Airline Deregulation: Addressing the Air Service Problems of Some
Communities (Testimony, 06/25/97, GAO/T-RCED-97-187).

GAO discussed the air service problems that some communities have
experienced since the deregulation of the airline industry in 1978 and
initiatives that may help address those problems, focusing on: (1) why
some airports serving small and medium-sized communities in the East and
upper Midwest have not experienced the same level of entry as those
serving communities that have benefitted from deregulation; and (2) GAO
recommendations and other initiatives that may help increase
competition, reduce fares, and improve the quality of air service at
those small- and medium-sized-community airports.

GAO noted that: (1) the combination of several factors has limited entry
at airports serving small and medium-sized communities in the East and
upper Midwest; (2) these factors include slower economic growth, harsher
weather, and the dominance of routes to and from those airports by one
or two established airlines; (3) in addition, operating barriers, such
as slot controls, at nearby hub airports and incumbent airlines'
marketing strategies, such as special incentives for travel agents and
frequent flier plans, have fortified those dominant positions and made
it very difficult for nonincumbents to compete effectively; (4) in
contrast, the more wide-spread entry of new airlines at airports in the
West and Southwest since deregulation, and the resulting geographic
differences in fare and service trends, has stemmed largely from the
greater economic growth in those regions as well as from the absence of
dominant market positions of established airlines and barriers to entry;
(5) increasing competition and improving air service at airports serving
small and medium-sized communities that have not benefitted from fare
reductions or improved service since deregulation will likely entail a
range of federal, regional, local, and private-sector initiatives; (6)
since GAO's October 1996 report, two national conferences have also been
held to examine various options; (7) the conferences have spurred
several initiatives, including; (a) outreach efforts by communities to
better inform airlines of local actions to generate economic growth; and
(b) commitments by corporations to support nonincumbents in markets
where one or two established carriers dominate; and (8) in combination
with such initiatives, commuter airlines' growing use of new regional
jets instead of turboprops (propeller aircraft) has the potential to
improve the quality of air service in many of the adversely affected
small and medium-sized communities.

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

 REPORTNUM:  T-RCED-97-187
     TITLE:  Airline Deregulation: Addressing the Air Service Problems 
             of Some Communities
      DATE:  06/25/97
   SUBJECT:  Airline industry
             Airline regulation
             Commercial aviation
             Airports
             Air transportation operations
             Competition limitation
             Restrictive trade practices
             Transportation rates
             Economic growth
             Monopolies
IDENTIFIER:  DOT Essential Air Service Subsidy Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives

For Release
on Delivery
Expected at
9:30 a.m.  EDT
Wednesday
June 25, 1997

AIRLINE DEREGULATION - ADDRESSING
THE AIR SERVICE PROBLEMS OF SOME
COMMUNITIES

Statement of John H.  Anderson, Jr.,
Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-187

GAO/RCED-97-187T


(348033)


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

  DOT -
  FAA -
  EAS -
  SPOKES -
  BTCC -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify on the air service problems
that some communities have experienced since the deregulation of the
airline industry in 1978 and on initiatives that may help address
those problems.  In April 1996, we reported that airline deregulation
has led to lower airfares and better service for most air travelers,
due largely to increased competition spurred by the entry of new
airlines into the industry and established airlines into new
markets.\1 However, some airports--particularly those serving small
and medium-sized communities in the East and upper Midwest--have not
experienced such entry and thus have experienced higher fares and
worse service since deregulation.  In October 1996, we reported that
certain industry practices, such as restrictive gate-leasing
arrangements at a number of key hub airports in these regions, have
contributed to these problems.\2 As requested, our testimony draws
from both reports to discuss (1) why some airports serving small and
medium-sized communities in the East and upper Midwest have not
experienced the same level of entry as those serving communities that
have benefited from deregulation and (2) our recommendations and
other initiatives that may help increase competition, reduce fares,
and improve the quality of air service at those small- and
medium-sized-community airports. 

In summary,

  -- The combination of several factors has limited entry at airports
     serving small and medium-sized communities in the East and upper
     Midwest.  These factors include slower economic growth, harsher
     weather, and the dominance of routes to and from those airports
     by one or two established airlines.\3 In addition, operating
     barriers, such as slot controls,\4 at nearby hub airports and
     incumbent airlines' marketing strategies, such as special
     incentives for travel agents and frequent flier plans, have
     fortified those dominant positions and made it very difficult
     for nonincumbents to compete effectively.  In contrast, the more
     wide-spread entry of new airlines at airports in the West and
     Southwest since deregulation--and the resulting geographic
     differences in fare and service trends--has stemmed largely from
     the greater economic growth in those regions as well as from the
     absence of dominant market positions of established airlines and
     barriers to entry. 

  -- Increasing competition and improving air service at airports
     serving small and medium-sized communities that have not
     benefited from fare reductions and/or improved service since
     deregulation will likely entail a range of federal, regional,
     local, and private-sector initiatives.  In our October 1996
     report, we recommended that the Department of Transportation
     (DOT) (1) create a pool of available slots by periodically
     withdrawing a small percentage from the major incumbents at each
     of the four slot-controlled airports and distribute those slots
     in a fashion that increases competition and (2) direct the
     Federal Aviation Administration (FAA) to consider an airport's
     efforts to make gates available to nonincumbents when making
     federal airport grant decisions.  We also suggested that the
     Congress consider revising the legislative criteria governing
     the granting of slots to make it easier for new entrants to
     obtain slots.  Since our October 1996 report, two national
     conferences have also been held to examine various options.  The
     conferences have spurred several initiatives, including (1)
     outreach efforts by communities to better inform airlines of
     local actions to generate economic growth and (2) commitments by
     corporations to support nonincumbents in markets where one or
     two established carriers dominate.  In combination with such
     initiatives, commuter airlines' growing use of new regional jets
     instead of turboprops (propeller aircraft) has the potential to
     improve the quality of air service in many of the adversely
     affected small and medium-sized communities. 


--------------------
\1 Airline Deregulation:  Changes in Airfares, Service, and Safety at
Small, Medium-sized, and Large Communities (GAO/RCED-96-79, Apr.  19,
1996). 

\2 Airline Deregulation:  Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct.  18,
1996). 

\3 Established airlines include the nation's seven largest:  American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines,
TWA, United Airlines, and US Airways. 

\4 To minimize congestion and reduce flight delays, the Federal
Aviation Administration has since 1969 set limits on the number of
operations (takeoffs or landings) that can occur during certain
periods of the day at four congested airports--Chicago O'Hare,
Washington National, and New York Kennedy and La Guardia.  The
authority to conduct a single operation during those periods is
commonly referred to as a "slot."


   SLOW ECONOMIC GROWTH AND
   AIRLINE DOMINANCE HAVE LIMITED
   ENTRY AT SMALL AND MEDIUM-SIZED
   AIRPORTS IN THE EAST AND UPPER
   MIDWEST
---------------------------------------------------------- Chapter 0:1

Our April 1996 report found that since deregulation fares have fallen
and service has improved for most large-community airports.  Our
report also found that substantial regional differences exist in fare
and service trends, particularly among small- and medium-sized
community airports.  A primary reason for these differences has been
the greater degree of economic growth that has occurred over the past
two decades in larger communities and in the West and Southwest.  In
particular, we noted that most low-fare airlines that began
interstate air service after deregulation, such as Southwest
Airlines\5

and America West, had decided to enter airports serving communities
of all sizes in the West and Southwest because of those communities'
robust economic growth.  By contrast, low-fare carriers had generally
avoided serving small- and medium-sized-community airports in the
East and upper Midwest, in part because of the slower growth, harsher
weather, and greater airport congestion in those regions. 

Our review of the trends in fares between 1979 and 1994 for a sample
of 112 small-, medium-sized, and large-community airports\6
identified 15 airports at which fares, adjusted for inflation, had
declined by over 20 percent and 8 airports at which fares had
increased by over 20 percent.  Each of the 15 airports where fares
declined was located in the West or Southwest, and low-fare airlines
accounted for at least 10 percent of the passenger boardings at all
but one of those airports in 1994.\7 Representatives of these
low-fare airlines told us that they were attracted by the relatively
strong economic growth at the communities these airports serve.  Our
analysis of data from the Bureau of Economic Analysis confirmed that
substantial growth had occurred in these communities.  Between 1979
and 1993, for example, the average annual growth in employment at
these 15 communities was 2.6 percent, compared with 1.5 percent for
the other 97 communities in our sample.  On the other hand, each of
the eight airports where fares had increased by over 20 percent since
deregulation was located in the Southeast and Appalachia.  We found
that little new entry had occurred at these airports and that
economic growth in the communities they serve had been slow.\8
Between 1979 and 1993, for example, the average annual growth in
employment at these eight communities was 0.9 percent. 

Our review of the trends in service quantity and quality at the 112
airports revealed similar findings.  Large communities in general,
and communities of all sizes in the West and Southwest, had
experienced a substantial increase in the number of departures and
available seats as well as improvements in such service quality
indicators as the number of available nonstop destinations and the
amount of jet service.  Smaller and medium-sized communities in the
East and upper Midwest, on the other hand, had generally experienced
a decline in the quantity and quality of air service.  In particular,
these communities had experienced a sharp decrease in the number of
available nonstop destinations and in the amount of jet service
relative to turboprop service.  This decrease occurred largely
because established airlines reduced jet service from these airports
since deregulation and deployed turboprops to link the communities to
those airlines' major hubs.  We found that the greatest declines in
the quantity and quality of service occurred where growth had been
the slowest and little new entry had occurred.  In some cases, the
communities served by these airports contracted.  For example, in
Charleston, West Virginia, the average annual change in population
between 1979 and 1993 was -0.6 percent and in Moline, Illinois, -0.5
percent. 

Our April 1996 report noted that, in addition to slower economic
growth, the dominance of one or two established airlines over routes
to and from these airports had further limited competition.  At each
of the eight airports in the Southeast and Appalachia where fares
increased by more than 20 percent between 1979 and 1994, for example,
one airline accounted for the vast majority of enplanements.  We
subsequently found in October 1996 that operating barriers at key hub
airports in the East and upper Midwest, combined with certain
marketing strategies of the established carriers, fortified
established carriers' dominance of (1) those hub airports and (2)
routes linking those hubs with nearby small- and
medium-sized-community airports. 

In the upper Midwest, there is limited competition in part because
two airlines control nearly 90 percent of the takeoff and landing
slots at O'Hare,\9 and one airline controls the vast majority of
gates at the airports in Minneapolis and Detroit under long-term,
exclusive-use leases.  Similarly, in the Southeast and Appalachia,
one airline controls the vast majority of gates under exclusive-use
leases at Cincinnati, Charlotte, and Pittsburgh.  Finally, in the
Northeast, a few established airlines control most of the slots at
National, La Guardia, and Kennedy.  As a result, the ability of
nonincumbents to enter these key airports and serve nearby small and
medium-sized communities is very limited. 

Our October 1996 report also emphasized that certain marketing
strategies of incumbent airlines had made it extremely difficult for
nonincumbents to enter markets dominated by an established airline. 
These strategies, taken together, have created strong loyalties among
passengers and travel agents and deterred new and established
airlines from entering those markets.  Two strategies in
particular--booking incentives for travel agents and frequent flier
plans--have encouraged business flyers, who represent the most
profitable segment of the industry, to use the dominant carrier in
each market.  Because about 90 percent of business travel is booked
through travel agencies, airlines strive to influence the agencies'
booking patterns by offering special bonus commissions as a reward
for booking a targeted proportion of passengers on their airline. 
Similarly, frequent flier programs have become an increasingly
effective tool to encourage customers' loyalty to a particular
airline.  As such, entry by new and established airlines alike into a
market dominated by one carrier is very difficult.  This is
particularly true given that to attract new customers a potential
entrant must announce its schedule and fares well in advance of
beginning service, thus giving the incumbent an opportunity to adjust
its marketing strategies.  In many cases, we found that airlines
chose not to enter, or quickly exit, markets where they did not
believe they could overcome the combined effect of booking incentives
and frequent flier programs to attract a sufficient amount of
business traffic. 


--------------------
\5 Before deregulation, Southwest provided intrastate air service
within Texas. 

\6 Our sample of 112 airports included 49 airports serving small
communities, 38 serving medium-sized communities, and 25 serving
large communities.  In 1994, these airports accounted for about
two-thirds of all domestic airline departures and passenger
enplanements in the United States.  We defined small communities as
those with a metropolitan statistical area population of 300,000 or
less, medium-sized communities as those with a metropolitan
statistical area population of 300,001 to 600,000, and large
communities as those with a metropolitan statistical area population
of 1.5 million or more. 

\7 Of the 15 airports, 5 serve small communities, 5 serve
medium-sized communities, and 5 serve large communities. 

\8 Of these eight airports, three serve small communities, four serve
medium-sized communities, and one serves a large community. 

\9 While retaining the right to withdraw slots at any time from their
holders, DOT in 1985 allocated slots to the incumbent airlines at the
four slot-controlled airports and began allowing airlines to buy and
sell them.  Our October 1996 report found that a few established
airlines had been allowed to purchase most of the available slots and
increase their slot holdings to such an extent that they could limit
other airlines' access to routes to and from those airports. 


   RANGE OF INITIATIVES WILL
   LIKELY BE NEEDED TO ADDRESS AIR
   SERVICE PROBLEMS OF COMMUNITIES
   ADVERSELY AFFECTED SINCE
   DEREGULATION
---------------------------------------------------------- Chapter 0:2

Because a variety of factors have contributed to the decreased
competition, higher fares, and poorer service that some small and
medium-sized communities in the East and upper Midwest have
experienced since deregulation, it is likely that no single action
will be able to solve those problems.  Instead, a coordinated effort
involving federal, regional, local, and private-sector initiatives
will be needed.  In addition to our October 1996 recommendations to
DOT, several public and private initiatives that are currently
underway as well as other potential options are discussed below.  If
successful, these initiatives would complement, and potentially
encourage, the increasing use of small jets by the commuter
affiliates of established airlines--a trend that has the potential of
increasing competition and improving the quality of service for some
communities. 


      OUR OCTOBER 1996
      RECOMMENDATIONS AND OTHER
      FEDERAL INITIATIVES
-------------------------------------------------------- Chapter 0:2.1

Our October 1996 report recommended that DOT address the operating
barriers to entry by (1) creating a pool of available slots by
periodically withdrawing a small percentage from the major incumbents
at each of the four slot-controlled airports and distributing those
slots in a fashion that increases competition and (2) directing FAA
to consider an airport's efforts to make gates available to
nonincumbents when making federal airport grant decisions.  We also
suggested that the Congress consider revising the legislative
criteria governing the granting of slots to make it easier for new
entrants to obtain slots.  In its January 1997 response to our
report, DOT stated that it shared our concerns about operating
barriers and the dominant position of some established carriers in
some markets.  DOT indicated that it planned to be more accommodating
to new entrant requests for slots and would give serious
consideration to our recommendation that the agency periodically hold
slot lotteries. 

Citing DOT's response to our October 1996 report, several airlines
recently applied to the agency for slots at O'Hare and La Guardia in
order to serve medium-sized communities in the East and upper
Midwest.  In April 1997, Trans States Airlines requested slots at
O'Hare for nonstop service from Asheville, North Carolina;
Chattanooga, Tennessee; Roanoke, Virginia; and Tri-City Airport
(Bristol, Johnson City, and Kingsport) in Tennessee.  In May 1997,
AirTran Airways requested slots at La Guardia for nonstop service
from Akron, Ohio; Knoxville, Tennessee; Bloomington, Illinois; and
Moline, Illinois.  Also in May 1997, Valujet Airlines applied for
slots at La Guardia for service from Atlanta, in part to provide
one-stop service via Atlanta to New York for many of the cities in
the Southeast, such as Mobile, Alabama, that Valujet serves.  DOT is
currently considering these applications. 

DOT's response to our report also stated that action may be needed at
some hub airports to ensure that nonincumbents are able to obtain
competitive access to gates.  However, DOT did not concur with our
recommendation that FAA make an airport's efforts to have gates
available to nonincumbents a factor in its decisions on awarding
federal grants to airports.  According to DOT, the number of airports
that we identified as presenting gate access problems is sufficiently
small that the agency would prefer to address those problems on a
case by case basis.  DOT emphasized that in cases where incumbent
airlines are alleged to have used their contractual arrangements with
local airport authorities to block new entry, the agency will
investigate to determine whether the behavior constitutes an unfair
or deceptive practice or an unfair method of competition.  If so, the
agency noted, it will take appropriate action. 

DOT has also developed and implemented some useful initiatives.  In
response to a growing number of complaints by new airlines of
anticompetitive behavior by established carriers, DOT has opened
formal investigations of allegations of predatory pricing--the
practice of setting fares below the relevant cost in an effort to
drive competitors out of markets.  The agency has also begun
publishing the average airfares for 1,000 domestic routes every 3
months in part to highlight for consumers those markets where
dominance by one carrier has led to significantly higher fares. 

Finally, in order to ensure adequate air service to the nation's
smallest communities, the Congress in 1996 directed that funding for
the Essential Air Service (EAS) program be increased.  The EAS
program was established in 1978 to ensure that smaller communities
that had air service under regulation would continue to have service
after deregulation.  Currently, 100 communities receive
EAS-subsidized air service.  The Federal Aviation Reauthorization Act
of 1996 authorized that funding for EAS be increased to $50 million
annually.  In fiscal year 1997, EAS funding was $25.9 million.  For
fiscal year 1998, the EAS program has been funded at $50 million. 
The act also directed that the $50 million be funded by new user fees
charged to foreign airlines for FAA's air traffic control services in
handling their flights over--but not departing from or arriving
in--the United States and for other services provided to foreign
governments. 


      REGIONAL, STATE, AND LOCAL
      INITIATIVES
-------------------------------------------------------- Chapter 0:2.2

Recognizing that federal actions alone would not remedy their
region's air service problems, several airport directors and
community chamber of commerce officials in the Southeast and
Appalachian region recently initiated a coordinated effort to improve
air service in their region.  As a result of this effort, several
members of Congress from the Southeast and Appalachian region in turn
organized a bipartisan caucus named "Special Places of Kindred
Economic Situation" (SPOKES).  Among other things, SPOKES is designed
to ensure sustained consumer education and coordinate federal, state,
local, and private efforts to address the air service problems of
communities adversely affected since deregulation.  Two SPOKES-led
initiatives under way include establishing and developing a Website
on the Internet and convening periodic "national air service
roundtables" to bring together federal, state, and local officials,
and airline, airport, and business representatives to explore
potential solutions.  On February 7, 1997, the first roundtable was
held in Chattanooga, and a second roundtable is planned for later
this year in Jackson, Mississippi. 

A key conclusion of the February 1997 roundtable was that greater
regional, state, and local efforts were needed to promote economic
growth and attract established and new airlines alike to serve small
and medium-sized markets in the East and upper Midwest.  Suggested
initiatives included (1) creating regional trade associations
composed of state and local officials, airport directors, and
business executives; (2) offering local financial incentives to
nonincumbents, such as guaranteeing a specified amount of revenue or
providing promotional support; and (3) aggressively marketing to
airlines community efforts to spur economic growth.  In at least two
recent cases, communities have succeeded in outreach efforts.  After
intense outreach efforts that highlighted recent growth in their
communities, officials from two of the eight communities identified
in our April 1996 report as having had fares increase by over 20
percent since deregulation--Chattanooga and Jackson--were successful
in attracting a low-fare airline to serve their airports and in
improving the quality of their communities' air service. 


      PRIVATE-SECTOR INITIATIVES
-------------------------------------------------------- Chapter 0:2.3

To grow and prosper in small and medium-sized communities, businesses
need convenient, affordable air service.  As a result, businesses
located in the affected communities have increasingly attempted to
address their communities' air service problems.  Perhaps the most
visible of these efforts has been the formation of the Business
Travel Contractors Corporation (BTCC) by 45 corporations, including
Chrysler Motors, Procter & Gamble, and Black & Decker.  These
corporations formed BTCC because they were concerned about the high
fares they were paying in markets dominated by one established
airline.  On April 23, 1997, BTCC held a national conference in
Washington, D.C.  to examine this problem and explore potential
market-based initiatives.  One initiative identified at the
conference involved the corporations giving support to nonincumbent
airlines so that they can overcome operating and marketing barriers
and compete successfully against the dominant airline in a market. 

Since the April 1997 conference, BTCC has continued to develop this
concept.  Under BTCC's approach, for a route that is dominated by one
carrier, member corporations located in communities on both ends of
the route would commit to purchasing a specified number of tickets
from a new entrant over a set period of time to ensure that the
incumbent airline cannot drive the new entrant out of that market. 
BTCC is currently working with several low-fare airlines on this
concept and has identified a number of potential routes to test the
initiative.  While many of these routes are between large
communities, such as Minneapolis and Detroit, a number also involve
small and medium-sized communities in the East and upper Midwest,
including the following routes:  Washington, D.C.--Charleston, South
Carolina; Washington, D.C.--Fayetteville, North Carolina; South Bend,
Indiana--Tulsa, Oklahoma; Evansville, Indiana--Port Smith, Maine; and
Fort Wayne, Indiana--Binghamton, New York.  To highlight the progress
of this initiative and to explore other potential options that may be
available to the private sector, BTCC has scheduled another
conference for October 3, 1997, in Washington, D.C. 


      REGIONAL JETS
-------------------------------------------------------- Chapter 0:2.4

In addition to public and private sector initiatives, the increasing
use of 50- to 70-seat regional jets is improving the quality of air
service for a growing number of communities.  Responding to the
preference of consumers to fly jets rather than turboprops for
greater comfort, convenience, and a perceived higher level of safety,
commuter affiliates of established airlines are increasingly using
regional jets to (1) replace turboprops on routes between established
airlines' hubs and small and medium-sized communities and (2)
initiate nonstop service on routes that are either uneconomical or
too great a distance for commuter carriers to serve with slower,
higher-cost, and shorter-range turboprops.  The following are
examples of this growing trend: 

  -- Comair, which is a Cincinnati-based commuter partner of Delta,
     put the first regional jet used in the United States into
     service in June 1993 and currently operates more regional jets
     than any other commuter carrier.  It serves approximately 60
     small and medium-sized communities in the East and upper Midwest
     with regional jets. 

  -- Continental Express initiated new nonstop flights with regional
     jets in May 1997 between Cleveland, Ohio, and White Plains, New
     York, and in June 1997 between Newark, New Jersey, and Savannah,
     Georgia.  Previously, there were no nonstop flights between
     Cleveland and White Plains, and Savannah did not have nonstop
     service to the New York area. 

  -- Atlantic Southeast Airlines--another Delta affiliate--recently
     ordered 30 regional jets and announced that it would replace
     some turboprop service between Delta's hub in Atlanta and
     several communities in the Southeast.  It also indicated that it
     would use regional jets to initiate several new routes. 

  -- Last week, American Eagle ordered 67 regional jets and indicated
     that, starting next year, it would use the first jets that are
     delivered to replace turboprop service between American's hub at
     O'Hare and several communities in the upper Midwest. 

Because regional jets can generally fly several hundred miles farther
than turboprops, commuter carriers will be able to link more cities
to established airlines' hubs.  To the extent that this occurs, it
could increase competition in many small and medium-sized communities
by providing consumers with more service options.  For example,
consumers traveling from Savannah to Boston now have the added choice
of a Continental Express regional jet flight to Newark connecting to
a Continental flight to Boston.  Previously, consumers had the choice
of one-stop service by US Airways via Charlotte or by Delta via
Atlanta. 

The benefits of regional jets are only beginning to emerge and will
likely increase substantially in the near future.  As of January
1997, regional jets accounted for only 90 of the 2,127 commuter
aircraft in service in the United States (4 percent).  However,
commuter carriers currently have on order over 200 regional jets for
delivery over the next several years and have placed options to buy
over 400 more.  Moreover, local communities could accelerate this
trend by providing incentives for commuter carriers to serve their
airports with regional jets.  If this trend continues, regional jets
offer the promise of mitigating the problems of some communities
adversely affected since deregulation and buttressing public and
private initiatives already under way to address these problems. 


-------------------------------------------------------- Chapter 0:2.5

Mr.  Chairman, this concludes our prepared statement.  We would be
glad to respond to any questions that you or any Member of the
Subcommittee may have. 


*** End of document. ***