SPEAKERS CONTENTS INSERTS
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COMPETITION IN THE U.S. AIRCRAFT MANUFACTURING INDUSTRY
TRANSPORTATION AND INFRASTRUCTURE
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HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
JULY 26, 2001
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
DON YOUNG, Alaska, Chairman
THOMAS E. PETRI, Wisconsin, Vice-Chair
SHERWOOD L. BOEHLERT, New York
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
WAYNE T. GILCHREST, Maryland
STEPHEN HORN, California
Page 3 PREV PAGE TOP OF DOCJOHN L. MICA, Florida
JACK QUINN, New York
VERNON J. EHLERS, Michigan
SPENCER BACHUS, Alabama
STEVEN C. LaTOURETTE, Ohio
SUE W. KELLY, New York
RICHARD H. BAKER, Louisiana
ROBERT W. NEY, Ohio
JOHN COOKSEY, Louisiana
JOHN R. THUNE, South Dakota
FRANK A. LoBIONDO, New Jersey
JERRY MORAN, Kansas
RICHARD W. POMBO, California
JIM DeMINT, South Carolina
DOUG BEREUTER, Nebraska
MICHAEL K. SIMPSON, Idaho
JOHNNY ISAKSON, Georgia
ROBIN HAYES, North Carolina
ROB SIMMONS, Connecticut
MIKE ROGERS, Michigan
SHELLEY MOORE CAPITO, West Virginia
MARK STEVEN KIRK, Illinois
HENRY E, BROWN, Jr., South Carolina
TIMOTHY V. JOHNSON, Illinois
BRIAN D. KERNS, Indiana
Page 4 PREV PAGE TOP OF DOCDENNIS R. REHBERG, Montana
TODD RUSSELL PLATTS, Pennsylvania
MIKE FERGUSON, New Jersey
SAM GRAVES, Missouri
C.L. (BUTCH) OTTER, Idaho
MARK R. KENNEDY, Minnesota
JOHN ABNEY CULBERSON, Texas
BILL SHUSTER, Pennsylvania
JOHN BOOZMAN, Arkansas
JAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
PETER A. DeFAZIO, Oregon
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
ROBERT MENENDEZ, New Jersey
CORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
BOB FILNER, California
EDDIE BERNICE JOHNSON, Texas
FRANK MASCARA, Pennsylvania
Page 5 PREV PAGE TOP OF DOCGENE TAYLOR, Mississippi
JUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
EARL BLUMENAUER, Oregon
MAX SANDLIN, Texas
ELLEN O. TAUSCHER, California
BILL PASCRELL, JR., New Jersey
LEONARD L. BOSWELL, Iowa
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania
NICK LAMPSON, Texas
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
BRIAN BAIRD, Washington
SHELLEY BERKLEY, Nevada
BRAD CARSON, Oklahoma
JIM MATHESON, Utah
MICHAEL M. HONDA, California
RICK LARSEN, Washington
SUBCOMMITTEE ON AVIATION
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JOHN L. MICA, Florida, Chairman
THOMAS E. PETRI, Wisconsin
JOHN J. DUNCAN, Jr., Tennessee
STEPHEN HORN, California
JACK QUINN, New York
VERNON J. EHLERS, Michigan
SPENCER BACHUS, Alabama
SUE W. KELLY, New York
RICHARD H. BAKER, Louisiana
JOHN COOKSEY, Louisiana, Vice Chairman
JOHN R. THUNE, South Dakota
FRANK A. LoBIONDO, New Jersey
JERRY MORAN, Kansas
MICHAEL K. SIMPSON, Idaho
JOHNNY ISAKSON, Georgia
ROBIN HAYES, North Carolina
MARK STEVEN KIRK, Illinois
TIMOTHY V. JOHNSON, Illinois
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
MARK R. KENNEDY, Minnesota
JOHN ABNEY CULBERSON, Texas
BUD SHUSTER, Pennsylvania
Page 7 PREV PAGE TOP OF DOCJOHN BOOZMAN, Arkansas
DON YOUNG, Alaska
WILLIAM O. LIPINSKI, Illinois
ELEANOR HOLMES NORTON, District of Columbia
EDDIE BERNICE JOHNSON, Texas
LEONARD L. BOSWELL, Iowa
JOHN ELIAS BALDACCI, Maine
PETER A. DeFAZIO, Oregon
JERRY F. COSTELLO, Illinois
ROBERT MENENDEZ, New Jersey
CORRINE BROWN, Florida
JUANITA MILLENDER-McDONALD, California
MAX SANDLIN, Texas
ELLEN O. TAUSCHER, California
BILL PASCRELL, JR., New Jersey
TIM HOLDEN, Pennsylvania
NICK LAMPSON, Texas
SHELLEY BERKLEY, Nevada
BRAD CARSON, Oklahoma
JIM MATHESON, Utah
MICHAEL M. HONDA, California
NICK J. RAHALL II, West Virginia
Page 8 PREV PAGE TOP OF DOCJAMES L. OBERSTAR, Minnesota
Aldonas, Grant D., Under Secretary for International Trade, International Trade Administration, U.S. Department of Commerce
Bolen, Edward M., President, General Aviation Manufacturers Association
Callan, Byron K., first Vice President, Merrill Lynch
Douglass, John W., President and CEO, Aerospace Industries Association of America
Falken, Steven J., Director for Aerospace and Automotive Trade Policy, U.S. Trade Representative
Miles, Richard B., Professor, School of Engineering and Applied Sciences, Princeton University
Miller, Jeffrey, Group Vice President, Structured Trade and Finance Group, Export-Import Bank of the United States
Page 9 PREV PAGE TOP OF DOC Rogowsky, Dr. Robert A., Director, Office of Operations, U.S. International Trade Commission
Venneri, Samuel L., Associate Administrator, Office of Aerospace Technology, National Aeronautics and Space Administration
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois
Oberstar, Hon. James L., of Minnesota
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Aldonas, Grant D
Bolen, Edward M
Callan, Byron K
Douglass, John W
Falken, Steven J
Miles, Richard B.
Page 10 PREV PAGE TOP OF DOC Miller, Jeffrey
Rogowsky, Dr. Robert A
Venneri, Samuel L
COMPETITION IN THE U.S. AIRCRAFT MANUFACTURING INDUSTRY
Thursday, July 26, 2001
House of Representatives, Subcommittee on Aviation, Committee on Transportation and Infrastructure, Washington, D.C.
The subcommittee met, pursuant to call, at 10:10 a.m. in room 2167, Rayburn House Office Building, Hon. John L. Mica [chairman of the subcommittee] presiding.
Mr. MICA. I would like to convene this hearing of the Aviation Subcommittee.
The order of business this morning will be opening statements by members, and I believe we have two panels of witnesses today. The subject of today's hearing is competition in the United States aircraft manufacturing industry. I believe it is an important hearing. It is somewhat an inside the beltway subject, but important to the United States.
This morning, as I said, we are going to concentrate on looking at where we are in U.S. competition in aircraft manufacturing. We are holding this hearing because the United States I believe is in danger of losing both its position as the leading aircraft manufacturing nation in the world and also its current dominance in avionics.
In the early 1960s, United States manufacturers accounted
Page 11 PREV PAGE TOP OF DOCfor 90 percent of the world's production of commercial jet aircraft. I think this chart shows some of the decline we can see in U.S. market share. It is pretty dramatic. Today, the United States manufacturers share of the marketplace has dropped to almost 50 percent for large commercial jet aircraft. When you factor in regional jet aircraft sales, the U.S. share is around 35 percent of the world's market today.
Currently, no U.S. manufacturer produces regional jet aircraft. The companies we see building these aircraft owe their competitive advantages to their particular governments' intervention in the marketplace. With a level playing field, I believe it is possible a U.S. manufacturer might have already entered this marketplace with American regional jet. We will look at some of the factors that have helped shape some of the trends in keeping us in markets or excluding us from markets today.
Last year the United States trade deficit reached $370 billion. The one glimmer of good news is that the aerospace industry has always had a positive effect on the balance of trade. Unfortunately, however, the aerospace trade surplus peaked in 1998 at $41 billion. The bad news is that the surplus declined by $11 billion last year. A decline in civil transports in particular accounted for a majority of the drop, with exports down some $6 billion and imports up some $2 billion. Passenger aircraft manufactured in the United States accounted for 4.2 percent of United States exports in 1990. Today, they account for 3.7 percent.
The United States sale and production of aircraft and aircraft parts is often disadvantaged by our own liability laws, regulatory barriers, and also by subsidization by foreign competitors which takes place and is supported by their governments. The European community I believe is currently the most formidable foreign challenger to U.S. manufacturers, though the Chinese and Russians and even the Japanese are poised to enter the marketplace to also compete against the United States. The European Union employs an aggressive approach of subsidization in the form of capitalization advantages, favorable repayment of loans or loan forgiveness, also subsidization of research and development, as well as aggressive export credit financing for its aircraft manufacturers.
Page 12 PREV PAGE TOP OF DOC The EU's aggressiveness also extends into its regulatory regime and its activities. We coin sort of a new term here but not used too often, ''regulatory nationalism,'' and that regulatory nationalism appears to be the standard being practiced by the EU. From the redundant process of certification of U.S. aircraft to the similarly redundant antitrust approvals, the European Union appears now to use its regulation to the advantages of its own aircraft manufacturing and aircraft parts manufacturing companies. The recent blocking of the GE-Honeywell merger is an egregious example of this regulatory nationalism. It is quite possible this merger was blocked, at least for one reason, in order to advantage European avionics companies.
If other countries employ similar methods on behalf of their aircraft manufacturers, United States manufacturers in the future will face even more difficult circumstances. These EU trade activities were to be regulated by two agreements the United States entered into with the European Union. For a variety of reasons they are not working to force the EU to end its interventions on behalf of its manufacturers. Unfortunately also, a gross lack of transparency is chief among the shortcomings in these agreements. To fix the problems that we have seen and, most importantly, avoid them in the future, I believe the President must be granted Trade Promotion Authority. Trade Promotion Authority is the only certain way we can achieve trade agreements which level the playing field, not just on paper, but in reality.
The General Aviation Revitalization Act, as some of you have been here for a while may recall we passed in 1994, is a good example of how Congress can positively impact the marketplace. If we look at this chart that is shown up here, we see what took place in the marketplace. We were once the leader in the number of aircraft shipments, as you see back in 1978. And with the problems we had in liability, you see the decline of that market. And if you look at the chart also in 1999, you see that we have made some recovery. The legislation, of course, has resulted in the reduction of the huge product liability costs which constrained our industry sales and the industry's ability to compete. Since enactment, the general aviation aircraft sales have tripled and production has increased, as we see.
Page 13 PREV PAGE TOP OF DOC In the areas of finance, Congress must recognize the importance of the Ex-Im Bank to competitiveness in the global marketplace. The Export-Import Banks work in finance and purchase of U.S.-built aircraft parts and services critical to the competitiveness of our manufacturers' aerospace business. Unfortunately, just an aside, we took a step back the other day in cutting some of the Export-Import Bank's financing potential. Unfortunately, many of the Members of Congress do not understand what Export-Import Bank does and how important it is to financing our industry in a highly competitive international marketplace where, again, foreign competitors are given great finance underwriting deals and that makes business possible, makes us less competitive. The fact is that EU export credit agencies are much more aggressive than our laws and policy allow even for our Export-Import Bank. If U.S. manufactures cannot obtain competitive financing for U.S. products and service, the result will be continued loss of U.S. sales.
The Congress must also recognize the critical role of research and development to competitiveness. In 1998, Federal funding for R&D was $18 billion. By 1998, ten years later, that number dropped to $9 billion. On the other hand, industry expenditures for R&D have remained static at approximately $5 to $6 billion a year. In the meantime, foreign governments have successfully cloaked from public view the research and development money that they are supplying to our foreign competitors' projects. The funding of research and development and other financial assistance by Congress is absolutely critical to our manufacturers' competitiveness.
Some incorrectly argue that this is ''corporate welfare.'' In a global marketplace where foreign governments routinely intervene in the marketplace to tilt the playing field to their advantage, the United States Government must also play a supporting role or our industry risks further deterioration. Our industry, as we know, is under deliberate attack on its market share by these foreign countries and companies. Not funding these agencies and efforts is naive and destructive. It has nothing whatsoever to do with corporate welfare. It has everything to do with our national economic health and job creation.
Page 14 PREV PAGE TOP OF DOC The aerospace manufacturing industry has undergone significant changes in the last 20 years, and particularly the last decade. In 1980, there were roughly 25 aerospace companies operating in the United States building aircraft components and, in doing so, employing large numbers of blue collar and white collar employees at, I might say, very high and competitive wages. Today, we have four such companies still in operation. Consolidation and mergers account for some of the decline, but other factors, factors with far-reaching consequences, are also at work here.
I believe a healthy aeronautics and aerospace manufacturing industry is absolutely fundamental and necessary for the United States to maintain its infrastructure, and that infrastructure supports economic growth and the economic health of our Nation. I further believe that a healthy aeronautics and aerospace manufacturing industry is also of critical importance to our national security and our military preparedness. This subcommittee is concerned that the downward trends currently at work in this industry, if continued unchecked, will not only reduce employment of thousands of blue collar and white collar workers, but will also have devastating effects on our national security and our continued economic growth.
It is critical that we identify the destructive trends that are taking place and that we gain a better understanding of how these trends began, what factors are involved here, and what difference we can make and how we can alter that pattern. This is no doubt a daunting task because this is a very complex phenomenon. However, it is critical that Congress understand where the industry is headed and why in order to determine what needs to be done to ensure a healthy and competitive industry in the future.
I am pleased that we have Mr. Matheson acting as Ranking Member today. Let me yield to him for an opening statement.
Mr. MATHESON. Thank you, Mr. Chairman. I appreciate Chairman Mica and Congressman Oberstar holding this hearing today. I just want to make a brief opening statement.
Page 15 PREV PAGE TOP OF DOC Mr. Chairman, this Congress will soon be taking up Trade Promotion Authority. This legislation, whether you are for it or against it, has at its core the fundamental principle of American competitiveness. In an increasingly global economy that is dependent on a global market access, it is important to ensure that our firms can compete. And that is the very nature of this hearing, trying to gain insight into the state of our domestic aircraft manufacturing industry.
We have all heard the statistics before. I will just go through them real quickly. Over the past 20 years, aircraft manufacturing has declined from close to 19,000 aircraft in 1978 to just under 3,500 aircraft in 1999. In 1998, the aerospace trade surplus reached a record high of $41 billion. Last year it was down more than a third, to $26 billion. We have seen the number of aerospace scientists and engineers decline dramatically to its lowest level on record, while young engineers between the ages of 25 to 34 now make up only 17 percent of all of our engineers in this country.
But this situation, however, is not bleak. While our aerospace trade surplus is down, it is still a sizeable surplus. In fact, it remains the largest of any sector of our economy. We will hear today about the tremendous growth in the general aviation industry and how its growth was spurred by smart business decisions along with smart policy-making. Through NASA and the military, we continue to have a sizeable commitment to continued research and development. Like military investments of a previous generation, our aerospace advances with NASA will necessarily lead to civilian spin-offs that will benefit our manufacturing industry.
This committee will hear the best ways in which the Federal Government can spur investment, research, and development. Innovation and improvement will be the cornerstone for continued market success.
Mr. Chairman, I want to thank you for your attention to this vital sector of our economy. I look forward to the testimony of our distinguished panel.
Page 16 PREV PAGE TOP OF DOC Mr. MICA. Thank you.
Let me recognize Mr. Ehlers.
Mr. EHLERS. Thank you, Mr. Chairman. Just a few brief comments.
Several years ago I discovered that one of America's leading airlines was ordering a large number of airplanes from Airbus. I was concerned about that, for two reasons. First of all, I like to buy American. But secondly, I actually in this case preferred the American airplane as a customer of the airline. So I called the upper management to see what was going on. They said, ''Well, we really would have preferred to buy the American plane but they practically gave us the Airbuses.'' And little red antenna went up. It is notably difficult to give away your product and still stay in business. So there is something going on there; I do not know whether it is a direct subsidy, tax breaks, what have you. But I am not at all surprised to see this chart simply because that is going to be the result of a much lower cost product.
I am also concerned about the regional jet market. I also discussed that with an American airplane manufacturer some years ago and said, ''That is going to be a very large and growing market, don't you think you should get into it?'' They said, ''Well, we really don't have the resources at this point and I guess we are just going to have to let them have the market.'' We now have regional jets flooding this country, most of them manufactured in Brazil, Canada, or Europe.
Neither of these bode well for our industry. The encouraging thing in the general aviation market, in the graph that you have shown it is still a long, long way from where it was, but I am glad we were able to take some corrective action a few years ago by lowering the liability. I think it should have been lowered much further and to something like nine years instead of the approximately 18 years we ended up with and that would have helped even more. But at least that is the one bright picture here, although that is a small part of the total market.
Page 17 PREV PAGE TOP OF DOC So I appreciate your calling the hearing, Mr. Chairman. This is an issue that we certainly have to examine and take a look at. I do apologize I will not be able to stay for all of it. I am chairing a hearing of my own very shortly and will have to leave. But I do appreciate your calling this hearing. I yield back.
Mr. MICA. I thank the gentleman.
I am pleased to yield now to the Ranking Member of our full committee and former chairman of the Aviation Subcommittee, under whom I served and learned so much and am anxious to hear his comments, Mr. Oberstar.
Mr. OBERSTAR. Thank you very much, Mr. Chairman. I appreciate your opening comments and thorough discussion of the subject matter. Well done. And Mr. Ehlers as well, I appreciate his very thoughtful consideration of the issues. Welcome, Mr. Matheson, for standing in for Mr. Lipinski who has had a family emergency or urgency, I should say, and is not able to be with us today.
There are many in both the public and the private sectors who are ringing alarm bells that U.S. aircraft manufacturing industry has lost or may be losing its competitive edge, that there are now only two major world class civil aircraft manufacturers, Boeing and Airbus, and they are neck-in-neck in the marketplace. We have lost by absorption one of the great all time manufacturers of aircraft, the Douglas Aircraft, McDonnell Douglas later, by absorption into Boeing. That created the conditions for two major aircraft manufactures.
Competition is good for any industry, including aviation, and we have to recognize that there are market-distorting practices in all countries that manufacture aircraft or any other major product. As we look at the impediments to competitiveness, we have to look at the range of these issues. In the U.S., that is underfunding of research and development, a matter that Mr. Ehlers has devoted a good deal of his time to, unpredictable certification and validation processes, and then the financing of aircraft sales themselves. Boeing and Airbus both engage in those practices that distort the market. They do it in different ways. The RJ manufacturers in the UK, in Canada, and Brazil, and those on the European mainland do the same. What we have to look at is what are we doing to sustain the competitive technological edge that our aircraft and aerospace manufacturing sector has enjoyed.
Page 18 PREV PAGE TOP OF DOC Last year, aerospace made up 8 percent of all exports. But more importantly, we had a $26.7 billion surplus in aerospace international trade. We are not alone in the arena any longer. There is new competition. China is looking to be a competitor. A few years ago I did see China's first two efforts at manufacturing their own aircraft; one is in little parts and pieces, and the other is on a static display, and only one of them ever flew. But do not make a mistake, China, with the industriousness of their people and the savings rate, two-thirds of China's gross domestic product is derived from personal savings, the $100 billion China is investing in upgrading their airports is evidence of that country's determination and capacity to compete in this marketplace as well as in others in which they compete.
Both Europe and the United States I think should take lessons from the competition between our two communities and work with these emerging countries such as Russia, the Commonwealth of Independent States, and recognize that the Russians do not take a back seat to anyone in aviation and aerospace. They have had creative geniuses in their ranks that have produced extraordinary aircraft and someday they will get their whole economy together and will be in a very strong competitive position. Let us do now the things that we need to dowork with these countries to build certainty and build safety into the international marketplace, and harmonize our certification and validation processes. That is a practice that is now underway between our FAA and the Joint Airworthiness organization in Europe.
Keep in mind something that we learned in the course of an Aviation Subcommittee visit to Toulouse in 1989, in an extended discussion and tour of the Airbus manufacturing facility, Jean Pierre Sonne, the president of Airbus Industry at the time, went on and on at length talking about all the changes they had made in their manufacturing practice to comply with FAA requirements. After a certain point he realized it sounded like whining, so he said, ''We are not complaining. I am explaining the extent to which we at Airbus Industry are prepared to go to comply with U.S. FAA standards because when we do we know we can sell this aircraft anywhere in the world.'' What he said was we are the standard in the world. We have to maintain that position of standard.
Page 19 PREV PAGE TOP OF DOC The Chairman referenced general aviation. It was in this room that in three successive Congresses we moved out of the subcommittee the General Aviation Manufacturing Revitalization bill as it was called ultimately. In two of those Congresses it got stuck in the Judiciary Committee; they would not move the bill. Eventually, we devised a process by which we got the bill out, Bill Clinger, my partner at the time in the Aviation Subcommittee, and I.
In 1979, we produced 17,000 general aviation aircraft. But by the time of those hearings, we were down to 954 general aviation aircraft produced in the United States. We were exporting $135 million in general aviation aircraft. We were then importing $35 million in general aviation aircraft. We were on the verge of having a whole generation of pilots trained in foreign aircraft. We had to do something about it. The industry was spending $250 million a year defending itself or settling civil lawsuits under the product liability. Eventually we got the bill signed into law, put a tail of limitation on liability. At the time, I remember very well Mr. Clinger and I brought Russ Myer, the president of Cessna, in and said, ''Look, if we go through all this, pass this bill, and you don't start up a manufacturing plant, we will go back and repeal it. You have got to show good faith.'' And they did. Before the ink was dry they began breaking ground. And now we are beginning to turn the corner on the 100,000 jobs that were lost in general aviation.
That was a change that we had something to do with. We could directly affect the future of general aviation by changing the product liability laws. Well, there are other areas where we can make a difference.
I have recently reviewed the report ''European Aeronautics: Vision for 2020.'' The question is, is this a propaganda document, or will it be a blueprint for real investment by the European community in research and development? Over the next five years they are projecting some $800 million of investment in research and development. One paragraph from that report: ''A generation ago, higher, further, faster were the imperatives for any vision of the future of air transport. Now they are more affordable, safer, cleaner, quieter, reflecting the need to combine cost-effectiveness with the uncompromising attachment to safety and environmental objectives. The key to securing these objectives is investment in research and technology, with a strategy that can meet the demands of the market and the needs of the European community.''
Page 20 PREV PAGE TOP OF DOC That has been our unstated practice in the United States.
What I reproach of our side is not putting enough money. Not necessarily doing something to block strategies from overseas, but not doing enough to sustain and support our own industry, whining and complaining that other countries are using ''stateism'' and state intervention to support their industries while we sit and wring our hands and attach ourselves to the shimmer of the marketplace.
Noise, for example, is a capacity issue. In 1990, we enacted a far-reaching noise Stage III compliance law that reduced Stage II aircraft from 2,360 in 1990 down to zero at the end of 1999. Seven and a half million people were impacted by Stage II noise aircraft. That is down to less than 600,000.
Europe has not done anything of the kind. In fact, ICAO,
the International Civil Aviation Authority, was envisioning 2002 to achieve a goal similar to the U.S. We did it two years ahead of them. What happened in Europe? The European parliament turned around, pressured by the ''greens'' who said we have had enough of noise, and passed legislation that the Chairman called regulatory nationalism. That was generated by the same kinds of political pressures in the European community that existed in our country, only they responded differently. I had always anticipated, first, noise is a capacity issue, but that Stage III was an interim. What we need to do is leapfrog that idea, leapfrog Stage IV and go to something far greater than that. But that is going to take some money to develop the green engine. ICAO is talking about a 10 decibel reduction in noise. By the time you get to 10 decibel reduction, people will say that is not enough. We have got to go far beyond that. And I am very pleased that the Appropriations Committee in the 2002 NASA budget funded ultra efficient engine technology and the quiet aircraft technology with some $10 million to get this started and get it moving. I testified at the committee hearings in favor of it.
Those are the kinds of things we need to do. In addition to which, further analyzing and effectively countering market distorting practices, but with a recognition however that there is a different regime in Europe than in the United States, a different view of antitrust than in the United States. And to the degree that we can harmonize all these practices, I think U.S. ingenuity and technology will prevail.
Page 21 PREV PAGE TOP OF DOC Thank you for highlighting this issue, Mr. Chairman.
Mr. MICA. I thank the gentleman.
Let me recognize Mrs. Kelly.
Ms. KELLY. Thank you very much, Mr. Chairman. As members of this subcommittee have pointed out time and time again, air travel is the fastest mode of transportation today and it is the fastest growing mode. By all indications, that trend is likely to continue for a long time. We all benefit then from an aircraft manufacturing industry which is vibrant and competitive. A strong industry means a more efficient aviation system. More importantly, it means safer air travel for everyone.
So I think the hearing today is important in helping us enhance our understanding of the industry and what we in Government need to do to facilitate a fair and competitive market. I thank the witnesses for coming today and I look forward to their testimony
. And I thank you, Chairman Mica, for holding this hearing.
Mr. MICA. Thank you. I might mention that on Monday we are going to be in New York at the invitation of Ms. Kelly to visit Stewart I think in the afternoon, and on Monday morning we will be in Syracuse looking at the STARS program. And on Saturday, if any of the members are planning to join us for the Oshkosh Air Show, it is going to be my first visit, but everyone is welcome to participate in those weekend events.
I am pleased to recognize the gentlelady from the District, Ms. Norton.
Ms. NORTON. Thank you, Mr. Chairman, and may I thank you as well for this hearing, which some would call timely, others might call overdue when they look at the graph that has been provided for us on the far wall. It is a matter of great interest to me and I think to many Americans, just at the point when the average American perhaps is getting to the point where he can ride one of the wonderful aircraft that our own industry makes.
Trends in the aerospace industry are serious and need the oversight you are beginning today. We must not see our aircraft manufacturing industry go the way of the auto industry, if that has not already occurred. Of course, it would not be fair to judge by the market share we once had. There was a time when for all intents and purposes we owned the market share because many other players simply were not in the game. So some decline in market share may have been inevitable. But it is a cause for concern when the market share declines from 70 percent to 50 percent, particularly given the measures that the industry has taken.
Page 22 PREV PAGE TOP OF DOC It is difficult for the industry to operate in the global economy and especially one where other nations promote and guard their own airline industries in ways we would not do in this country. Nevertheless, it behooves us to quickly find what we can do to try to offset these trends and make sure that the American aircraft manufacturing industry retains its crowning place in the world economy.
I thank you, Mr. Chairman, again for this hearing.
Mr. MICA. I thank the gentlelady.
Are there other opening statements? Mr. Lampson?
Mr. LAMPSON. Very shortly, Mr. Chairman. Thank you. I am most anxious to hear our presenters. Thank you for calling the hearing.
Just a thought as I was sitting here. As we look at this issue of decline in manufacturing, what it is going to mean, the decline in jobs, the decline in education, later today we will be looking at a bill that could potentially take away funding from NASA, which also gives us a commitment to what we are doing that fits in with all aerospace efforts. I ponder the question I guess, and I am sure and hopeful we will hear, what must we do as a country to recreate the enthusiasm for science and math and engineering that is going to cause our kids to want to go to college and get right back into this program to make all of these statistics turn around.
So thank you for calling this hearing and I am anxious to hear the presenters. I yield back my time.
Mr. MICA. Thank you.
Mr. COOKSEY. Just a brief statement, Mr. Chairman. I do want to thank you for holding these hearings. I think these hearings are important. They are important because the health of our aerospace industry is important to this Nation and to the world. We still set the standards. I still think we build the absolute best aircraft in the world. I do not think that we are quite in the situation of total doom and gloom that some people paint. But I think we can look to Europe and hope that we do not get in the same situation that they are in.
Page 23 PREV PAGE TOP OF DOC I happen to have visited the same aircraft factory that my good friend Mr. Oberstar visited at the Toulouse Airbus factory. It is really a model of automation. I was struck by the fact that there are not many people working there. And the reason not many people are working there is because the costs of labor are high there. They cannot change according to what the economy is doing, and so they have a lot of robots. I know someone that had worked in an aircraft manufacturing factory in this country, and there were a lot of union rules that almost made it look as if our people were not as efficient as they could have been, they took a lot of time off and so forth. Believe me, I know this case very, very well. Anyway, I hope that we do not move to the point that they have in Europe where they almost have to use total robots
and not use our talented men and women. But that could happen.
I do think we should send a message to the world that we are still building the best aircraft in the world. We have some great military aircraft manufacturers and we have civilian aircraft manufacturers. But there has been a consolidation in the industry. Boeing, of course, is premier, as far as I am concerned. Cessna is a great company and they have been able to get out from under the devastating umbrella created by the trial lawyers, so they are out building aircraft again. I learned to fly in a Cessna many years ago but they quit building them for a long time.
I do think it is important to make certain that we do have enough investment from maybe the Federal Government in aerospace R&D, that we do have human talent to work in these aircraft plants, have people that really want to work, that want to show up and do eight or ten hours worth of work in a day and 40 or 50 hours worth of productivity in a week, and make sure that we have good labor relations and do not lose time to strikes. I think it is inevitable that we are going to have more and more automation and this is just part of the information age. It is a trend that started decades ago.
So the closing message is that I think that our aircraft industry is a great industry and we need to do what we can do to support it and not take away from it. I am anxious to hear from the witnesses. Thank you, Mr. Chairman.
Page 24 PREV PAGE TOP OF DOC Mr. MICA. I thank the gentleman.
I think that concludes our opening statements.
We do have our first panel, modified slightly. We have got Mr. Steve Falken, who is with the Office of the U.S. Trade Representative; Mr. Robert Rogowsky, he is with the United States International Trade Commission; Mr. John Douglass, with the Aerospace Industries Association; and Mr. Ed Bolen, who is with the General Aviation Manufacturers Association.
Let me start, if I may, with John Douglass, who is the president and CEO of the Aerospace Industries Association, for an opening statement. If you have lengthy statements, materials you would like to be made part of the record, please request it to the Chair and by unanimous consent they will be made part of the record.
Welcome, Mr. Douglass. You are recognized.
TESTIMONY OF JOHN W. DOUGLASS, PRESIDENT AND CEO, AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA; STEVEN J. FALKEN, DIRECTOR FOR AEROSPACE AND AUTOMOTIVE TRADE POLICY, U.S. TRADE REPRESENTATIVE; DR. ROBERT A. ROGOWSKY, DIRECTOR, OFFICE OF OPERATIONS, U.S. INTERNATIONAL TRADE COMMISSION; EDWARD M. BOLEN, PRESIDENT, GENERAL AVIATION MANUFACTURERS ASSOCIATION; AND GRANT D. ALDONAS, UNDER SECRETARY FOR INTERNATIONAL TRADE, INTERNATIONAL TRADE ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE
Mr. DOUGLASS. Thank you, Mr. Chairman. In addition to thanking you for holding the hearing, I certainly want to thank all of the members of this committee for the words that have been said so far this morning in the hearing. It is encouraging to me, as I know it must be to my colleague, Ed, here, that there is such a keen grasp of what is going on in this industry today. And, sir, as you have noted, I would like to submit my statement for the record.
Mr. MICA. Without objection, your entire statement will be made part of the record. Please proceed.
Page 25 PREV PAGE TOP OF DOC Mr. DOUGLASS. In the short time I have here today, sir, I cannot go into all of the structural issues that are involved. I was just writing these down as the members were raising them, but the issues involving subsidies, export licensing, export financing, regulatory nationalism, and certification were all issues that were mentioned. And they certainly are all real issues and issues that we need to pay some attention to.
I guess the most important thing that I would like to start my testimony with, and I will show you a few charts which I think you will find interesting, is that we know that other nations, as the members have pointed out, have different socioeconomic systems which support their industries in ways that are different from ours. We can affect some of these. I am looking forward to hearing from our Government colleagues here about what they think about what we can affect and what we cannot affect. But more than anything else, we can affect what we do here in America at home to, as Mr. Oberstar said, play to our strong points, to leap ahead, to use our strong points to make American industry competitive. And that is what I want to talk about in the five minutes that I have.
Let me draw your attention to this first chart that is up here. As you can see, our sales are cyclic; they have to do with a lot of complex things that are going on around the globe. Not only do they have to do with things like investment in military systems, but also global economic trends. The sort of dip you see there starting around 1989 is the end of the Cold War and a global recession which occurred around that same time. As you can see, we have grown since then. But in the last couple of years we have declined, and that decline in large degree represents the economic situation that is happening in the world and a sort of procurement hiatus over at the Department of Defense. There are some reasons though why we believe that growth is going to start again.
This is how our sales are broken down. I have got a sort of a ten year profile there, from 1989 to 1999. What this shows is the shift from an industry that during the Cold War was primarily associated with national security and with Government programs to an industry where more and more and more our future depends on the global economy. That is why this issue of competitiveness is so much on all of our minds.
Page 26 PREV PAGE TOP OF DOC I would also point out to you that just the manufacturing portion of the aerospace industry has gone over the years from about 3.5 percent of our Gross Domestic Product down to about 1.5 percent of our Gross Domestic Product, not because we have not grown, we have grown, but because the economy has grown very rapidly during that period. But what is most important to note is that 1.5 percent of manufacturing here in the United States supports an overall transportation industry which is somewhere between 10 and 12 percent of our Gross Domestic Product. And we never want to get ourselves into the situation where that big huge chunk, well over a trillion dollars of expenditures a year, is dependent on other countries for the source of our materials.
The other thing that is brought to mind by this change over the ten years is that when the Department of Defense was the primary source of sales for this industry we had one department to go to. When you talk to the global economy as being the primary source of our future, I just jotted down during the testimony, we are now receiving substantial oversight from DOD, NASA, Department of Transportation, Department of Justice, Department of Energy, State Department, Department of Commerce, the Trade Representative, who is sitting here with me, NTSB, the FAA, 50 States, the EU, and a number of airports around the globe.
When you have that many people involved in these regulatory processes, that is when I think you have to fall back on basic principles, you have to try to get them organized, thinking along a central line of thought about what is the right thing to do in the future. But that is when fundamental issues like research and development become paramount. I would laud the President and the Congress for their activities over the last couple of years in creating the Presidential Commission on the Future of the U.S. Aerospace Industry, which we understand is about to be announced by President Bush in the next few weeks, because only at the top of our Government can all of these agencies be focused into a coherent long term program to do the kinds of things that many of the members have mentioned this morning.
Page 27 PREV PAGE TOP OF DOC Let me just quickly conclude here because I am running out of time. You talked about this chart here. This is our trade balance. What is different about what is happening in the last couple of years is that the last time the trade balance declined both exports and imports declined. We are in a situation right now where exports are declining but imports are not, and that is the nut of the problem.
I will move very quickly to wrap up. This chart is where we are in terms of the rest of the economy. Several of the members have pointed this out; we are the single biggest earner of export credits in the American economy. This is the R&D pattern that several of you mentioned. This is the fundamental root of the problem that we have today; and that is, our national investment in aerospace research has declined so dramatically since the height of the Cold War that it has brought into question the long term sustainability of the industry in lieu of the fierce competition that is going on today. And I might add, that chart ends in 1998, that decline continues all the way down until you hit the projections for 2002 and then I believe it is going to begin to move up. And I laud President Bush for what he has done to make that happen.
This chart is the aerospace share of national R&D funding. You can see the decline over the years. Two years ago, I set in motion a parametric study to say let us go back just to where we were when Jimmy Carter was President of the United States, and in order to do that you have to go up that little red line you see on the right-hand side. Let me just give you a quick progress report on where we have gone there.
The yellow at the bottom is the investment that our industry made in 1997. The blue is what the Federal Government made in aerospace research and development in 1997. We said if the Federal Government will add $50 billion over five years, we will add $20 billion over that same period. That is roughly the amount of money needed to move this country back to where we were back in the 1970s in terms of aerospace R&D investment.
Page 28 PREV PAGE TOP OF DOC There is some good news and some bad news on this chart. The good news is that the $20 billion you see there for the Department of Defense was picked up during the recent presidential campaign by the President and he made a promise to the American people that he would add $20 billion to DOD research and development for aerospace. In fact, in his first budget in 2002 he has added already $8 of that $20 billion. So the Administration deserves very, very strong accolades for what they are trying to do over at the Department of Defense.
The bad news is the $20 billion needed in NASA has not been put in place either by the Administration or by the Congress. In fact, NASA's budget has been stagnant for over 10 years and has now declined to the point where it is 1/15th of 1 percent of the Gross Domestic Product. I would assert to you, Mr. Chairman, that we cannot move forward in a commercial environment where the global economy is where our future is at that level of investment. And not only has NASA investment remained stagnant, but there has been a gradual transfer of resources out of aeronautics and into the space side of NASA. So we need to fix that NASA portion of this long term budget problem.
We need to pay attention to the amount of money that has been put into the FAA. And I know that this committee, above all other committees in the Congress, is aware of the air traffic situation that exists in the United States today and the need to build more runways and improve our air traffic control system.
So with that very brief overview, sir, I will be glad to answer any questions that you may have.
Mr. MICA. Thank you.
Let me recognize Mr. Ed Bolen, who is the president of the General Aviation Manufacturers Association. Welcome, sir, and you are recognized.
Mr. BOLEN. Thank you very much, Mr. Chairman, and other members of the subcommittee. A lot has been made already this morning about the situation the general aviation industry found itself in throughout the 1980s and 1990s before passage of the General Aviation Revitalization Act. I am pleased to report, as it has already been noted, that legislation has been an absolute unqualified success.
Page 29 PREV PAGE TOP OF DOC Since the passage of that Act, we have seen aircraft production triple in the United States, we have seen tens of thousands of good manufacturing jobs created, and we have seen a host of new models coming to the marketplace. That is not just good news for the general aviation manufacturing industry; that is good news for all Americans.
That means that we are having a positive impact on our Nation's balance of trade. It means we are improving our transportation system in the United States. It means that we are creating the kind of high wage, high tech manufacturing jobs that we can keep in the United States in the 21st century.
We are very excited about where we are today and we think we can continue this momentum. In fact, we are working hard for it. We are working with NASA on several programsthe AGATE program, the GAP program, and the SATS program. We see a future for general aviation that is very, very bright.
We see general aviation becoming more and more environmentally friendly, and more affordable. We see it becoming even safer, and easier to operate. We see a future where general aviation becomes even more of a mainstream mode of transportation. We see it where we are able to take people off congested roads and out of congested airports and allow them to fly point-to-point, reducing substantially the amount of travel time it takes to go from doorstep to doorstep.
So we think that the general aviation industry is in an exciting position. We are pleased that several members of this committee will be in Oshkosh on Saturday and get a chance to see the vibrancy that is out there today and perhaps glimpse the potential that this industry really offers for the United States.
As excited as we are about that future, we do recognize that there are significant challenges to us making our vision a reality. Among those challenges, clearly we have some workforce issues. For us to reach our goals, we are going to need to have pilots, and we are going to need to have A&P mechanics. In addition, we are concerned about the workforce out there. If you look at the educational trends at our Nation's universities and high schools, they are going away from vocational training and going away from engineering and science. That is a concern to us as we are going forward.
Page 30 PREV PAGE TOP OF DOC We are also concerned about the amount of time it takes to certify our products. In order for a manufacturer to bring a new product to the market, we must go through the FAA for certification, and that is how it should be. But the FAA is challenged in terms of resources in the certification area, it is challenged in terms of the technical competence of the people in that area, and it is challenged by the process itself. And so we have been working with the FAA to try to streamline the certification process and make it not shorter in terms of safety, we do not want to sacrifice that, but we do want to base it on common sense. We also want to make sure the resources are there to accommodate the exciting new products that are coming to market.
In addition, we are concerned about the system delays that this committee has spent so much time focusing on. General aviation is a vital link in our Nation's transportation system and we need access to the airspace and the airports for us to continue to provide benefits to the American public. So we are looking forward to working with this committee on trying to address some of those serious issues.
And a final barrier that I want to touch on is one that has been talked about already today, and that is the international competition issue. For several years GAMA has been watching as the Europeans in one form or another have been promoting different types of rules, regulations and laws that seem to have the impact of hurting U.S. manufacturers but not Europeans. We saw this with the proposal that they had on extended range twin-engine operations, where U.S. manufacturers of twin-engine aircraft were harmed but the French, who manufacture a tri-jet engine, were not impacted. We saw this in flight training proposals, where the Europeans said in order to train a European pilot that should be European headquartered and 51 percent owned by Europeans. We have seen it in the certification process and validation process in Europe, where it takes them almost half as long to validate an airplane as it took the FAA to certify it initially. That is wrong. And we have seen it most recently with the European hushkit regulations.
Page 31 PREV PAGE TOP OF DOC When we have seen all of that at GAMA, we have come to believe perhaps this was a coordinated effort. Perhaps the Europeans have targeted the U.S. aerospace industry and decided that they wanted to challenge us for world leadership. I think all of those suspicions were confirmed when we saw the European Vision 2020 statement, which said clearly that the Europeans wanted to be the world leader in all aspects of aviation by the year 2020. And I think that is a pretty substantial challenge. Importantly, they are willing to put $93 billion into their industry between now and 2020 to become the world leader in all aspects of aviation.
Now I would suggest the United States has always responded very well to challenges. And I hope, if nothing else, the hearing today helps put everyone in the United States on notice that our aerospace industry is being challenged by the Europeans. I think we need to respond to that challenge. I think we need to respond by renewing NASA's commitment to aeronautics. I think we need to respond by making sure all of our Executive Branch agencies understand what is going on and what is at stake and so we all work together to address this challenge. And I think we clearly need to invest in our own system. I think we need to make sure we continue to be the world's best market for aviation products.
I am confident that we can get there. I think that the important first step is to recognize that the U.S. always has been the world's leader in aviation, it is now the leader in aviation, and it can continue to be the leader in aviation if we work together and we fight for it. And Mr. Chairman, that title of world leader in all aspects of aviation is worth fighting for. Thank you.
Mr. MICA. Thank you.
We will hear now from one of those U.S. agencies, the United States Trade Representative's Office. We have the Director of Aerospace and Automotive Trade Policy, Mr. Steve Falken. Thank you for coming, and you are recognized.
Page 32 PREV PAGE TOP OF DOC Mr. FALKEN. Thank you, Mr. Chairman. I request that my full statement be included in the record.
Mr. MICA. Without objection, your entire statement will be made part of the record.
Mr. FALKEN. I appreciate the opportunity your subcommittee has afforded to the Office of the U.S. Trade Representative to discuss the subject from the perspective of the President's Trade Agreements Program. The importance of the U.S. aircraft industry has been recognized in the negotiation of international trade agreements and in special provisions in agreements dealing with aircraft trade. In my written statement I have provided a concise overview of three major trade agreements governing civil aircraft trade, including the 1994 Marrakesh Agreements establishing the World Trade Organization, the WTO; the Signatural Agreement on Trade in Civil Aircraft incorporated into the WTO as a plurilateral agreement applicable to 27 parties who have signed it; and thirdly, the 1992 U.S.-European Community Agreement Concerning Large Civil Aircraft.
I appreciate the Chair's favorable remarks concerning the Trade Promotion Authority. One purpose of the Trade Promotion Authority legislation that the President seeks is to improve and expand these agreements in the aircraft agreement as well as to include more broadly other agreements that would reduce tariff and non-tariff barriers to all U.S. exports including aircraft.
I will now turn to how those agreements affect the competitive environment for international trade in aircraft and describe the status of some current trade problems facing the industry and the Administration's efforts to respond to them.
Although changing market conditions and foreign government practices make it difficult to interpret the net effects upon our competitiveness of the WTO Aircraft Agreement, it resulted in the elimination of duties and contributed to the reduction of trade barriers and increased trade among its signatories, and may have contributed to fairer competition in third markets. Broad international markets are, of course, essential for achieving scale efficiencies in aircraft programs.
Page 33 PREV PAGE TOP OF DOC Nonetheless, the WTO Aircraft Agreement has not been entirely effective. Specifically, the Aircraft Agreement did not appear to deal well with massive government subsidies provided by the Airbus Consortium governments. Although in 1991 a GATT complaint against all Airbus subsidies was initiated by the U.S., the solution sought by both sides at the time was a negotiated one. The resulting 1992 U.S.-EU Agreement on Large Civil Aircraft covers large civil transport aircraft with 100 or more seats. General aviation aircraft and business jets and engines are not covered by that agreement.
This agreement contained specific disciplines over European government support for the Airbus Consortium. The major improvement here was this was a front-end voluntary limitation on support. The alternative at that time was to go to the GATT and prove that there were subsidies that harmed U.S. exports or invoke domestic U.S. statutes against subsidies and dumping. But in either case, injury or threat had to be clearly demonstrated and this was a time when the U.S. industry was accounting for over 80 percent of the deliveries. Time and the market share numbers have changed, as has been noted, but with regard to the WTO and domestic laws, the 1992 agreement represents no derogation to those.
The current situation. From 1992 until 1997, the EU Airbus governments did not provide any new direct supports for the development of new Airbus aircraft programs. However, in the following two years, they announced new government support for the development of derivative versions of the existing Airbus A380 and A340 aircraft.
In April of this year, the EU notified the U.S. that seven Member States had made commitments to provide development support for the Airbus A380 aircraft, the so-called super-jumbo. They also provided confidential information under the transparency provisions of the 1992 agreement on the terms of that support and publicly declared that it was on terms consistent with the interest rates and repayment terms of the 1992 bilateral Large Aircraft Agreement and within the 33 percent limit for such support provided by that agreement.
Page 34 PREV PAGE TOP OF DOC Although we appreciated this notification, the Administration continues to be concerned about further EU Member State subsidies for Airbus since it is a mature company with about half of the global aircraft market, and Ambassador Zoellick has raised this concern with EU Trade Commissioner Pascal Lamy and other counterparts within the EU. We have reviewed the information in the EU's April notification on supports for the A380. However, in order to undertake further analysis, we have requested supplemental information from the EU prior to our next consultation, which we expect to take place in September.
On other trade matters, some of which would have been already mentioned here. During the WTO Aircraft Committee meetings and bilaterally, we have also pursued these other possible trade distortions that might affect the competitive situation of U.S. aircraft manufacturers and air carriers. These include foreign government support for aircraft suppliers, delays in certification of large U.S. aircraft and business jets, and EU regulation of aircraft equipped with noise quieting hushkits and engines. On this last matter, as you may know, the Administration initiated an arbitration dispute resolution procedure in ICAO under Article 84 of the Chicago Convention last year, and we are actively discussing the resolution of this matter with the EU in the context of the development of new ICAO standards for aircraft operations.
The Administration has also intervened as a third party in the aircraft subsidy dispute in the WTO between Brazil and Canada on commuter aircraft. Though the U.S. does not currently produce the size aircraft involved in the dispute, we believe that the interests of U.S. aircraft and component producers are best served by minimizing the use of trade distorting subsidies by Canada or Brazil.
The Administration is also concerned about the adverse effects of free trade agreements that have been negotiated by other countries; for example, the association agreements between the EU and several Eastern European countries, which provide tariff preferences for EU exports of aircraft and other products. While we are seeking and have achieved some unilateral tariff suspensions for aircraft exports to these countries, U.S. aircraft exporters could lose business to foreign competitors in Eastern Europe or in other countries with similar preferential trade agreements. Trade Promotion Authority is needed to place U.S. aircraft exporters on an equal footing in world markets.
Page 35 PREV PAGE TOP OF DOC In the future, the Administration will continue to update
and strengthen the WTO Aircraft Agreement by bringing it into conformity with the new WTO framework, this agreement was not updated when the WTO was established in 1994, and we will maintain the balance of rights and obligations with respect to the other WTO agreements, particularly the agreement on subsidies and countervailing measures which could apply to aircraft.
The Administration will also continue to make it a high priority for countries with aircraft industries that are seeing membership in the WTO to become signatories to the Agreement on Aircraft as part of their WTO accession obligations.
Finally, the Administration is committed to the appropriate exercise of our rights under multilateral, plurilateral, and bilateral trade agreements covering the aircraft sector. Foreign aircraft competitors should face the same market risks as the U.S. industry and should not be insulated from those risks by various government supports.
Lower tariffs and improved trade rules will benefit the U.S. aircraft industry by removing trade barriers, promoting fair competition, and helping them to export. In order to negotiate new or improved trade agreements and to seek tariff elimination, we hope that Congress will soon provide the President with the Trade Promotion Authority necessary to do this.
I will be pleased to take questions at the end. Thank you.
Mr. MICA. Thank you.
We have one more witness on this panel. We will now hear from Robert Rogowsky, the director of the Office of Operations of the United States International Trade Commission. We appreciate your participation, and you are recognized.
Mr. ROGOWSKY. Mr. Chairman and members of the subcommittee, I am very pleased to have the opportunity to share some of the findings of a study we conducted at the request of the House Ways and Means Committee. The committee requested that the Commission examine the ability of the U.S. civil aerostructures industry to compete over the short and the long terms with those industries in Europe, Canada, and Asia. I should point out that the aerostructures industry is a supplier of relatively large complex components to the large civilian aircraft manufacturers.
Page 36 PREV PAGE TOP OF DOC The Commission examined the process of new aerostructures development, the means and trends of government support for R&D, and the relative strengths and weaknesses of the aerostructures industries in those countries. I want to briefly summarize some of our principal findings.
The U.S. aerostructures industry became the world leader through its design and engineering expertise, skilled workforce, and long term experience in supplying large civilian aircraft manufacturers. Its competitive position appears to be deteriorating, however, as it confronts the multiple challenges of a smaller customer base supplying mature programs that typically do not employ or allow the most cost-effective state-of-the art manufacturing processes, and operate under more aggressive and demanding contract terms. In addition, U.S. firms are facing increased competition from European and Asian producers and a declining U.S. aeronautical R&D infrastructure. Whether the U.S. aerostructures industry can maintain a strong competitive position is directly related to its ability to overcome these challenges.
The customer base has dropped from three major U.S. large civilian aircraft customers to one domestic and one foreign. These customers, facing their own pressures from competitively pressed civilian airlines, are in turn putting more pressure and demands on their aerostructures suppliers. U.S. aerostructures suppliers appear to be disadvantaged by the growing use of risk-sharing elements in contracts with large civilian aircraft manufacturers. Foreign competitors are more experienced with risk-sharing, and in some cases it appears the risks are mitigated by public monies or the availability of favorable interest rates.
U.S. firms indicate that they generally can meet recurring costs but often find it difficult to meet nonrecurring costs. Moreover, aerostructures suppliers increasingly are being forced to assume greater responsibility for supply chain management and often face renegotiation of long-term contracts. These new requirements set up a challenge to acquire capital. Options include more aggressive efforts in the open market, consolidation with other companies, or linking with foreign companies receiving government support. Some U.S. companies have already integrated the assets with smaller firms to compete more effectively in the global market.
Page 37 PREV PAGE TOP OF DOC The U.S. industry lags its foreign counterparts, especially in Europe, in implementing new manufacturing technology. The most economical time to upgrade or add expensive tooling is at the inception of a new program; consequently, participation in newer Airbus programs has contributed to the ability of many European aerostructures suppliers to invest in the most current manufacturing equipment and processes. Workforce limitations and labor law rigidities, typically considered a competitive disadvantage, have forced the Europeans more aggressively to implement productivity-enhancing capital equipment.
Pressure from emerging manufacturers is growing, especially in Asia. Large civilian aircraft manufacturers are willing to use the procurement process to gain access to Asia's large and growing market for aircraft, skewing competition for contracts. Moreover, many of these firms are often components of larger corporate entities with deep pockets to support a growing and desirable manufacturing sector. In some instances, China being a notable example, the government determines which aerostructures firms receive subcontracting work regardless of the distinct capacity or cost of production, with the goal of improving local skills. In this case, government support and the aircraft manufacturers offset agreements govern the competitive process for contracts.
On top of these changes in the marketplace, NASA's relatively flat aeronautical budget allots relatively little for aerostructures programs. The basic U.S. research infrastructure is critically important to the industry and is in many important ways falling behind the newer facilities found in Europe and Asia. In the important area of wind tunnel research, despite NASA's partnering with industries around the world, the income generated is not always sufficient to address the long-term needs of these research facilities. U.S. firms increasingly go overseas for state-of-the-art facilities.
To retain their competitive position in the face of challenges presented by European and Asian firms and address the more intense competition for a shrinking number of large civilian aircraft programs, U.S. aerostructures producers must adopt the industry's current ''best manufacturing practices,'' amass the corporate size needed to fulfill the added demands of new contracts and risk-sharing requirements, and be supported with a state-of-the-art research infrastructure. U.S. firms unable to adjust will likely not survive as large civilian aircraft aerostructure suppliers.
Page 38 PREV PAGE TOP OF DOC Thank you again for this opportunity, and I would be happy to answer any questions.
Mr. MICA. Thank you.
I want to thank each of you for participating. We will have time to get maybe a few questions in, maybe we can get one or two quick rounds. First of all, Mr. Rogowsky, in the International Trade Commission's report on competition in the large civil aircraft aerostructures industry, your group reviewed the global marketplace to evaluate how U.S. manufacturers are competing. In what established marketplace are U.S. manufacturers' competitiveness ability declining the fastest? Can you give us some idea where we are losing advantage and what the cause of the decline may be?
Mr. ROGOWSKY. In terms of the aerostructures industry, the place where we are facing the greatest competition of course is in Europe which has a growing and sophisticated industry. One of the reasons we are struggling there is that they are tending to sell to Airbus. Of course, there is a strong connection that they have with the Airbus manufactures. But they also have very good facilities because these are very high-tech, complicated, sophisticated pieces of equipment that are going into the aircraft and they have a strong infrastructure facility system that is allowing them to
Mr. MICA. Excuse me. We have been joined by Grant Aldonas, the Under Secretary for International Trade of the International Trade Administration in the Department of Commerce. Since we have got about ten minutes or less before we need to scoot for a vote, we will go back and hear from him at this point, then we will recess for about fifteen minutes while the members vote. This way everyone will get to hear Mr. Aldonas before they leave. There will be a bell in about three or four minutes and after that you will have about three or four minutes to conclude.
Mr. Aldonas, welcome, and you are recognized.
Page 39 PREV PAGE TOP OF DOC
Mr. ALDONAS. Thank you, Mr. Chairman. Mr. Chairman, Congressman Oberstar, who is from my home State, I used to spend a lot of time up in your district as a canoe guide years and years ago and am heading out there again this weekend. And I will be travelling on hopefully a Boeing aircraft. I know it will be Northwest, there is no doubt about that. First of all, I want to say on behalf of Secretary Evans how much I appreciate being invited to testify and look forward to establishing a good working relationship with the committee and with the subcommittee.
The United States obviously has developed a world class air manufacturing industry. That is something the Secretary emphasized when he was in Paris last month at the Air Show. U.S. manufacturers of aircraft and aircraft components can more than hold their own in the global marketplace, given an opportunity for free and fair competition.
Access to foreign markets is, of course, crucial for the U.S. aerospace industry, and especially for manufacturers of civil aircraft and parts of civil aircraft. About two-thirds of all large civil aircraft produced in the United States are shipped to overseas customers. So all the more reason that we are interested in overseas markets on behalf of our manufacturers.
One other thing that I want to make clear, which is not often known, is the degree to which these exports sustain hundreds of thousands of high wage, high-tech U.S. jobs not only with the manufacturers themselves, but with their suppliers. What I have with me is actually a description that Boeing has put out about its suppliers. And if you look at it, one of the wonderful things about it is it shows you that these are a lot of small-and medium-size enterprises that are not necessarily engaged directly in exporting, but it draws on parts and component suppliers from all around the United States. And the list is phenomenal. You are looking at 10,000 or so parts and component suppliers in the United States.
Page 40 PREV PAGE TOP OF DOC So the aerospace industry is not just important in terms of the actual sales of the aircraft themselves, but of the follow-on industries in the after-market and the services market that they provide a vehicle for. According to Boeing's commercial airplane group, in 1999 they paid more than $13 billion to suppliers throughout the United States, including small companies like Circle Seal Controls, Hansen Engineering, Stretch Forming Corporation in California, Air Pro Incorporated, Future Metals, and Tensilelight in Florida, Hitchcock Industries, Progress Casting, and RMS Company in Minnesota.
There are competing visions now for where we go with the aircraft industry for large civil aircraft. Airbus believes that there is demand for significant numbers of a 550 seat-plus aircraft to serve major air transportation hubs. Boeing sees air carriers choosing smaller aircraft to meet point-to-point demand on a much faster basis.
From the perspective of the Administration, what we need to see and what we must have is a level playing field. Not that the competition is determined by governments or government intervention, but that it is determined by the competitors themselves and what they can bring to the table in terms of technology, in terms of their manufacturing prowess. We believe under those circumstances the United States has some hands down winners.
Now there is a civil aircraft trade agreement that my colleague from the USTR may have mentioned that imposes disciplines on subsidies and other government grants. It has been in place since 1992. We are in consultations with the European Union over the A380 in terms of the financing that is being provided. Those conversations are ongoing. We expect the maximum amount of transparency from the EU, as the agreement requires. We are going to look forward to concluding those conversations and ensure that we do have their plan in place and understand whether it fits within the parameters of the agreement.
But it does bring me to a point that I did want to make, which is that to the extent that the disciplines are insufficient, there is a meeting in Doha this fall which is going to launch a new trade round of negotiations. One of the things I think we have to actively consider is what we have in the way of disciplines on government intervention in this market in particular, and to see what we do next to ensure that our interests are vindicated at the negotiating table going forward.
Page 41 PREV PAGE TOP OF DOC Now to do that, obviously one of the key elements that is going to face the Congress to see whether we can launch a round in Doha that address these sorts of things is the grant of Trade Promotion Authority by Congress. At the end of the day, many people oftentimes say that Trade Promotion Authority is not needed until the end of the negotiation process. I have to say, based on my experience, it is needed at the front end more than ever. And the reason is, it is Congress' responsibility under the Constitution to regulate our foreign commerce, and what we have to have at the negotiating table, frankly, is the agreement of both Congress and the Executive to have our trading partners understand that we are at the table with the full powers and the full backing of the Congress and the U.S. Government when we come to the table with our offers and when we try to bring a deal together at the close. So, we need Congress and the President together on the negotiating objectives at the front end.
Let me close simply by saying I appreciate the opportunity to be here, the opportunity to be heard on the topic, and want to express our interest in working with the committee on these issues going forward. Thank you very much.
Mr. MICA. Thank you. Thank you also for your brevity.
We will recess here for approximately fifteen minutes, reconvene about a quarter of twelve, and then we will have an opportunity to continue questioning of all of the panelists.
With that, we will stand in recess.
Mr. MICA. The hearing will come back in order.
I think members will be returning shortly. But if we can, I would like to continue some questioning. We have heard from all of the witnesses now in this panel. One of the things that concerns me, we had a chart that I think Mr. Douglass showed, and typically the U.S. has sort of recovered in the export area even in times of economic downturn, but what we have seen recently, and in the last chart you showed, is that imports are continuing since I guess 1994-1995 to grow dramatically as a percentage of our foreign trade. In what areas are we seeing this aerospace import activity take place?
Page 42 PREV PAGE TOP OF DOC Mr. DOUGLASS. Well, sir, it is in several areas. The one we have talked about the most today, of course, which is kind of the subject of this hearing, is in the large aircraft arena.
Mr. MICA. What about parts?
Mr. DOUGLASS. Sir?
Mr. MICA. What about parts and other
Mr. DOUGLASS. Yes. I was just going to say, there is a very disturbing trend across the board in the whole parts and subcontract arena, and it has to do with the problems that we have had, sir, in recent years in export licensing. Just to give you one example that is an overall aerospace example that affects this considerably, several years ago, after some concerns in the Congress about trade with China, they moved the licensing of commercial communication satellites from the Department of Commerce, where normally commercial goods are licensed for export, over to the State Department, where we license bombs, rockets, and military systems. That move alone cost us 40 percent of our global market share.
And what did the Europeans do? They decided to design out all American content on their space programs. And that is a national policy of the EU not to buy commercial communication satellite components from the United States because they cannot get them in time to meet their launch schedules because of the lengthy licensing process in the Department of State. So not only have we had this phenomena in the large airplane business, but we have also seen it across the board in all of the suppliers that supply to the large airplane business and in the space business as well. This has a big impact, as you know.
Mr. MICA. I had never been to the Paris Air Show. I went and spent about three days there, the first time I attended, the first time some of the other members attended, and I was quite shocked really to find the number of vendors who seemed to be taking some of our research and technology or even our parts and are now producing them. One of our local vendors from Florida was there, I saw him again this morning, and he produces a small component, but he said that he is written out of the specifications. He has tried to enter that market and failed and is still failing.
Page 43 PREV PAGE TOP OF DOC Is this something we are seeing more of, that the components and the construction of the planes or whatever are weighted toward other manufacturers?
Mr. DOUGLASS. Yes, sir. Let me give you a perfect example of that, Mr. Chairman. I recently had one of my member companies come to me with the following problem. This member company makes switches. If you were to go in the cockpit of any airplane, whether it is Boeing or whatever, you would see, as you know, a lot of switches all over the place that the aircrew has to use to do things like turn things on and off, to connect radio frequencies, to do various functions. And this company made a wide variety of switches which are used in both commercial and military airplanes. More and more the military is using commercial products because they are built in such large numbers.
Well, this company was supplying switches to the British in a British trainer which the British wanted to sell to India. And because our State Department is mad at India over some of their foreign policy issues, they put them on the restricted list. So the British company called up our American company and said if you do not get a waiver to the export prohibitions, we are going to design you out of our airplane and you will never ever again be sent a request to bid on any of our products. Now that is happening more and more across the board.
Mr. MICA. One of the other charts you showed was the pie chart which showed how it appears that if our industry is to compete, they are going to have to go after export markets.
I think it grew to some 41 percent, is that correct?
Mr. DOUGLASS. Yes, sir.
Mr. MICA. What is our ability to compete, particularly for small and medium manufacturers?
Mr. DOUGLASS. Well, it is becoming increasingly complex. One of the programs that AIA has set in motion, Mr. Chairman, is to organize our small and medium suppliers in their effort to market in the global economy. If you were at the Le Bourget Air Show, I think I saw you there, I did take Secretary Evans, Secretary Aldonas' boss over and show him where AIA has purchased a large display area. I purchased it in block and then resold it to my small and medium members at a discount so they could come to Paris to exhibit in a global arena to try to sell their products. So we are trying to do that. Many of our large aircraft manufacturers are doing the same thing because they recognize that by having their vendors and suppliers able to sell into the global economy it helps them because it lowers the price for everybody.
Page 44 PREV PAGE TOP OF DOC So, across the industry there is a sort of a management trend for us to work together to try to provide opportunities for the small and medium vendors to have access to the global economy.
Mr. MICA. I compliment our folks on getting access to some of those markets for our smaller folks to compete or at least show their wares. I was a bit disturbed though, I went with Mr. Boehlert, the Chairman of the Science Committee, that some of the members took some hits from the press when they came back. The press has acted very immaturely towards the members. We had the Science Committee people take a weekend, which I guess it sounds pretty glamorous to go to Paris, but flying over and back is sort of an ordeal as far as your time, other priorities. But the U.S. I do not think has ever had a better representation, and it is particularly important that the Science Committee saw what is taking place. Mr. Mineta was there in addition to Secretary Evans. Mr. Mineta and I both agreed that if we do not do something, we could become bit players in this whole industry that we have dominated for some years.
This 2020 Vision seems to be a targeted effort, Mr. Falken, to really come after the U.S. market. Is that something that our Trade Representative is aware of and is trying to develop some strategy to compete on an equal footing?
Mr. FALKEN. Well, we are certainly aware of the report. I have read it. We are not responsible in the Trade Representative's Office for promoting R&D, but we will be working with the Aerospace Commission soon to be set up, which is sort of our response in part to that report, to take a look domestically here at what we should be doing. We will provide input to them since they will also be looking at our trade rules as well.
Mr. MICA. You and others have advocated giving the President Trade Promotion Authority, Mr. Aldonas. Labor seems to be one of the primary critics of approving that authority and believes that there would be some loss of jobs. However, it appears that with that trade authority you have the potential for trying to move forward with job creation, or at least keeping our own place, by allowing us to enter markets we are excluded from. What is your take on how this will affect labor?
Page 45 PREV PAGE TOP OF DOC Mr. ALDONAS. Well, it is interesting. The critics of trade have oftentimes said that we were going to see our manufacturing base hollowed out, that we were going to see lower labor standards in a race to the bottom. In fact, the evidence over the last decade, while we have opened up our market and opened up other markets with respect to both the North American Free Trade Agreement and the Uruguay Round, has
been just the opposite. In fact, manufacturing as a percentage of our GDP has held steady at 17 percent. Private sector productivity has been up 3 percent a year, well in advance of what it has done before. And economic growth has been the strongest in a generation. And, at the end of the day, the labor laws have obviously remained in place, and nobody disagrees with the idea of trying to promote labor rights going abroad.
So, ultimately, trade provides some real benefits, particularly in areas like aerospace where you have very high paying jobs, the average wage is well above the average. So it is exactly the sort of sector where we want to stay in front and stay out ahead of our competitors.
Mr. MICA. Thank you.
Let me now yield to Mr. Matheson.
Mr. MATHESON. Mr. DeFazio, if you would like, I could yield to you now to ask questions.
Mr. DEFAZIO. Thank you. I thank the gentleman for yielding.
To Mr. Aldonas, on page two of your testimony, the bottom
paragraph, you say, ''In the past, some European governments have sought to influence these decisions by potentially offering increased airline landing rights....'' I have heard very consistently that they actually do offer increased landing rights.
Mr. ALDONAS. I was trying to be delicate.
Mr. DEFAZIO. But when other countries are bribing people to buy their products, should we continue to be delicate or should we start to confront the problem?
Page 46 PREV PAGE TOP OF DOC Mr. ALDONAS. Plainly not. And in our discussions with our trading partners, we are as direct as we possibly can be about that. There is a host of issues out there. I wanted to come back to something Chairman Mica said as well, Congressman, which is increasingly you see alternative ways of trying to guarantee market share or trying to enter markets, whether it is the use of regulatory authority or whether it is something like these sorts of inducements. That is the new leading edge of how governments try and provide support.
In the point of view of the Commerce Department, we need to be there in front of those issues, frankly. It is not just about securing compliance with our trade agreements, which is very important in this area, we need to reach beyond that in terms of our advocacy.
Mr. DEFAZIO. Right. Focusing on tariffs and other such antiquated barriers is really fighting the old battles, the last battles, and not the new battles.
Mr. ALDONAS. True.
Mr. DEFAZIO. I just consistently have heard, particularly in China and elsewhere, that this has been an inducement. You got an Airbus and you get two slots at Heathrow. The U.S. of course then gives away our landing rights with impunity to whomever. I really think we need more of a level playing field there, as you said. We certainly do not have a level playing field.
I'd like to reflect on your remarks on Trade Promotion Authority. There is plenty of blame to go around and I would put it both to the Bush one and Clinton Administrations. At the time of the GATT and the WTO arrangements, I raised questions regarding the aviation sections of the agreements. I said that I really do not think these are adequate to go to the principal problem we have here, which is the subsidized development costs in Europe. At the time, Boeing said, do not talk about that, people buy Airbus and they buy our airplanes. We do not think this is really a problem. Now, of course, this is an extraordinary problem.
Page 47 PREV PAGE TOP OF DOC There is some reference both in your testimony, and I believe in Mr. Falken's testimony, about the super jumbo A380 triple-X, whatever we call it these days, and this unprecedented agreement for development costs. We are asking for transparency, but how aggressively are we going to pursue that? And what tools do we have under the current international trade arrangements to pursue a complaint of unfair competitive advantage through subsidized development costs on that plane?
Mr. ALDONAS. Well, all of this is subject to the normal dispute settlement procedures. But the first step in the process is an examination where they owe us an obligation of transparency with respect to the plan. They have been providing information and we are continuing to work with them on that in terms of what the plan and all the costs are. In fact, just yesterday in preparation for the hearing, one of the things that I was trying to drill in on is whether we actually have the capacity to do the financial analysis on that to make sure we understand whether, if this were a ''green field'' investment, would the private sector investors be interested in this project absent the government intervention or the government supports on it. We are very focused on that in terms of trying to bring that analysis to bear, and I intend to find the resources in government to do that.
Mr. DEFAZIO. And should you find that, in fact, does not pencil out, what would be our options? We have both the agreement previously on the aviation sector and then we have the WTO. What is the strongest enforcement action we could pursue if we found that to be the case?
Mr. ALDONAS. I think it is within the framework of the WTO. Ideally, the discussions would be with the EU, should their commitments in terms of support exceed the limits provided for under the 1992 agreement, that they would reduce those commitments in a way that kept them within the guidelines that they had agreed to in 1992, at a minimum.
To go further than that though, and that was really the reference I made to Trade Promotion Authority, not only here but in many other areas it may require us to reach beyond where we have been in the past under the subsidies and countervailing measures agreement to actually impose further disciplines on domestic subsidies, in part to get governments out of the business of subsidizing. And what that may mean is bringing a new round together and including these sorts of elements on the table. At the end of the day, I think the President needs to put these sorts of issues on the table so you do get governments out of affecting the marketplace.
Page 48 PREV PAGE TOP OF DOC Mr. DEFAZIO. But the last round took I believe seven years.
Mr. ALDONAS. It did.
Mr. DEFAZIO. And so we are not anticipating we are going to do this round in one or two, I assume.
Mr. ALDONAS. Well, Congressman, I do not intend to let up on the enforcement side of this.
Mr. DEFAZIO. Right.
Mr. ALDONAS. Part of what Congress has asked the Department to do is look after compliance. And we have gotten a lot of additional resources recently. I intend to make that my central focus while I am there. I understand from Congress' perspective that if we are not doing a fair job in terms of enforcing our trade agreements, we cannot expect the American public to support a forward leaning trade strategy or forward leaning trade agenda. That is an obligation we own. And certainly the Secretary is going to judge my performance on whether or not we are doing an adequate job. We will not let up on that front.
At the same time, if it is something that has to reach beyond the existing agreement, that is something that we are going to have to take care of at the negotiating table, not only in this sector, but in other sectors that are affected by trade as well in our economy.
Mr. DEFAZIO. Right. I think a couple of things we have discussed here, both the linking of slots and/or subsidized development costs, would be prosecutable under existing trade agreements.
Mr. ALDONAS. Fair enough.
Mr. DEFAZIO. Okay. Thank you. Thank you, Mr. Chairman.
Mr. MICA. Thank you.
Let me recognize Mr. Duncan.
Mr. DUNCAN. Thank you, Mr. Chairman. I apologize, I have been in and out so maybe you have covered some of this.
Page 49 PREV PAGE TOP OF DOC Secretary Aldonas, almost everybody says to us on every issue is all they want is a level playing field; we hear that all the time. But what countries are giving us the most difficulty in achieving this level playing field? What countries are giving us the most trouble in regard to our aviation products?
Mr. ALDONAS. It depends on the product, of course. But most of where the issues have been in the past have been with the EU and the discussion about subsidies. Increasingly, I think what we are finding is that governments are turning to alternative methods. So you start to look at regulatory restraints, you start to look at the use of Airworthiness Certificates, things like that as a means of leveraging your market share. That is sort of a new host of issues. A number of those are concerns that we have raised with our European trading partners precisely for some of the reasons that Congressman DeFazio is suggesting. They may either, if the facts prove true, violate existing trade agreements or are on the margins, but they are certainly things that are inconsistent with the spirit of where we are trying to move in terms of the industry. But that is a source of issues.
There have been complaints, for example, between the Canadians and the Brazilians within the WTO as well about similar sorts of issues on subsidies.
Mr. DUNCAN. Where do we stand with China?
Mr. ALDONAS. With China, of course, they are not in the World Trade Organization yet. I expect that will happen shortly. I expect that they will be trying to reach agreement on some final stages. At that point, they will become subject to the disciplines of the WTO generally. But I have to be clear that they would not be a part of the 1992 agreement, if I am not mistaken, and so only the normal subsidy measures would apply. And there, the only real tight discipline you have is on export subsidies as opposed to inputs.
Mr. DUNCAN. When you talked about the EU, of course Airbus is the big player, but the Airbus people tell me that about 40 percent of their product is made in the United States. Do you think that is an accurate figure?
Page 50 PREV PAGE TOP OF DOC Mr. ALDONAS. Well, it could be if they are using a U.S.-produced engine on their airframe. Certainly, we are strong advocates for American engine manufacturers to crack the European market. But that is probably the high end of what they purchase.
Mr. DUNCAN. What percentage of their operation do you think is subsidized by governments?
Mr. ALDONAS. I could not give you a figure right off the top of my head. But I would be happy to get back to you on that.
Mr. DUNCAN. All right. Thank you.
Mr. Falken or Mr. Rogowsky, what types of activities do we see governments in other countries doing to assist or promote their aircraft manufacturers? Give me some specific examples if you can.
Mr. FALKEN. Well, in marketing they will assist, have political officials, have diplomatic corps out helping assist in marketing the aircraft, but also combining that with linkages of inducements of the type that have been described here, the offering of things that only governments can offer like landing rights. Some of these things are hard to track down. One sees reports in the press, one fairly recently of the meetings between Western European officials from France and Russia talking about selling Boeing aircraft, and in the French press agency release there was something about linking launching from the Island of Karu of the Soyas with buying Airbuses. So one wonders about what is going on but one cannot jump at every rumor. Some of these things can be substantiated, others cannot.
Mr. DUNCAN. I am told that there are a lot more new entrants in other countries in these fields than there are in the United States. Is that accurate? Also, and I will ask Mr. Bolen or Mr. Douglass, in one of our briefing papers it says the aircraft manufacturing industry has shrunk from 25 companies to 4 companies in the last 19 years. What effect has that had on competitiveness?
Page 51 PREV PAGE TOP OF DOC Mr. DOUGLASS. Well, sir, there has been a general consolidation in the industry in what we call, I hate this term but it is the one we use, the post-Cold War period. I would wonder about the effect on innovativeness. I think probably there has not been much of an effect in the commercial side because of this intense competition between Boeing and Airbus. Clearly, if you look at what Boeing is moving towards in the sonic cruiser, it is probably the most innovative civil airliner to come along in many, many years. So it is hard to make an argument that the consolidation of the domestic civil aviation industry has led to stifling of innovation.
On the military side, there probably are some concerns about that. But that is more of a function of the relaxation of tensions around the world than it is an industrial consolidation. We are still many years ahead of our European allies in the ability to design and manufacture military aviation products. We are not ahead of them on the commercial side. They have reached parity I would say technologically on the commercial side. But there is a lot of innovation because there is a lot of competition.
Mr. DUNCAN. Mr. Douglass, you mentioned several trends that trouble you or concern you. Yet, last week in Aviation Week there is an article that says aerospace profits were very
strong and it presents a pretty bright picture, especially in comparison to what we see in the domestic airlines in this country that are having a lot of trouble. What do you say about that?
Mr. DOUGLASS. Well, sir, the manufacturing part of the industry, which is the part that I represent, is being well-managed. One of the things that caused us great concern over the last two or three years was that Wall Street sort of fell out of love with us right at the time when we were making record profits and they were putting all their money into dot-coms. That was enormously frustrating for us.
From a structural point of view, the industry is pretty well managed. Just to give you an example. If you were to go back to 1989, we produced $119 billion worth of product with 1.3 million employees. In 1999, we had gone all the way up to $150 billion of product with just over 700,000 employees. So we cut our workforce almost by 50 percent and increased our output by about 40 percent. And we stayed ahead of the general increase in manufacturing efficiency that the Secretary talked about that is there in the economy. So the industry, in my opinion, has been pretty well managed.
Page 52 PREV PAGE TOP OF DOC Our frustration is, despite the fact that we are very well managed, sometimes we cannot sell our products because they are offered on the market at a highly subsidized rate.
Mr. DUNCAN. Mr. Bolen, do you see any further consolidation within the industry?
Mr. BOLEN. I think some consolidation is out there. I think general aviation is uniquely situated from the commercial and the military in the sense that we, during the product liability crisis, really hit rock bottom. And since that has turned around, we have seen not only new investment by the established companies in general aviation, but we have actually seen some new companies coming into general aviation.
So we have seen our field grow. And we think the potential is there for it to continue. One of the reasons that it has been so robust is that the true market for general aviation products is the United States. Some 80 percent of the market for general aviation products is in the United States. So having a healthy, open environment here has been very advantageous. Now the second largest market, the one that we have targeted, is Europe and that has been much more challenging. It has been much more challenging because of the barriers to growth that I have talked about as well as their entire infrastructure, which, as you and I have talked about in the past, includes difficult air traffic control, not a lot of access to air space for general aviation, high user fees, and so forth.
Mr. DUNCAN. All right. Thank you. Thank you, Mr. Chairman.
Mr. MICA. Thank you.
Let me recognize Mr. Matheson.
Mr. MATHESON. Thank you, Mr. Chairman.
Mr. Rogowsky, you note in your testimony that ''United States aerostructures producers have not been able to upgrade their manufacturing capabilities and reduce their costs to compete effectively with the more advanced manufacturing methods found in typically more modern plants in Europe and certain Asian countries.'' That is a quote from your testimony. Do you have a sense why this is the case, and what
Page 53 PREV PAGE TOP OF DOCwe can do to ensure that U.S. manufacturing capabilities do advance with technology?
Mr. ROGOWSKY. One of the problems, as I had mentioned before, is with basic research. NASA actually provides a substantial amount, I think 80 percent is the figure, of the basic research in this area. And then the bulk of the research that the manufacturers produce is going into the application of this into products. So the NASA budgets, of course, have a big impact, and if budgets are flat, then basic research is going to be flat.
If you look at the expenditures in Europe, they have had some pretty substantial expenditures in the aeronautics and space areas. It is a little hard to sort out where the money is going specifically, but they have had some quite substantial research. And I did mention a very important technology is the wind tunnel technology. Airplanes are basically wings that carry people around and so that kind of technology and support is extremely important. And if research is not maintained as state-of-the-art, then our manufacturers have to go over there and buy time in those countries.
Also a problem, one of the great areas of competition is from the newer entrants, emerging entrants in the Asian markets. They are very aggressively working to improve their technology and to become more aggressive suppliers in this industry. Of course, one of the ways they can become competitive is with the offset agreements, where if we want to get access to their markets to sell our planes to their airlines, they want to have parts coming from those countries into our planes. So they have a competitive advantage in that way.
They are putting a lot of money in, both private money and public money, national funding, for research and development both military and civilian. And so they are pushing ahead aggressively in new technology. It is not that we do not have good solid technology and good engineering in the United States, but there are others that are catching up rapidly and have a great deal of help outside of the marketplace.
Mr. MATHESON. You also are suggesting that some of the Canadian aerostructures can expect future work from Airbus as Airbus experiences some supply limitations in Europe. Do you have thoughts about what U.S. manufacturers could do to attract that work?
Page 54 PREV PAGE TOP OF DOC Mr. ROGOWSKY. Well, as I say, there are lots of reasons why this work goes to certain places. U.S. manufacturers have to be able to compete as effectively as they can in the marketplace. One of the things that the U.S. manufacturers are getting better at that is fairly common in Europe, at least for the aerostructures industry suppliers, is this risk-sharing. We have to be more competitive in that area. That is both taking on some of the design and basic research for the components that are going into the aircraft. We have a longer history of having it designed by Boeing, possibly McDonnell Douglas earlier, and it is sent down and then they produced a spec. But now Boeing is changing its focus and it is taking a lot of what had been their design and the intellectual property that they were developing and sending it
down for spec and now expecting their suppliers to provide it.
So that is a new strategic area in which our suppliers have to go. And as they get better in that area, and our report talks about this some, but as they get better in that area, they will be more competitive with some of the firms in Europe that have been doing it. And I think that kind of competition will help steer it from Canada down to the United States. Other more export promotion areas I will leave
to Mr. Aldonas.
Mr. MATHESON. Okay. Mr. Douglass, I wanted to ask you one question. In your testimony you referenced the United States' cumbersome export licensing process as a significant barrier to trade. Could you talk about how this process limits our manufacturers' ability to compete in the global marketplace.
Mr. DOUGLASS. Yes, sir. As you know, we have two systems. We have one administered by the Commerce Department which is designed basically to say yes unless there is a security reason to say no. The principal interest in the Commerce Department is on regulating dual-use technology which could be used for either military or commercial services. Over in the State Department, there is quite another system which is for military products, and it is basically designed to say no unless there is a reason to say yes.
Page 55 PREV PAGE TOP OF DOC The problem lies when you get a commercial product stuck over in the State system. The State system is so pervasive and technology is changing so rapidly that more and more and more of our product base gets caught up in that State system. And when that happens, sir, we cannot meet the deadlines of the global economy. If one of our companies gets a request for a proposal from a European company and they have to respond in 30 days, chances are State Department has just begun to open up the envelop by the time the bid is due. That is a huge structural problem.
The other problem is, as you know, the Export Administration Act, the foundation for the commercial system, has really not been enacted for I think the last 10 or 12 years. That is an issue that we think needs to be looked at so that the whole underpinning for commercial exports in the United States can be rethought and moved forward by the Congress.
Mr. ALDONAS. Mr. Matheson, if I could just say for the record.
Mr. MATHESON. Sure.
Mr. ALDONAS. From the Commerce Department's perspective, we do not look at the system as being designed to say yes. We look at it as a statute and a set of regulations that are now enforced under the International Emergency Economic Powers Act where there is a series of things that we look atend use, end user. Certainly, we try and focus the list as narrowly as possible so that it is only those technologies or goods that might invoke questions of national security or any of the other provisions of the law, and then we take it on a case-by-case basis when a license is required.
Mr. DOUGLASS. I certainly did not mean to denigrate. I was trying to give you a compliment over there, Mr. Secretary.
Mr. ALDONAS. I knew you were carrying my equities, I just wanted to say that for the record, John.
Mr. MATHESON. Mr. Aldonas, let me ask you just one other question. Do you believe that there are countries that are violating the subsidies agreement right now?
Page 56 PREV PAGE TOP OF DOC Mr. ALDONAS. Well, I think that certainly you worry about the level of support that people have claimed is coming out. It is going to require some time to work our way through the information available from the EU to really make a determination about whether that is under the line. Up to this point, our sense is we will keep our powder dry until we have got all the information in front of us and then make the judgement accordingly.
Mr. MATHESON. Okay. Thanks, Mr. Chairman.
Mr. MICA. Thank you.
Let me recognize Mr. Hayes now.
Mr. HAYES. Thank you, Mr. Chairman, and thank you for holding this series of hearings which are very vital to our aviation industry in this country.
I would like to follow up on your last question, Mr. Matheson. Mr. Aldonas, was that a yes or no? It seemed like a qualified yes.
Mr. ALDONAS. Well, Congressman, the fact of the matter is under the 1992 agreement it does allow for a certain measure of support. And what you are really trying to determine is are you right on the line, are you close to the line, are you over the line. So some of the commitments about transparency under the agreement, the process by which you get
to look at what the other side is doing, is what becomes critical in that. And the one thing that we want to continue to reinforce with our European trading partners is our expectation that, first and foremost, they are going to live up to those transparency obligations so that we can make an effective judgement about it.
But at this point, I think it is too early to tell actually based on what we have in front of us where we are with respect to what is allowed under the civil aircraft agreement. My point is that there is no doubt that there is government support being provided, no question about that. The question is whether in fact it violates the particular parameters of the agreement.
Page 57 PREV PAGE TOP OF DOC Mr. HAYES. Let me ask you the third way.
Mr. ALDONAS. I get the sense of dancing here.
Mr. HAYES. Are you and Secretary Evans, for whom I have a very high regard after spending some time with him
Mr. ALDONAS. He is a great man.
Mr. HAYES. Are you going to aggressively pursue the position that puts our people, our manufacturers, and our industry in a partnership position now? Partner means kind of equal and on the same footing. And based on testimony today, we are down here. We get the shaft and they get the gold mine in too many instances. So do I have your assurance that they will not, and I use the term of the Secretary, ''pencil whip'' us in future negotiations?
Mr. ALDONAS. Absolutely.
Mr. HAYES. Thank you.
We have sort of covered the airline industry and our disadvantages competitively because of things that are happening there. And I would identify with the remarks made by Mr. DeFazio and others about the problems that we face. Let me switch over for just a minute to the issue of general aviation. This is an absolutely vital tool for the U.S. economy, for business, for a whole host of different reasons. When the Secretary came down he came down on the airlines, that was great, went back on general aviation, that worked very well too.
In general aviation, Mr. Bolen, a couple of years ago we addressed some issues of tort reform that have impacted the charts that we had today in a positive way. We certainly need additional relief, additional attention to that area. Would you speak to that issue for a moment or two.
Mr. BOLEN. I think that there continue to be a variety of barriers to general aviation reaching its full potential. We are continuing to work on those in terms of affordability and in terms of access. One of the issues that was not highlighted in my testimony, but I think it is also an issue that is beginning to continue to grow out there, is the growing cost of the insurance for the pilots themselves. What we have seen over the past year or two is that the limits of coverage are shrinking at the same time the premiums are increasing. And that is particularly vexing to those of us in general aviation because this is happening at a time when the general aviation accident rate is going down.
Page 58 PREV PAGE TOP OF DOC Mr. HAYES. Can I interrupt you just a minute, because that is my third question. You have already asked and answered my third question. I want to stay with the whole issue of the cost to manufacturing. The cost to the product for that insurance coverage, I want to get there, but if you will
Mr. BOLEN. The cost of developing the general aviation aircraft has got a couple of things that make it particularly difficult. One is, the products have to be certified. The Federal Government has required since 1926 that all products sold into the aviation market be certified. That takes a lot of testing, it takes a lot of time, and it requires a lot of investment.
The other thing that works against us in general aviation
is it is still a relatively small market. So we do not have the huge volumes over which to distribute the cost. We are hopeful that as the market continues to grow, we can begin using more mass production type techniques in general aviation manufacturing. But it still right now continues to be a very unique type of skills that are brought to bear. We are not using what the automotive industry would use, for example, as manufacturing processes simply because the numbers are not there. Where they are manufacturing hundreds of thousands of automobiles, we manufactured last year almost 3,000 total general aviation aircraft. So the volumes work against us a little bit as well.
Mr. HAYES. Very good point. It gets more and more costly to train a pilot. It is kind of hard to run the general aviation business without people to use the product. That is something I am very much concerned with as we go forward.
Mr. Douglass, it would seem that our manufacturers would certainly have an edge, but for some reason we are not really visible in the regional jet market, which is an area that seems to be growing rapidly. What can we do about that?
Mr. DOUGLASS. Well, sir, the set of issues that we have
Page 59 PREV PAGE TOP OF DOCtalked about in this hearing today probably falls heaviest in that sector of the market. As you know, sir, there is a huge dispute between Canada and Brazil about government support for their individual manufacturers.
I think the consolidation in our industry and the way it occurred created a situation where our manufacturers looked at that market and decided that was a niche where they probably could not enter in the near term and make a lot of money, and for that reason they stayed out it. I would point out, though, that a couple of the regional manufacturers, at least one, is relocating to the United States. It was a European company and it is becoming a U.S. company. So there is possibility that we are going to see some U.S.-based companies begin to prosper in that sector. But the traditional manufacturers here in the United States have kind of stayed out of it.
Mr. HAYES. That is certainly a market that is growing.
Again with the leadership of the Chairman and the interest of the committee, we have opened up some areas that are very vital to our industry. It is my opinion, and Mr. Bolen, Mr. Douglass, or anyone else, the additional cost that comes because of the slownessand safety is paramount in everybody's mind, none of my comments in any way are putting safety second to speed or costbut the slowness with which the FAA moves on the certification process, and we talked about runway incursions last time, there seems to be a propensity of let us do something expensive, let us use some piece of equipment, and we have a history of throwing common sense and simple fixes out the window. Would you like to comment on that for just a minute? And to add to that, when we require these expensive fixes, that means more equipment in the aircraft, which means more expense and harder to get into the market. Just speak about that for a minute and the impact on your industry.
Mr. DOUGLASS. One comment I would make, sir, is that, as you have pointed out, the certification process has become more and more complex and the cost to get something certified has become more and more complex. I believe the end result though is that we produce the world's best airplanes. And that once they get that FAA certification, it is kind of a global stamp of approval that is respected around the world.
Page 60 PREV PAGE TOP OF DOC It is enormously frustrating to me to see an airplane that I know has been superbly designed and is thoroughly certified by the FAA take years to be certified over in Europe. The best example that I could give you in recent times is the Gulfstream G-5. Gulfstream, as everybody knows, is a wonderful airplane. I think it was three years ago they won the Collier Trophy for the G-5. And to the best of my knowledge, the European JAA still has not certified that Gulfstream wing, despite the fact that there are hundreds of thousands of hours of flying time, no one has ever cast any technical doubt that the wing is sound, the FAA has certified it, it has been certified in other parts of the world, but still it not certified by the JAA.
When we see examples of that, that is when we turn to our colleagues down at the end of the table and say you really need to look into this. Why is it that they are able to use these regulatory techniques as trade barriers, I think Chairman Mica used the term regulatory nationalism. We are seeing more of that, sir.
Mr. HAYES. To follow up on that, Mr. Chairman, if you will indulge me a bit longer. This is Mr. Isakson's question but I think it is very relevant. Give us the other side of that equation. If there is a European product, the PC-12 or whatever, you pick the product, how do we deal with them when they want to certify their equipment over here?
Mr. BOLEN. We did a study at GAMA about a year ago to look into how the validation process works on both sides of the Atlantic. The way we did it was we looked at how long it takes the company to certify their product in their home country and then we looked at how much additional time the foreign country took to validate it. What we found is when the United States was the sovereign country it would take a certain amount of time to certify a product, let us say five years, it would then go over to Europe and it would take them 50 percent of that time to validate that what the U.S. did was accurate. So after a five year certification program in the United States, we would then spend another two and a half years just trying to prove to the Europeans that this was a good airplane.
Page 61 PREV PAGE TOP OF DOC Now the flip side of that is if Europe would spend five years, we would turn around and validate that in about 20 percent of the time that they took. So we would do that in about a year.
Mr. HAYES. Can you help us with that, Mr. Aldonas?
Mr. ALDONAS. Sure.
Mr. HAYES. Okay. Last question, Mr. Chairman. Mr. Bolen, you talked earlier about the cost of insurance. For someone to fly, the owner has to have liability insurance, the operator who is providing training, the charter operator all have to have insurance. It seems like this cost is going through the roof, becoming unmanageable.
Mr. Chairman, if we could, in the future I would love to have the insurance industry come in and talk about what they are doing and why, because they have put some requirements on the industry, which are good onestraining, simulators, state-of-the-artthat is great stuff and we responded and the insurance rates reflected it for a while. But now all of a sudden that is out the window. The owner-operator is an endangered species.
So again, Mr. Bolen, you were headed there before, what are some of your thoughts about how we can address that problem? Again, if you cannot buy insurance to fly, then that hurts the market for the equipment that the industry produces.
Mr. BOLEN. That is exactly right, and I would urge you to go forward and try to investigate it. The industry is trying to do that, NATA, which represents fixed-base operators, AOPA, GAMA, and others have tried to talk to them about it. And it defies common sense. If our accident rates are going down, the assumption is the insurance rates should be going down. Just the opposite is happening. And when we have tried to talk with them about it.
They have indicated is not about the industry, that we have to understand there may be an over-capacity in the insurance industry, how many providers are there, what other industries are doing, are there bigger profit margins elsewhere. And so I think the answers we began to hear were that it is not really related to what your safety record is, it is related to a lot of factors out of your control. But the reality is that it does have a big impact on the future of general aviation and we are concerned about it. Mr. HAYES. Thank you, Mr. Chairman, for your patience.
Page 62 PREV PAGE TOP OF DOC Mr. MICA. I thank the gentleman.
Let me recognize Mr. Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman. I want to thank this panel for a very interesting and thoughtful in-depth discussion of the subject. It is good that you have dealt in specifics rather than in billboard poster statements.
Mr. Aldonas, I know that my colleague from Oregon, Mr. DeFazio, pursued some questions about allegations of various inducements European governments have offered. Let me come back to that. You are suggesting that they offered landing rights, trading rights, and perhaps other similar inducements in order to attract purchasers for Airbus aircraft. Have you documents situations in which those inducements were actually offered?
Mr. ALDONAS. No. We are in the process of investigating those reports now. Our staff, both in trade development, which is the industry sector, and then relying on the resources we have in the field, are trying to look into that right now.
Mr. OBERSTAR. I have heard of a number of practices but never one that involved landing rights. That would mean going back to bilaterals and adjusting bilaterals.
Mr. ALDONAS. It would.
Mr. OBERSTAR. That at a place like Heathrow could involve extremely valuable rights.
Mr. ALDONAS. Absolutely. Given the tightness of the market in any of the major airports, it could involve extremely valuable air rights, but particularly at a place like Heathrow.
Mr. OBERSTAR. That is certainly not a transparent practice.
Mr. ALDONAS. Not at all.
Mr. OBERSTAR. If you document it, that certainly is a very serious matter and one that really is a market-distorting practice.
Page 63 PREV PAGE TOP OF DOC Mr. ALDONAS. Absolutely.
Mr. OBERSTAR. I am not aware of any such, and I will be interested in following this further.
You talked about advocacy cases that we conduct on behalf of U.S. exporters. Describe what you mean by ''advocacy cases.''
Mr. ALDONAS. Generally, particularly where you have a foreign carrier that is government-owned, you may find that other companies are relying on their governments to come in and try and help them as a part of the process to be an advocate on behalf of their aircraft. And what we do when there is a bid that is let, we try and make sure that we are aware of it, if we hear from companies that we are there at their side as well, unless there is more than one U.S. competitor, in which case we would do advocacy on behalf of all of them, so that we try to make sure that we go measure for measure with what other governments are doing in terms of expressing a political interest on behalf of our company that they at least get a fair shake as a part of the bidding process.
Mr. OBERSTAR. There is a very interesting aircraft sales, for want of a better word, war underway between Canada and Brazil of a regional aircraft, RJs.
Mr. ALDONAS. Absolutely.
Mr. OBERSTAR. It is unfortunate that our industry under-estimated the significance of regional jets 10 even 15 years ago and downplayed the significance of getting into that market, in effect, leaving it up to foreign competition. Both Canada and Brazil are offering financial inducements. Each does it in a slightly different way. Canada is offering financing to a very attractive interest rate. Brazil goes to the banker, whether it is a bank or a leasing company like GE Capital and others, and says we will write you a check for the difference a U.S. airline buyer will purchase at market interest rate, let us say 8 percent, we will pay you the difference between the 8 percent and 6 percent financing and we will write you a check from the Brazilian government. That certainly is a market distorting practice.
Page 64 PREV PAGE TOP OF DOC Mr. ALDONAS. Absolutely. Frankly, both sides are engaged in a little bit of fratricide over the regional market, having taken cases to the WTO about each party's practices at this juncture. But, frankly, the inducements on either side would result in a distortion of the market.
On the Canadian side, at least as I understand it with respect to their export credit agency, they have abided by the OECD arrangements to which we try and comply as well with Export-Import Bank financing. But I would be happy to look into that if there is something more, particularly as it affects our market or any of our manufacturers.
Mr. OBERSTAR. It certainly is affecting the decision-making process for U.S. carriers.
Mr. ALDONAS. And any potential new market entrant from the United States as well.
Mr. OBERSTAR. And if, in addition, Embraer continues to
offer inducements like very low cost, or at one point they were offering a year's worth of spare parts free, part of the bargain, for your maintenance, that is a pretty big inducement item.
Mr. ALDONAS. It is huge. Absolutely.
Mr. OBERSTAR. Now let us take this a step up the ladder
to Boeing and Airbus. Buying an aircraft is a little like buying an automobile at a car dealership. There is a price but it is not necessarily the price you are going to pay. They both have market-affecting practicesyou buy aircraft from Boeing but then there are discounts, deep discounts, and even deeper discounts, and if you are a launch customer you get an even better deal, and Airbus does the same. What financial practices are different between these two regimes?
Mr. ALDONAS. I could not cite you the difference between those two regimes. Of course, what I am more concerned about is the ability to rely on government support as a part of providing those sorts of financing. If it is fair competition between two competitors in the marketplace unaffected by inducements provided by the government and they do that as a commercial matter, that is the market at work. What I am always concerned about is are they able to provide those sorts of benefits as a part of the financing as a result of the support provided by the government that stands behind them.
Page 65 PREV PAGE TOP OF DOC Mr. DOUGLASS. Mr. Oberstar, may I point out something here?
Mr. OBERSTAR. Yes.
Mr. DOUGLASS. First of all, the way I approach this is that on both sides of the Atlantic we have a socioeconomic system unique to each side which has been developed over many years. Both sides try to work within some sort of international framework to reach this equality. And the set of agreements we are working under now, as you know, were negotiated back in the early 1990s. A lot has changed since the early 1990s. Part of the sort of levelling mechanism, if you will, that was in the minds of the negotiators back in the early 1990s was that our industry received a lot of spin-off from the military investments made here in the United States and that was supposed to be the quid pro quo for the European side doing things to help their domestic commercial industry.
On the military side, as you know, the Cold War has ended, there has been a vast curtailment of military research, and in fact the research that is going on today has an every year decreasing spin-off factor into commercial aviation. Things like stealth, precision-guided munitions, information warfare, bio warfare, combatting weapons of mass destruction, and so on has almost no value to commercial aviation. So the scale has changed dramatically.
Now if you are an investor or you are a subsystem manufacturer here in the United States today and you are deciding to go forward to be a part of either of the new programs that are now being laid outas you know, there is a fundamental difference in the view of the future market; one of these companies is banking on a very large airplane going to the hub-to-hub, the other one is trying to do a technological leap forward and go point-to-point in a much faster ratethe difference to an American manufacturer is that you are asked by both parties to assume all of the risk if that particular approach fails. If you are a European company, you may have access to a loan that would be forgiven if that side fails.
Page 66 PREV PAGE TOP OF DOC So on the American side, we are assuming all of the risk. On the other side, the government assumes part of the risk. That is a differentiating factor, sir.
Mr. OBERSTAR. Your discussion of the military input to the civilian aircraft manufacturing sector is useful and important and I am glad you acknowledged that. We have done backdoor subsidies, if you will, for our civilian industry, and the Europeans have been up front about it, putting the money right out front on the table. But, as you described it, the changes in our international military posture and equipment requirements are of less value to civilian purposes today. That is a very interesting point.
The second point though, and I now come to our two trade specialists, the European community has taken a tough stand against government support of airlines. They have allowed support in the past for Air France from the French government, and for KLM from the Dutch government, and for Lufthansa from the German government. That has been cut off now. Lufthansa is largely privatized, although there still are ties to the government. There is largely privatization of KLM, although there still are ties to the Dutch ministry of transportation. Sabena is still the sick man of the European airline industry. And the question is whether the European community will draw the line against the Belgian government supporting Sabena in the next several months when they are now hanging on with their fingernails to avoid what we would call Chapter 7 collapse. Well why do they not take the same step against the
manufacturing sector; that is, say there are not going to be up front government supports. What is the difference in the regime there?
Mr. ALDONAS. Gosh, I would be speculating, Congressman,
but certainly they recognize that consolidation has to take place in terms of aircraft, particularly following on the single market concept. They are seeing a lot of that. I think they are sort of gradually ridding themselves of a 50 year legacy of intervention in the marketplace. But at the bottom line on the manufacturing side, I think it is still about jobs and they want the jobs there.
Page 67 PREV PAGE TOP OF DOC Could I go back to one other point you made, Congressman?
Mr. OBERSTAR. Yes.
Mr. ALDONAS. And this is not based on my current position so much as it is a past life when I was practicing law and was engaged by a number folks as defense contractors. I do have to say that the argument that there was an awful lot of indirect subsidies has in my experience always brushed up against the reality that we also imposed things like the Competition in Contracting Act on our defense contractors which guarantee that the government is getting value for its money on the R&D contract itself. And so the notion that there is an implicit subsidy there, at least in my experience, has fallen on deaf ears for me personally.
The second thing is that with respect to what we do in the defense area, not only is much less of it relevant to the civil aircraft, the fact of the matter is that there is a learning process that goes on with it. But I do not think you could fairly describe that as financial support in the same way that you have seen out of the European governments for a new launch, for example.
Mr. OBERSTAR. Fair points and valuable points.
Last point of inquiry here, Mr. Chairman. There are differing views of antitrust in our two communities. The United States view of antitrust is historically a review of market share. Europe has a different approach on that. Describe the European view of antitrust. I think it is very relevant to the GE case and to Europe's review of the Boeing-Douglas merger.
Mr. ALDONAS. I am stepping a little out of my area, Congressman, but I think it is fair to say that where on the U.S. side it is focused much more on market share and levels of concentration, on the European side it is focused much more on the ability to leverage whatever market share you have as an abuse of monopoly power. And the current split, at least as you see it played out in the discussion with respect to GE- Honeywell, is whether or not we are focused on consumers and they are focused on protecting competitors.
Page 68 PREV PAGE TOP OF DOC I think that is probably not a fair characterization and there may not be as much difference if you really got the Assistant Attorney General together with Mario Monte to discuss the substance of it. And, frankly, that is the direction we have to go. One of the things that you see these periodic disputes suggest is we need to get back on four-square with respect to the substance of competition policy, antitrust policy, in part so it cannot become a tool of trade policy or another way of intervening in the market.
Mr. OBERSTAR. Mr. Falken, Mr. Rogowsky, do you have further comments on that?
Mr. FALKEN. That's a fair explanation. It certainly was a large issue when Boeing merged with McDonnell Douglas and it seemed like other factors came into play in the Commission in reviewing that than strictly competitive factors. In fact, they required Boeing to provide information on its government R&D and to license any technology that comes from government R&D, which is another reason this spin-over argument from the USI that they are trying to match is an untrue argument. Certainly, if you look at who the major competitors were in our market years ago with big military contractors like McDonnell Douglas and Lockheed, they failed to make it in the civil aircraft industry despite being the largest military contractors.
Mr. ROGOWSKY. Let me just throw in very briefly on that.
Mr. OBERSTAR. Yes, Mr. Rogowsky.
Mr. ROGOWSKY. In many ways, U.S. antitrust law is more evolved I think than in Europe. They have really had as part of their competition policy an attempt to integrate the markets. So a lot of their law is focused on things that would help to integrate at market. It is since then focusing more on economic efficiency, especially the decisions coming out of the European Court of Justice.
And one area where that is true, and it was relevant in the Boeing-McDonnell Douglas case, is they really have not evolved yet an effective way of looking at declining markets, declining firms and failing firms. And so where we the United States authorities saw in this a failing firm whose assets we still wanted to keep active in the marketplace, the Europeans just saw two large competitors coming together to create a more dominant firm.
Page 69 PREV PAGE TOP OF DOC Mr. OBERSTAR. Is there anything fundamentally inappropriate in the international trade arena, in the exchange between U.S. and Europe with our NASA or other R&D programs of the Federal Government conducting separately or jointly with the industry basic research initiatives that will advance the state-of-the-art, such as the green engine or a fuselage design that can streamline flight? Is there anything inappropriate that we are doing compared to what Europe is doing?
Mr. ROGOWSKY. Well, inappropriate gets defined in different ways. But if you are looking at it in terms of international trade relations, largely what NASA does is basic research and it is pretty widely accepted that countries can fund basic research. I think roughly 80 percent of what NASA is putting into this area is the basic research. Particularly as you mentioned green engines, that also has its own special exception in export subsidies because you can actually fund things that have an environmental impact.
Mr. OBERSTAR. So the program of NASA and general aviation manufacturing in the AGATE project that helps advance the state-of-the-art of general aviation aircraft manufacturing, those are entirely appropriate or at least not under fire from others. And that is where we ought to put a lot of money, a lot more than we are doing now.
Mr. DOUGLASS. Sir, if I could add to that. I would just say there is a feeling in industry that the competitors outside the United States, I will not restrict it to any area, have more access to the research done here at NASA than we have to the domestic research done in other countries in other parts of the world.
Mr. OBERSTAR. That is true. That is a fair and important observation.
Thank you, Mr. Chairman.
Mr. MICA. This is I think a very important discussion and I think it is important to the United States' interest. I have a whole host of additional questions and we do not really have time to get into them, some questions about what we can legitimately expect as far as transparency, some questions about advocacy programs, all which could really take a great deal of time. What I may do is reconvene some of the industry and government folks, and there are some folks missing from the government side.
Page 70 PREV PAGE TOP OF DOC I think it is particularly important with a new Administration that we sort of get our act together here. The trends we have seen this morning and this afternoon should be a cause of alarm, if not alarm, concern. We need a national strategy to approach this and also to look at some of the highly uncompetitive barriers particularly in the regulatory area that we have heard testimony to today here.
So I am going to thank each of you, not ask these additional questions, and with the consent of the minority, we will leave the record open for an additional 30 days and we will submit the questions for written responses. And we may possibly reconvene on an informal basis at a time to be determined in the near future. So with that, I thank each of you.
By unanimous consent, the record will be left open for 30 additional days.
Thank you again for your participation.
Mr. MICA. Let me call our second panel. The second panel today consists of Mr. Richard B. Miles, and he is with Princeton University; we have Mr. Byron Callan, he is with Merrill Lynch; we have Mr. Samuel L. Venneri, he is with the National Aeronautics and Space Administration; and Mr. Jeffrey L. Miller, he is with the Export-Import Bank of the United States.
We thank each of you for your patience. This is, as I said at the beginning of the hearing, sort of an insiders hearing, people really dedicated to the industry are interested in this topic. You can see there really is great interest and concern about where we are heading. We are pleased that you have had the patience to wait to testify. We value your testimony and thank you again for being part of our hearing today.
Let me recognize first Mr. Richard B. Miles, Professor of Mechanical and Aerospace Engineering with Princeton University. Welcome, sir, and you are recognized.
TESTIMONY OF RICHARD B. MILES, PROFESSOR, SCHOOL OF ENGINEERING AND APPLIED SCIENCES, PRINCETON UNIVERSITY; BYRON K. CALLAN, FIRST VICE PRESIDENT, MERRILL LYNCH; SAMUEL L. VENNERI, ASSOCIATE ADMINISTRATOR, OFFICE OF AEROSPACE TECHNOLOGY, NATIONAL AERONAUTICS AND SPACE ADMINISTRATION; JEFFREY MILLER, GROUP VICE PRESIDENT, STRUCTURED TRADE AND FINANCE GROUP, EXPORT-IMPORT BANK OF THE UNITED STATES
Page 71 PREV PAGE TOP OF DOC Mr. MILES. Thank you, Chairman Mica, and thank you honorable committee members for inviting me to speak to you today at the hearing. As you have said, I am from Princeton University, but today I am testifying on behalf of the AIAA, which is a nonprofit society with over 35,000 members, representing all sectors of the aerospace community.
I would like to address three disturbing trends that I see within the aviation profession. The first is a sharp reduction in the numbers of students interested in aviation. The second is an aging of the skilled workforce. And the third is the significant reduction in the level of Federal support for research.
Princeton has programs in both mechanical engineering and aerospace engineering that are ranked among the top ten in the country. Phil Condit, the CEO of Boeing, and Norm Augustine, the previous CEO of Lockheed Martin, are among our distinguished graduates. Since 1993, the number of Princeton undergraduate students graduating with accredited degrees in aerospace engineering has dropped fivefold, from approximately 25 students per year to an average of 5 per year today. The blue bars on the chart which is being projected indicate that trend.
Many reasons are offered to explain this decline, but there are several that particularly stand out: (1) America's leaders in government, industry, and education have failed to articulate a national vision or define a compelling national need; (2) aviation is viewed especially by the students as a ''solved'' problem; and (3) the monolithic nature of the aviation industry offers few opportunities for career advancement and has a generally poor level of job security.
By contrast, fields other than aerospace engineering generate very strong competition for highly competent students. It is notable at Princeton that top students who are finishing their advanced degrees in our department are being heavily recruited by consulting and financial institutions, and many have joined those ranks.
The aerospace industry is partly to blame for discouraging top students in aviation. We are told that economics is now the major driver, and that the industry is looking for rapid and inexpensive design cycles rather than innovation in aviation. Most of the cost savings are expected to occur in areas other than technology.
Page 72 PREV PAGE TOP OF DOC Turning to my second concern, the aviation workforce is aging, and understanding of aviation technologies is aging with it. Creative energy naturally arises from a young workforce. Increasingly, I see a tendency to look back to the ''good old days'' of aviation rather than forward towards defining a new vision. I see fewer decision-makers with first-rate technical competence. Decisions are often made relying on the self-serving advice of subcontractors, and large amounts of money are spent on fundamentally bad ideas.
My third area of concern is government funding for fundamental science and engineering. For researchers in the field of aviation, the funding picture is bleak. There is inconsistent support of core research areas with the result that America's once proud aviation technology ''pipeline'' is now woefully short of new ideas and becoming less capable of meeting national needs.
Some of the cuts in research funding have been based on the premise that computation can replace experimentation. Although computation is an increasingly useful tool, it cannot predict highly complex flows or high velocity phenomena. The industry and the research community must be able to rely on national facilities, such as the wind tunnels as pointed out by Mr. Rogowsky, for any sophisticated development of complex vehicles. This is an area where the Federal Government has been an important resource for the country, but the facilities are old and new concepts are being largely ignored.
Mr. Chairman, Federal funding of academic research results in two essential outcomes: the retention and training of aerospace engineers, and the support and stimulation of innovative, fresh research thrusts that are critical to the emergence of new aviation technologies. Increased funding and strategic planning are needed to establish a comprehensive sponsored university research program designed to support and encourage the education and development of an expanded source of technical experts.
Perhaps Congress and the President can help in raising the profile of aerospace through the proposed Commission on Aerospace with participation by relevant Federal agencies as well as commercial and public interests. This Commission could help address the inconsistent support of core research areas in aviation, and work toward a future where, borrowing from the words of Congressman Ehlers' 1998 report on science and technology, ''federal research funding is stable and substantial [and] diversity is maintained in the federal research portfolio.''
Page 73 PREV PAGE TOP OF DOC Historically, America's universities have proved to be an engine that powers our Nation's economic growth. In aerospace, we are not taking full advantage of this national resource. When compared to the National Institutes of Health, NASA's investments in university sponsored research is lagging far behind. This may be partially an explanation for the booming interest in biotechnology and the comparative struggle to attract students and researchers to aerospace. I should point out, however, that NASA's recently announced major new initiative to create university-based technology and engineering institutes, the URETI Initiative, is a welcome change that should be supported and further expanded.
Thank you, Mr. Chairman, and I would be happy to answer any questions that you or your committee might have.
Mr. MICA. Thank you. We will withhold questions until we have heard from all the panelists.
Mr. Byron Callan is First Vice President of Merrill Lynch. Welcome, sir, and you are recognized.
Mr. CALLAN. Thank you, Mr. Chairman, and thank you honorable members of the committee for inviting me to present my views on what is a very important topic. I really would like to make three points in my brief remarks.
The first point is I do not believe that recently U.S. aircraft manufacturing competitiveness has been harmed by the fact that U.S. major companies, the prime contractors, are publicly owned. We have seen a trend over the past couple of years where the competitors in this industry have gone public themselves. EADS, which owns 80 percent of Airbus, had a public offering last year. BAE, which owns the other 20 percent, has been public for some time. Embraer and Bombard J are both also publicly held. And that has been a significant change in this market.
Page 74 PREV PAGE TOP OF DOC I would also point out that a number of the subcontractors to this industry are public, the major subcontractors that are involved in risk-sharing programs. The engine manufacturers are pretty much all publicly held, as are some of the major avionics houses.
I would point out that I think increasingly primes are answering to shareholders, not just to broader policy concerns that may be evidenced not only in Europe but in other parts of the world. I am intrigued to see some business decisions that, frankly, look less nationalistically. And I would cite the Airbus selection on the A380 program of Goodrich, a U.S. company, to provide the landing gear and the evacuation slides for that program. Historically, that may have been a much more nationalist decision.
The second point I would like to make is I do not see U.S. capital markets as a real competitive advantage for U.S. firms. The capital markets themselves are global in scope and composition. Certainly, U.S. equity and debt investors have provided the capital for the consolidation that has taken place in this industry, as well as the product development and the financing of some of the products. The Boeing-McDonnell Douglas merger has previously come up. Gulfstream went public in the mid-1990s, allowing that company to reduce debt and continue development of products. And more recently, Boeing Capital Corporation, which is helping finance purchases of Boeing aircraft, has raised money in the public market. This capital is also available to smaller firms. I think of recent offerings by the Triumph Group, for example, which is a smaller aerostructures supplier.
But U.S. firms are not the only ones that can tap into these capital markets. This is an arena that is open to non-U.S. companies as well. Embraer raised several hundred millions of dollars last year in an offering of ADS' on the New York Stock Exchange that has allowed them to proceed with development of their 70-to 90-seat airplane family. U.S. investors participated in the EADS offering. And we have seen
private equity used as well. Clayton Dubilier Rice, a New York based management firm, has invested in Fairchild Dornier which is building regional jets in Germany.
Page 75 PREV PAGE TOP OF DOC The third point I would like to make, I guess really what we are here today to answer, is on this question of how further erosion can be prevented and reversed. I think this has been mentioned several times, but we Americans tend to take this industry for granted. We tend to be more focused on high technology. But this really is a high technology industry and it is an industry or a field that very few other countries or companies have mastered. I do think, however, that this industry is not different from other major manufacturing operations to the extent that lower value-added work will go to lower cost producers, and I think those pressures are going to mount particularly as the economic softness seeps into aircraft demand over the next year or two. So the primes are probably going to step up their outsourcing of business and will look for global sources for that.
I would like to echo what Mr. Miles just raised, however, and that is I really think the key issue for the long-term competitiveness of this industry is the workforce, the need for skilled engineers, the machinists, the materials specialists, and that basic research and development in aeronautical engineering and possibly in the materials market is really a key to this industry on a go forward basis.
There are two anecdotes I would like to cite. First, I am aware of instances in some of the military aircraft manufacturing plants where the average age of workers is in the mid-50s. As these workers reach retirement age in the coming decade, the U.S. sector may become far less competitive in its ability to execute work and to compete with industries overseas that have younger workforces.
Secondly, on the research and development funding front, I had an intern who worked with me last summer, he had a ph.d. in aeronautical engineering, he had worked at Boeing, he was pursuing an MBA and had obviously left the aeronautical field to pursue a career in finance. In the conversations I had with him as to why had he made this decision, a lot of it came down to the fact that there was very little new development work going on and that left him very limited career choices either in business or academia.
Page 76 PREV PAGE TOP OF DOC Thank you very much.
Mr. MICA. Thank you for your testimony.
Let me recognize Mr. Samuel Venneri, who is Associate Administrator for Aerospace Technology in the National Aeronautics and Space Administration. You are recognized, sir.
Mr. VENNERI. Thank you, Mr. Chairman. On behalf of all of us at NASA, we appreciate your hosting this hearing and giving us the opportunity to participate. I would like to start out by reiterating things that I think have already been said. You can look at basically the trend from the 1970s to where we are now and see that the civilian market is what is dominating the strength of this industry now. You can also look at that bottom statistic, that, in effect, the $800 billion share over the next decade of this market is what is motivating all countries to look at aerospace in terms of a viable economic engine for them.
One of the things that we worry about is not just so much market share, but how do you maintain the design teams and the integrity of the intellectual depth of people in that market when, in fact, the downsizing has occurred in the size and scope of the industry today.
The other thing, let us look at 20 years, if you look at the blue curve, you see about 14,000 down to 10,000 airplanes. But in the upper two curves, there are 23,000 airplanes in transport categories over the next 20 that, if you look at the growth rate of where we are in aviation, what that represents in terms of a $1.7 trillion market, that is why you see a European 2020 Vision in terms of this industry sector. Now, this will not occur if we do not solve the problem with the air traffic system. This is not about the aerospace industry and vehicles, it is about vehicles and the operational infrastructure that these vehicles fly in.
Since 1978, there has been a phenomenal growth rate in this industry in passengers and cargo that has outpaced the Gross Domestic Product. The problem is those bottom curves, of the delays that are in the system. Fundamentally, where we are in aviation, if you go back, say, 100 years, we have been on these technology insertion curvesthe propeller age, to how we handle traffic, to the radar environment we have today with the jet age. And the way we handle traffic is basically World War II technology that has not changed since the 1960s. It is radar position, single communications, sectorization of all the airspace into very discrete airspace. It is the world's most complex. The European system is only half as complex as ours, but it is a system that will not further expand at a capacity that is needed there. Also, it impacts our national economy, as other speakers have said.
Page 77 PREV PAGE TOP OF DOC The problem we see, I guess a barrier is this is viewed as a mature, static industry, that it has arrived. It has sort of gone through the ''golden age'' and it is relatively flat. We contend that it is not. So we look at this as major opportunities for innovation and change in terms of what technology and R&D can do to this industry. And I am approaching it not from a marketing or subsidies or countries perspective, we are looking at this as research and development--as a viable force multiplier to expand and grow this industry, both in near-term and revolutionary concepts that can excite our young folks that this is a field to get into. And I am going to touch upon each of these in the remaining few minutes.
One, in terms of this near-term, we clearly have a noise emissions environmental issue concerning these vehicles. NASA has participated in a tenfold improvement in safety, a doubling of the reduction by order of magnitude of noise. There is still more to be done. Containing noise within the airport environment is a major goal of ours, and that is a technology-driven program that we have with today's fleet of planes as well as what future aircraft may involve. And likewise, a green airplane. Our goal would be zero emissions.
Now the air traffic system I touched upon. We and the FAA are working in a very good partnership. They agree with us that in order to expand this system there needs to be a changed state of the architecture. We are doing a lot of system simulations to look at what that architecture should be. Should it be space-based? One of the concepts you see here is not just ground-based, but airplanes in effect talking to each other, and letting airplanes themselves become intelligent items in the system, and in fact expand the system by the airplanes expanding the system where it is no longer just a ground-based infrastructure which we currently have. We do not have all the answers. We are working technology solutions to help today's architecture. But what we need to define is the future architecture.
We talked about general aviation. We have not tapped what general aviation can do to mobility. Keep one fact in mind: 90 percent of our population lives within 30 miles of an airport, yet we use 1 percent of our airports today, 64 airports, to move 80 percent of our people. That is the hub and spoke system we have. There needs to be a changed state of what mobility means by opening up all 5,400 airports in this country, not just the 64.
Page 78 PREV PAGE TOP OF DOC I touched upon the engineering and the workforce issue. We clearly have a problem with our workforce and the people we are attracting into engineering. NSF has documented a 25 percent reduction in engineering. We looked at a statistic that is somewhat disturbing. We looked at an average 24 year-old U.S. citizen, about one-third of those people get bachelor's degrees, 5 percent get engineering. You go to China, 45 percent is engineering. Go to Japan, 20 percent is engineering. Go to Russia, same high statistics. U.S., 5 percent. So we clearly have to do something about motivating our workforce and developing an understanding of how that workforce fits into what I contend aviation is a high-tech industry, it always has been, always will be.
And lastly, this idea of what we are about in NASA. We have not reached what airplanes are yet. We are looking at a new technology frontier of what nanotechnology, biotechnology, information technology means to future vehicle systems, systems that do not have control services, systems that do not have tails, things that will radically change our concept of flight vehicles, including putting layers of intelligence and capability into the systems that really give us absolute safety not statistical safety. And that transcends over to military superiority. One of the concerns we have is if this industry is lost in terms of intellectual workforce, you have just jeopardized national security.
Now, opportunities for the future. We view that we are embarking not on the golden plateau age, but we should move into a new era of aviation and we need to help define what the Federal Government's role, what our role is, how we work with the industry, the universities, to, in effect, move to this other plateau to deal with the issues that we have talked about.
So, again, thank you very much for the opportunity.
Mr. MICA. Thank you.
We will now hear from our final witness, Jeffrey Miller, who is Group Vice President with the Export-Import Bank of the United States. Welcome, sir, and you are recognized.
Page 79 PREV PAGE TOP OF DOC Mr. MILLER. Thank you, Mr. Chairman. Mr. Chairman and Members of the Subcommittee, on behalf of the Export-Import Bank, I thank Chairman Mica and the Members of the Subcommittee for the opportunity to present testimony about Ex-Im Bank's role in relation to the competitiveness of the aircraft manufacturing industry.
First let me say that the Export-Import Bank's mission is to support transactions that commercial markets are unable to finance, and to level the playing the field by neutralizing the effects of export credit subsidies from other governments. We do not compete with or replace commercial banks. Rather, we stand behind U.S. companies who face additional competition from other government-financed lending programs.
For 67 years, the Bank has worked to grow and sustain American jobs through supporting U.S. exports. Ex-Im Bank is an independent agency and employs approximately 400 people. Our basic programs consist of direct loans to foreign buyers of U.S. goods and services, guarantees of commercial loans to foreign buyers, and insurance programs that are geared for short-term, small business exporters. I thank Secretary Aldonas for pointing out the amount of small businesses and subsuppliers involved in a large aircraft transaction. In fiscal year 2000, the Bank supported $15.5 billion in U.S. exports. Of this figure, Ex-Im Bank supported $3.5 billion in large and small aircraft transactions.
Ex-Im Bank is congressionally mandated to exercise due diligence. We are required to ensure reasonable assurance of repayment. Since its inception in 1934, the Bank's default rate has been around 2 percent, compared to commercial banks whose rate is around 6.
The role of the Transportation Division of the Export-Import Bank is to offer support for the export of new and used U.S. manufactured commercial and general aviation aircraft, including helicopters and other aviation equipment. Ex-Im Bank will only finance the U.S. produced content of an aircraft. The terms and conditions of our aircraft programs are governed by the Large Aircraft Sector Understanding, otherwise known as LASU, under the auspices of the Organization of Economic Cooperation and Development, the OECD, Arrangement.
Page 80 PREV PAGE TOP OF DOC Ex-Im Bank financing is needed in the aircraft industry for several reasons. One is the capital intensive nature of the aircraft itself, where a single wide-body aircraft can cost between $80 and over $150 million. These prices make it difficult for many commercial banks and foreign buyers to finance a fleet of airplanes. Add to that the political and economic risk of emerging markets, where significant demand for U.S. manufactured aircraft exists, and you can see how difficult it is to obtain commercial financing.
Also, the airline industry is subject to cyclical downturns and upswings. In the downturn of the cycle profit margins erode and make it more difficult for airlines to access financing options. It is at this place in the aircraft cycle where foreign buyers often seek Ex-Im Bank financing for scheduled deliveries.
In addition to the financial cycle of the aircraft industry, there are other reasons why Ex-Im Bank support is vital to the aircraft manufacturing industry. In the markets where Ex-Im Bank is active, many foreign airlines do not generate sufficient cash to renew or expand their fleet through internally generated funds and most turn to external sources of financing to cover at least part of the cost. Foreign airlines without ready access to commercial bank or capital market financing at affordable rates often turn to export credit agencies for support. Lack of access to commercial financing could be attributed to country limits and concerns about the legal environment, especially with respect to secured lending. In addition, there could be a lack of capital due to general economic conditions.
Ex-Im Bank continues to strive to achieve a level playing field. To this end, our financing packages are developed through an attempt to remain competitive in the international market against other countries export credit agencies that may have more aggressive export credit systems. In this regard, a new wave of innovative financing emerged as another path. Such programs are quasi-governmental in nature and receive significant benefits from host governments. Some members of the OECD have developed financing institutions that do not fall under the arrangement guidelines for aircraft support. These quasi-governmental financial institutions often offer better terms and conditions that tilt the playing field to their exporters' advantage.
Page 81 PREV PAGE TOP OF DOC Ex-Im Bank is working with other agencies to undertake a study of the practices of these institutions. If uncompetitive practices emerge, the U.S. will take action to bring these institutions under the OECD export credit disciplines.
In summary, Ex-Im Bank provides financing for U.S. exports that help create and sustain U.S. jobs. Ex-Im Bank attempts to level the playing field with respect to financing vis-a-vis foreign export credit agency supported transactions and provides financing for buyers who cannot otherwise find commercial financing.
And although large aircraft manufacturers account for the majority of our aircraft transactions, the Bank is also reaching out to small aircraft manufacturers. In the past five years, Ex-Im Bank has authorized $97.4 million in small aircraft guarantees, and $133 million in medium-term insurance. I have personally visited with several manufacturers to see how we could work to expand their businesses overseas.
Let me commend the Members of the Aviation Subcommittee for convening this hearing to better understand the competitiveness of the aircraft manufacturing industry. I am happy to answer any questions. Thank you very much.
Mr. MICA. Thank you.
Unfortunately, we only have about seven minutes, six and a half minutes before a vote. That gives us time for maybe one question apiece. Let me yield in just a second to Mr. Oberstar.
Mr. Miller, if you cannot find out what the subsidies are say for financing, how do you compete? Are you now investigating what some of these subsidies are?
Mr. MILLER. That is correct.
Mr. MICA. Full and financial arrangements as you just stated.
Mr. MILLER. Yes. As the sales campaigns go on and we are told about the competitive financing packages offered by the competition, we try to understand them and we are trying to collect this data to find out if they are uncompetitive or are outside the OECD credit disciplines.
Page 82 PREV PAGE TOP OF DOC Mr. MICA. Mr. Miles, you cited Princeton as losing students. Is this also a national trend? Was it just Princeton or was that national?
Mr. MILES. No, it is a national trend, and I have some data from the AIAA to confirm that fact. Essentially, the number of students have dropped by about a factor of 2 in aerospace BS enrollments between 1987 and 1995. There has been a little bit of a return back in the last two or three years from that.
Mr. MICA. Mr. Callan, I have been in business and if there is no risk and someone will loan you the money, that is a great deal. Unfortunately, that is what we have going on even with some of those now converted companies. Is that correct?
Mr. CALLAN. I think I would look at the way the current, certainly in the context of Airbus, I would characterize it as a contingent liability. It is a potential liability. Well, they have to pay it back if the program is a commercial success. And that is the critical issue particularly when we look at the A380, is that going to be a commercial success for not.
Mr. MICA. Mr. Oberstar.
Mr. OBERSTAR. I share your frustration, Mr. Chairman, that the vote occurred just at this inopportune moment.
I made careful notes on the testimony of each of the witnesses and really appreciate your substantial contribution here and significant thoughts. I agree, Mr. Miles, that computation is no substitute for actual experimentation, hands-on, and actually doing wind tunnel and other testing.
Mr. Venneri, where should we invest those really high-risk, leap-frog, basic research dollars to make the greatest advance? I have suggested the green engine and the airframe. Perhaps you have got some other thoughts.
Mr. VENNERI. Actually, you are right, it ought to be both. We are past the stage of designing airframes and bolting engines to them. You have really got to look at this as an integrated system so the propulsion system and the airframe is really one. That is true for noise, that is true for emissions, that is true for efficiency and design. So we look at this as an integrated systems approach, and research should be done in innovative ideas of how to make that a reality and bring it into low-cost manufacturing.
Page 83 PREV PAGE TOP OF DOC Mr. OBERSTAR. Putting those substantial amount of dollars in that area and just moving this industry ahead I think is where we get our biggest pay-off. I thank you very much.
Mr. MICA. I do want to thank each of you. As I said, I
am going to try to reconvene the whole group and see what we can do in putting our heads together to help the industry.
We appreciate your participation. We are going to have additional questions to submit to you and we would appreciate very much your response in writing which will be made part of the official record. Thank you again.
There being no further business to come before the subcommittee, this meeting is adjourned.
[Whereupon, at 1:36 p.m., the subcommittee was adjourned.]