel agents

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Cover
================================================================ COVER

Report to the Chairman, Subcommittee on Aviation, Committee on
Transportation and Infrastructure, House of Representatives

July 1999

AVIATION - ISSUES ASSOCIATED WITH
THE THEFT OF STOCK USED TO CREATE
AIRLINE TICKETS

GAO/RCED-99-219

Stolen Airline Ticket Stock

(348108)

Abbreviations
=============================================================== ABBREV

  ARC - Airlines Reporting Corporation
  ARINC - Aeronautical Radio, Inc. 
  FBI - Federal Bureau of Investigation
  GAO - General Accounting Office
  IRS - Internal Revenue Service
  INS - Immigration and Naturalization Service

Letter
=============================================================== LETTER

B-280702

July 30, 1999

The Honorable John J.  Duncan, Jr.
Chairman, Subcommittee on Aviation
Committee on Transportation and Infrastructure
House of Representatives

Dear Mr.  Chairman: 

Travelers fly billions of miles each year, sometimes using tickets
produced from stolen ticket stockï¿½the paper upon which a ticket is
imprinted.\1 In 1998, your Subcommittee heard widely divergent
testimony about the extent to which ticket stock has been stolen and
the implications associated with the use of stolen stock.  For
example, the Airlines Reporting Corporation (ARC)ï¿½the largest
supplier of airline ticket stock worldwide and the primary supplier
for U.S.  travel agentsï¿½testified that the losses from stolen ticket
stock are relatively minor, costing the multibillion-dollar airline
industry only a few million dollars annually.  Travel agency
representatives disagreed, testifying that the thefts of ticket stock
cost billions of dollars annually and result in the closure of travel
agencies held liable for the losses.  These representatives also
testified that the use of tickets produced from stolen stock results
in the loss of tax revenues to the federal government and raises
concerns about whoï¿½terrorists and others, such as illegal aliensï¿½may
be using stolen ticket stock for travel.  According to the travel
agency representatives, the problem could be solved if airlines used
an existing database to detect tickets produced from stolen ticket
stock. 

Given these divergent views, you asked us to examine the following
questions:  (1) What is the number and value of the airline ticket
stock stolen annually?  (2) What financial implications are
associated with the use of stolen ticket stock?  (3) What other
issues are potentially associated with the use of stolen ticket
stock?  and (4) What technological interventions and other
initiatives are available to detect the use of stolen ticket stock? 

To determine the overall number and value of airline ticket stock
reported stolen, we obtained information from the industrywide
database on stolen and other fraudulent ticket stock maintained by
Aeronautical Radio, Inc.  (ARINC).\2 This database cannot be broken
out by year and does not contain information about the value of
reported stolen stock.  Accordingly, we used ARC's status reports to
determine the amount of ARC ticket stock that is stolen annually.\3
We also used information provided by ARC to estimate the value of its
stolen ticket stock for 1997 and 1998--the years for which the most
complete information is available.  A detailed description of our
scope and methodology appears in appendix I. 

--------------------
\1 A typical airline ticket is composed of several partsï¿½the airline
auditor's record, an agent's record, several flight coupons (one for
each segment of a traveler's journey), the passenger's receipt,
and--if paid by credit card--a charge form.  While some tickets are
written out by hand (manually), most are generated using a computer. 
For manual tickets, the individual parts of the tickets are already
bound together in the form of a ticket.  In contrast, each piece of
an automated ticket must be generated separately and then combined to
form a ticket.  As used in this report, each manual ticket and each
piece of an automated ticket is called ï¿½ticket stock.ï¿½ Moreover, the
term ï¿½stolen ticket stockï¿½ refers to stock that is known to be stolen
as well as stock that has been reported lost or missing and therefore
has possibly been stolen. 

\2 Since 1989, ARINCï¿½an airline-owned company in Annapolis,
Marylandï¿½has maintained a centralized database for listing stolen,
lost, missing, and other fraudulent airline ticket stock worldwide. 
The database is called ï¿½TICKETS.ï¿½

\3 ARC's ticket stock accounted for 72 percent of all the stolen
stock reported to ARINC. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Definitive information on the amount and value of airline ticket
stock stolen annually does not exist.  However, from 1989 through
1998, worldwide suppliers of ticket stock reported 11.3 million
pieces of stolen ticket stock to Aeronautical Radio, Inc.  The
Airlines Reporting Corporation reported the majority of these
losses--8.2 million pieces.  The Corporation, for a variety of
reasons, tracks only 27 percent of the stock it reported and, based
on this information, identified over 447,000 pieces of its stock that
were stolen in 1997 and 1998.  In the event that all of this stolen
ticket stock is used, we estimate the potential value (loss)
attributable to the Corporation's ticket stock could range between
$116 million to $302 million, depending on the number of pieces of
stock used to create each airline ticket. 

The airlines bear the financial risk for most situations involving
the theft of ticket stock.  For the airlines, however, the losses are
relatively small compared with their total annual revenue and their
losses from other airline-related fraud, such as losses resulting
from abuses of the airlines' frequent flyer programs.  In contrast,
the losses incurred by travel agencies that did not adequately
safeguard the Airlines Reporting Corporation's ticket stock can
result in serious financial hardships.  If all of the Corporation's
ticket stock stolen in 1997 and 1998 were used for travel, which is
unlikely, we estimate that the airline and travel agency industries
could lose about $151 million each.  In practice, however, travel
agencies would likely incur significantly smaller losses because
airlines frequently settle for far less than the amounts the travel
agencies owe.  U.S.  tax officials believe that the financial
consequences to the federal government from the use of stolen ticket
stock are minor and of limited interest for auditing purposes
compared with higher-risk tax issues, such as the depreciation of
airline assets. 

The traveling public does not appear to be at any greater risk from
individuals who use tickets created from stolen ticket stock than
they are from individuals who travel on legitimate tickets.  In part,
this is because the airline industry believes that unsuspecting
passengers purchase and use the majority of tickets created from
stolen ticket stock.  Federal law enforcement and intelligence
officials and airline officials were unaware of any individual who
had traveled on stolen ticket stock to conduct terrorist activities. 
They also thought it unlikely that terrorists would knowingly use
tickets created from stolen stock because (1) terrorists generally
have the means to purchase false identification and legitimate
tickets and (2) using tickets created from stolen stock increases
their risk of detection.  Although airline and immigration officials
believe that illegal aliens are unknowingly sold tickets created from
stolen stock, the extent of their travel by this means is not known. 

The airline industry's centralized database on fraudulent ticket
stock is the principal means for detecting the use of stolen stock. 
While this database is an effective tool, many airlines do not
subscribe to it.  Moreover, according to officials of participating
airlines, the database is not routinely used, primarily because the
time required to manually query it delays passenger processing.  Some
airlines are experimenting with other technologies, such as optical
scanners, bar code readers, and magnetic strip readers, that may
speed up the detection of stolen ticket stock.  While there is
currently no single solution to prevent the use of stolen ticket
stock, the steady increase in electronic ticketing may eventually
reduce ticket stock thefts.  This is because, with paperless tickets,
travel agencies and other ticket distributors will have less need to
maintain large inventories of airline ticket stock. 

   BACKGROUND
------------------------------------------------------------ Letter :2

While the federal government is deeply involved in many aspects of
air travel, it is not involved in the creation or distribution of
airline tickets.  Instead, such matters are left to the airline
industry. 

There are a variety of sources and types of airline ticket stock. 
For example, when airlines issue tickets directly to passengers, they
use individualized ticket stock bearing their corporate name. 
However, the vast majority of U.S.  travel agencies obtain their
ticket stock from ARC--an airline-owned corporation created, among
other things, to accredit U.S.  agencies and to facilitate the
distribution of airline ticket stock to the agencies.  In 1998, there
were 32,694 ARC-accredited retail travel agencies. 

In 1998, ARC issued 1.1 billion pieces of ticket stock to U.S. 
travel agencies.  The ticket stock is blank except for the
inscription of a unique identifying number and has no value until it
is made into a ticket.  Over 90 percent of the ticket stock ARC
issued in 1998 was in automated form.  Travel agents imprint this
stock by computer with dataï¿½such as flight dates, flight numbers, and
fares--generated from the airlines' computer reservation systems. 
According to ARC, a typical ticket is composed of six to seven pieces
of ticket stockï¿½the airline auditor's record, an agent's record,
several flight coupons (one for each segment of a traveler's
journey), a charge form, and the passenger's receipt.  When combined
together, these pieces of stock form an airline ticket.\4
International suppliers, including the International Air Transport
Association, issue similar ticket stock.  Figure 1 illustrates ARC's
automated ticket stock. 

   Figure 1:  Example of ARC's
   Automated Ticket Stock

   (See figure in printed
   edition.)

Source:  Airlines Reporting Corporation. 

--------------------
\4 When a passenger receives a ticket created from ARC ticket stock,
two pieces of ticket stockï¿½the airline auditor's record and the
travel agent's record--have already been removed.  In addition, if
the passenger paid by credit card, the piece of stock used to charge
the customer's account would have been removed. 

   NUMBER AND VALUE OF STOLEN
   TICKET STOCK
------------------------------------------------------------ Letter :3

Definitive information on the amount and value of ticket stock stolen
annually does not exist.  However, from 1989 through 1998,
subscribing airlines and other worldwide suppliers of ticket stock
reported 11.3 million pieces of stolen ticket stock for inclusion in
ARINC's database--an annual average of about 1.1 million.\5 ARC
reported the majority of these losses--8.2 million pieces (72
percent).  Although the amount of stolen ARC ticket stock is
sizeable, it represents less than one-hundredth of 1 percent of the
over 9.2 billion pieces of ticket stock that ARC issued to travel
agencies during the period.  International ticket stock suppliers,
including the International Air Transport Association, were the
second largest source of the reported losses.  They reported 2.8
million pieces of stolen ticket stock (25 percent).  Eleven U.S. 
airlines reported the remaining 350,000 pieces of stolen ticket stock
(3 percent). 

ARINC's database cannot be analyzed by year, and given the
predominance of ARC ticket stock losses and the absence of other
information sources, we relied on the data supplied by ARC for annual
information.  However, ARC's database only tracks 27 percent of the
stolen stock it reported to ARINC.  During 1989 through 1998, ARC's
annual status reports identified 2.2 million pieces of stolen ARC
ticket stock--an annual average of about 220,000.\6

After peaking in 1995, as shown in figure 2, the amount of ARC ticket
stock reported stolen has declined considerably.  ARC attributes the
decline to (1) the more stringent security rules that it established
in April 1996, (2) its increased fraud prevention activities, (3)
increased awareness by travel agency personnel of the problem, and
related to this, (4) the agents' increased compliance with ARC's
required security measures. 

   Figure 2:  Amount of Stolen ARC
   Ticket Stock, 1989-98

   (See figure in printed
   edition.)

Source:  ARC's annual status reports on stolen ARC ticket stock. 

In 1997 and 1998, about 97 airlines voluntarily reported to ARC that
8,330 tickets were created from stolen ARC ticket stock and used for
travel on their airlines.\7 The tickets had a total face value of
about $10.5 million and an average value of about $1,260.\8 Using
this average, we estimate that the 447,000 pieces of ARC ticket stock
identified as stolen in ARC's status reports for 1997 and 1998 could
be valued at as much as $302 million--$186 million for the stock
stolen in 1997 and $116 million for 1998.  The $302 million
represents the ï¿½worst-caseï¿½ scenario and therefore is likely to
overstate the potential loss from stolen ARC ticket stock.  This is
because, while travel agents normally use six to seven pieces of
ticket stock to create an airline ticket, we assumed that individuals
creating fraudulent tickets would, wherever possible, try to minimize
the amount of stock used for each ticket so as to maximize the number
of tickets they could create.  For example, according to ARC,
individuals creating tickets with stolen stock could use--for a
direct, one-way trip--as few as two pieces of stock (one for the
flight and one for the passenger's receipt) to create an airline
ticket.  As a result, rather than using six to seven pieces of ticket
stock to create an airline ticket--as in the case of a typical
ticket--we assumed that only two pieces would be needed and used.\9
Likewise, we assumed that all of the stolen ticket stock would be
used.  This is extremely unlikely because, during 1997 and 1998,
officials from the four airlines we contacted said that their
airlines had confiscated over 1,900 pieces of stolen ARC ticket stock
before the stock could be used.\10

--------------------
\5 ARINC provides its ticket stock listing service to airlines and
other ticket stock suppliers on a subscription basis. 

\6 The 2.2 million pieces of stolen ticket stock identified in ARC's
status reports reflects only 27 percent of the amount (8.2 million)
of ticket stock that ARC reported to ARINC for the same period. 
However, as discussed in app.  I, ARC's annual status reports are
more reliable than ARINC's database in determining the amount of ARC
stolen stock that could be used for travel. 

\7 Airlines are under no obligation to provide ARC with information
about the amount and value of stolen ARC ticket stock used on their
airlines.  Some airlines do not provide ARC with any information,
while others provide incomplete information about their losses.  In
total, ARC estimates that airlines--for proprietary reasons--report
about one-third of the stolen ARC ticket stock used annually. 

\8 The airlines reported 5,158 pieces of stolen ARC ticket stock used
in 1997 and 3,172 in 1998.  The value of this ticket stock totaled
about $7.1 million in 1997 and about $3.4 million in 1998ï¿½an average
value of about $1,373 and $1,076, respectively. 

\9 Potential losses drop significantly if additional pieces of ticket
stock are used.  For example, potential losses drop to about $215
million if three pieces of stock are used for each ticket and to
about $116 million if seven are used. 

\10 We also assumed that none of the stolen ticket stock would be
lost, damaged, or destroyed before it could be used. 

   FINANCIAL IMPLICATIONS
   ASSOCIATED WITH USE OF STOLEN
   TICKET STOCK
------------------------------------------------------------ Letter :4

The airlines bear the financial risk for most situations involving
stolen ticket stock, but their losses are small relative to their
total annual revenue and represent only a small portion of their
total losses from all airline-related fraud.  In contrast, losses
incurred by travel agencies held liable for not adequately
safeguarding ARC ticket stock can result in serious financial
hardships.  Of the 447,000 pieces of ticket stock stolen in 1997 and
1998, we estimate that the potential financial risk to the airlines
and travel agencies would be about $151 million each.  In actual
practice, however, travel agencies would likely incur significantly
smaller losses because airlines frequently settle for far less than
the amounts that travel agencies owe.  U.S.  tax officials believe
that the financial consequences to the federal government from the
use of stolen ticket stock are minor and of limited interest for
auditing purposes compared with higher-risk tax issues, such as the
depreciation of airline assets. 

      AIRLINE LOSSES ARE SMALL
      COMPARED WITH THEIR ANNUAL
      REVENUES AND THEIR LOSSES
      FROM OTHER TYPES OF AIRLINE
      FRAUD
---------------------------------------------------------- Letter :4.1

Airlines incur the financial burden for stolen ticket stock under a
wide range of scenarios.  For example, the airlines are liable for
losses resulting from the use of their own stolen ticket stock.  From
1989 through 1998, 11 U.S.  airlines reported the loss of 350,000
pieces of their own blank ticket stock to ARINC's database.  The
actual value of the airlines' losses is not known because the
database does not include information on the value of used ticket
stock. 

In addition to losses from the use of their own stolen ticket stock,
airlines bear the financial burden for much of the ARC stock that is
reported stolen.  For example, airlines bear the cost of crimes
committed by travel agencies against the airline industry, including
missing stock from terminated agencies and travel agency
ï¿½bust-outs.ï¿½\11 Bust-outs involve the fraudulent acquisition or
retention of ARC ticket stock by a travel agency.  For example,
according to ARC officials, because it is relatively easy to obtain
ARC's accreditation as a travel agency, some persons set up agencies
solely to acquire and flee with ARC ticket stock.  Moreover,
according to ARC officials, travel agencies sometimes file for
bankruptcy or otherwise discontinue their operations without paying
for the tickets they have sold and without returning their remaining
inventory of ARC ticket stock.  In 1997 and 1998, ARC reported 33
travel agency terminations and bust-outs involving 150,000 pieces of
ARC ticket stock.  These losses represent about 34 percent of ARC's
total ticket stock losses during this period. 

In many cases, airlines also suffer losses from crimes perpetrated
against travel agencies.  For example, ARC holds travel agencies
harmless for the use of ARC ticket stock that is stolen during an
armed robbery.  In 1997 and 1998, about 23,000 pieces of ARC ticket
stock were stolen in 29 armed robberies of travel agencies.  In
addition, if the agency followed ARC's ticket security procedures,\12
ARC holds travel agencies harmless for ticket stock that is (1)
stolen in burglaries, daytime thefts, and other thefts or (2)
reported missing.  In 1997 and 1998, 232 travel agencies reported the
loss of about 274,000 pieces of ARC ticket stock from these types of
crimes.  ARC determined that 81 of these agencies, which had reported
a total of about 45,000 pieces of stolen ticket stock, had followed
ARC's security procedures, and thus the airlines were responsible. 

Taken together, the airlines are responsible for the use of 217,000
pieces of ARC ticket stock stolen in 1997 and 1998.  In the unlikely
event that all of this stock is used, we estimate that the airline
industry could incur about $151.3 million in losses--$94.7 million
for ticket stock losses in 1997 and $56.6 million for losses in
1998.\13 Figure 3 summarizes, by year and type of incident, the
airlines' potential losses resulting from this stolen ticket stock. 

   Figure 3:  Airlines' Potential
   Losses From the Use of ARC
   Ticket Stock Stolen in 1997 and
   1998, by Year and Type of
   Incident

   (See figure in printed
   edition.)

Source:  GAO's analysis of ARC's annual status reports. 

In addition to the losses for which they are responsible under ARC's
policy, airlines frequently assume a large portion of a travel
agency's financial liability.  For example, according to
representatives of 15 travel agencies held liable for ARC stock
stolen in burglaries in 1997, their agencies were able to negotiate
33 settlements with 12 airlines.\14

Ten of the 12 airlines agreed to forgive 90 percent of the amount
owed by the agencies in 21 of the 33 settlements.  For 10 of the 12
other settlements, airlines agreed to forgive 67 percent to 85
percent of the total amount owed by the agencies.  The remaining two
settlements were for 50 percent and 25 percent of the amounts owed. 
Many of the airlines also agreed to waive the travel agencies'
liability for the future use of the remaining stolen ticket stock--a
factor that is likely to increase the airlines' future losses. 

While airline officials acknowledge that the losses from stolen
ticket stock are considerable, they note that the airlines' losses
are small relative to the billions of dollars that the airlines earn
annually.  Furthermore, according to surveys of the airline industry,
the losses are minor compared with the airlines' total losses from
other types of airline fraud.  Specifically, according to a survey of
31 airlines in 1995, the losses from stolen ticket stock accounted
for about 15 percent of all external fraud losses.\15 The largest
source of fraud (28 percent) resulted from abuses of the airlines'
frequent flyer programs.  Another survey, conducted in 1996,
identified tariff abuse as the primary source of airline-related
fraud.\16 Other types of airline fraud included mail fraud; cargo
theft; and internal airline fraud, such as expense account abuses and
inventory fraud. 

--------------------
\11 ARC can terminate an agency's accreditation for various reasons,
including an agency's default on payments owed to airlines.  In such
cases, ARC inventories the terminated agency's ticket stock to
identify any unaccounted for ticket stock. 

\12 Travel agencies are required to limit their inventories of ARC
ticket stock and to follow specific procedures for safeguarding the
stock.  ARC developed the requirements with the cooperation and
agreement of the Association of Retail Travel Agents, the American
Society of Travel Agents, the airlines, and selected travel agents. 

\13 We used an average value of $1,260 per ticket--the average value
of stolen ARC ticket stock reported by the airlines to ARC as used in
1997 and 1998.  We did not factor in airline tax write-offs, which
reduce the airlines' losses.  That issue is addressed later in this
report. 

\14 ARC's status report for 1997 identified 24 travel agencies that
were burglarized and held liable for the use of stolen ticket stock. 
Representatives of three agencies told us that they were not held
liable.  We were able to contact representatives of 15 of the
remaining 21 travel agencies.  A detailed description of our
methodology appears in app.  I. 

\15 Airline Fraud Survey, KPMG in association with the International
Association of Airline Internal Auditors, 1996. 

\16 1996 Fraud Loss Survey (International Air Transport Association,
1997).  Tariff abuse involves a seller's use of various ticket
pricing schemes.  For example, because airlines give various
commissions to travel agencies, depending on the traveler's
destination and the location of the ticket sale, travel agency
personnel sometimes imprint the ticket with false information to
receive a higher commission payment. 

      TRAVEL AGENCY LOSSES CAUSE
      SERIOUS FINANCIAL HARDSHIP
---------------------------------------------------------- Letter :4.2

ARC determined that travel agencies had not adequately protected ARC
ticket stock in 151 of the 232 incidents involving travel agency
burglaries, daytime thefts, other thefts, and situations involving
missing ticket stock in 1997 and 1998.  As a result, ARC deemed the
agencies liable for the use of about 230,000 pieces of ARC ticket
stock.\17 In the unlikely event that all of this ticket stock is
used, we estimate that--absent settlement agreements--it could cost
the travel agency industry as much as $151.1 million--$91.6 million
for losses in 1997 and $59.5 million for the 1998 losses.\18 Figure 4
summarizes, by year and type of incident, the travel agencies'
potential losses resulting from the losses of ARC ticket stock in
1997 and 1998. 

   Figure 4:  Travel Agencies'
   Potential Losses From the Use
   of ARC Ticket Stock Stolen in
   1997 and 1998, by Year and Type
   of Incident

   (See figure in printed
   edition.)

Source:  GAO's analysis of ARC's annual status reports. 

Potential losses of this magnitude create serious financial hardship
for travel agencies even when airlines forgive the majority of the
travel agencies' existing debt as well as the agencies' liability for
the future use of outstanding stolen ARC stock.  As of the end of
December 1998, 33 of the 232 travel agencies victimized by thefts or
otherwise missing ARC ticket stock in 1997 and 1998 were no longer in
business.  Of those found liable for the loss, 24 of 151 were no
longer in business, including 3 of the 15 travel agencies we
contacted.\19 We could not determine the extent to which the theft of
ARC ticket stock was a factor in the agencies' failure.\20 However,
the owners of the three agencies told us that their actual and
potential liability for the loss of ARC ticket stock was the primary
factor in closing their businesses.  These owners were held liable
for the use of over 15,000 pieces of ticket stock stolen in
burglaries in 1997, and they closed their businesses without
attempting to negotiate lesser payments with the airlines.  One of
the three former owners owed 12 airlines between $100,000 and
$500,000, and the other two each owed more than $500,000 to numerous
airlines.\21

Representatives of 7 of the 12 remaining travel agencies told us that
their airline debts could force them out of business.  While some
airlines settle for less than they are owed and waive liability for
the future use of stolen ARC ticket stock, representatives of four of
the seven agencies noted that other airlines refuse to (1) negotiate
at all or (2) waive a travel agency's future liability for the use of
stolen ARC ticket stock.  As a result, travel agencies often owe
thousands of dollars.  For example, one travel agency we contacted
owed nine airlines between $100,000 and $500,000.  While the agency
settled with seven of the nine airlines, paying them between $10,000
and $50,000, two airlines refused to settle for less than the total
amount owed.  Furthermore, only two of the seven airlines agreed to
waive the agency's future liability.  Consequently, the travel agency
is liable for the future use of stolen ARC ticket stock on the other
five airlines.  According to the travel agency owner, a potentially
huge financial burden continues that could eventually force the
agency out of business. 

While still in business at the end of March 1999, five agencies we
contacted told us that they had incurred a variety of economic
hardships, including having to sell or mortgage their assets,
downsize their operations, lay off staff, and forgo their salaries to
pay their airline debts.  For example, one agency owner told us that
she had sold her home and her car and used her retirement savings to
pay $50,000 to $100,000 in settlements to seven airlines.  Two of the
other three airlines she owed, however, refused to settle and instead
turned the debts over to collection agencies.\22 Many of the other
travel agencies reported similar experiences.  For example, while
generally successful in negotiating greatly reduced payments, seven
agencies that had been billed by the airlines reported that at least
two airlines refused to negotiate reduced payments, and five agencies
indicated that at least one airline refused to waive the agencies'
future liability.\23 Moreover, all 14 agencies that had been billed
by the airlines reported that the airlines turned their debts over to
a collection agency.  Similarly, 12 of the 14 agencies that had been
billed for the use of stolen ARC ticket stock told us that at least
one airline either temporarily or permanently terminated business
with them--a factor that, depending on an airline's dominance in an
agency's market, can greatly diminish an agency's financial
viability.  Seven of these 12 agencies in operation as of March 31,
1999, expressed serious concerns about the future viability of their
businesses. 

Representatives from 12 of the 14 travel agencies that had been
billed by the airlines also expressed concern about the accuracy of
the airlines' bills.  This is because airlines typically bill travel
agencies for the face amount shown on the ticket, regardless of
whether (1) the fare is accurate or (2) the traveler actually
completed the entire trip.\24 At our request, one airline compared
its actual fares on the day each ticket was issued with the fares
printed on 66 tickets that were created from stolen stock and used on
the airline from July 1998 through September 1998.  The fares shown
on 61 of the 66 tickets were correct.  The fares shown on the
remaining five tickets were underpriced by $19 to $130.  According to
airline officials, the airlines do not adjust their bills to travel
agencies to reflect overpriced tickets or portions of tickets that
were not used.  Such adjustments are not necessary, according to one
airline official, because airlines routinely consider the possibility
of overpriced and underused tickets in arriving at their settlement
decisions with travel agencies. 

Several efforts have been undertaken to increase travel agencies'
awareness of the need for adequately securing ARC ticket stock to
reduce the likelihood and impact of losses from thefts.  For example,
owing to the prevalence of travel agency burglaries in the Chicago
area,\25 ARC initiated a crime prevention program for agents in and
around Illinois.  Specifically, between July 1998 and December 1998,
ARC hired a retired law enforcement officer to assess the adequacy of
the travel agencies' compliance with ARC's ticket security
requirements and, where warranted, provide advice about needed
improvements.  In April 1998, ARC also began (1) sending travel
agencies information about recent crimes, including photographic
images of suspected thieves, and (2) increasing its interactions with
local and federal law enforcement agencies.  More recently, ARC has
begun advocating that travel agencies reduce their exposure to crime
by minimizing the amount of ticket stock they maintain on their
premises.  According to ARC, this can be accomplished by using less
ticket stock when an agent creates an airline ticket.\26 For their
part, the Association of Retail Travel Agents and the American
Society of Travel Agents--both of which helped develop ARC's ticket
security requirements--are encouraging travel agencies to adhere to
ARC's requirements because doing so ensures that the agencies will
not be held accountable for any losses. 

--------------------
\17 Travel agencies can dispute ARC's liability decisions with the
Travel Agent Arbiter--a neutral, third party funded in equal parts by
the travel agency and airline industries.  Since 1992, the arbiter
has reviewed 35 travel agency complaints in this area.  According to
the arbiter, most of the complaints dispute ARC's position that the
agencies did not adequately safeguard ARC ticket stock.  The arbiter
upheld 15 of ARC's liability decisions and overturned 6.  Thirteen of
the 14 remaining complaints were either withdrawn or abandoned by the
travel agencies.  In the remaining complaint, ARC overturned its
decision prior to the arbiter's ruling. 

\18 As discussed earlier, we used an average value of $1,260 per
ticket--the average value of stolen ARC ticket stock the airlines
reported to ARC as used in 1997 and 1998.  We did not factor in tax
write-offs, which would reduce the travel agencies' losses.  Tax law
allows a travel agent to deduct payments to an airline for the value
of used stolen ticket stock not compensated by insurance proceeds and
for related legal fees, as either a theft loss or as a business
expense. 

\19 The majority of the 15 agencies reported gross annual incomes of
between $1 million and $5 million.  Thirteen of the 15 agencies lost
between 1,000 and 6,500 pieces of ARC ticket stock in the burglaries,
one agency lost 29,000 pieces, and the remaining agency lost less
than 200 pieces of ARC ticket stock. 

\20 While the thefts are likely to have contributed to the agencies'
closures, 9 of the 81 agencies that were not held liable for thefts
also closed their businesses during this period. 

\21 One of the three owners paid $3,000 to one airline.  The other
two owners did not make any payments because, in their view, there
was no point in doing so since they could not afford to pay all of
the airlines. 

\22 The remaining airline had billed the agency but, at the end of
March 1999, had not yet initiated further action to collect the debt. 

\23 As discussed, one of the 15 agencies had not yet been billed for
the use of stolen ARC ticket stock.  Six of the remaining 14 agencies
were billed between $100,000 and $500,000, another 6 were billed more
than $500,000 (with one owing $1.8 million), and the remaining 2 were
billed between $10,000 and $50,000. 

\24 Airline officials contend that the face value on tickets created
from stolen stock is rarely overstated because individuals who print
the tickets usually obtain a price quote from an airline's
reservation system before creating the ticket. 

\25 App.  II shows the location of travel agency burglaries in 1997
and 1998. 

\26 For example, according to ARC, agencies normally use ARC ticket
stock to print passenger receipts.  However, they need not do so
because passengers can receive other documentation indicating that
the ticket has been paid.  The American Society of Travel Agents
supports the idea of using less ticket stock to create airline
tickets, particularly for passenger receipts, airline auditor's
records, and agent records.  However, domestically, such an action
would need to be approved by the Air Transport Association and,
internationally, by the International Air Transport Association. 

      INTERNAL REVENUE SERVICE
      BELIEVES TAX CONSEQUENCES
      ARE NOT MATERIAL COMPARED
      WITH HIGHER-RISK ISSUES
---------------------------------------------------------- Letter :4.3

Federal tax law allows airlines, travel agencies, and other taxpayers
to deduct (write-off) from their taxes a variety of losses, including
losses from bad debt.  This has resulted in concern within the travel
agency community that airlines may not be properly accounting for (1)
losses resulting from the use of stolen ticket stockï¿½a form of bad
debt, (2) revenues received from travel agency settlements, and (3)
federal taxes due on the airline tickets.  The Internal Revenue
Service (IRS) is aware of these concerns.  However, its knowledge of
airline accounting practices,\27 including the airlines' treatment of
bad debt, has led it to conclude that the tax consequences to the
government are ï¿½not materialï¿½ compared with higher-risk tax issues,
such as the depreciation of airline assets.  According to IRS, its
specialist for the airline industry and others involved in airline
audits are considering examining the issues during future airline
audits.  However, according to IRS, any decision to examine the
issues will be made on a case-by-case basis and only after full
consideration of each issue's relative importance compared with other
airline tax issues.\28 Appendix III provides information about the
airlines' tax accounting practices. 

--------------------
\27 This knowledge has been acquired through the IRS Coordinated
Examination Program, which involves over 1,000 of the largest
corporations, including major U.S.  airlines.  These corporations are
subject to continuous IRS audit. 

\28 IRS develops a specific audit plan for each airline to be
audited.  According to IRS, the plan is based on prior and potential
tax issues, tax returns, financial statements, filings with the
Security and Exchange Commission, and any other relevant information. 
According to IRS, it considers the materiality of each tax issue and
assigns each a priority through a process called risk analysis. 
Given limited resources, only the highest-risk issues are selected
for IRS' examination. 

   OTHER ISSUES ASSOCIATED WITH
   THE USE OF STOLEN TICKET STOCK
------------------------------------------------------------ Letter :5

The traveling public does not appear to be at any greater risk from
terrorists or illegal aliens who could use tickets created from
stolen ticket stock than they are from individuals who travel on
legitimate tickets.  In part, this is because the airline industry
believes that unsuspecting passengers purchase and use the majority
of these tickets.  While efforts to combat ticket stock thefts have
focused on identifying passengers who use stolen ticket stock, the
airline industry believes that more effort is needed to target
individuals responsible for stealing and distributing the ticket
stock as a means to reduce the thefts. 

      NO KNOWN USE OF STOLEN
      TICKET STOCK BY TERRORISTS
---------------------------------------------------------- Letter :5.1

According to federal law enforcement and intelligence officials from
the Central Intelligence Agency, the Customs Service, the Immigration
and Naturalization Service (INS), the National Security Agency, the
Secret Service, the Federal Bureau of Investigation (FBI), and
officials at four airlines, no individual they know of has traveled
on tickets created from stolen ticket stock to conduct terrorist
activities.  The officials stressed that terrorists are unlikely to
knowingly use tickets created from stolen stock because doing so is
likely to increase their risk of detection.  Moreover, they pointed
out that organized terrorist groups have sufficient financial backing
and access to falsified personal identification to purchase
legitimate tickets.  Officials from the Federal Aviation
Administration agreed with this assessment.  While no terrorists are
known to have used stolen ticket stock for travel, the Customs
Service identified a passenger with stolen stock in his possession. 
The individual was attempting to enter the United States through
Miami and had links to two terrorist groups.  Further investigation
revealed that he had refunded, for cash, numerous stolen tickets in
Europe. 

      ILLEGAL ALIENS HAVE USED
      STOLEN TICKET STOCK, BUT THE
      EXTENT OF THEIR TRAVEL BY
      THIS MEANS IS UNKNOWN
---------------------------------------------------------- Letter :5.2

ARC and two of the four airlines we contacted suspect that illegal
aliens often use tickets created from stolen ticket stock for travel. 
However, they could not provide definitive evidence that this is the
case.  Their view, according to airline industry officials, is
supported by analyses of the usage of stolen ticket stock, including
the prevalence of specific (1) types of surnames (Hispanic and Middle
Eastern) and (2) combinations of origin and destination locations
within the United States.  For example, of the 8,330 tickets created
with stolen ARC ticket stock that airlines reported to ARC as used in
1997 and 1998, about 54 percent (4,476 tickets) were for flights
originating from one of three U.S.  locations--Los Angeles,
California; Phoenix, Arizona; or San Diego, California.  Similarly,
about 28 percent (2,342 tickets) were for flights destined for one of
five U.S.  locations--Los Angeles, California; Charlotte, North
Carolina; Chicago, Illinois; Atlanta, Georgia; or the New York/New
Jersey area.  ARC and other industry officials believe that the
illegal aliens are unknowingly sold tickets created from stolen stock
as part of a package deal that includes fraudulent personal
identification and the promise of a job. 

Only INS can determine if an individual is an illegal alien.  INS
inspectors must interview the suspected passengers and scrutinize
their identification to determine if they are in the country
illegally.  Likewise, only the airlines can definitively establish
whether a ticket has been created from stolen ticket stock.  As a
result, while illegal aliens have used tickets created from stolen
ticket stock, the extent of their travel by this means is not known
because INS and the airlines have not routinely worked together to
identify illegal aliens using stolen ticket stock.\29

Consistent with its mission to prevent individuals from illegally
entering the United States, INS does not typically scrutinize
domestic travelers.  Instead, INS concentrates its resources at U.S. 
ports of entry, such as the five destination locations discussed
above.  As a result, unless requested to intervene by an airline, INS
would not normally come into contact with illegal aliens using stolen
ticket stock for domestic travel.  One exception was in February 1999
when INS inspectors apprehended 162 illegal aliens on three domestic
flights at the Sky Harbor International Airport in Phoenix, Arizona. 
INS confiscated the illegal aliens' tickets and returned them to the
airlines so that they could cancel the seat reservations.  However,
while one of the two airlines had the capacity to determine whether
the tickets were produced from stolen ticket stock, it did not do so. 
Instead, it--like the other airline--returned the tickets to INS,
which, in turn, gave them to the illegal aliens before deporting
them.\30 As a result, no one knows whether, or to what extent, the
162 illegal aliens were traveling domestically on stolen ticket
stock. 

Given the airlines' and INS' separate capabilities, airlines
sometimes request INS' assistance in determining whether individuals
they suspect of traveling on stolen ticket stock are illegal aliens. 
For example, in 1997, one airline determined that 22 percent of its
passengers using tickets created from stolen stock were destined for,
or passing through, the Minneapolis/St.  Paul Airport.  The airline
requested INS' assistance, and between January and February 1998, INS
responded to five flights involving passengers who the airline
suspected were illegal aliens.  Twelve passengers were detained, all
of whom were using tickets created from stolen stock.  INS found that
11 of the 12 passengers were illegal aliens.  None of the passengers
had a criminal history, so local law enforcement officials declined
to prosecute them.  Instead, the illegal aliens were turned over to
INS for deportation. 

While INS and the airline industry have not routinely worked together
to identify illegal aliens using stolen ticket stock, cooperation in
this area is increasing.  For example, in 1996, INS initiated a
program for detecting stolen ticket stock at the Miami International
Airport in Florida and the John F.  Kennedy International Airport in
New York.  While INS could not provide details on the program's
success, an INS inspector told us that, in cooperation with airlines
at the Miami International Airport, he had identified about 100
illegal aliens using tickets created from stolen stock between July
1996 and February 1998.  Moreover, in April 1999, INSï¿½with ARC's
assistanceï¿½began training its inspectors in manual methods for
detecting stolen ticket stock as an additional tool in interdicting
illegal aliens.  According to INS officials, INS is also interested
in securing access to the airline industry's database on stolen and
other fraudulent ticket stock and, as a result, intends to request
the airline industry's cooperation in this area. 

--------------------
\29 According to INS officials, while information on the use of
stolen ticket stock by illegal aliens is useful in targeting the
agency's detection initiatives, sufficient information is often not
available from the airline industry.  Moreover, even if more
information were available, according to INS officials, INS does not
consider the detection of stolen ticket stock a primary part of its
mission. 

\30 INS' policy is that, unless there is evidence to indicate
otherwise, tickets confiscated from apprehended aliens are the
ï¿½personal propertyï¿½ of the aliens and must be returned.  As
discussed, airline sources believe that illegal aliens and others
using tickets created with stolen stock are probably unaware that
they are using tickets created from stolen ticket stock. 

      LAW ENFORCEMENT EFFORTS TO
      COMBAT THE THEFT OF TICKET
      STOCK
---------------------------------------------------------- Letter :5.3

Efforts to combat the theft of ticket stock have focused on
passengers who use tickets created from stolen stock.  Recognizing
that this is only part of the problem, airline and travel agency
representatives told us that additional efforts to identify and
arrest those responsible for stealing and distributing the ticket
stock would significantly reduce the supply of stolen ticket stock. 
Typically, the theft and distribution of stolen ticket stock involves
federal crimes, such as the interstate transportation of stolen goods
and mail and wire fraud, which fall under the purview of the FBI. 
While ARC believes it has made substantial progress in reducing ARC
ticket stock thefts from travel agencies, according to ARC officials,
additional FBI assistance is needed to achieve more dramatic results. 

According to ARC, it has been unable to enlist sufficient
investigative support from the FBI.  FBI and U.S.  Attorney's Office
officials told us that the theft of airline ticket stock is a
ï¿½property crimeï¿½ that competes with higher-priority investigations,
such as crimes involving narcotics, counterterrorism, and violent
crimes.  In addition, the U.S.  Attorney's Office's typical threshold
for prosecuting stolen property cases exceeds $50,000.  This
threshold is difficult to establish for stolen airline ticket stock
because it is considered valueless until used.  Notwithstanding these
difficulties, as of August 1998, the FBI had about 20 pending cases
involving stolen airline ticket stock, 17 of which were classified as
violations involving the interstate transportation of stolen
property.  Four of the 20 cases have since been closed for various
reasons.\31 More recently, according to FBI officials, crimes
involving stolen airline ticket stock have received increased FBI
scrutiny.  For example, the FBI said that, in December 1998, it held
a training conference for its agents in Chicago and has been devoting
additional resources to address these crimes. 

The Miami-Dade Police Department has linked a criminal group to the
theft of airline ticket stock.  According to individuals involved in
this case, the group is composed of the thieves who steal the stock;
ï¿½fencesï¿½ who buy and store the stock;\32 salespeople who sell the
tickets; and individuals who print the tickets.  The salespeople are
located throughout the United States and solicit buyers for the
tickets through unaccredited travel agencies, newspaper
advertisements, and word-of-mouth.  They transmit their sales by
telephone or fax to the individuals who print the tickets.  These
individuals imprint the passenger's itinerary on the blank stock
using home computers and send it to the applicable salesperson for
delivery to the passenger.  According to Miami-Dade police personnel,
a salesperson normally calls the airline--about 1 to 4 days prior to
the flight--to make the passenger's reservation. 

--------------------
\31 One case was closed because of a pending investigation in another
FBI field office; another was closed when all leads were exhausted;
the third was closed because the last subject under investigation was
sentenced; and the fourth was referred to local law enforcement
authorities for prosecution.  As of March 1999, the U.S.  Attorney's
Office had prosecuted five cases involving the theft of ticket stock
from travel agencies. 

\32 According to ARC officials, individuals operating as fences pay
about 6 cents for each piece of blank ticket stock that they receive
from the ticket stock thieves.  Law enforcement officials believe
that the fences operate primarily in Los Angeles, California. 

   TECHNOLOGICAL INTERVENTIONS AND
   OTHER INITIATIVES TO DETECT THE
   USE OF STOLEN TICKET STOCK
------------------------------------------------------------ Letter :6

While the ARINC database can be used to detect stolen ticket stock at
airport check-ins, many airlines do not subscribe to the database. 
Moreover, according to the airline officials we contacted, their
airlines do not routinely use the database because the time required
to query it delays passenger processing.  When used with ARINC's
database, other technologies--optical scanners, bar code readers, and
magnetic strip readers--detect stolen ticket stock more quickly.  The
airline industry also has other detection initiatives under way.  The
steady increase in electronic ticketing, according to many airline
officials, will reduce the need for airline ticket stock and thus may
eventually reduce ticket stock thefts. 

      TECHNOLOGICAL METHODS FOR
      DETECTING STOLEN TICKET
      STOCK
---------------------------------------------------------- Letter :6.1

ARINC maintains a centralized database, available since 1989, that
the airline industry uses to report and detect fraudulent ticket
stock.  Access to the database (1) is limited to participating
airlines and (2) varies depending on the type of subscription each
airline purchases.\33 According to an ARINC official, the
organization had 140 subscribers to its ticket stock listing and
on-line detection services in 1998, including 26 airlines that had
integrated ARINC's database into their computer systems.  On-line
airline subscribers can query the database for stolen ticket stock by
manually entering the ticket stock's unique identification number. 
If the inputted number matches the number on ticket stock that has
already been reported as stolen, the database indicates a match. 

Officials of the four subscribing airlines we contacted stated that
the ARINC database is generally effective in detecting the use of
stolen ticket stock.  In fact, most of the 1,900 pieces of stolen
ticket stock that these airlines confiscated in 1997 and 1998 were
identified using this database.  Nevertheless, the officials cited
several disadvantages that preclude routinely using the database. 
The primary drawback was the time required to query the database,
which delays the processing of passengers.  We observed the database
in operation at two different airline ticket counters at Washington
Reagan National Airport near Washington, D.C., and recorded a total
query time per ticket of between 6 seconds to 10 seconds.\34 While
each search takes only seconds, according to one airline official,
the cumulative time required to check every ticket on a flight--as
has been recommended by some in the travel agency industryï¿½makes the
idea impractical because, in his view, flights would never leave on
time.  Moreover, airline ticket agents sometimes enter the number
incorrectly, thereby producing a false result.\35 Conversely,
airlines fear that they might detain a passenger using a legitimate
ticket because suppliers, such as ARC, periodically re-use their
stock control numbers.  As a result, purchasers of legitimate tickets
could find themselves with the same ticket number as stock that was
previously reported stolen.\36 Finally, the database cannot be used
to detect altered ticket stock, which, according to one major U.S. 
airline, represents a significant portion--40 percent--of the
fraudulent ticket stock it unknowingly accepted in 1997. 

Some airlines are experimenting with other types of technology that,
in conjunction with the airlines' computer reservation systems and
ARINC's centralized database, can help detect stolen ticket stock. 
For example, the four airlines we contacted had all tested or planned
to test optical scanners, bar code readers, or magnetic strip readers
that can quickly capture a wide range of passenger information
without increasing passengers' check-in times.\37 The latest
generation of these devices is capable of reading ticket information,
including the ticket's identification number; credit cards; frequent
flyer cards; and machine-readable passports, visas, and other
passenger identification. 

The scanner and reader devices address some of the problems
associated with using ARINC's database.  For example, the devices
reduce the time needed to query the database because airline ticket
agents need not manually enter each ticket's identification number. 
This eliminates keystroke errors and allows the number to be read and
compared with the database with only one swipe of the ticket.  In
addition, the devices can be programmed to determine whether the
ticket stock has been altered.  We observed demonstrations of two of
these technologies.  Each technology was capable of reading and
displaying information from a variety of documents, including airline
tickets.  According to the manufacturers' representatives, when
interfaced with the airlines' computer systems and ARINC's database,
the devices can (1) read and compare airline ticket numbers with
ARINC's database and (2) display the results of the search within 2
seconds. 

Without other proven benefits, however, airline officials said that
the use of scanner and reader devices solely to detect stolen ticket
stock would be unduly expensive.  Each of the devices costs between
$2,000 and $3,000--a considerable amount when multiplied by all of
the airlines' ticket counters.  Moreover, airlines would still have
to pay about $14,000 annually to subscribe to ARINC's database on
fraudulent ticket stock. 

While these devices are being tested, we know of only one airline
that is using them.  This international airline initially used a
device for reading passports and, in 1997, contracted with the
manufacturer to develop an enhanced device capable of also reading
ticket stock.  In June 1998, the airline purchased 300 of the devices
at a cost of about $660,000 for use at its U.S.  locations. 
According to officials of this airline, the device is about
99-percent accurate, and as a result, the airline paid for its
investment through reduced losses from stolen ticket stock within the
first 5 months of its use, even though the device was not introduced
for this purpose. 

--------------------
\33 Subscribing airlines can list the unique identifying number of
fraudulent ticket stock in the centralized database.  Airlines also
can subscribe to one of four detection-related services that allow
them to detect fraudulent ticket stock. 

\34 It took between 4 seconds to 8 seconds for the airlines' ticket
agents to manually input each ticket's identifying number into the
computer and about 2 seconds for the database to respond to the
inquiry.  Both of the airlines had integrated ARINC's database into
their computer systems.  According to industry officials, it would
have taken more time to query the database if, as in the case of many
airlines, the airlines had not integrated their computer systems with
ARINC's database. 

\35 Mistakes in inputting ticket numbers against ARINC's database can
cause erroneous results.  For example, inputting the number of a
legitimate ticket incorrectly could identify it as a ticket created
from stolen ticket stock.  Conversely, an inputting mistake can cause
a ticket created from stolen ticket stock to be identified as a
legitimate ticket. 

\36 According to ARC, while its procedures for re-issuing stock
control numbers specifically prohibit the reissuance of numbers that
have been listed in ARINC's database, mistakes occasionally occur. 
This is because stock is printed in large blocks of consecutive
numbers and, as a result, previously reported stock control numbers
must be manually pulled out and destroyed, a very labor-intensive
process. 

\37 According to airline officials, this information is also useful
in validating tickets and in tracking passenger revenues. 

      OTHER MAJOR DETECTION
      INITIATIVES
---------------------------------------------------------- Letter :6.2

ARC and the four airlines we contacted analyze information about the
use of stolen ticket stock to profile common characteristics and
identify patterns for use in targeting their detection efforts. 
These analyses produce statistical profiles that the airline industry
uses to set priorities for their detection efforts, including the
targeting of specific geographic locations.  Moreover, to enhance
their detection initiatives, many airlines offer rewards to employees
who detect and confiscate fraudulent ticket stock.  In 1998, for
example, the International Air Transport Association found that 14 of
the 20 airlines it randomly surveyed had programs for rewarding
employees who detect fraudulent tickets.  The rewards included $25 to
$50 for each ticket confiscated, first-class travel anywhere the
airline flew, and 5 percent of the value of the confiscated ticket. 
The four airlines we contacted also reward employees who detect and
confiscate fraudulent ticket stock. 

      ELECTRONIC TICKETING SEEN AS
      A LONG-TERM SOLUTION
---------------------------------------------------------- Letter :6.3

According to industry representatives, there is currently no single
solution to prevent the theft of airline ticket stock.  However, many
officials commented that the steady increase in electronic ticketing
may soon resolve the problem because, with paperless tickets, travel
agencies and other ticket distributors will have less need to retain
large inventories of airline ticket stock.  According to ARC,
reducing the amount of stock that a travel agency keeps on hand has
two potential benefits.  It reduces the agency's potential losses
should a theft occur, and it lessens the agency's attractiveness as a
target of crime.  At the end of 1998, over 32 percent of all airline
transactions reported by travel agencies to ARC were for electronic
tickets, compared with 14 percent at the beginning of the year. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided a draft of this report to the Departments of
Transportation, Justice, and the Treasury for their review and
comment.  Collectively, these Departments have responsibility for the
Federal Aviation Administration, the Federal Bureau of Investigation,
the U.S.  Attorney's Office, the Immigration and Naturalization
Service, and the Internal Revenue Service.  We also provided a draft
of this report to the Airlines Reporting Corporation for its review
and comment.  The Departments of Transportation, the Treasury, and
Justice (on behalf of the Federal Bureau of Investigation and the
U.S.  Attorney's Office) had no comments on the report.  However, we
met with officials from Justice's Immigration and Naturalization
Service, including the Directors of the Service's Office of Carrier
Affairs and Office of Investigations.  While the Service generally
agreed with relevant information in the draft report, it provided
additional information and suggestions for improving the clarity and
accuracy of the report.  The Airlines Reporting Corporation also
provided editorial and technical comments.  Finally, we provided
relevant sections of the report to the American Society of Travel
Agents, the Association of Retail Travel Agents, the Aeronautical
Radio, Inc., American Airlines, Continental Airlines, Northwest
Airlines, and United Airlines.  Each of these organizations also
provided technical comments.  We incorporated all comments, as
appropriate. 

---------------------------------------------------------- Letter :7.1

We performed our work from April 1998 through July 1999 in accordance
with generally accepted government auditing standards.  A detailed
description of our scope and methodology appears in appendix I. 

We are sending copies of this report to appropriate congressional
committees; the Honorable Rodney E.  Slater, Secretary of
Transportation; the Honorable Jane F.  Garvey, Administrator, Federal
Aviation Administration; the Honorable Lawrence H.  Summers,
Secretary of the Treasury; the Honorable Charles Rossotti,
Commissioner, Internal Revenue Service; the Honorable Janet F.  Reno,
Attorney General of the United States; the Honorable Louis J.  Freeh,
Director, Federal Bureau of Investigation; the Honorable Doris
Meissner, Commissioner, Immigration and Naturalization Service; and
the Honorable Jacob Lew, Director, Office of Management and Budget. 
Copies will also be made available to others upon request. 

If you or your staff have any questions about this report, please
contact me at (202) 512-2834.  Appendix IV lists key contacts and
contributors to this report. 

Sincerely yours,

John H.  Anderson, Jr.
Director, Transportation Issues

OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

The Chairman of the Subcommittee on Aviation, House Committee on
Transportation and Infrastructure, asked us to examine issues related
to the theft of ticket stock used to create U.S.  airline tickets.\1
In consultation with the Subcommittee, we agreed to address the
following questions:  (1) What is the number and value of airline
ticket stock stolen annually?  (2) What financial implications are
associated with the use of stolen ticket stock?  (3) What other
issues are potentially associated with the use of stolen ticket
stock?  and (4) What technological interventions and other
initiatives are available to detect the use of stolen ticket stock? 

To determine the number and value of stolen airline ticket stock, we
obtained information from Aeronautical Radio, Inc.  (ARINC)ï¿½an
airline-owned company in Annapolis, Maryland--that since 1989 has
maintained a centralized, proprietary database of stolen, lost,
missing, and other fraudulent airline ticket stock worldwide.  ARINC
provided an aggregate listing spanning 10 years, from 1989 through
1998.\2 We used this information to determine the total amount of
ticket stock reported stolen to ARINC by the Airlines Reporting
Corporation (ARC) (on behalf of ARC-accredited travel agencies) and
other domestic and international suppliers of ticket stock over the
10-year period.  We could not use ARINC's information to estimate the
value of this ticket stock because ARINC's database does not contain
information about the use and value of the ticket stock. 

Given ARINC's data limitations, the predominance of ARC's ticket
stock losses (ARC accounted for 72 percent of all stolen stock
reported to ARINC), and the absence of other data sources, we
compared the ARINC data with information in ARC's annual status
reports over the 10-year period.\3 Because the amount of stolen
ticket stock reflected in these reports totaled only 27 percent of
the amount ARC reported to ARINC, we took additional steps to ensure
the accuracy of selected ARC data.  Specifically, for 1997 and
1998--the only years we could use to estimate the ticket stock's
potential value--we examined all (294) of ARC's Fraud Prevention
Bulletins for 1997 and 1998 and compared our results with ARC's
annual status reports and, on an incident-by-incident basis,
reconciled differences with ARC officials.\4

Over 80 percent of the difference between ARINC and ARC's data
related to ARC's treatment of stock associated with terminated travel
agencies.  As a precautionary measure, according to ARC officials,
ARC reports to ARINC's database, the unique identifying numbers of
all unaccounted for ARC ticket stock previously provided to the
agencies it has subsequently terminated even though some portion of
this stock has probably been issued by these agencies.  However, in
compiling its status reports, ARC includes only the ticket stock that
has been used or is likely to be used.  For example, according to ARC
officials, ARC's status reports do not include unreported ticket
stock of terminated agencies if the stock is over 5 years old and has
not yet been used.  Likewise, according to ARC officials, ARC reports
to ARINC all subsequent adjustments to the initial amount of ticket
stock reported stolen by the travel agencies but does not adjust its
annual status reports.  As reflected in this report, the amount of
ARC ticket stock reported stolen in 1997 and 1998 represents the
amounts agreed to by ARC and us through this reconciliation process. 

To determine the value of airline ticket stock stolen annually, we
used ARC's Field Investigation and Fraud Prevention Department's
informal database of information provided voluntarily by the airlines
about the number and value of stolen ARC ticket stock used for travel
on their airlines.\5 ARC supplied us with a copy of its database,
which contained 15,542 records (each record represented a ticket). 
After eliminating (1) duplicate records according to criteria
supplied by ARC and (2) ARC's incomplete listing of losses earlier
than 1997, we had 8,330 records in our database.  Using the average
cost per ticket derived from these records, we computed the estimated
value of the ARC ticket stock reported stolen in 1997 and 1998. 
While six to seven pieces of ticket stock are normally used to create
a legitimate airline ticket, as discussed in the report, we assumed
that only two pieces would be used.  Likewise, contrary to industry
experience, we assumed that all of the stolen ARC ticket stock
eventually would be used for travel.  Thus, our estimate provides a
ï¿½worst-caseï¿½ scenario and, consequently, is likely to overstate the
potential loss from the use of stolen ARC ticket stock. 

We performed a reliability assessment on the data elements we used
from the ARINC and ARC databases and found that the data were
reliable enough for our uses in this report.  We performed limited
reasonableness tests on the data, conducted extensive interviews with
ARINC and ARC officials regarding the creation and control of the
data, and reviewed information about their data quality factors. 

To identify the financial implications associated with the use of
stolen ARC ticket stock, we first determined the extent to which
airlines and travel agencies were held liable for the use of the ARC
ticket stock reported stolen in 1997 and 1998.  Then, using the
average cost per ticket that the airlines' reported to ARC, we
computed the potential losses for the airlines and travel agencies if
all of the ARC ticket stock reported stolen in 1997 and 1998 were
used for travel.  We also collected information about the number,
value, and impact of losses from stolen ARC ticket stock from
American Airlines, Continental Airlines, Northwest Airlines, and
United Airlines.  These four airlines accounted for 37 percent of the
revenue passenger miles flown by all U.S.  airlines during the
12-month period ending March 1998 and 35 percent of the ticket stock
reported stolen to ARINC by U.S.  airlines as of December 31, 1998. 
Moreover, officials from these airlines expressed a willingness to
cooperate in our review even though much of the information we
obtained is considered proprietary and confidential by the airline
industry.  To evaluate the impact on travel agencies held liable for
the theft of ARC ticket stock, we conducted a telephone survey of 24
agencies that ARC identified as being liable for ARC stock stolen in
burglaries in 1997.  Representatives of three of these travel
agencies told us that they were not held liable for their ARC ticket
stock losses so we deleted them from our survey.  Between February
12, 1999, and February 22, 1999, we were able to contact 15 of the
remaining 21 travel agencies, which agreed that they had been
burglarized and held liable for the use of the ARC ticket stock
stolen in 1997.  We interviewed representatives of these 15 travel
agencies to, among other things, verify the amount of ARC ticket
stock stolen and to discuss the airlines' billing practices for the
stolen stock and the impact of the burglaries on their agencies.  We
also reviewed and discussed travel agency complaints filed with the
Travel Agent Arbiter.  Finally, we interviewed Internal Revenue
Service (IRS) officials to identify the tax and reporting
requirements for airline carriers and travel agencies that have
experienced losses arising from the use of stolen ticket stock and to
determine the extent to which IRS has examined their compliance with
tax requirements. 

To identify other potential issues, we focused on possible safety
concerns related to the use of stolen ticket stock by terrorists and
illegal aliens.  We interviewed federal law enforcement and
intelligence agency officials from the Central Intelligence Agency,
the Customs Service, the Immigration and Naturalization Service, the
National Security Agency, the Secret Service, and the Federal Bureau
of Investigation, as well as Federal Aviation Administration
personnel and officials at four airlines to determine whether they
knew of individuals traveling on tickets created from stolen ticket
stock to conduct terrorist activities.  To determine whether illegal
aliens are using tickets created from stolen ticket stock, we
interviewed officials from ARC, the Immigration and Naturalization
Service, and officials at four airlines.  We also interviewed
officials from ARC, the Miami-Dade Florida Police Department, the
Federal Bureau of Investigation, and the U.S.  Attorney's Office
about law enforcement efforts to combat the theft and distribution of
stolen ticket stock. 

To identify the technological interventions available to detect the
use of stolen ticket stock, we also interviewed officials from ARINC,
ARC, and officials at four airlines.  We also observed ARINC's
database in operation at two airline ticket counters at the
Washington Reagan National Airport near Washington, D.C.  In
addition, representatives from two manufacturers of optical scanner
and magnetic reader devices provided us with demonstrations of their
products.  We also discussed other initiatives to detect the use of
stolen ticket stock and the use of electronic tickets as a means of
reducing ticket stock thefts with ARC officials and officials at the
four airlines. 

We performed our work from April 1998 through July 1999 in accordance
with generally accepted government auditing standards. 

--------------------
\1 A typical ticket is composed of several parts--the airline
auditor's record, an agent's record, several flight coupons (one for
each segment of a traveler's journey), the passenger's receipt,
and--if paid by credit card--a charge form.  While some tickets are
written out by hand (manually), most are generated using a computer. 
For manual tickets, the individual parts of the tickets are already
bound together in the form of a ticket.  In contrast, each piece of
an automated ticket must be generated separately and, then, combined
to form a ticket.  As used in this report, each manual ticket and
each piece of an automated ticket is called ï¿½ticket stock.ï¿½ Moreover,
the term ï¿½stolen ticket stockï¿½ refers to stock that is known to be
stolen as well as stock that has been reported lost or missing and
therefore has possibly been stolen. 

\2 Data in ARINC's database is continually entered and deleted. 
Thus, the information provided by ARINC for the 1989 to 1998 period
reflects the information in the database as of December 31, 1998. 
ARINC's data cannot be broken out by year. 

\3 ARC's annual status reports provide the only readily available
information for identifying annual trends in the amount of ARC ticket
stock reported stolen. 

\4 ARC's bulletins detail the circumstances related to the loss of
ARC ticket stock and are used to alert ARINC and others about the
loss. 

\5 Some airlines do not provide ARC with any information on the value
of stolen ARC ticket stock that is used on their airlines.  Other
airlines provide incomplete information about their losses.  In
total, ARC estimates that--for proprietary reasons--airlines report
about one-third of the stolen ARC ticket stock used annually. 

LOCATION OF TRAVEL AGENCY
BURGLARIES OF ARC TICKET STOCK IN
1997 AND 1998
========================================================== Appendix II

The number of travel agencies reporting ARC ticket stock stolen in
burglaries declined from 62 in 1997 to 44 in 1998.  ARC attributes
this decline to (1) the more stringent security rules it established
in April 1996, (2) its increased fraud prevention activities, (3) the
increased awareness by travel agency personnel of the problem, and
related to this, (4) the agents' increased compliance with required
measures for safeguarding ARC ticket stock.  The locations of travel
agency burglaries in 1997 and 1998 follow. 

                               Table II.1
                
                 Location and Number of Travel Agencies
                     Reporting Burglaries, 1997-98

                                     Number of agencies reporting
                                              burglaries
                                --------------------------------------
State                                         1997                1998
------------------------------  ------------------  ------------------
Arizona                                          0                   1
California                                      10                   5
Colorado                                         4                   1
District of Columbia                             0                   1
Florida                                          5                   4
Georgia                                          3                   2
Hawaii                                           0                   2
Illinois                                        13                   8
Indiana                                          1                   0
Iowa                                             0                   2
Kentucky                                         2                   0
Michigan                                         1                   1
Minnesota                                        1                   2
Missouri                                         1                   4
Montana                                          2                   0
New Jersey                                       2                   0
New Mexico                                       1                   0
New York                                         1                   1
North Carolina                                   1                   0
Ohio                                             1                   0
Oklahoma                                         0                   2
Oregon                                           0                   2
Pennsylvania                                     2                   0
South Carolina                                   0                   1
Tennessee                                        2                   2
Texas                                            4                   1
Utah                                             1                   0
Wisconsin                                        4                   2
======================================================================
Total                                           62                  44
----------------------------------------------------------------------
Source:  GAO's analysis of ARC's annual status reports. 

INFORMATION ABOUT THE AIRLINES'
TAX ACCOUNTING PRACTICES
========================================================= Appendix III

According to IRS officials, for federal tax purposes, airlines
normally report revenue when a passenger takes a flight.\1 That is,
if a travel agency reported the sale of a $1,100 airline ticket, the
airline would normally account for the transaction in three separate
book entries.  Specifically, the airline would recognize the cash
($1,100) from the sale along with two offsetting entries representing
the airline's future liability to transport the passenger ($1,000)
and to pay the federal excise tax due IRS ($100).\2 When the ticket
is used, according to IRS, the airline reverses these entries by
eliminating its $1,000 liability and recognizing the $1,000 as
revenue.  Likewise, when the airline pays the excise tax, it
eliminates its $100 liability to IRS. 

Furthermore, according to IRS, when an airline accepts a ticket for
travel that was not reported as sold by a travel agency--as in the
case of a ticket printed on ARC ticket stock stolen from a travel
agency--the airline recognizes the transaction as an ï¿½unreported
saleï¿½ and, using the earlier example, sets up a $1,100 account
receivable to collect the funds from the travel agency.  Since the
travel has already occurred, according to IRS, the airline also
recognizes $1,000 in (expected) income and records the $100 in
federal excise tax due IRS.\3 If the airline succeeds in collecting
the $1,100 from the travel agency, the airline eliminates the $1,100
receivable it collected and pays the federal excise tax due IRS. 
Conversely, if the travel agency fails to pay, the airline writes
off--as permitted--the $1,100 receivable as a bad debt, reduces its
income by $1,000, and eliminates the $100 in excise tax that it could
not collect.\4

When an airline reaches a financial settlement with a travel agency,
according to IRS, the settlement amount most likely would be treated
as ï¿½liquidating damagesï¿½ rather than ï¿½an amount paid for the taxable
transportation of persons by air.ï¿½\5 While any airline income derived
from settlements with travel agencies is fully taxable, according to
IRS, excise tax is not due on settlements treated as liquidating
damages. 

Finally, according to IRS, if an airline purchases insurance to,
among other things, cover losses from the use of stolen ticket stock,
any insurance proceeds it receives normally would be accounted for as
income and would be fully taxable.  The same is true for any
recoveries an airline receives from collection agencies.\6

--------------------
\1 Tax law allows airlines and other service providers to defer
reporting their income until the service is provided.  This practice
is known as the ï¿½accrualï¿½ accounting method and is allowed under IRS
Revenue Procedure 71-21. 

\2 IRS estimates that federal excise taxes account for about 10
percent of an airline ticket's cost.  For Oct.  1, 1998, to Sept. 
30, 1999, the domestic passenger airline ticket tax is 8 percent of
the passenger's fare plus $2 for each segment of a passenger's
domestic flight.  Other federal taxes include commercial fuel taxes
and international departure and arrival taxes. 

\3 According to IRS, the excise tax is due even though the airline
has not yet received the funds. 

\4 If the airline has already paid the excise tax due, according to
IRS, it can obtain a refund. 

\5 26 U.S.C.  4261. 

\6 According to IRS, funds recovered by collection agencies also
could be subject to excise tax if the tax has not been previously
paid. 

GAO CONTACTS AND STAFF
ACKNOWLEDGEMENTS
========================================================== Appendix IV

GAO CONTACTS

John H.  Anderson, Jr.  (202) 512-2834
Kathleen Turner (202) 512-6899

ACKNOWLEDGEMENTS

In addition to those named above, Steve Calvo, Tom Collis, Fran
Featherston, Judy Pagano, Carol Herrnstadt Shulman, Pamela V. 
Williams, and Mario Zavala made key contributions to this report. 

*** End of document. ***