Segment 2 Of 2 Previous Hearing Segment(1)
SPEAKERS CONTENTS INSERTS
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38—434CC
1997
PROPOSALS TO ESTABLISH USER FEES FOR FEDERAL AVIATION ADMINISTRATION SERVICES
[PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.]
(105—2)
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
AVIATION
OF THE
COMMITTEE ON
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TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
FEBRUARY 5 AND 13, 1997
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTUCTURE
BUD SHUSTER, Pennsylvania, Chairman
DON YOUNG, Alaska
THOMAS E. PETRI, Wisconsin
SHERWOOD L. BOEHLERT, New York
HERBERT H. BATEMAN, Virginia
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HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
SUSAN MOLINARI, New York
THOMAS W. EWING, Illinois
WAYNE T. GILCHREST, Maryland
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
JACK QUINN, New York
TILLIE K. FOWLER, Florida
VERNON J. EHLERS, Michigan
SPENCER BACHUS, Alabama
STEVEN C. LaTOURETTE, Ohio
SUE W. KELLY, New York
RAY LaHOOD, Illinois
RICHARD H. BAKER, Louisiana
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
ROBERT W. NEY, Ohio
JACK METCALF, Washington
JO ANN EMERSON, Missouri
EDWARD A. PEASE, Indiana
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
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ASA HUTCHINSON, Arkansas
MERRILL COOK, Utah
JOHN COOKSEY, Louisiana
JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
KAY GRANGER, Texas
JON D. FOX, Pennsylvania
THOMAS M. DAVIS, Virginia
FRANK A. LoBIONDO, New Jersey
J.C. WATTS, Jr., Oklahoma
JAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
GLENN POSHARD, Illinois
ROBERT E. (BUD) CRAMER, Jr., Alabama
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
PAT DANNER, Missouri
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ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
BOB FILNER, California
EDDIE BERNICE JOHNSON, Texas
FRANK MASCARA, Pennsylvania
GENE 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
JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
JAMES P. McGOVERN, Massachusetts
Subcommittee on Aviation
JOHN J. DUNCAN, Jr., Tennessee, Chairman
ROY BLUNT, Missouri Vice Chairman
SUSAN MOLINARI, New York
THOMAS W. EWING, Illinois
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VERNON J. EHLERS, Michigan
RAY LaHOOD, Illinois
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
EDWARD A. PEASE, Indiana
JOSEPH R. PITTS, Pennsylvania
ASA HUTCHINSON, Arkansas
MERRILL COOK, Utah
JOHN COOKSEY, Louisiana
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
KAY GRANGER, Texas
JON D. FOX, Pennsylvania
THOMAS M. DAVIS, Virginia
J.C. WATTS, Jr., Oklahoma
BUD SHUSTER, Pennsylvania
(Ex Officio)
WILLIAM O. LIPINSKI, Illinois
LEONARD L. BOSWELL, Iowa
GLENN POSHARD, Illinois
NICK J. RAHALL II, West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
JERRY F. COSTELLO, Illinois
ROBERT E. (BUD) CRAMER, Jr., Alabama
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PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
EDDIE BERNICE JOHNSON, Texas
JUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
JAMES L. OBERSTAR, Minnesota
(Ex Officio)
(ii)
CONTENTS
Proceeding of:
February 5, 1997
February 13, 1997
TESTIMONY
FEBRUARY 5, 1997
Anderson, John H., Jr., Director, Transportation Issues, Resources, Community and Economic Development Division, U.S. General Accounting Office, accompanied by Timothy F. Hannegan, Assistant Director, and Charles R. Chambers, Jr., Senior Evaluator
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Bolen, Edward M., President, General Aviation Manufacturers Association
Boyer, Phil, President, AOPA Legislative Action
Coyne, James K., President, National Air transportation Association
Olcott, John W., President, National Business Aircraft Association, Inc.
Poole, Robert W., Jr., President, Reason Foundation
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois
Menendez, Hon. Robert, of New Jersey
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Anderson, John H., Jr.
Bolen, Edward M.
Boyer, Phil
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Coyne, James K.
Olcott, John W.
Poole, Robert W., Jr.
SUBMISSIONS FOR THE RECORD
Olcott, John W., President, National Business Aircraft Association, Inc.:
Business Aircraft Purchase Expectations Survey, chart
Reported Impact of User Fees on Aircraft Utilization, chart
Percent Reduction in Flight Activity After Pay-As-You-Go, chart
FEBRUARY 13, 1997
Crandall, Robert L., Chairman and CEO, American Airlines
Harrison, Kay, Member, Board of Directors, City of Fort Smith, AR
Kelleher, Herbert D., Chairman, President and CEO, Southwest Airlines, Inc
Plavin, David Z., President, Airports Council International-North America, accompanied by Charles Barclay, President, American Association of Airport Executives
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Shyman, Judie, President, National Business Travel Association, accompanied by Norman R. Sherlock, Executive Director, NBTA
Wolf, Daniel A., President, Cape Air/Nantucket Airlines
(iii)
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois
Cramer, Hon. Bud, of Alabama
Metcalf, Hon. Jack, of Washington
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Crandall, Robert L
Harrison, Kay
Kelleher, Herbert D
Plavin. David Z
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Shyman, Judie
Wolf, Daniel A
SUBMISSIONS FOR THE RECORD
Kelleher, Herbert D., Chairman, President and CEO, Southwest Airlines, Inc.:
State by State Passenger Loss Due to $24 Roundtrip Federal Head Tax or User Fee, chart
Memorandum from Lawrence B. Gibbs, Miller & Chevalier, June 18, 1996
Comparison of Proposed User Charges System vs. 10 Percent Tax Collected (Based on CY 1995 Data) for Domestic Operations of the Major, National, Regional, and Commuter Airlines, chart
Big Seven Proposed User Tax System to Fund the FAA (It's Really and Excise Tax All Along)
Articles from the Wall Street Journal and the St. Louis Post-Dispatch
ADDITIONS TO THE RECORD
Joint Committee on Taxation, report, Background Information on Federal Air Transportation Excise Taxes and the Airport and Airway Trust Fund
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Levine, Michael E., Executive Vice President-Marketing and International, Northwest Airlines, Inc., statement
U.S. General Accounting Office Estimate of Tax Revenues, chart
U.S. General Accounting Office Comparison of Various User Fee Proposals
Kolstad, James L., Vice President, Public and Government Relations, American Automobile Association, letter, February 19, 1997
Boyer, Phil, President, AOPA Legislative Action, letter, January 23, 1997
Reding, Robert W., President and CEO, Reno Air, letter, January 31, 1997
Handel, Mark, e-mail to Skymag@aol.com, January 21, 1997
Alterman, Stephen A., President, Air Freight Association, letter to Timothy Hannegan, Assistant Director, Aviation-Competition Issues, U.S. General Accounting Office, February 19, 1997
(iv)
PROPOSALS TO ESTABLISH USER FEES FOR FEDERAL AVIATION ADMINISTRATION SERVICES
THURSDAY, FEBRUARY 13, 1997
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U.S. House of Representatives,
Subcommittee on Aviation,
Committee Transportation and Infrastructure,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:25 a.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. (chairman of the subcommittee) presiding.
Mr. DUNCAN. Good morning.
The subcommittee will now come to order.
I would like to welcome everyone to our second day of hearings on the issue of aviation user fees, specifically the user fee proposal fee put forth by the seven largest airlines.
Before we get started, I'd ask unanimous consent that all members of the Transportation and Infrastructure Committee be permitted to participate in this hearing. Hearing no objection, it is so ordered.
We, unfortunately, do have a Republican conference going on on the floor at this time and we will be joined by some of the Republican members later on.
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We are very fortunate this morning to have two of the best minds in the airline industry here with us, Mr. Bob Crandall from American Airlines and Mr. Kelleher from Southwest Airlines. Thank you both for taking time from what I know are very busy schedules to be with us and the subcommittee certainly looks forward to your testimony.
We will also hear from a number of other distinguished witnesses: Mr. Daniel Wolf, President of Cape Air/Nantucket Airlines; Mr. David Z. Plavin, President of the Airports Council International North America, accompanied by Mr. Charles Barclay, President, American Association of Airport Executives; Ms. Kay Harrison a member of the Fort Smith, Arkansas City Board of Directors and Ms. Judie Shyman of the National Business Travel Association, who will be accompanied by Mr. Norman Sherlock.
We have some outstanding witnesses here with us and we look forward to hearing from all of them.
As I said last week, I believe that most members of the subcommittee wish to take a fresh look at this issue and have an open mind on the issue of user fees.
For those who do not know, some of the newer members, these hearings arise out of a meeting that occurred late in the session last year with the Speaker of the House and with the Chairman of this committee, the Chairman of the Ways and Means Committee and various others, when we met with the CEOs and the top leaders of most of the major airlines in this country.
We were asked, at that time, by the Speaker of the House to hold our first hearings in this session on this issue. If we stay with the ticket tax, of course, that would be primarily up to the Ways and Means Committee. If we go to a user fee system, then it would be up to this subcommittee to come up with some sort of formula that would be fair and acceptable to as many people as possible. That is what we're looking at at this time to see if this is the fairest or the best way to finance the FAA and the various matters that have to be accomplished through our aviation system.
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Certainly this morning's testimony will be very helpful to us as we move forward on what is a very, very important issue to a very, very major segment of our economy.
I also believe the testimony from these hearings will be helpful to the National Civil Aviation Review Commission, as soon as its members are appointed, on how best to finance our Nation's aviation system.
I will now recognize my good friend, the distinguished ranking member, Mr. Lipinski, for any statement that he wishes to make.
Mr. LIPINSKI. Thank you, Mr. Chairman.
I really don't have an opening statement to make. I made my opening statement last week.
I simply want to say that I think we're very fortunate to have the two giants of the American aviation system before us today. I know that we can learn a great deal. I was very sorry that they didn't take my advice from last week's hearing when I suggested that they both fly up from Dallas today on a United Airlines flight to resolve the situation.
Apparently that has not developed, so we will have to go ahead with this hearing today and develop some legislation in the future.
Thank you, Mr. Chairman.
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Mr. DUNCAN. Thank you, Mr. Lipinski.
Does any other member wish to make an opening statement before we begin the testimony? Mr. Ehlers
Mr. EHLERS. Thank you, Mr. Chairman. Just briefly.
We heard testimony on this issue last year as well and it's an ongoing problem. I'm very disappointed that when we reactivated the tax last fall, we did not do it until April 1. I thought it was silly for it to terminate in the middle or at the end of the session when we knew we would not be able to reinstitute it until at least April 1.
Be that as it may, I think the real issue here is trying to develop a fair and equitable system. I don't think the current system is entirely fair and equitable. I don't believe the proposal from the big seven, is totally fair either, although perhaps it is a step in the right direction.
I'm looking forward to the testimony. I think when push comes to shove, Mr. Chairman, we're going to have to sit down and design our own system that we believe is fair and equitable and get it passed as rapidly as possible.
Thank you.
Mr. DUNCAN. Thank you very much, Mr. Ehlers. You certainly have been one of the most active members of this subcommittee and I appreciate always your very fine input that you give us.
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We've got several new members here today, but before we get to them, I would like to call on Mr. Costello.
Mr. COSTELLO. Mr. Chairman, thank you.
I do have an opening statement that I'd like inserted in the record.
I would like to say that I favor reinstating the ticket tax immediately. I would say that there's no question that we need the revenue in order to protect the flying public as well as to improve the airports to meet the growing demand of a growing industry.
I might also say that I look forward to hearing the testimony of both of our witnesses and have several questions that I'd like to ask at the appropriate time.
[The prepared statements of Mr. Costello, Mr. Cramer, and Mr. Metcalf follow:]
[Insert here.]
Mr. DUNCAN. Thank you very much.
I told Ms. Granger before the hearing that I would call on her. I believe that she may want to make a brief opening statement, but also to introduce one of her constituents who is on this panel.
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Ms. GRANGER. Thank you very much.
First of all, Mr. Chairman, I want to say how pleased I am to be on this subcommittee. It was a priority with me and I appreciate the opportunity.
We have numerous aviation issues in District 12. Unfortunately, one of the most important right now is the pending American Airlines Pilots Union strike that we hope doesn't occur.
I'd like to say hello to my two friends, Bob Crandall of American Airlines and Herb Kelleher of Southwest. I'm glad to see both of you here. I see you're on opposite sides. We will try, of course, to be fair and find something that is equitable, but I'll be flying both of your airlines this weekend, as a matter of fact.
Mr. Crandall, I hope I will be flying your airline regularly past this Friday, but I'm very pleased to have you both here, to see you both here and thank you again, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Ms. Granger. We're pleased to have you and all of the other new members on the subcommittee.
Does anyone else wish to make an opening statement at this time? Mr. Metcalf?
Mr. METCALF. Thank you very much, Mr. Chairman.
I normally keep my remarks very brief. First, I'd like to express appreciation for being on the subcommittee. I'd like to thank both Mr. Kelleher and Mr. Crandall for their attendance and I look forward to an informative presentation by you.
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The Aviation Trust Fund is being adversely affected since the expiration of the ticket tax at the end of 1996 creating a severe shortfall in the Trust Fund. This shortfall will soon reach a crisis and I think something has to be done, and I think we all agree, before this crisis gets out of hand.
We have to work together closely with each side to solve this problem and devise a system that returns adequate dollars to the trust fund while sharing the burden of costs imposed by the system in an equitable manner.
I wish to commend you, Mr. Chairman, on convening this hearing today and look forward to working with members of both sides in all aspects of commercial aviation to find the best solution possible.
Thank you.
Mr. DUNCAN. Thank you very much, Mr. Metcalf.
Does any other member wish to make any statement at this time?
[No response.]
Mr. DUNCAN. I welcome the new members. I also want to welcome back all of the veteran members of the subcommittee too. We had, I think, the most hearings and the most active subcommittee in the entire Congress in the last 2 years. I don't know what this next 2 years holds, but we had some tremendous accomplishments and I look forward to this next 2 years as being a very active, productive session also.
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At this time, I wish to welcome the first panel. We have, as listed on the formal witness list, Mr. Herbert D. Kelleher, Chairman, President and Chief Executive Officer of Southwest Airlines. Mr. Kelleher, welcome.
Mr. KELLEHER. Thank you, Mr. Chairman.
Mr. DUNCAN. And Mr. Robert L. Crandall, Chairman and Chief Executive Officer of American Airlines. Mr. Crandall, glad to have you with us.
Mr. CRANDALL. Thank you, sir. I'm glad to be here.
Mr. DUNCAN. Ordinarily, the way we proceed is in table order and Mr. Kelleher, that means you're up first and you may proceed with your statement.
TESTIMONY OF HERBERT D. KELLEHER, CHAIRMAN, PRESIDENT AND CEO, SOUTHWEST AIRLINES CO.; AND ROBERT L. CRANDALL, CHAIRMAN AND CEO, AMERICAN AIRLINES
Mr. KELLEHER. Thank you, Mr. Chairman, Mr. Lipinski, members of the committee.
My name is Herb Kelleher. I co-founded Southwest Airlines in 1967. Our 24,000 employees let me be CEO. That is fortuitous because I love my job and I love the people of Southwest Airlines.
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There is little most of you have not heard already with respect to the scheme by the seven largest airlines to increase our taxes and decrease theirs. The GAO and DOT explained how the Big Seven plan is a blueprint for reducing competition.
Last week, Congressman Oberstar said that the Big Seven airline plan was ''a lousy idea, deserving an early and decent burial.'' I'll volunteer as a pallbearer.
Since others have summed up the Big Seven anti-competition plan so well, it was incumbent upon me to think of something new. I ultimately fell back on the question, ''Why are we here?''
Are we here because under this committee's oversight, the United States is the unquestioned world leader in commercial aviation?
Are we here because under this committee's oversight, the United States has the biggest, the most efficient, the safest and the most prosperous airport, airway and air transport network in the world?
Are we here because under this committee's oversight a user-funded revenue stream has worked extraordinarily well for 25 years, financing the operations of the FAA without user or voter complaint? As a collection mechanism, the excise tax system is fearless in its simplicity and its effectiveness.
Are we here because in 1996, this committee saw to it that the most far-reaching personnel and procurement reforms ever granted to a Federal agency were conferred upon the FAA, promising the potential of billions of dollars in aggregate savings?
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Are we here because under this committee's stewardship, the incredibly complex ATC modernization program is 87 percent complete, according to authoritative sources? When coupled with technological advancements which are clearly visible on the horizon, these improvements will produce many more billions of dollars in potential aggregate savings.
Are we here because under this committee's watchful eye, new processes were put in place to reform the management of the FAA and to estimate the FAA's budgetary needs? The new Management Advisory Council and National Civil Aviation Review Commission, subject to appropriate and essential policy-making congressional oversight, should enable us to learn more about what can and should be done to improve the FAA.
Are we here because under this committee's steady hand, competition has flourished? Low cost carriers have been given a chance to compete, producing $6.3 billion a year in consumer benefits and making winners out of many communities which would otherwise be losers according to recent DOT and GAO reports.
Are we here because the members of this committee have made it feasible and practical for all Americans to fly, not just a few?
No, ladies and gentlemen, we are here today because seven large airlines are spending millions trying to convince you and the American people that there is a so-called permanent crisis in aviation.
Do you see a permanent crisis? Do you feel a crisis? When you fly, do you observe a crisis? I don't. Every problem is not a crisis. We may have a problem. The possible problem is this. The arcane and arguably, unwanted and unintended consequence of the Budget Enforcement Act is that some of the user funds collected and deposited into a dedicated trust fund cannot be spent for their intended purpose. This is a technical, legal problem. This is not a financial problem.
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The money, delivered by the ever efficient excise tax is there. This is not a permanent crisis. This is the kind of problem this committee has solved to the betterment of our Nation for decades.
The crisis mongers say that privatization of key FAA governmental services will cure all ills. Privatization as an economic concept only works in an environment where competition lives and thrives. Is anyone suggesting that we break up the FAA and allow competition in the delivery of air traffic control services? Only those with special agendas could say with a straight face that privatizing a natural monopoly like the FAA will ever lead to innovation and greater productivity.
To do so would defy the laws of economic gravity. The issue is not one of economic efficiency, but of economic power, of economic domination and of economic control. The end game of the Big Seven is control of the FAA by the Big Seven and for their exclusive benefit.
The public interest, as defined by this committee, literally made Southwest Airlines possible. Some people will never forgive you for making us possible. Southwest and the very existence of low fare competition is the only crisis of which they truly complain.
They want you and the other members of Congress to solve their alleged crisis. As they now admit, the Big Seven user fee is merely a stalking horse for privatization of the FAA. Translated, it simply means an FAA they will literally and figuratively own. We're betting they don't get their way.
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The Big Seven should be more grateful. The government has been good to them. They have almost all the slots at four big airports, a process which immunizes them from competition and allows them to charge monopolistic prices. They evade taxes on the domestic portion of international trips, a subsidy valued at $294 million per year.
Their long-term, exclusive use gate leases are barriers to competition. Their computerized reservation systems distort the free market. They have caused the congestion at the 23 most congested hub airports in the Nation. A disproportionate share of the FAA's budget for both airport development and ATC infrastructure has gone to support those 23 congested airports.
The Big Seven apparently give you a failing grade. They should be sending you valentines instead.
We think you have served the Nation well by creating and maintaining the finest and fairest aviation system in the world. You have fostered, not oppressed competition. You have permitted growth; you have made it possible for all Americans to fly. That's more than a passing grade on our report card.
There are at least 10 reasons why the so-called user fee is a bad idea. They are listed in my complete statement.
Southwest Airlines has given many Americans the freedom to fly. The Big Seven want to take that freedom away. America was founded on the concept of freedom. Support freedom by saying no to the Big Seven proposal.
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Thank you.
Mr. DUNCAN. Thank you very much, Mr. Kelleher.
Before we go to Mr. Crandall, we have been joined now by the Chairman of the full committee, Mr. Shuster. Under Chairman Shuster's leadership, this committee, in the last Congress, produced I think 40 percent of the legislation that was passed by the Congress. I think it's fair to say that we're fortunate to have the most active chairman in this entire Congress.
I'd like to call on Chairman Shuster at this time for any comments that he wishes to make in regard to this matter before us this morning.
Mr. SHUSTER. I thank my good friend for all the nice things you're saying. I'd just as soon have you keep talking.
[Laughter.]
Mr. SHUSTER. We do welcome you here today and we're interested in your testimony. It's a very, very important issue and thank you for being here.
Mr. DUNCAN. We also are very fortunate to have been joined by the distinguished ranking member of the full subcommittee, Mr. Oberstar who served for so many years as chairman of this subcommittee and who has such great expertise on aviation issues, and who is a real asset to this subcommittee and the entire Congress. I'd like to ask Mr. Oberstar for any comments he wishes to make at this time.
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Mr. OBERSTAR. My only comment is to quit when you're ahead, Mr. Chairman, with those kinds words.
I paraphrase Lyndon Johnson, ''I wish my father were here; he would have loved it and my mother would have believed it.''
[Laughter.]
Mr. OBERSTAR. We welcome the witnesses here. It's good to have these two very distinguished giants of the industry and I look forward to your testimony this morning.
Mr. DUNCAN. We'll proceed at this time with the testimony by Mr. Crandall, whom I've already introduced and already welcomed. Mr. Crandall, you may begin your testimony.
Mr. CRANDALL. Thank you, Chairman, Duncan, Mr. Lipinski, Mr. Shuster, Mr. Oberstar.
I'm very pleased to be here to discuss the financing of the Federal Aviation Administration. The testimony I offer today is on behalf of American Airlines as well as the Coalition for FAA Fair Funding which includes the Nation's seven largest passenger airlines, and the 69 carriers of the Regional Airline Association.
In view of Mr. Kelleher's stirring introduction, I suppose I might also say that I'm here on the behalf of the alien forces in Independence Day.
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[Laughter.]
Mr. CRANDALL. The subject of today's hearing is as important, I think, to aviation's future course as any issue since the economic deregulation of the industry in 1978.
I think there is a clear consensus that the FAA must be rigorously restructured. Certainly the work of this committee and the report of the Gore commission yesterday suggests that we do, indeed, have a problem.
I also think it is clear that a consensus has emerged that the remedial actions to be taken by the FAA must be supported by a financing plan which will assure us all that the FAA can and will be continuously and adequately financed.
This committee set out the needs for adequate, stable financing very clearly in last year's FAA reauthorization bill. The two principal components of your plan call, on the one hand, for a cost accounting study by an outside party, and on the other, for the creation of a Civil Aviation Review Commission to make specific recommendations to Congress and the Administration on alternative funding formulas. I think both are sound ideas.
With respect to the cost accounting study, I should take this opportunity to offer two cautions. First, as Bob Poole of the Reason Foundation pointed out in last week's hearing, no cost accounting system is ever completely accurate. There are some joint costs generally attributable to many users and some necessary costs directly attributable to none.
Fortunately for us all, perfection is not required. What is required is a sophisticated understanding of the factors that drive system costs, as well as the ability to use easily obtainable data, and to translate those factors into fees.
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Even that goal is a challenging one, particularly since the FAA now has little, if any, cost-related data. Thus, I think you will find that the initial 90-day study will provide little more than an outline of the actual work that is needed.
Therefore, we hope the study group will be asked to continue its work through the full term of the Commission so that you and the Commission can eventually have the full range of information that is needed. We also hope the Commission will soon be empaneled. As its creation is delayed, its mandate grows more challenging and its ability to offer you carefully reasoned advice more limited.
When the commission convenes, we will urge that it structure the new FAA funding plan around three basic principles. First, the FAA's revenue, like that in any successful business, should be closely linked to both its costs and its operating efficiency. No successful business operates without fiscal accountability and a basic understanding of its costs, the value of its product and the needs of its customers. We all want the FAA to be a more cost effective provider of world class air traffic management services. By linking the FAA's funding to measurements of actual system use, Congress will dramatically strengthen the link between the FAA and its users.
Second, as the FAA creates the new and better air traffic management tools that it needs to manage growing demand, it must be able to rely on revenues which are closely linked to its financial requirements. Revenues linked to the price of airline tickets are unrelated to the agency's operating and modernization costs.
Third, and finally, I hope that all the participants in this debate can agree that equity is a fundamental requirement of any Federal fee or tax system. Unfortunately, a system which finances the FAA's activities by means of a ticket tax is not equitable.
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It is an indisputable fact that ticket tax financing requires passengers who pay higher fares, whether as a consequence of their destination, their date of purchase, or their choice of carrier, to pay a disproportionate share of the cost of FAA services.
In our view, it is entirely inappropriate for the Congress to ask two people receiving exactly the same service to pay widely different amounts. Fortunately, an equitable solution is readily available.
If the FAA financing plan is based on a reasonable allocation of costs among all users, as is every other country's financing of its air traffic control system, then everyone, passengers and airlines alike, will be treated fairly.
This committee has dealt successfully with controversial airline issues in the past, including not too many years ago, the difficult problem of noise. In the late 1980s, at a time when the industry was locked in a passionate debate about whether to accept or oppose more stringent noise rules, you and your counterparts in the Senate made it clear that there would be a noise law, after which the industry moved very quickly to work together and to come together and agree on what it would support.
We hope you will deal with the FAA financing controversy in a similar, straightforward way. In my view, if you make it clear that when the temporary ticket tax expires this September, there will be a usage-based system, the industry will hasten to reach consensus on how that plan should work.
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To facilitate that process, let me take this opportunity to state unequivocally that our coalition does not advocate an increase in any other sector's funding responsibilities, nor do we care how each sector pays its share. We are perfectly comfortable with the general aviation and cargo sectors paying their share in exactly the same way as they always have, through a fuel tax and a waybill tax respectively.
We are fully prepared to recognize that Alaska and Hawaii face unique air travel challenges that should be recognized by the funding system.
Our goal is to reach a consensus on how to replace dollar for dollar the taxes that our passengers now pay with a more appropriate revenue mechanism. There is no hidden agenda, we do not seek to put any company out of business, to harm any sector of the industry, or to cripple any community.
Indeed, we are completely sympathetic to the notion that any new funding formula should take into account the special needs of small communities and rural air transportation.
As I believe many of you know and Mr. Kelleher has pointed out, the Coalition proposed an alternative to the ticket tax last June. So far, we are the only group to make a specific proposal.
While we continue to believe that the principles involved in our proposal are sound, we were compelled to formulate it on the basis of the incomplete information available. Thus, we make no claim that it is the only or even the best alternative available.
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Accordingly, we look forward to joining with the committee and other interested parties in an examination of alternative proposals.
Thank you very much for the opportunity to testify. I look forward to responding to your questions.
Mr. DUNCAN. Thank you very much, Mr. Crandall. I know we will have many questions of both witnesses. Let me start with a couple.
Mr. Kelleher, in your longer statement that you provided to the subcommittee, you called the Big Seven proposal that's on the table an anticompetition proposal and you even note a study that your company had made that predicts a net loss of 26 million passengers nationwide if that is instituted. Let me ask you a couple of questions arising from that.
You said in your earlier statement that you thought this was sort of the big airlines asking for help from the government against competition that's hurting them. Do you think if this Big Seven proposal was instituted that it would help the big get bigger and some of the smaller airlines would then go by the wayside? Specifically, what would it do to Southwest? Would you have to reduce or cut back in some ways?
Mr. KELLEHER. Yes, Mr. Chairman. There's no question about it that price elasticity runs both ways. Low fares stimulate additional passengers; higher fares cause fewer people to travel.
If you took the most price sensitive segment of the market, the 53 percent of the American travelers who paid less than $100 in 1995 and you superimposed upon their costs the proposal by the Big Seven, that would result in an 11.4 percent increase in what they pay for air transportation.
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Then, you can join with that, the existing 10 percent tax and you have together imposed a 21.4 percent tax on those people who are the most price sensitive segment of the market.
So we hired an outside consultant to do a study on how many passengers would be lost throughout the United States if you had that type of increase. His conclusion was that approximately 26 million less people would fly each year as a result of those fare increases. Insofar as Southwest Airlines is concerned, that extends to about 5 million passengers a year for Southwest or about 10 percent of what we carried last year.
Beyond that, Mr. Chairman, if I may add an addendum, this proposal by the Big Seven is directed at penalizing low fare, high frequency, short haul air transportation. That is the niche that Southwest Airlines has traditionally occupied.
If this proposal were to pass, Southwest Airlines would immediately have to rearrange its market mix. It would have to become a longer haul, lower frequency carrier, charging higher fares because of the longer distances it transported passengers.
As a consequence of that, you would find that there are a good many communities that were experiencing reduced service or loss of service in its entirety as a consequence of the Big Seven proposal.
Mr. DUNCAN. I was going to get into that because you do get into that in your testimony, but basically, you say in this longer statement that it's a tax break for the first class travelers but it hurts the lower income or the more price sensitive people, is that correct?
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Mr. KELLEHER. That's correct, Mr. Chairman, and it may or may not be a tax break for the first class traveler because if this proposal was in effect, there is no law that requires the Big Seven to confer the benefits of it upon the first class traveler. They can simply increase their profits without decreasing the first class traveler's cost.
Mr. DUNCAN. Let me ask you this. You know the FAA has recently commissioned Coopers & Lybrand to do a major study of this whole issue. Do you think the Coopers & Lybrand study is going to show that you are paying your fair share of the cost of air traffic control and the FAA operations and so forth?
Mr. KELLEHER. The General Accounting Office says, in a fairly cursory approach, that if you take several measures of airline usage, such as amount of fuel consumed as an example, or you take mileage flown, that you would conclude that the low cost carriers are paying their fair share of expenses visited upon the air traffic control system.
I think what you're going to find with respect to the Coopers & Lybrand study, quite frankly, is that it's virtually an impossible task to determine, for instance, what the cost burden is of a flight flying between New York and Washington at 5:00 p.m. as compared to a flight flying between say, as a hypothetical, Knoxville and Cincinnati at the same time of day. That example was selected by computer. It's just a random selection.
I think that we are trying to say something. It's sort of a pseudo science to determine how these costs might be allocated. There is no science to it; it's simply guess work. You know exactly how costs are allocated in the cost accounting profession.
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When you conclude the thing is so complex you can't come up with a definitive answer, costs are allocated based on the amount of revenue that's generated which is exactly the system that prevails today.
Mr. DUNCAN. I notice in your longer statement that the three examples you gave of places that would be hit by a decrease in passengers were Knoxville, Tennessee, Chicago Midway, and Altoona, Pennsylvania, and you just happened to pull those out of the air, is that right?
Mr. KELLEHER. Just fortuitous, Mr. Chairman. It was serendipity.
Mr. DUNCAN. Thank you very much.
Mr. Crandall, you have said before you feel the present system is giving a subsidy to airlines like Southwest, is that correct? Do you feel that way, and if so, how much of a subsidy are you giving to Mr. Kelleher? Have you figured out anything?
Mr. CRANDALL. It's not a feeling, Mr. Chairman. I think it's a clear fact that the costs of operating the ATC system, which can be determined--my friend, Mr. Kelleher, is a very smart fellow, but he doesn't believe that we can't figure out what it costs to do something.
Now, you can apply any number of formulas. You can apply the formula that the Coalition proposed, you can apply the Euro control formula, which is widely used in Europe, you can apply a variety of formulas and you come to the conclusion that the costs of the system are unrelated to the price of tickets.
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All we are doing is making a very simple statement and that is that if it costs x dollars to operate an airplane, to take off, to land an airplane, to fly an airplane through the system, every operator ought to pay the same costs and then every operator can set their own ticket prices.
That isn't going to put anybody out of business and it isn't going to disadvantage any competitor unless some competitor feels the need for a subsidy.
Mr. DUNCAN. Let me ask you this. Mr. Kelleher and others who favor the present system say that we have a simple, easy to understand, easy to collect formula at this time and that if you come in with some sort of user fee system, it would be complicated, convoluted, hard to understand, hard to collect, and so forth. What do you say in response to that?
Mr. CRANDALL. I say that every other country in the world has managed to figure out a way to allocate the costs of its air traffic control system and I don't think the United States is the least capable of the world's countries.
Mr. DUNCAN. This doesn't have anything to do with the issue that's before us this morning but I know every other member is interested in this. Are you going to be able to settle the strike?
Mr. CRANDALL. I don't know, Mr. Chairman. Having been given the opening or invited to comment on that, let me simply say that American Airlines' pilots are the highest paid pilots in the airline industry. They are paid the highest hourly rates, they have the most restrictive work rules, they have the most generous pension plans.
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I might say parenthetically, about 20 of them retired so far this year and each left with an average lump sum payment of $2 million.
They are highly skilled, very experienced people and they should be well paid. We struck a deal with them, we made a deal in September after 2 1/2 years' worth of negotiations which would have put our pilot costs about 9 percent above the costs of our highest cost competitor, highest cost competitor.
The pilots have now said to us, we want more than that. They have said to us, here are the five things you are going to give us. If you do not give us all of these five things, which will raise your costs by $200 million a year, we are going to go on strike.
I don't know whether we can settle it or not. We have only two choices at this moment. We can either cave in and give the pilots union exactly what it wants or we can take a strike. A strike of 90 days would destroy the company.
Mr. DUNCAN. We certainly all hope that it doesn't come to that, but I've run way over my time and Mr. Lipinski has asked I go to Mr. Costello first. Mr. Costello?
Mr. COSTELLO. Mr. Chairman, thank you, and Mr. Lipinski, thank you.
Mr. Crandall, how do you respond to your critics that say this is a so-called scheme to penalize and hurt the smaller airlines and discount carriers?
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Mr. CRANDALL. Mr. Costello, I would simply say that a critic who says that is choosing to mischaracterize what we say. What we've said is very simple. We would like to have outside, independent studies made to determine the cost of operating the air traffic control system and we would like to have those costs distributed equally to all parties based on the actual usage of the system by all parties.
The result of that will be to reallocate costs among carriers because up to this point, all carriers are not paying that portion of the costs which they charge.
So it is not a scheme, it is a simple desire that everybody who gets a unit of government service pay the same price for it.
Mr. COSTELLO. Your critics would also say that you ignore the fact that the Big Seven benefit from other public policies such as a virtual monopoly on total capacity at major hubs. How do you respond to that?
Mr. CRANDALL. I respond to that by making the point that if we have a virtual monopoly at major hubs, we are uniquely unskilled in exploiting that monopoly. The average profitability of the seven major carriers has been consistently below that of Southwest and the other low cost carriers, and consistently below that of the companies represented by the S&P 500.
So, if I am a monopolist, I am an inept one.
[Laughter.]
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Mr. COSTELLO. Mr. Chairman, thank you.
Mr. DUNCAN. Thank you very much.
Chairman Shuster?
Mr. SHUSTER. Thank you, Mr. Chairman.
As I've listened to the discussion and thought about the way to reinstitute the ticket tax or some other formula, it caused me to reflect on the battle we're in right now with regard to the Highway Trust Fund. The Highway Trust Fund, as you know, is largely a cents per gallon charge. There are other aspects to it, but that's the heart of it.
Have you looked, either or both of you, at a simple cents per gallon charge and what that would do? How many gallons do you use and how many cents per gallon would it take to raise the $6 billion or so that we need each year and what would the impact be on the larger and smaller carriers?
Mr. CRANDALL. We haven't explicitly studied that, Mr. Shuster. Certainly, that could be done. I think there are two things that would dissuade me from recommending a fuel tax as opposed to ticket tax.
The first is, like a ticket tax, a fuel tax is unrelated to the actual costs of the FAA. It seems to me what we're trying to do here is raise money to finance the activities of the FAA, and to the extent we can do so, we ought to raise that money by charging people what it actually cost to perform those services.
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Mr. SHUSTER. But we're also raising money for the AIP program.
Mr. CRANDALL. Yes, sir, I quite agree with you, and that can be more directly related, I believe, to the air traffic control activities of the FAA.
Mr. SHUSTER. It is related. I'm trying to find symmetry here between the Highway Program where we raise money on the gas tax to build highways. We raise money through the ticket tax or fuel tax with aviation, yes, in part, to fund the FAA, but very substantially to build airports.
Mr. CRANDALL. Yes, that's right, but the bulk of the dollars that are collected go towards the operation of the air traffic control system and research facilities and equipment costs related to it.
The other difference, of course, is that in terms of the highways, there are an enormous number of users and you couldn't very well allocate costs among 80 zillion cars. In the case of the ATC system, there are a relatively few users and you can allocate costs as most other countries do.
I do think there is another issue that has quite a profound effect on investment decisions. If you look at the operating costs of an airline, you've got some fixed costs which are much higher if you invest in new airplanes and you've got some variable costs which would be fuel and fuel-related taxes which are lower in the case of new equipment and higher in the case of old equipment.
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Most of the new entrant carriers in the United States--this is no longer true of Southwest which has enjoyed very good success and has a very young fleet--but most of the new entrant carriers tend to use old equipment. I think the use of a fuel tax would have a very discouraging impact on the ability of people to enter the airline business using older equipment, but certainly a fuel tax is an alternative that could be considered.
Mr. SHUSTER. The other side of that coin, and please correct me if I'm wrong, would be that it would certainly stimulate all carriers to get more modern, more efficient, and presumably safer equipment.
Mr. CRANDALL. I think that is perfectly right. One of the side benefits of a fuel tax would be that it would motivate people to invest more heavily in new equipment.
Mr. SHUSTER. Do you care to comment on that?
Mr. KELLEHER. Mr. Chairman, of course our basic position is that the excise tax has performed flawlessly for over a quarter of a century and it's only by an accident of history, so to speak, the veto of the budget bill, that this issue is even before the Congress again.
We think it's a perfectly acceptable way of doing business. It is the equivalent to the sales tax that prevails in all of our States. If you go to Neiman-Marcus, you pay more than if you go to Wal-Mart for the same product and there's nothing wrong with that unless all the States' sales taxes should be invalidated.
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However, if the Congress, under your leadership, felt that it needed to consider some alternatives to the existing methodology of raising money for the FAA, certainly I would agree with Mr. Crandall that some kind of fuel tax would be worthwhile considering in that context.
Certainly that would be, in my estimation at least, a much more fair approach to the issue than the proposal to the Congress by the Big Seven which is absolutely unrelated to the cost of anything having to do with air transportation this side of the planet Jupiter.
Mr. SHUSTER. Could both of you or others run the numbers on a fuel tax and what it would mean in terms of who the winners and who the losers would be?
Mr. CRANDALL. Yes, I think those studies could be done. To my knowledge, they haven't been done but they could be and, in fact, as I commented earlier, there are lots and lots of formulas that one could use and we can work out the alternatives as to how they would affect each individual carrier with a fair degree of precision.
Mr. SHUSTER. I would ask our staff to pursue that, Mr. Chairman, if appropriate.
Thank you very much.
Mr. DUNCAN. Thank you, Mr. Chairman.
We'll next go to Mr. Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman.
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Again, I want to compliment you on your very judicious handling of all the aviation issues in the past 2 years and your continued judicial manner of conducting the hearings in this extremely important economic sector which amounts to well over $600 billion for our national economy. That's about 10 percent of our gross domestic product. Whatever we do with aviation should be done carefully and thoughtfully.
I hope, Mr. Crandall, you do come to a resolution of your current negotiations; a shutdown of American Airlines would have a very powerful, adverse impact upon the national economy. We, in this committee, did attempt to resolve a similar matter involving Eastern Airlines in 1989 and had the Presidential Emergency Board that Congress passed been put into effect, I think Eastern very likely would still be flying.
Mr. CRANDALL. I believe that's so and I hope the members of this committee will support our efforts to bring the pilots into mandatory arbitration, either through a PEB or in any other way. We think it's now appropriate for the parties to simply put the arguments to a disinterested third party and set aside the whole notion of a work stoppage which is unacceptable.
Mr. OBERSTAR. The issue at hand is an extremely important matter for all of aviation. The fiscal 1997, current fiscal year appropriation for FAA is $7.2 billion, $1.46 billion for the Airport Improvement Program, $1.8 billion for the facilities and equipment account, $4.9 billion for the operations account; and $185 million and small change for research and development.
To cover those costs, the ticket tax was established in 1970 probably because it was an easy way to do it. We've talked already about a gas tax. The highway user tax, the gasoline tax, does not fairly allocate costs and you already acknowledged that it would be extremely difficult to do that among the 110 or 120 million vehicles that roll on America's roads every day.
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Our interest is twofold, I think, in this committee. One is to fairly, equitably and fully finance air traffic control operations and airport improvements, and secondly, to find a means of financing that will not be subject to the fluctuations of the budget mania that periodically attacks the Congress, the Office of Management and Budget, and the White House to hold back monies to cover up deficit, to play games with the public treasury, that have no purpose whatever for aviation.
The trouble is getting to a revenue stream that is truly a fee that we could then take off budget and have under the jurisdiction of this committee.
I have very carefully and extensively, not only I but the GAO, analyzed the Group of Seven proposal and I am encouraged with your comment that this is only a starting point because if it were the end point, it would deserve a decent burial.
The upshot of the Group of Seven proposal is to shift some $600 million in costs away from the big carriers to the smaller carriers. That would mean $140 million less for Delta, $126 million less for American, $101 million less for United, $88 million less for USAir, $205 million more for Southwest and $312 million more for all the other carriers.
In coming to an alternative means of financing the system, I think that clearly the current system does not reflect costs that each carrier imposes on the air traffic control system, but neither does the Group of Seven become in its reality a user fee. It separates airlines that hub from their nonhubbing competitors. Hubbing places a very substantial burden on the air traffic control system.
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So supposing we changed or reformulated that proposal to take account of the enplaned passenger rather than the proposed embarking passenger, substitute actual miles flown for nonstop miles, what would be your reaction?
Mr. CRANDALL. Let me try and respond this way, Mr. Oberstar.
Mr. OBERSTAR. You can't put numbers on those figures.
Mr. CRANDALL. We can put numbers on those figures, but to be candid, I hope we won't bother. I'm not here today to try and persuade you to accept either the so-called Group of Seven proposal or any other formula.
I'm here today rather to say to you that we put that forward as a proposal because we think it is closer to a real cost allocation formula than a ticket tax. We don't have costs and we think that what ought to happen is that professionals ought to be put into the FAA to determine what the system costs and those costs should be allocated based on how those costs are caused.
So I hold no brief for the formula which Mr. Kelleher attacks, it may be good, it may be bad. Interestingly, and you're very familiar with the systems in Europe, if you simply take the Eurocontrol formula and apply it in the United States, the result is pretty close to the results that come out of the formula that we proposed, but that's neither here nor there.
I don't want to argue about the formula or about any modification of the formula. I think we need to go into the FAA, figure out what the system costs, and then allocate those costs based on the cost drivers. That's all we want to do.
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Mr. OBERSTAR. That is an objective of all of us, to find out how we can associate use with cost and distribute those costs. I would be cautious about applying a European model to the U.S. system because their distances are so much smaller than ours. Though their population is greater, in all of Europe, the distances are relatively small.
I'd be happy to yield to the Chairman.
Mr. DUNCAN. I worry when we talk about the FAA costs as being the whole ball of wax because while I realize that most of the $6 billion now goes to the FAA, I know you and I and many, many others have said that $1.46 billion a year that goes for airport improvement is inadequate and indeed, Administrator Hinson said we need $10 billion a year to improve airports.
Therefore, any formula we look at should not only be focused on the cost of the FAA, but the cost of the Airport Improvement Program in America.
Mr. OBERSTAR. I completely agree and that is among the difficulties in developing a cost structure that you can relate to use.
Mr. Kelleher, if a formula were developed to take account of enplaned passengers instead of embarking passengers, and actual miles flown for nonstop miles flown, what impacts would there be on your operations or how would you react to this as a proposal?
Mr. KELLEHER. Mr. Oberstar, I frankly haven't studied what the impact of such a change in the Big Seven proposal would entail for Southwest Airlines and for competition in the industry and for the consumer, but that's certainly a task that I would very happily set myself to.
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Mr. OBERSTAR. We had a proposal last week in testimony before the committee suggested by the Reason Foundation using the ICAO formula of per mile en route charge and a terminal use charge related to aircraft weight. Your reaction?
Mr. KELLEHER. Again, Mr. Oberstar, I have not looked into any other formula. We've basically been busy trying to fight off the Big Seven anticonsumer, anticompetitive proposal, so we haven't focused on any other proposals.
Mr. OBERSTAR. Well, in conclusion, I know I've gone beyond my time here, but none of these formulas take into account the military use of the air traffic control system and that is money that has to come out of the defense budget, out of general revenues dedicated to the FAA and notwithstanding our efforts to come to a fee concept, there still is the general value to the American public of the air traffic system. I think the public, out of general revenues, ought to make contribution into this system as well.
That is sort of the range of complexity that I think we're dealing with here.
Mr. KELLEHER. I think you're right.
Mr. OBERSTAR. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Oberstar.
Chairman Shuster, in the last Congress, started a new policy and a good policy of naming a freshman member as a vice chairman for each subcommittee and I would like to welcome as the new vice chairman for the Subcommittee on Aviation, Mr. Blunt from Missouri.
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Mr. Blunt, if you have any statements or questions at this time, you may proceed.
Mr. BLUNT. Mr. Chairman, as you pointed out, this is my first day on the committee and I look forward to learning lots of things here and certainly look forward to your leadership on the committee.
I guess looking at the testimony and hearing the testimony today, Mr. Crandall, it seems to me that maybe you're giving up on the Big Seven proposal from your last answer. I don't see much about that proposal. I wonder if you'd like to explain what Mr. Kelleher just described as the anticonsumer, anticompetitive proposal that the seven major airlines have made here?
Mr. CRANDALL. I'd be happy to, Mr. Blunt. It really seems to me that the argument which is being made is that since we have always subsidized the low cost carriers, we must always continue to do so.
Likewise, it seems to me that Mr. Kelleher, whose company has been enormously successful, is saying that in order to sustain competition, we must sustain subsidies. Neither argument seems to me to hold any water.
I, frankly, am baffled by how either Mr. Kelleher or anyone else can argue that each aircraft operator ought not to pay their fair share of the costs. That's all we seek, a fair allocation of costs as determined by disinterested third parties who do cost accounting studies for agencies and companies around the world.
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If the allocation of costs according to how they are caused is unfair, just how it is unfair is lost on me.
Mr. BLUNT. Give us just a thumbnail sketch that even a freshman member of the committee would understand of how you're proposing we do this, how you're proposing we determine the individual airline cost to the system?
Mr. CRANDALL. I think what you do, Mr. Blunt, is you go in the FAA, as we all go into our own companies, and you determine what it cost. For example, what does it cost to operate a given terminal area, how many controllers, how much radar, how many airplanes come in and out of that area in the course of a day. Therefore, how much does it cost per aircraft operation for that particular segment of the air traffic control system's cost and so on, and you would add it all up.
You would simply say, Mr. A operated so many airplanes, that's so many dollars per operation, and Mr. B operated so many airplanes at so many dollars per operation and that's what Mr. A pays and that's what Mr. B pays.
That is the way that every company in America keeps its own costs and allocates its costs among the various products it sells. I think the FAA should be no different.
Mr. BLUNT. Mr. Kelleher, would you like to comment on that?
Mr. KELLEHER. Yes, Mr. Blunt. What Mr. Crandall says, in an abstract, theoretical, hypothetical way is certainly true, but frankly, that's all it is. It's an oversimplification.
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Of course you can determine what the FAA's costs are. We know how much money the FAA spends. The real mystery and where the political influence comes into play is how you allocate those costs among the various segments of the industry and among the various carriers comprising commercial aviation.
Every effort has been made by the Big Seven across Capitol Hill to get their formula into effect regardless of what the costs might be. They have no attachment to using costs as a determinant of what would be a fair allocation. They tried to get a $12 per passenger head tax and their lobbyists were all over the Capitol espousing that. That has no relationship to costs whatsoever.
Their newest proposal, the three-prong proposal, has no relationship to costs whatsoever. As a matter of fact, the regional airlines were opposed to their position and so they simply modified their formula to reduce the seat cost to the regional airlines so that they would switch sides.
So this sounds like a highly balanced, highly fair and highly just approach to the subject, but in actuality, from its very inception, and that informs the whole process and the process that would occur if you went away from the excise tax, it has been an effort to impose additional costs upon competitors in order to make them less effective.
Mr. CRANDALL. With all due respect to my good friend, Mr. Kelleher, that simply isn't true. The fact is we do not ask this committee or the congress to accept our formula. What we do ask you to do is to reimpose the ticket tax for only a limited period of time and during that limited period of time, have the necessary cost studies done and then develop a formula which reflects costs.
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We made the suggestion of the formula and we have spent a lot of time discussing here because we believe it comes closer to a cost allocation formula than does a ticket tax, but we have never said that it was cost-based and we have not defended it in terms of its being the ultimate solution.
We simply said after the ticket tax lapsed, the FAA needs money. You have a choice: you can reimpose the ticket tax or you can adopt an alternative approach, here is a suggested alternative.
Mr. DUNCAN. All right. Thank you very much, Mr. Blunt.
Mr. DeFazio.
Mr. DEFAZIO. Thank you, Mr. Chairman.
Gentlemen, I thought I saw the testimony but I'd like to just go back to it. Under the existing system, how much is the 10 percent for each of your airlines, the 10 percent tax? How much did you pay under that system on an annual basis?
Mr. KELLEHER. For Southwest Airlines, that 10 percent would be about $300 million per year.
Mr. DEFAZIO. Mr. Crandall?
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Mr. CRANDALL. I don't know the number, Mr. DeFazio, but again, we do about $1.4 billion in passenger revenues. I'd have to break that down into domestic. I simply don't know what that number is.
Mr. DEFAZIO. I thought I saw it somewhere in your testimony.
Mr. CRANDALL. We can get it for you. It's a big number.
Mr. DEFAZIO. I'd like to approach this from the perspective of passengers, individual passengers and consumers. Mr. Kelleher raised a subject in which I'm interested, which was price elasticity and his concerns about the new formula, and his studies showing how much passenger travel would drop.
I'm just curious what your respective airlines have done since the expiration of the 10 percent tax? Have your fares on the average gone down 10 percent or has the 10 percent been captured? Certainly if an increase is going to drive passengers away, I would assume if you had foregone that 10 percent, perhaps it drove passenger travel up if the market is so elastic. I'm curious.
Mr. KELLEHER. This time around, Mr. DeFazio, we have kept fares exactly where they were for the passenger. In other words, they're paying exactly the same today that they were before the fuel tax elapsed.
Mr. DEFAZIO. So you're capturing that 10 percent?
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Mr. KELLEHER. Yes. The reason we have not reduced fares is because jet fuel prices are at their highest level since Desert Storm.
Mr. DEFAZIO. And that eats up all the 10 percent?
Mr. KELLEHER. Yes.
Mr. DEFAZIO. So there's no windfall for the airline there?
Mr. KELLEHER. No.
Mr. DEFAZIO. It didn't increase your profitability any.
Mr. Crandall, the 10 percent?
Mr. CRANDALL. Mr. Kelleher is perfectly right, the industry has essentially captured the 10 percent. Some of it has been used to pay for fuel increases and some has gone to increase profitability.
One of the great problems of our industry has been that the industry is insufficiently profitable which is why the United States airlines, as a group, operate the oldest airplanes among the scheduled airlines in any country.
Mr. DEFAZIO. That would be an interesting subject to get into another time, the tradeoff between profitability cycles and aging fleets but that's beyond the scope today.
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Mr. Lipinski, the able ranking member on our side, provided the number for you under the 10 percent in 1995, Mr. Crandall, it is $735,284,000.
Mr. CRANDALL. He's always helping me out.
Mr. DEFAZIO. I guess what I heard in the discussion between the two of you was I think there's some grounds for agreement here because I think with the GAO report, we poke holes a little bit in the existing formula or the proposed formula which, Mr. Crandall, you say you are not wedded to, but on the other side, Mr. Kelleher, I think you'd have to admit, for consumers the existing system is not totally fair in that if I have a government fare, the person sitting next to me has a tourist fare, and the person sitting one seat over has a full or first class fare, there's a dramatic difference in what the assessment of the 10 percent would constitute.
I think that we should strive to deal with that in one way or another. Do you have a problem with just the concept, not any application, not their formula, of trying to determine a fair application maybe doing away with the tax? Because as you also point out in your testimony, there is a subsidy for international travelers because they don't pay on the domestic leg.
If we took all those things and just leveled the playing field and said now we're going to fairly apportion costs, do you think we could get to something where the two of you might agree?
Mr. KELLEHER. I don't know whether that's possible or not but I will say this. The ticket tax has worked out very well for a great many years. It is an incentive to reduce fare; it's not a disincentive, it works the other way.
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It is within the control of each carrier to reduce the impact of the tax upon it by reducing its fares. That is the way carriers can control it from a business standpoint and if carriers are concerned about the impact of the tax on them, all they need do is reduce their own fares and that impact will diminish.
Mr. DEFAZIO. Mr. Crandall, do you want to respond?
Mr. CRANDALL. Mr. Kelleher knows perfectly well that of course if you reduced your fares to zero, you could avoid the tax altogether, hardly a desirable or a result that is going to produce good, long-term results.
The fact of the matter is, we're not talking about airline ticket pricing, we are talking about whether or not different recipients of a government service should or shouldn't pay the same price or cost of that service.
If Southwest Airlines operates a 737 into or out of an airport, then it ought to pay the same amount to operate that 737 as American Airlines pays to operate a 737 in and out of the same airport.
Mr. DEFAZIO. If I look at it, the GAO did say the proposal only incorporates factors that would substantially increase the taxes paid by low fare small airlines.
If we went to, for instance, direct routes, you're going to deal with actual miles flown as opposed to ignoring hubbing, and things that would provide a little more equity. Mr. Crandall seems to be open to this discussion or is indicating an openness here today.
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Mr. CRANDALL. We'd be happy to use actual miles as opposed to route miles. It doesn't make any difference to us.
Mr. KELLEHER. There are some things, if I may respond myself, that need to be taken into account and the Department of Transportation has addressed those in a general way in its comment upon the Big Seven proposal.
It is not quite as easy to come up with a formula as Mr. Crandall might indicate. For instance, where you have the huge hubs operated by the megacarriers, you will have a disproportionate amount of expense attributable to those hubs. It's not simply how many airplanes come in and out. It's how many airplanes they feed in and out within a given period of time and how much response is required on the part of the FAA to accommodate the peak demands they place upon the system.
Mr. DEFAZIO. So you'd like to look at some congestion pricing?
Mr. KELLEHER. Yes. Something along those lines. Certainly that cost should be taken into account and I believe--you can correct me on the figure, Bob probably knows--this was all brought home to the committee how difficult and complex this is and how this oversimplification might have taken place because as I remember, the FAA said that it took something like $136 million of expenditure on their part to gear up Nashville to become an American hub, in other words, $136 million than it would have taken if it were not a hub. I offer that as an illustration of the expenses of hubbing in that connection.
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Another thing that has been overlooked that Mr. Shuster mentioned earlier is that this money for airport improvements comes out of exactly the same pot, so if you look, for instance, at Love Field in Dallas, Texas, the FAA might have spent--I'm making up the figures by way of illustration--$10 million over the last $15 years on airport improvements at Love Field which is served by Southwest Airlines.
On the other hand, if you go to DFW Airport, probably the FAA has spent $500 million on improving DFW Airport. That's a cost that is not attributable to Southwest Airlines. That is a cost that is attributable to the carrier that hubs at DFW Airport and the same principle applies throughout the system.
Mr. DEFAZIO. Mr. Chairman, if I could. At this point I have a very dramatic announcement regarding the strike.
Mr. DUNCAN. All right.
Mr. DEFAZIO. I wanted to see all the cameras pivot.
Thank you, Mr. Chairman.
[Laughter.]
Mr. CRANDALL. I'd like to observe, Mr. Chairman, that the numbers, the $500 million and the $10 million were selected by the same random computer program as selected the cities.
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[Laughter.]
Mr. DUNCAN. Mr. Ehlers?
Mr. EHLERS. Thank you, Mr. Chairman.
First of all, Mr. Kelleher, in response to your rhetorical question, why are we here and your satirical responses, I just wanted to tell you why I am here. I'm here because my constituents elected me to represent them and to make decisions which are best for them and for the country.
In particular, I regard equity of taxation as one of the most important functions that we can perform here. That's really the objective.
I think our goal really has to be twofold. Number one is equity and fairness for the taxpayers and for the organizations or entities being taxed. The second is to achieve good public policy. Those should not be in conflict, though occasionally they are, but I think, we can achieve equity and achieve good government policy.
So the question is how. Clearly, the current system is inequitable and I don't think it is good public policy. I'm not that impressed with the Big Seven proposal. Mr. Crandall, you repeatedly said that the goal should be to try to relate the tax or the fee to the service provided. That does not happen presently and I don't think it happens under your proposal either.
If you followed that strictly, you would vastly increase the cost of operating the smaller aircraft who require in many ways the same services from the FAA as the larger aircraft. So your proposal was not totally equitable either.
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In thinking about this before the hearing, I came to the conclusion that although we can't achieve perfect equity, one of the components could be provide the one that Chairman Shuster came up with a minute ago, the fuel tax.
I won't say too much about it because he's already covered it, but I think that could certainly be a bigger component of FAA's funding and it's really quite equitable in many ways.
I think having a seat tax is in some ways just as inequitable as having the excise tax we currently have, partly because of the irrationality of the pricing system within the industry.
You mentioned several times, Mr. Crandall, that you have two people getting the same service and paying vastly different amounts. That's very true. I happen to be Dutch and I shop very carefully. In fact, I'm quite proud that I saved the Federal Government $15,000 in airplane fares my first year here by shopping around for bargains.
I find it rather ironic that because I fly a lot of miles that often I'm upgraded to first class free of charge. So I'm flying from here to my home in Grand Rapids occasionally for as low as $75 and sitting in first class. While there's some poor person across the aisle or even in coach who has paid $300 or $400 for that same privilege and accordingly, they've paid that much more tax as well.
Even a seat tax, is not totally equitable because you don't fill all the seats, you can have an airline that's getting as much service as another airline the with same size and weight, but carrying 10 percent of the number of passengers at 10 percent of the tax of the other one.
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I think there are problems with both of these proposals. I think if we can deal in generic terms with issues such as a fuel tax, and incorporating something like the number of landings performed on a particular flight--because a lot of the cost is associated with landing, transferring and taking off--we can come up with something that's more equitable than what we have now. And more equitable than what you've proposed. Mr. Chairman, think that's the direction we have to go.
I would appreciate any reactions either one of you would have to these comments.
Mr. KELLEHER. Well, my reaction to it is that we certainly would be pleased to examine any alternatives that might be proposed to the excise tax for funding the FAA, but, as you pointed out, the discrepancy involved in some cases is rather substantial because of the fact that carriers charge vastly different fares to their passengers.
That discrepancy will continue with or without the excise tax, so the disparity in that regard is not solved by whether you raise the money through an excise tax or through some other formula.
Mr. CRANDALL. I guess I would say, Mr. Ehlers, it sounds to me as if you endorse the notion of equity and on the other hand, as is true with all complicated subjects, there are lots of views of what is equitable and what isn't.
As I've said several times here today, we don't hold out the particular formula we proposed as the end all and the be all, and we'd be pleased to participate with you and with the other members of the committee in looking at alternative approaches.
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Mr. EHLERS. Thank you. Just a concluding comment.
One of the reasons I'm discussing a fuel tax is to deal not so much with equity, although that's part of it, but also with good government policy. Namely it can be a very strong inducement for greater fuel economy which would result in greater efficiency of service.
I think long term. Greater fuel economy is healthier for the industry and for the energy resources of this Nation. If I were in the airline business, I'd be extremely worried about what's going to happen to the price of fuel in approximately a decade. It's going to be the single greatest threat for your business. Anything we can do to improve fuel economy or fuel efficiency is certainly going to be helpful.
The other factor I'd mention, Mr. Chairman, I've heard it said that what we should do is get the Big Seven together with the regional airlines and get these two gentlemen and their colleagues to sit down and work this out and rubber stamp a proposal.
I just want to go on the record saying I'm not willing to do that. I think we're the ones that are going to have to work this out if we want to really choose something that's fair and equitable and serves the needs of our government and the people.
Thank you very much.
Mr. DUNCAN. Thank you very much, Mr. Ehlers.
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Ms. Danner, I believe Mr. Lipinski said to go to you next.
Mrs. DANNER. Thank you. I just didn't want to go beyond my seniority.
I think of the comments that I've heard here this morning, Mr. Kelleher, your comments more than anything proposed by the Group of Seven leads me to believe that this committee must look at a new formula.
Whenever I hear an American businessman or businesswoman tell me that some government formula or program has, in your own words, ''performed flawlessly,'' it tells me that there is inequity.
I think that I will leave it at that because I know there are many others to comment but I believe that truly we must look at this.
I appreciate your comments about price sensitivity. You do serve my airport, Kansas City International, but I also must mention that all of the Group of Seven serve it too.
Another comment you made I think I must reflect upon is when you commented about your people being a price sensitive segment of the market. I would suggest to you that those who fly TWA, and I hope that's every person, will recognize that the people that fly the seven airlines are also price sensitive.
Thank you, Mr. Chairman.
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Mr. DUNCAN. Thank you, Ms. Danner.
Ms. Granger?
Ms. GRANGER. I don't know what the answer is but certainly the issue is clear today.
Mr. Crandall, I was very pleased and think it's very reasonable that you suggested that we reinstitute the ticket tax and use that time to reach a very fair and equitable solution. I think it's very clear to me that you're willing to do that and that's what we should be doing.
I also have to take this opportunity to again talk about the seriousness of the possibility of a strike and what you said of the seriousness to your airline and shutting down an airline that is so important to the national economy. It's very, very serious.
That and the economic impact to the entire Nation of a strike such as this, not to mention what it would do to the families and to those employees far beyond just your employees that will not have a paycheck, but of course all the support that's out there, supporting families and those people whether it's car rentals, taxi drivers or concessions or anything else, it's very, very serious.
I certainly hope that the pilots will agree and if not, I was glad to hear you say that you would look at a third party to mediate and step in because this shouldn't happen.
Thank you very much. Thank you, Mr. Chairman.
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Mr. DUNCAN. Thank you very much.
Mr. Poshard said that he has no questions, so Mr. Menendez, we'll go to you next, please.
Mr. MENENDEZ. Thank you, Mr. Chairman.
Gentlemen, I want to thank you for your testimony and I've been listening with great interest. I've sat on this committee now for a couple of years.
Let me first ask you, Mr. Crandall, very briefly on the American Airlines situation. The President yesterday said that he called upon both of the parties to hopefully seek a resolution saying that ''It has huge implications for the country if you did not.''
Do you believe that if you cannot, that, in fact, the President should invoke his executive powers to stop a strike and to hopefully create the mediation necessary to resolve it?
Mr. CRANDALL. Yes, I do.
Mr. MENENDEZ. You do believe he should?
Mr. CRANDALL. I think the Railway Labor Act, which may be part of this committee's interest, should be amended to provide for mandatory binding arbitration. I do not think that strikes are appropriate in the airline business. There is simply no way to deal with a strike and the consequences.
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I believe that if the parties cannot negotiate an agreement that mandatory, binding arbitration should be required.
Mr. MENENDEZ. Thank you for your answer.
Let me ask you both the following question. Mr. Poole, who testified and I think, Mr. Crandall, you refer to him in your testimony, last week or the last time we had a hearing on this subject matter, said that he found really some equities on both sides and found some negativity in some of the proposals.
He said that in reference to the Big Seven, they have one point in their favor, ''They correctly point out the current ticket tax unfairly charges two identical airline flights, one by a major airline and one by a low fare airline, significantly different amounts for receiving exactly the same ATC services and that's clearly unfair,'' in his words, ''but so is the proposal which would unfairly charge must less to hub and spoke operators who impose far more of a burden on the system than point to point operators.'' What do you both have to say about those comments?
Mr. CRANDALL. Well, I guess I would repeat to some extent what I said earlier. We believe, the Group of Seven airlines believes that the formula we proposed is closer to a real cost allocation than a simple ticket tax.
On the other hand, we did not have, when we formulated it, and we do not have today, real cost data from the FAA. That data doesn't exist. This committee last year set out the goal of having a cost accounting study done and that study is in its early days.
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So I think probably Mr. Poole is right, our formula may indeed not sufficiently charge those who operate the hubs. We didn't undercharge deliberately; we simply didn't have costs and don't have cost pools today that can be allocated.
I would state once again this shouldn't become an argument about the ticket tax versus the alternative formula proposed. Our argument, reduced to its simplest form, is let's go get the costs and let's allocate them fairly and if, in fact, hubs need to bear more costs than they are bearing today, it ought to be in our overall societal interest to make sure that we allocate appropriate costs to those hubs.
Mr. MENENDEZ. Mr. Kelleher, what about the comments where Mr. Poole said that the ticket tax unfairly charges two identical airline flights?
Mr. KELLEHER. I don't think that any factual basis has been established for making that contention. As Mr. Crandall said earlier in his testimony, he doubts that the findings of Coopers & Lybrand, for instance, at least on this first go around, are going to provide any solid indicators as to how costs should be allocated by the FAA.
So at this point, I think when you talk about cost, allocation is the key here. That's the magic. We don't really know what we're talking about in one respect or another.
I do think, if I might add this, this could really, above all other committees, has a responsibility to make policy with the American consumer in mind. In other words, I think the committee should focus on that as the end result that it's trying to achieve rather than on a mathematical quarrel among competing airlines.
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Mr. MENENDEZ. It seems to me that the mathematical quarrel also affects the passengers and the process, especially if there is a disproportionate effect between where they're flying and the amount they are being charged.
One last question. Have either of you and your respective organizations looked at Mr. Poole's comments about the merits of an ICAO user-based fee system where he describes the system being used in Canada as based on ICAO's weight and distance standards and then gives three examples of how that increases fairness in each of various different possibilities.
One is two 737s flying from Point A to Point B use the same services, pay the same amount, he considers that an increase in fairness and another one where the flight goes from A to B directly without going in and out of a hub would pay less than a hubbing flight and considers that an increase in fairness, and it goes on.
Have either of you considered that and what are your views on that?
Mr. CRANDALL. Yes, we've looked at the ICAO formula. We haven't, to my knowledge, Mr. Menendez, actually run the numbers, but I've read his comments and they generally reflect a view which is very similar to our own.
The ICAO system is based on both the measurement of costs and the ICAO system is an effort to allocate those costs in direct proportion to the drivers of those costs. That is the outcome we seek.
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Whether the ICAO formula is the right one or not, I'm not prepared to say this morning, but that is the approach that we think is most appropriate.
Mr. KELLEHER. We have not studied the ICAO formula as it would apply to domestic air transportation.
Mr. DUNCAN. Thank you, Mr. Menendez.
Mr. Cook?
Mr. COOK. Mr. Kelleher, I just wanted to commend you and Southwest for certainly being a real factor in making the fares very competitive in the Salt Lake City market that I represent.
I'm wondering if you're bothered by the basic economic situation that as discounting goes on and prices come down, and that's a wonderful thing as far as I'm concerned, it does bring, as you've testified, passengers almost out of the woodwork and there's a lot more air travel activity and obviously air traffic is increasing, so with those lower prices under the current system, obviously the FAA, even with that increase, is getting a lower total tax revenue I would think in many, many cases.
There is obviously some area where cutting prices brings in more revenue on the supply side but generally speaking, I think you can probably say isn't that a real concern of your's in terms of your commitment to the existing system?
Mr. KELLEHER. No, it's not for a country of reasons, Mr. Cook, and that's a very excellent issue that you raise.
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The GAO has done some work on the question that you raised. In other words, when you reduce fares and you cause more people to fly, what are the revenue consequences to the trust fund and therefore, indirectly to the FAA?
Just by coincidence, as a matter of fact, they took some Salt Lake City markets and they concluded that in those markets, where Southwest Airlines had reduced fares with the other carriers following along, and many more people were flying, the amount of total revenue going to the FAA was substantially more than it had been prior to our entry into those markets and the reduction in fares. So you derive more, not less revenue.
Secondly, Southwest Airlines is a point to point carrier. It operates its schedules on a very regular basis. By way of example, only 7:30, 8:30, 9:30, 10:30, 11:30, 12:30. That imposes no unusual bulges or surges of demand on the air traffic control system unlike the hub and spoke carriers that may have as many as 50 or 60 departures or arrivals scheduled within 15 minutes.
So the type of service that we operate doesn't impose the sort of Easter Sunday requirement on the air traffic control system that the major hub and spoke carriers do and this was confirmed by the Department of Transportation.
In addition, again you have the issue of the money that is applied to airport improvements. Most of that money goes to the major hub airports rather than to the smaller airports that Southwest Airlines serves in different areas of the country. So those things have to be taken into account as well.
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Mr. COOK. I did want to ask Mr. Crandall, I was impressed with your testimony in terms of fair allocation of costs and have to ask, when I fly, and I always fly coach, I don't know from one week to the next whether I'm going to be paying $120 for that ticket or $1,250 for that ticket. I'm just wondering if the airlines have considered pricing to the public the same way they might consider fair allocation on this issue?
Mr. CRANDALL. We've had a number of very interesting meetings with this and other committee members on the whole subject of airline pricing, Mr. Cook. In fact, the way we price to the public is driven entirely by market forces.
I have said in a variety of places, costs have nothing whatever to do with the airline prices and they really don't.
Mr. COOK. And that doesn't concern you?
Mr. CRANDALL. Oh, it does concern me. I would be very, very much in favor of being able to relate prices to cost. Unfortunately, there are many, many competitors out there and I've got to price my seats and Delta must price its seats and United must price its seats based on what all those competitors are doing at any moment in time, at any particular airport, and on any route around the country.
In the case of the air traffic control system, just like any particular airport, there aren't a whole lot of competitors out there. I can't go to ATC Provider A or ATC Provider B, I've got to go to a natural monopoly. That natural monopoly operated by the government has a number of duties it seems to me. One is to operate as efficiently as it possibly can and that's part of the reason for congressional oversight.
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Second, to charge every citizen that wants to use those services the same price for the same product, the government monopoly is in a different posture than a private seller of goods and services, so I'm driven by the market. The ATC can't be driven by the market.
I would come back to your earlier question and make the point to you that whatever the flow of total revenue to the FAA under a ticket tax approach, it does seem to me that the amount of revenue the FAA gets ought to be derived from the amount of activity, that is the number of tasks that the FAA is asked to undertake.
As flight frequencies go up, even if ticket prices go down, the FAA ought to get more money, not less because it is being asked to do more things.
Mr. KELLEHER. That's very interesting, that observation, Bob. I would tend to disagree with you based on the filing that the Big Seven itself made with the joint staff of this committee in which the filing says that most of the costs experienced by the FAA are fixed costs and fixed costs would not vary with the amount of activity that transpires.
Mr. COOK. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Cook.
Ms. Johnson?
Ms. JOHNSON. Thank you very much, Mr. Chairman, and thank you for having this hearing.
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I think since both of these gentlemen have hubs in my district, based in my district, this has been a very interesting hearing. I want the committee to know they are very good friends.
I've appreciated hearing both sides. I do have one question for Mr. Kelleher. You indicated, your phrase was that the Big Seven is directly penalizing the carriers offering lower fares. I wonder if you really feel that's true?
Mr. KELLEHER. Yes, I certainly do. I think that was the object of the whole exercise. The way that formula was contrived provides evidence of my contention in that respect. That is the second formula that has been advanced by the Big Seven that has no connection whatsoever with the cost of the air traffic control system in any way, shape or form.
The first one was a $12 a head tax which is equally irrelevant and shows that the focus was not upon cost. The formula was jiggled as difficulties were encountered with it to bring more people over to the Big Seven side and to try to coerce them into supporting that formula.
The end result of it is that it bears no relationship in any way, shape or form to costs whatsoever. Therefore, it cannot be advocated as a fair and rational, and studied answer to the question of equity with respect to the burdens of air traffic control.
Ms. JOHNSON. I was just under the impression that businesses, when they draw the bottom line, want to make a profit and they find ways of doing that. I would have a culture shock if I had to fly any other airline except Southwest and American. I'm sorry to say to my colleague here, I don't fly any other two.
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I can tell you what meals are served at what time on what days on American and both of you mean a great deal to the economy of the Dallas-Fort Worth area and all over the Nation and the world, for that matter.
We have seen a totally new metroplex in Dallas since the Dallas-Fort Worth Airport and American basing there, so it's critically important. I would say probably the majority of the employees at both airlines in those areas probably live in my district.
So I am torn between but I will promise you that I will carefully and thoughtfully arrive at a decision. Both of you have made excellent points and I appreciate both of you being here, even though it makes me a little uncomfortable.
Mr. CRANDALL. You've made a wise choice as to air carriers. They're both terrific.
Mr. KELLEHER. They are.
Mr. DUNCAN. Thank you, Ms. Johnson.
Mr. Pease?
Mr. PEASE. Thank you, Mr. Chairman.
I'm very grateful for the time you both have spent with us. I'm also sensitive to the fact that we have another panel that we haven't yet had the chance to speak with and I merely want to ask if you can get information to me rather than spending a great deal of time on it today as to whether there are any studies that address the question that's been discussed here about the increased marginal costs of a hub operation on air traffic control versus the standard cost I presume would be incurred in the absence of a hub operation?
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I don't know if there are any studies. If there are, I'd appreciate receiving them.
Mr. CRANDALL. I think the answer, Mr. Pease, is there are none that are definitive or responsive to the question of how hubs affect the cost of the air traffic control system. Indeed, that is one of the outputs of the study that this committee has requested.
Mr. DUNCAN. Thank you very much, Mr. Pease.
Mr. Hutchinson?
Mr. HUTCHINSON. Thank you, Mr. Chairman.
I want to thank both Mr. Crandall and Mr. Kelleher for their testimony today.
Mr. Kelleher, I represent an area that has an airport in Fort Smith and in Fayetteville, Arkansas as well. We're building a regional airport, a lot of activity and growth in my district but I'm certainly concerned about the present tax structure. At least to my view in the studies I've seen, it unfairly impacts my district and my air travelers.
You've argued that the carriers that serve places like Fort Smith and Fayetteville place a burden on the aviation system because of what you call the hub system, in contrast to the direct routes that you fly serving the larger cities.
It would appear to me that the carriers that serve the smaller communities such as Fort Smith and Fayetteville, serve an important public service and that the consumers in my area are being unfairly taxed.
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Would you agree that the present system does place an unfair tax burden on the air travelers from that area that use the smaller airports?
Mr. KELLEHER. No, I would not agree with that. I respectfully disagree with it, Mr. Hutchinson. When I was referring to the burdens of the hub airports, I wasn't talking about flights going into and departing from Fort Smith as an example. I was talking about flights going into DFW Airport, Chicago O'Hare, Atlanta, Georgia, the other end in other words. That's where the excessive and undue burden on the air traffic control system takes place where you have these massive aggregations of activity.
Secondly, the burden that has been placed upon the smaller communities in America with respect to the fares that they pay is not really a function of the ticket tax; it's a function of the fares that carriers charge in a noncompetitive situation. That's why the fares are higher.
Mr. HUTCHINSON. But you're not coming in to serve our area and they are. Do you have any plans to come in as a low cost carrier into Fort Smith or into Fayetteville?
Mr. KELLEHER. Well, one of the things that we have been looking at, Mr. Hutchinson, is the completion of that new airport and what action we would take when it was completed.
Mr. HUTCHINSON. I certainly hope that you will. Obviously, it is important that we are provided the air service. Presently, you're not serving our area, so your arguments on the tax structure, at least from my view, does not hold quite as much merit.
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Let me go to another area. You've mentioned a number of different studies. I think some of these have been submitted to the Department of Transportation in regard to your arguments. Have these studies been made public?
Mr. KELLEHER. Yes, they have.
Mr. HUTCHINSON. So we have access to all those studies and they have been submitted to the Department of Transportation?
Mr. KELLEHER. Yes, sir, and the General Accounting Office.
Mr. HUTCHINSON. Let me go to Mr. Crandall. This hub argument that's been made that that places is an extra cost on the system, would you briefly respond to that for me?
Mr. CRANDALL. It may or may not be true, Mr. Hutchinson. As Mr. Kelleher points out, what he's referring to is what might it cost the ATC system to service a hub like at Dallas-Fort Worth, like Atlanta, et cetera?
The FAA can't tell us and I think one of the things we need to know is what unique burdens the hub imposes and they should be paid by the carriers that operate in and out of the hub.
I would make the point, however, that the reason the 69 members of the Regional Airline Association have joined with us in urging that we move towards a user fee and away from a ticket tax system is that in areas like your own which is served primarily by small carriers, fares are very high and the consequence is those people pay a disproportionately large contribution for operating the ATC system which is not appropriate.
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Mr. HUTCHINSON. That's the way it seems to me.
Mr. Kelleher, let me go back and compliment you. I think your airline has made a tremendous contribution to the industry.
We've heard some good arguments from both sides, but it looks to me like there is an unfair system right now; there needs to be further discussion and study. Would you agree that it would be appropriate to study the cost impact and perhaps some appropriate changes in the tax structure?
Mr. KELLEHER. I don't think that it's amiss to study the cost of the FAA and how they might be allocated, Mr. Hutchinson. I have not disputed that. We have simply said that the Big Seven formula has no relationship to costs in any way, shape or form.
If a true cost study is undertaken, that is something that we would be very interested in and there is going to be lots of contentiousness with respect to how costs should be allocated because even businesses have a great deal of difficulty if they're complex in determining how costs should be allocated to the separate functions that they perform.
Mr. HUTCHINSON. I know that it's Congress' responsibility and we're going to take it seriously as to what should be done, but if you can engage in discussion with the Coalition, I think that would be helpful to increase the dialogue and provide us more information. Would you be willing to do that?
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Mr. KELLEHER. Yes. We have several times indicated our willingness to discuss with the Coalition perhaps a more equitable approach than their Big Seven proposal and thus far, that has been rather fruitless.
Mr. HUTCHINSON. But you will continue discussing it with them?
Mr. KELLEHER. We've held ourselves open to that.
Mr. HUTCHINSON. Thank you very much, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Hutchinson.
I sometimes try to get Mr. Lipinski to go first even before me but he always wants to go last, so I'll just say we always save the best for last. Mr. Lipinski?
Mr. Lipinski. That's very kind of the Chairman. I appreciate those remarks and the Chairman is always very gracious and very even-handed. It's a pleasure working with you.
It has also been a great pleasure working with the two gentlemen sitting at the witness table, which I have had the opportunity to do on numerous occasions. I find myself in an extremely difficult situation here because of all the people in the aviation industry, the two individuals I am the closest to happen to be the two gentlemen sitting here at the table.
So anything I have to say here will not be personal remarks but only in the desire to try to get down to what is best for the American aviation industry.
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The proposal made by the Big Seven or the Coalition, I understand is the starting point, Mr. Crandall, but I think you must have been a little bit detached when this was put forward because I know you and based upon my personal experience with you and your reputation, and being truly one of the giants of the aviation industry, a big error was made.
Let me read to you what the increases or decreases would be under the system put forward by the Big Seven as of 1995. American Airlines would pay 15 percent less, Continental 8 percent less, Delta 15 percent less, Northwest 16 percent, TransWorld Airlines 11 percent, United Airlines 12, USAir 14 percent. It's all percentages less and the gentleman sitting alongside you there, his airline would pay 65 percent more. If I was in his position, I would be enormously concerned about any proposal when I saw something like that pop up.
Do you have any idea what kind of modifications would possibly be made in your formula to make this at least appear a little bit more even-handed?
Mr. CRANDALL. Mr. Lipinski, I think Mr. Kelleher, as you point out, is a skillful advocate. The issue before the House isn't how much money we're going to change from Pot A to Pot B. This isn't an argument about whether we should modify or reduce the subsidy that we have been providing for the low cost carriers for many years.
It is an argument about whether we do or don't want to allocate the cost of the ATC system based on usage. I've said to you several times today and I'll say again, I don't know whether or not the formula that we put forward would spread costs around in proportion to actual system use.
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This debate began, you will recall, when the ticket tax lapsed. The ticket tax, by any measure, doesn't come close to spreading the cost of the ATC system in proportion to its use. So rather than simply seeing the ticket tax reinstated, we put together this formula.
The accuracy or inaccuracy of the formula will be established or disproved once we know what the FAA's costs really are. I think the issue of how much cost we are shifting from Carrier A to Carrier B is an irrelevancy.
If, in fact, the Coalition's formula is correct, we've been providing an enormous subsidy for Southwest for many years. If it is wrong, then we haven't been providing as large a subsidy as we think we have, but it's not a matter of being even-handed.
Mr. LIPINSKI. Well, it is my personal opinion that we should move away from the ticket tax to a different formula. I think unfortunately the Big Seven proposal makes it more difficult for us to move in that direction because that proposal has been thought about by so many different individuals and agencies as being one that is out to get the gentleman sitting next to you.
Because of that, as I said I think it makes it much more difficult for us and I understand that the costs are extremely difficult to fix at the present time. We are going to study that and try to come up with the correct costs.
Maybe we should have waited down the line to do something like this Big Seven proposal. This is why I bring this to your attention because I want to move in the direction that you want to move in. I think this proposal has made it more difficult for us to do so and I'm disappointed.
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I'm sure that Mr. Kelleher is not happy to hear me say that, but I do believe that we have to pump more money into the FAA to better service all of the American aviation industry. I don't think we're doing enough at the present time.
I also think we have to be fairer in allocating the costs. Mr. Kelleher, you continually talked about the ticket tax having been imposed and having been a fair system, but really the ticket tax has nothing to do with the cost to the system, nothing whatsoever.
Just because I fly first class and pay a high fare and he flies in steerage and pays a very low fare, that seat in that airplane still requires the same amount of work by the FAA. I believe that we have to move in the direction that the Big Seven have been talking about.
I know you've said on numerous occasions today your position in regards to the ticket tax, but could you give me an explanation of why you support the ticket tax when it comes down to cost to the system?
Mr. KELLEHER. First of all, Mr. Crandall and the Big Seven, Mr. Lipinski, have made the assertion that the ticket tax does not fairly reflect the costs that carriers activities impose upon the air traffic control system. There is no factual basis for making that contention whatsoever, as has been acknowledged, because no one has done a thorough cost study. So that is just a stab in the dark.
Secondly, the General Accounting Office has concluded that if you look at certain indications of usage, such as consumption of fuel as an example, the ticket tax approximates that very closely. In other words, the burdens that are placed upon the system with respect to movements are reflected in the ticket tax and in a potential jet fuel tax, so there is support that the ticket tax indeed does represent the burdens imposed upon the system in one way or another.
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Thirdly, you have a system that has been in effect for 25 years, 26 years, and during that time, prodigious investments have been made on the basis of the system as it exists.
The Big Seven would propose that be changed over to a formula of their own designation and that has no basis in fact whatsoever and that the investment that has been made by other carriers, based on the existing system, simply be I guess rejected, scrapped, done away with. I don't know what the proposal is in that respect.
There has been an enormous amount of investment based on the type of tax that we have now, in addition to the fact that no one has demonstrated why it should be moved away from except as a mere academic, hypothetical, theoretical approach.
Mr. LIPINSKI. As I should have said earlier, both of you are enormously articulate individuals. You advocate your position extremely well. I think that everyone that has been here this morning has learned a great deal about the aviation industry.
I think we should try to get you two gentlemen together so we can have a very successful American aviation industry, so your stockholders can make money, so your employees can make money, so the American flying public can be served to the utmost degree.
I offer myself, I offer the Chairman if he's willing and interested, to sit down with you two gentlemen privately and try to resolve this problem for the good of all of us. I sincerely appreciate both of you being here and testifying today. I have much admiration for both of you.
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I also know that like I, you are smokers, and I have an opportunity to run out and have a cigarette, and you two are stuck at the table and can't do so. Consequently, Mr. Chairman, I yield back the rest of my time.
Mr. KELLEHER. Mr. Chairman, may I be indulged for just a moment. I would like to make a closing point if I may.
Mr. DUNCAN. Yes.
Mr. KELLEHER. That is Mr. Lipinski, I want you to know that I like you a lot more than Mr. Crandall does.
[Laughter.]
Mr. CRANDALL. That's not true.
Mr. KELLEHER. It is too.
Mr. DUNCAN. Let me say this and I echo many of the comments by Mr. Lipinski.
I started out this hearing by mentioning we had passed several pieces of significant legislation out of this subcommittee in the last Congress but we also remember that at the start of the last Congress, about 2 years ago the Administration came forward with what it considered to be a major, significant proposal to set up a Postal Service type corporation called the Air Traffic Control Corporation.
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We heard 3 days of testimony on that and there was almost no support for that and that legislation was stopped in its tracks.
I guess it's too early to tell and impossible to say whether anything will come out of these hearings in regard to a user fee proposal. We may have to hold additional hearings. I do know that if we are able to come up with any significant change or any new system, it's going to have to be something that almost everybody in the industry feels is very fair.
We don't have that meeting of the minds yet. We'll never get 100 percent but if we are going to make a change, we'll have to have something that almost all the people feel is a fair change.
In that regard, I'm going to ask one last question, Mr. Crandall. We heard last week when we started these hearings from Phil Boyer who is the head of the largest group of private pilots, ALPA, a very significant constructive group and he said they wouldn't be in favor of any user fee system even if it was one where they were one of the winners.
Some people think it may be because some of the general aviation feel that if we go to the user fee system, the big airlines would then control the FAA and they would lose any voice they have in it and so forth.
Is there anything that you might say you feel could alleviate some of these fears by the general aviation people which they are a very significant part of our aviation system.
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Mr. CRANDALL. They are a significant part, Mr. Duncan, and we long ago, commercial aviation long ago gave up the notion of trying to quarrel with general aviation. It's an important part of the industry but the notion that people ought to be free to fly is an important part of American culture. It's a big country and there are lots of private pilots in it.
I can't imagine how Mr. Boyer thinks we might control the FAA. I believe that general aviation's opposition to a system of user fees is based on the premise that once user fees are established as the methodology for financing the FAA, some future Congress may decide that since user fees are out there, why not put a user fee on general aviation as well.
The comment I would make is that if you look around the world, and I'm not sure this is universally true but it is true in all the major countries of the world, even though they have a less vibrant general aviation industry and business than the United States, most countries essentially exempt general aviation, private pilots from whatever system of user fees they impose.
They do that simply because the cost of ATC control systems is such that it can't reasonably be borne by private pilots and therefore, I think general aviation in the United States need not worry that a system of user fees is inevitably going to leak over onto them.
I think that's the basis for their objection to it. I'm sorry they feel that way because, as you know from our testimony today, I think user fees of one kind or another are the only appropriate way to finance the FAA.
Mr. DUNCAN. Thank you. Any other comments, Mr. Kelleher?
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Mr. KELLEHER. Yes. I think with respect to user fees, that is a general label that everybody has used, Mr. Chairman. In that connection, I'd like to offer this thought.
If the committee feels that a user fee should be enacted, it can simply take the existing methodology for raising funds for the FAA and call it a user fee.
If you get down to the situation that Mr. Crandall is talking about, I think one of the former administrators of the FAA described it very well and I think this reflects the worries not only of general aviation but also of smaller carriers within the commercial industry.
He said, you know, if you have a fee-based system for allocating costs among carriers, you're going to convert the FAA Administrator from someone who is totally concerned with the safety of the system to someone who suddenly has become a cost accountant and a political arbitrator because the various segments of aviation and the components of those various segments will be over at the FAA every day seeking a revision in the way that it allocates costs in order to benefit their segment or their carrier as opposed to some other segment or some other carrier.
That, I think, is at the heart of that concern, that user fees essentially result in a politicization of a safety function.
Mr. DUNCAN. Thank you very much. I'll tell you this. Both of your companies, along with other airlines, do an awful lot for this Nation in many, many different ways. You serve this country well, both of you, and I want to say like Mr. Lipinski, that we have the greatest respect for you and we thank you for taking time out today to spend quite a bit of time with us. Thank you for your very helpful testimony.
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Mr. KELLEHER. Thank you for the opportunity.
Mr. DUNCAN. We'll go to the next panel now. The next panel is listed on the hearing notice as Mr. Daniel A. Wolf, President of Cape Air/Nantucket Airlines; Mr. David Z. Plavin, President, Airports Council International North America, accompanied by Mr. Charles Barclay, President, American Association of Airport Executives; Mrs. Kay Harrison, a member of the Board of Directors of the City of Fort Smith, Arkansas; Ms. Judie M. Shyman, President, National Business Travel Association, accompanied by Mr. Norman R. Sherlock, Executive Director, National Business Travel Association.
Gentlemen and ladies, we're honored to have you with us this morning. A couple of you have been here several times before. Mr. Plavin and Mr. Barclay, we welcome you back. We certainly welcome the other witnesses as well.
I guess if we start the same way we did with the table order, that means Ms. Shyman, you would be the first witness, so you may proceed with your testimony.
TESTIMONY OF JUDIE SHYMAN, PRESIDENT, NATIONAL BUSINESS TRAVEL ASSOCIATION, ACCOMPANIED BY NORMAN R. SHERLOCK, EXECUTIVE DIRECTOR, NATIONAL BUSINESS TRAVEL ASSOCIATION; DANIEL A. WOLF, PRESIDENT, CAPE AIR/NANTUCKET AIRLINES; DAVID Z. PLAVIN, PRESIDENT, AIRPORTS COUNCIL INTERNATIONAL NORTH AMERICA, ACCOMPANIED BY CHARLES BARCLAY, PRESIDENT, AMERICAN ASSOCIATION OF AIRPORT EXECUTIVES; AND KAY HARRISON, MEMBER, BOARD OF DIRECTORS, CITY OF FORT SMITH, AR
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Ms. SHYMAN. Thank you, Mr. Chairman.
My name is Judie Shyman and I am accompanied by Mr. Sherlock. I'm President of the National Business Travel Association which represents travel managers of large and small corporations.
It is the responsibility of these people to ensure that travel is cost efficient, safe and productive as an instrument for conducting business. The Association's members account for $31 billion annually in travel-related expenditures.
At the outset, I'd like to commend you and the committee for two things: First, in allowing us to testify so you hear the views of the people who pay the excise taxes which the airlines collect. Second, for your steadfast support of the Airport Airways programs and the integrity of the Aviation Trust Fund.
We have a vested interest in the outcome of the debate over the airline passenger taxes and shippers taxes because we, and our companies pay about half of the revenue that goes into the trust fund.
There are about 244 million business trips taken each year and of course companies pay the 6.25 cargo waybill as well. We also pay a major share of the local passenger facility charges. In addition, the level of the airline taxes is of vital importance to us because it affects corporate decisions and our ability to travel.
Some people may think the Association's role is to persistently resist taxes and keep pushing them down but that is not the case. We have a larger view. I'm here today to support the reinstatement of the taxes unless and until some better alternative is devised.
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Our approach is based on a recognition that a good national air transportation system is critical to American business. Further, we know that adequate funding is needed to assure that the system is safe and we need to cut down on congestion and delays. For us, time is money.
When the federal excise taxes were created, we accepted them as the price that had to be paid if there was going to be enough money to maintain and improve the air system. When Congress authorized local airport passenger facility charges, we supported them.
In each of these cases, we insisted on and understood that revenues of the Aviation Trust Fund would be fully and solely used to improve the system. We were gratified that you required some protection with the adoption of the local PFCs, that they be in accord with the national plan and be subject to approval by the Federal Aviation Administration.
We were supportive in these matters because we recognize that ample revenue must be provided to assure a safe and efficient air travel system.
While we have been supportive, we do want all the revenue from the taxes to go into the Aviation Trust Fund and to be spent. Like you, we have been very disappointed over the years with the way appropriations were withheld in order to mask the full dimension of the Federal deficit. We were also outraged when funds were diverted from the Trust Fund to underwrite deficit reduction. These things are clear breaches of faith with the users of the system and the companies and individuals who pay the taxes.
We were pleased to see the recent action of the Transportation and Infrastructure Committee in again passing legislation to take the Aviation Trust Fund and others off budget to ensure their integrity.
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Mr. Chairman, there are a great many dialogues and issues today about the structure of the FAA, the funding of the airport/airways system, and the kind of taxes that should be used to provide the revenue. These issues will all be resolved and of course they will determine what level of taxes business and leisure travelers will pay, but we cannot await the outcome.
The financial level of the Aviation Trust Fund has gone down significantly, but the need for systems improvements has not. So we believe for now that the reinstatement of the excise taxes is the best course of action.
We do hope that Congress will, however, in the near future, deal with the fact that business travelers bear a disproportionate burden with the taxes as they exist today. Since business trips are usually at a higher air fare, a business traveler riding an airplane for the same distance pays more tax and more revenue into the Aviation Trust Fund than a leisure traveler who is often on a very low cost, promotional air fare.
The fact is business travel substantially subsidizes leisure travel and we would like to see something done to correct this imbalance.
Thank you for the opportunity to testify.
Mr. DUNCAN. Thank you very much, Ms. Shyman.
Mr. Plavin?
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Mr. PLAVIN. Thank you, Mr. Chairman, Mr. Lipinski.
I'm David Plavin, President of Airports Council International North America. With me is Charles Barclay, President of the American Association of Airport Executives.
We have some written testimony we would like to submit for the record with your approval.
I would like, in the interest of time, just to make a few comments on the subject of today's hearing. First of all, my thanks to Chairman Shuster and Mr. Oberstar for their colloquy which basically means we don't have to say anything. I think they made our points for us.
We do, indeed, have an interest in the question about how the money is raised for the system and more importantly, what happens to it once it's raised.
We think the issue of funding and the success of the air traffic control system is very much a matter that's of importance to our members. So indeed, we would support Ms. Shyman's point and those of the previous witnesses but the first priority needs to be the reinstatement of the ticket taxes for a limited period of time, at least enough time so that we can get on with the business of reforming the way we now finance the system.
Secondly, the question of the specifics of the user fees are less relevant to us than the principle of user fee financing if for no other reason that the user fee is ultimately a political judgment in the best sense of that word. The allocation of responsibility and burden is a responsibility the committee will make and a formula can well and readily be devised that would achieve that result.
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The question for us though is that the trust fund is supposed to be used for investment in the system. When the trust fund was conceived and the ticket tax was identified as the source of funding for the trust fund, the first priority was supposed to be for investment in the system and if there were dollars remaining, then additional dollars would be available to fund operations of the air traffic control system.
We've heard today the testimony about the need for a system to fund air traffic control as if that was the primary purpose of the trust fund.
We think that we can come up with a solution that suggested airports will be more than happy to collect the money, whether they be fuel fees or anything else to simplify administration and we'll make sure the FAA gets all it needs in the process.
Seriously, the issue that is at stake here is that the funding source needs to be understandable, it needs to be acceptable, it needs to be clear to the people who are paying it, and it needs to be reliable from year to year.
One of the biggest problems we've had in this process is the fact that our members cannot anticipate how much money will be available, the rules keep changing, the shares of allocation within the system change from year to year and indeed, we are seeing the situation where the money seems to be shrinking inexorably.
The second part of it is that the aggregate dollars in addition to being squeezed by the pressures to balance the budget, are also being squeezed within the FAA. As you know, the Airport Improvement Program competes with air traffic control for the use of these funds. Again, we would submit that is not the original intent of the trust fund.
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While we were able to succeed in appropriating almost $1.5 billion for the Airport Improvement Program in the current fiscal year, the lack of enactment of the ticket tax has made it impossible for any of those monies to be allocated and the Administration proposes for its next year's budget to further reduce those dollars from $1.5 billion to just about $1 billion.
We find that to be a classic pronouncement on the priority that the Administration gives to airport improvement needs and therefore, if for no other reason, it highlights the fact that we must do something to reform the way that funds are raised and the way they're provided to the system.
Thank you.
Would you like to add anything?
Mr. Barclay. Mr. Chairman, in the spirit of full disclosure, I'm only accompanying David because I wanted to be sure to get a seat for the first panel, so I don't have any statement.
Mr. DUNCAN. Thank you, Mr. Barclay.
Our next witness, Mr. Hutchinson, I believe is a constituent of yours. Would you like to introduce her to the committee and make a statement at this time?
Mr. HUTCHINSON. Thank you, Mr. Chairman.
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I'm delighted to have Kay Harrison here, who is a member of the Board of Directors of the City of Fort Smith, and who is very knowledgeable in the matter of airports and the effect they have on small communities. I'm honored for her to be here as a constituent and am delighted to hear her testimony.
Kay, we welcome you to this committee and we look forward to your testimony.
Ms. HARRISON. Thank you, Congressman.
Thank you, Mr. Chairman and others, for allowing me to testify. Like Congressman Hutchinson just said, I am an elected official. I'm a member of our city governing Board of Directors and I've also brought with me today, Bob Johnson who is the airport director for the Fort Smith Regional Airport.
In our business, I work with organizations on process improvement, so I see resistance to change every day. I also see how the easy answer is often not the right answer. In this debate, I urge you to look at the overall good, that of our citizens, to solve the problem.
Let me begin by saying this is not an issue about airline funding; this is an issue of citizen funding because citizens are the ones who actually pay this tax. The problem is that through the expired ticket tax, the government has fostered an unfair system that often favors one individual, as you heard earlier, who is seated next to another individual on the same airplane.
I invite you to look at this issue from the perspective of your constituents. Mr. Chairman, this example was not chosen by random by a computer, the good people of Knoxville in your district pay $7.2 million more than they should in excise and unfair taxes every year simply because of where they live.
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When you look at it that way, Mr. Chairman, I think you would have to agree with me that's pretty unfair.
Mr. DUNCAN. I certainly do agree with you.
Ms. HARRISON. I have never been the founder, the owner or even an employee of an airline, but I have and continue to be a passenger. For years, I've admired Southwest Chairman Kelleher and it was really interesting for me to get to hear the discussion this morning, and I respect the way Southwest treats its customers.
This, however, is the crucial point. Mr. Kelleher wants to burden a majority of your constituents and mine with an unfair ticket tax and Congress must not continue to acquiesce. Take a look at who is paying this inequitable tax. It's neither Northwest, Delta, American, nor Southwest Airlines who are paying it; passengers are. I pay this tax, my constituents pay this tax, and so do the people in your districts.
We all want to be treated fairly by our government, but we don't understand why some travelers are given favorable tax treatment while others are not. Don't tax us based on where we live or the price we have to pay for air fares, tax us for the share of the FAA system that we actually use.
Like many consumers, I fly all airlines and I shop around for the absolute best fares that I can find. If you compare the cost of the expired ticket tax to the usage-based system proposed by the major airlines and took all the passengers in and out of the three airports in northwest Arkansas, we pay $4.2 million more in aviation taxes than we should. I repeat, $4.2 million.
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I realize that $4.2 million may just be a rounding error here in Washington, but it's a huge sum for the folks back in Arkansas and everyone else in America who has to reach into their wallets and ante up.
My city's story is typical. I could be here telling you this story from Biloxi or Bloomington or Chico or Chattanooga. The numbers are based on the U.S. Department of Transportation data from the year ending last June, the latest figures available.
The usage-based formula for this particular calculation was proposed by the Coalition for Fair FAA Funding, the only formula that has been made public. The majority of the airline industry supports this formula and using it provided me an opportunity to simply move beyond anecdotal evidence to real economic outcomes.
I'm sure that scores of possible formulas exist, most of all I am positive that numerous formulas could be developed that were more fair than the 10 percent excise tax.
The DOT figures show that Fort Smith generates 173,820 one-way passengers per year with an average one-way fare of $186. Keep in mind that is an average. We do pay lots more than that on lots of occasions.
The most traveled route, 28,780 passengers, is to Dallas-Fort Worth, Texas. By exploring the Dallas statistics, you will understand my frustration.
The average fare between Fort Smith and Dallas is $99. Under the 10 percent tax system, the tax was $10. That means travelers between the two cities paid almost $300,000 in taxes. Under a usage-based system, which is meant to be revenue neutral for the FAA, the tax would be $7. It's very simple, multiply it out. A $7 tax means a savings of $80,000, a savings of nearly 30 percent. Overall, a usage-based system would save Fort Smith passengers alone again $1 million per year, $1 million for one medium-sized city. That is not peanuts.
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The point is that some airlines have been taking advantage of a biased tax system and now they are telling me it is my responsibility to continue as the resident of a medium-sized city to subsidize their airline when they won't even serve my market. There are 268 cities in the same boat. Southwest will never go there. I don't know about you but it sounds like corporate welfare to me.
The people of northwest Arkansas, like travelers everywhere, are wiling to pay their fair share of funding Federal aviation services but they do not want to subsidize any airline. The current system, which was totally appropriate under regulation, is now both inappropriate and appalling in its unfairness to citizens.
None of us would continue to patronize a business which showed openly such gross unfairness to certain customers. As citizens, we unfortunately have no choice unless you, as our elected representatives, move decisively and quickly to remedy this unfairness.
Even the President's budget recognizes the need to switch away from the unfair and outmoded excise tax. As you know, Mr. Chairman, the United States currently does not have an airline ticket tax. We are faced with a decision on how to enact a new tax to provide steady, reliable financing and maintain a safe, efficient air traffic control system, something we all support.
The way to meet these needs and to meet these needs fairly is a usage-based system. I am not committed to any specific formula, but I am committed to a fair formula. I will repeat, this is an issue about consumers and passengers, not airlines.
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Along those lines, I was stunned to read the General Accounting Office report in December about this issue. The GAO simply ignored consumers and passengers and the impact on communities like Fort Smith, although a GAO representative last week admitted to this committee that the excise tax is unfair and should be changed.
I equally was stunned by the news that money collected from passengers last year but awaiting deposit this year is being deposited into the general treasury fund instead of the Federal Aviation Administration Trust fund. We have taken money from passengers to pay for the aviation system, but are diverting it to pay for who knows what. I appeal to Congress to right this wrong.
The real question then is where do we go from here? In my view, it would be a mistake to go backwards to a percentage tax based on fares, even for the remainder of this fiscal year. Under that system, too many travelers are asked to pay too much, especially travelers in smaller cities who fly less popular routes and generally are forced to pay higher fares.
A 10 percent Federal sales tax on tickets is higher than any State sales tax and it is unmistakably unfair to consumers when tickets vary so widely in price. Thus, the debate must focus on how a new tax should be structured.
It seems that almost every airline wants to discuss options except Southwest Airlines. That should tell you something. Although Southwest says it needs the ticket tax subsidy to remain competitive, the debate in Congress should be about what is best for the consumers and passengers.
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Even under the usage-based formula proposed by the major airlines that Mr. Kelleher so strongly criticized this morning, I am told that the average Southwest Airline ticket would increase by less than $5, certainly not an amount that would prevent people from flying Southwest Airlines.
Air travelers should pay the government only for the air travel services they actually receive. Two passengers on the same plane should pay the same tax for upkeep and improvements of the air traffic control system because they place the same demands on the system.
Congress should adopt a usage-based tax that will provide the funds needed for FAA and air traffic control improvements. A usage-based tax will distribute costs fairly and evenly among all travelers and will also be fair to areas like northwest Arkansas.
I am working to form a coalition called Fair Share which will speak for those hit hardest by the 10 percent excise tax. Our voice will grow during this debate. We plan to speak for all air travelers, all of your constituents and mine, to make sure that all are treated alike.
Thank you.
Mr. DUNCAN. Ms. Harrison, thank you for some very fine testimony.
Next, we're honored to have with us Mr. Daniel Wolf who is the founder and president of Cape Air/Nantucket Airlines. What a story you have, Mr. Wolf, one airline, one route, six employees in 1988 and now 300,000 passengers and you'll operate this year more than 75,000 flights. That's great. Are you the inspiration for Wings?
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Mr. WOLF. You stole my thunder there. That was my opening line, but I'll have to find a new one.
Thank you very much, Mr. Chairman for hearing us today. We really appreciate the opportunity to participate.
Mr. Lipinski, thank you very much.
My opening comment would be that while you're inviting the giants to sit at the table, I would respectfully request that as a midget, I be allowed share the same table. Just bring me a booster seat.
Mr. LIPINSKI. We'll be happy to have you sit at that table.
While I have an opportunity to interrupt here, unfortunately, there's a luncheon scheduled in a few minutes that unless I'm there, it's not going to start, so I'm going to have to go out and start the luncheon and come back. I thank you all for being here today. I will be back for some questions, but right now I have to run out.
Mr. Chairman, thank you for the time.
Mr. DUNCAN. Thank you, Mr. Lipinski.
Mr. WOLF. Thank you very much.
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As you alluded, we started with one airplane and six employees in 1989; we've grown to be the second largest unaffiliated airline in the United States carrying over 300,000, 75,000 departures this year and I expect 75,000 arrivals as well.
We are currently one of the largest employers in our region and we're a vital transportation link to Cape Cod which probably most of you are familiar with and the more remote islands of Martha's Vineyard and Nantucket, hard to get to places.
Since 1993, we have started service in southern Florida where we serve four communities.
Our success to date, I believe, is that we have a hardworking and happy employee group that have really shared the success of building a small business together. Many times as I listen to the news, small business is the engine that drives the economy and we're all very proud of that.
I am going to differ in a lot of ways, almost diametrically with my co-panel person here and I think as I do you will see the inequity of the proposed user fee. Just as the ticket tax is seen as unfair, I want to talk for a minute about what the impact of the proposed user fee would be on some of our routes and some of our communities.
Our average flight in 1996 was 51 miles, our average fare was $48.20. I kind of wish Mr. Kelleher was here because he'd probably be drooling over that, but a distinction between what we do and what he does is our average fare is low because we fly extremely short distances. So we do have a low fare structure but it's not because we're a low-cost carrier, it's because our routes are very short.
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The impact of the proposed user fee would be as follows. At 10 percent, we're currently paying $4.38 per passenger in tax. Under the G Seven proposal, we would be paying $6.74. That represents a 54 percent increase.
Even worse than that, our busiest route, which is between Hyannis and Nantucket, a 25-mile route, the average fare on that route is about $28. We currently on that route pay $2.55 in tax; under the G Seven proposal, that would go up to $6.25. Let me repeat that, $2.55 up to $6.25. That is a 145 percent increase in the tax.
To put it in other terms, we would go from paying 10 percent of the fare up to 25 percent of the fare which would constitute the user fee or ticket tax.
I guess the question is how could we possibly explain that to our travelers, whereas last year their ticket tax was 10 percent, now it's 25 percent. The answer is, I don't think we can explain that and I think we have to look for something which is a lot more fair and equitable. I've heard those words thrown around a lot today. This G Seven proposal destroys our business.
I'm going to go through this quickly because I know we're short on time and I don't want to bore you with a lot of things that have been said.
The proponents argue the G Seven is a fair mechanism. I just want to make this point. That might be true if what the G Seven did was really attempt to allocate expense based on usage. I would like to make the point that as a short haul carrier, we impact the FAA very differently than a Southwest or an American.
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Most of our flights are operated under visual flight rules and at low altitudes. We do not utilize the expensive, high altitude, en route radar facilities, we usually do not use instrument flight facilities such as approach control, or approach instrument equipment.
In addition, due to our aircraft type, we only require 4,000 feet of runway. We do not require 11,000 or 12,000 feet of runway which is what the bigger airlines require.
So most of the facilities and equipment found at the larger airports are irrelevant to our operation and yet the user fee does not make that distinction. Therefore, a small operator, such as ours who doesn't utilize the facilities or equipment would be expected to contribute equally to a large airline which is utilizing all of them. So the proposal is not sensitive to operators such as ours that operate very differently. Our operational characteristics are very different.
A true and fair user fee system, if it's really going to be a user fee system, needs to include a method for allocating charges based on actual expenses incurred. How do you do that? I can't even begin to tell you. It would be very complicated because you would have to look at an operator like ours who only uses 4,000 feet of runway, operates at low altitude so we never get into the high altitude radar facilities. I would love to be the midget on the committee to talk about this. It's going to be a long discussion if what we're really and truly interested in is user fees.
Let me just make an analogy to the road system. If a highway has a toll booth, what you would be doing to us is making us pay the toll for using the country road and avoiding the highway. That's what you would be doing if you impose the same user fee on us as you did on American or Southwest.
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One other troubling aspect of this proposal is the administrative burden. I cannot imagine how the FAA is going to oversee this; I cannot imagine how the funds are going to be collected; and I cannot imagine the auditing process.
One thing is for sure. Whatever the FAA does to do that, the cost of administering it are going to be passed along to the consumer end user so that whatever happens, part of our user fee is now going to fund what I would see as an administrative burden bureaucracy.
We certainly recognize that the life blood of this industry are the facilities and the airports and the system. The system does work very well. However, if we fund this by improving the lot of some, by improving the lot of the G Seven at the expense of others such as us, we really do risk the delicate and effective web of short and long haul carriers that make up our transportation network. It is a very fragile network and at this time it is a very good network. I think the services that are out there are very good and I would hate to see that damaged.
If it does happen, there are clearly some winners, I can think of seven off the top of my head and we heard some of the numbers earlier today, hundreds of millions of dollars and there will be many more losers, small airlines like ours could be very negatively impacted and there could be a tremendous ripple effect in the small communities.
Again, I look to my colleague, a small community needing air service. Our communities are small communities needing air service which would be very negatively impacted at least by the current proposal.
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You really have two extremes which indicate why the proposal doesn't have fairness or equity to it.
I really do not have much else to say. I want to thank you again for being given the opportunity to come today.
Mr. DUNCAN. Thank you very much, Mr. Wolf. Not only do you have an amazing and very positive history or story, but it's also amazing to think of the fact that your busiest route is a 25 mile flight. That's very unusual.
I want to go first for questions to Mr. Ehlers.
Mr. EHLERS. Thank you, Mr. Chairman. I appreciate you going first to me because I'm already late for a meeting so my questions will be fairly brief.
I do want to make it clear that in response to issues of fairness and equity, which I've raised a number of times, I didn't realize I had thrown those words around, I thought I had simply uttered them.
I do think that's the key to it. I don't think the Big Seven is fair and equitable at all. I also think, if I were sitting down to design a tax system, I would not choose the present system either because it's also not fair and equitable.
I think I've got a fairly good idea developing in my mind of what might be fair and equitable in terms of a combination of these. I do have to say I think the user fee concept borders on being absurd.
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We can get some sort of relationship between the tax and the use, but your example is perfect. Would we charge you for each foot of runway usage and so you'd pay less for taking off and landing because you'd take less runway than other planes and so on down the line. You just cannot find a strict correlation without having a huge administrative burden.
The question I have is very simple. One thing I haven't heard discussed is the fairness and equity of the fuel tax that Chairman Shuster and I both discussed. How would that impact the smaller airlines, and how would that impact those lines serving the smaller cities such as Fort Smith? How would that affect the business travelers if we increased the amount of the fuel tax to pick up a part of the burden?
I'm not saying all of it, because I did a quick calculation here based on some rough numbers I have. If we did it all out of fuel tax, it would be a 40 cents per gallon increase, but at least I think we could increase that portion and achieve some greater equity.
How would that affect each of you in a quick answer? This would replace the current excise tax.
Mr. WOLF. Let me just preface this by saying the conundrum you're in is no matter what you propose, the people who win are going to support it and the people who lose are going to be against it.
My quick answer to that would be if you told me what the tax was, I could tell you we use roughly 1 million gallons of fuel a year and I could tell you that our taxes last year, if the 10 percent had been in effect all year, would be roughly $1.5 million.
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So for it to be a neutral tax, all you have to do is take 1 million gallons of fuel and figure what would make up $1.5 million. That would be neutral for us.
I have absolutely no problem at all advocating something like a fuel tax, but the big question is how much are we talking about?
Mr. EHLERS. At 40 cents, that would be $400,000.
Mr. WOLF. I like the proposal.
Mr. EHLERS. I thought you would.
Ms. HARRISON. May I differ with that, Mr. Ehlers? The problem from a passenger standpoint of using a fuel tax is that you are charging me, again, a disproportionate amount. If there are three people on that plane, the three of us are paying the fuel tax for the entire flight. If the plane is full, then I'm paying a much lower fee.
Mr. EHLERS. Thank you.
Ms. SHYMAN. From the business travelers' perspective, we would appreciate something like that as long as it would be fair and equitable to all travelers. Right now, we're paying a high percentage of tax because we pay the higher air fares. This should bring that level down and make it fair to everyone.
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Mr. EHLERS. Thank you very much. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Ehlers.
Mr. Hutchinson?
Mr. HUTCHINSON. I just wanted to ask one question. Mr. Wolf, I've enjoyed your presentation and learning about your service in the northeast. I wasn't aware there was an airline that went those few passenger miles.
It appears to be that would be a fairly unique situation. Are there other airlines in your same category?
Mr. WOLF. Unfortunately, we don't have the resources of American or Southwest to have the department working on the analysis, but the best we could determine is there are roughly 50 very short haul operators in the United States carrying about 2.8 million people.
The DOT does have very good statistics by carrier of the average route, so what we did was we took every carrier who flew less than 120 miles and there were roughly 50 of them that average less than 120 miles and because of that, they would be very adversely affected by this type of user fee, not to say it couldn't be modified but that's kind of the rough number.
Mr. HUTCHINSON. I certainly wouldn't want any new fee to be imposed that would adversely affect enterprises like yourself. I hope we can come up with something that either provides an exception which I think if it is a fairly unique situation, there might be an appropriate exception that could be written in to protect you. We certainly wouldn't want to do something that puts you under.
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Thank you very much.
Mr. DUNCAN. Thank you, Mr. Hutchinson.
We get into a lot of discussion, certainly today and last week, about whether to replace the ticket tax with a user fee but in the end, the passenger has to pay anyway, so isn't the more important question how we ensure the money we collect is actually spent on aviation improvements? Is that a fair statement, Mr. Plavin?
Ms. SHYMAN. Short and sweet, that's exactly what we need because we need the money to go for what it should be spent on, the improvements to the airports. It cost a lot of money to business travelers in time lost when they are sitting in airports and not getting where they have to get.
Mr. DUNCAN. Now, we have this recommendation I think figures out to a 31.5 percent cut in airport improvement funds to approximately $1 billion a year at a time when air passenger travel, all the predictions are it's going to be shooting way up over the foreseeable future.
What is this going to mean to your group, Mr. Plavin or Mr. Barclay, comments from either one of you?
Mr. BARCLAY. You've hit the nail on the head twice there. The argument of a new allocation formula right now to airports looks like an argument over rearranging the deck chairs on the Titanic.
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We've had passenger traffic in the last 5 years go up by over 20 percent and airport investment go down by over 20 percent. Those are two trends no matter how you're allocating current costs in the system, our problem is we're not building enough facilities to be able to handle the future growth in the system.
The first target we need to keep our eye on is to make sure we've got adequate resources for the growth that's coming because it's not just important to those of us in aviation but it's important to the economy.
The second issue is the one you alluded to first. That is there are two problems, one with the tax issue, one is the allocation fair among the users for the proper level of funding, but the second one that I think is perhaps more important or should come first is how do we reconnect supply and demand in the system.
Right now, we don't have the growth in air traffic and passenger connected to supplying resources into the system because we have a congressional budget process stuck right in between the demand and the supply.
The key issue on a fee is how can we design something that is not subject to the budget process interfering with getting us the resources to meet the demand out there in the system? That is what this committee is trying to do with off budget. I think that's what the Senate was trying to do with the notion of an offsetting collection. They are all efforts to say how do we reconnect the growing passenger demand and the ability to collect greater fees with actually delivering that money to the system.
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That is a very important question that ought to be a key part of any fee discussion.
Mr. PLAVIN. If I could add something to that. I think Mr. Barclay is right on target in describing the underlying set of issues we're faced with, but I would add in the discussion of the user fee concept, focusing on air traffic control cost is only one small element of a broader set of issues, since in fact the trust fund is supposed to be used for investment in the system. Airport costs are significant issues.
We always have an annual debate about whether it is appropriate for airports to charge for capital improvements. It seems to me that is an issue that has been resolved long since and while we think about user fees to fund the airport and airways trust fund, we also need to think about giving airports the opportunity to make the improvements they need if indeed we're not going to, as a Nation, provide the funds the system needs.
Mr. WOLF. Just to reiterate the point, I think it is going to be very difficult to do a true user fee based on impact and usage. I really think one of the things the committee should consider is something Mr. Kelleher suggested which is using something such as a 10 percent vehicle but calling it a user fee, so this doesn't get caught up in the budget process and so we ca count on the money being there.
I really think it should be considered. I know it was tongue and cheek, but I really am concerned you are not going to be able to come up with a structure which on the one hand handles American Airlines and on the other hand, handles Cape Air in an equitable way. It's going to be very difficult.
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Mr. DUNCAN. Ms. Harrison, I heard some of your comments because it's a real problem we have in this country. We deregulated the airlines several years ago and it's been a wonderful thing because the costs have gone way down, the price of tickets has gone way down, the number of passengers flying has gone way up and overall it's been a really good thing, but then you also have the problem that many smaller and medium-sized cities have been losing service and the cost of tickets have gone way up and are extremely high in places like my hometown, your hometown and many others. It's a real problem.
I think we're going to have to look into that a little more closer sometime in this year or next. Have you any ideas or suggestions or thoughts?
Ms. HARRISON. No, sir. I wish I did, Mr. Duncan. I went to the National Air Service Roundtable that was co-sponsored by Congressman Zack Wamp this last Friday and that was the topic of discussion for the day, what can we do for these smaller markets.
The problem is I certainly understand for passengers on Cape Air that is a significant increase. I also feel from my standpoint if I buy an airline ticket, I had to travel to Boston on business the first of December and the quote for my airline ticket was $1,343 for a round-trip ticket. That means I paid $134 worth of tax.
So when my colleague tells me that his passengers are not going to fly because they're paying an extra $2, that's a little difficult for me.
Mr. DUNCAN. Mr. Oberstar, I know you had to be on the floor. We've had some real interesting testimony from these witnesses. Do you have any comments or questions?
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Mr. OBERSTAR. Thank you, Mr. Chairman.
I have reviewed the testimony prior to the hearing today and I appreciate the time and effort of all of the distinguished witnesses. Many have been before our committee previously.
I think they raise significant concerns that I share about how we finance the air traffic control system. One of the concerns that I have, among many that I expressed earlier to the previous panel, is how would we finance the needs, not the wish lists, but the needs in the construction of runways, taxiways, hard side of the air side of airports.
Going back to 1990 when we crafted the AIP bill, we had a projection of a need of $10 billion a year for airport capacity expansion. Does that still stand? That was projected through the end of this decade.
Business travelers, the National Business Travel Association was very instrumental in forging support with us for the passenger facility charge with the understanding that would be invested in capacity enhancement.
How do you feel about the $10 billion figure and the need to continue funding the system, and will the proposal of the Group of Seven contribute to those objectives?
Ms. SHYMAN. I don't know if the figure is exactly right, I don't have any studies on that for the rest of the decade, but I do know that the PFC has been good so far. It's been working and we do need to continue to provide money to improve the airports and the situations and the different congestion and building areas. It's important to us to get our travelers to where they have to go on a timely basis, on a reasonable basis.
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Mr. PLAVIN. Mr. Oberstar, I think as you know ACI and AAAE conducted a study a year or so ago to try to update some of those numbers. Clearly, we believe the numbers still approach the $10 billion a year need in the system and I don't think anybody was particularly surprised by the finding.
Our airports are aging, they need to have reinvestment in their existing infrastructure. The system continues to grow. FAA projects by the year 2005, we will come close to between a 60 and 70 percent increase in the number of passengers coming through the airports.
The size of aircraft using these airports continues to grow along with the growth in the number of new smaller carriers like Cape Air, so the demand is clearly there.
We have a concern that as that happens, the external dollars to help fund that process continue to shrink and the fetters that restrict us from raising the funds locally are continuing to tighten.
Smaller airports are finding it increasingly difficult to put in place the infrastructure they need because their costs of building a 1,000 foot runway are the same as any larger airport's cost of building a 1,000 foot runway.
In the meantime, the kinds of demands that we are seeing continue to grow and the kinds of resources available and opportunity to deal with those issues continues to shrink, so the question of the user fee to us is that user fees, if they are appropriate to fund the air traffic control system, ought to be seriously considered to fund airports while at the same time focusing the resources that are available on the folks that can less afford to pay for them themselves.
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Mr. OBERSTAR. One of the problems GAO identified, that our own staff analysis and my own review confirmed, was that the Group of Seven proposal does not take into account fully the effect of hubbing on the cost of the air traffic control system.
Hubbing imposes a unique burden in special ways in certain parts of the country and differences from one area to another depending on the size of the hub. What are your views about that issue?
Mr. BARCLAY. If you're going to go to a fee-based--if you're going to try to get to costs, you've got to address the hubbing issue. It's exactly correct that there is a peaking effect from hubs which require more facilities than purely spreading out traffic throughout the day.
On the other hand, those peaks are driven by customer demand, not by carriers desires to schedule all their flights at one time. So it is a reality of the system. It ought to be a part of any allocation discussion and we think you'll find there is going to have to be a factor for that included in any kind of new cost-based fee.
Mr. OBERSTAR. Like a premium pricing concept?
Mr. BARCLAY. Figuring out what the costs are. Let me add a personal notion that I would encourage the committee to look at the fuel-based issue because you don't have to stick with the straight A. It's simple, people kind of understand the fuel fee because of the highway system.
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Once you get beyond general aviation, you don't have to leave it as a simple cents per gallon. One could have a formula that the committee in its public policy role takes a look at costs and thinks it gets a fair allocation and apply that formula so that Cape Air and American Airlines aren't treated the same.
Part of that formula could have a hub peaking element within the formula.
Mr. OBERSTAR. If we had only a fee system based on the concept of the Group of Seven, the resulting revenue stream might well support the technology of the air traffic control system, the F&E account as we call it, facilities and equipment, and the operations of FAA, but may not take into account the needs in airport construction.
If we left it up to the airlines, and I've said this many times, Mr. Chairman, over the years, we would have very little airport hard side capacity in this country because they want the airport expanded only when they need more space or better runways. They don't look ahead down the road to say, in 5 years traffic is going to this level and we need this much more runway space and we need the runway separated or 1,000 feet or more. They don't do that; the airports have done that.
Business travelers, this was before your time at NBTA, Mr. Sherlock, NBTA has been a very strong and important performer in this whole process but that's the concern I have about the fee concept, that it doesn't support the totality of the system and the ultimate unfolding of such a plan would be to say, let landing fees take care of runway costs.
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Mr. PLAVIN. Mr. Oberstar, you know better than I think most of the others here, Congress and this committee in particular under your leadership was instrumental in creating what has become known as the passenger facility charge to address some of those issues.
I think it's important to note that when the PFC was enacted, it was assumed it would be supplemental to a large level of funding under the Airport Improvement Program.
Mr. OBERSTAR. Not only assumed, it was part of a deal that we negotiated, Mr. Clinger and I, with the Appropriations and Ways and Means Committees, the Office of Management and Budget, the Department of Transportation under Secretary Skinner. We spent long hours hammering that out.
There was a commitment of a $100 million a year increase in funding to a $2.2 billion level. In fact, over the years, we've not only had greater demands by the FAA on the use of those funds, but we've also seen AIP continue to shrink and it seems to me at the very least, it's time to identify that gap and to revisit the issue about whether the $3 cap continues to make any sense.
Thank you for your indulgence, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Oberstar. You always provide a lot of insight and expertise on these issues.
Mr. Pease?
Mr. PEASE. Thank you, Mr. Chairman. Just one question for Ms. Harrison.
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My district I think is very similar to Representative Hutchinson. It has two airports similar to yours and that's it. I was following your commentary with great interest and agreeing but you lost me when you said the ticket tax was so bad we shouldn't even use it for an interim basis until we can get something else worked out.
My concern is given what I've seen so far, I don't think we're going to get something worked out in the next week or so. What are we going to do with that funding loss for those months until that happens? Do you have a thought on that?
Ms. HARRISON. Certainly, Mr. Pease. I appreciate your question.
One of the problems I see with just simply reinstating the excise tax until the end of the fiscal year is that we simply reinstated it last year until the end of the year. We created a commission that was supposed to address this and as of now, it only has one person appointed to it to address this.
My concern is let's reinstate it until the end of the fiscal year. How prepared are we going to be at that point? If we want to reinstate or if you as Congress decide to reinstate this excise tax, that is not particularly a problem with me. My question is, can we not do it from a limited time period? Can we not say yes, we will not get this situation solved by next week, let's take a 90-day period and it has to be resolved within that 90-day period. Let's take this period.
In markets such as yours, Mr. Duncan's and ours, those passengers are continuing to pay and we need to get something solved. We don't need to sit on this issue continually over and over, so let's set a specific time period and say we will have a formula that includes the airline improvement program, that includes some fairness for Cape Air, that includes some fairness for all the citizens of our country and that is not an easy job to do.
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I think we're going to have to give ourselves a deadline for it.
Mr. PEASE. The more I hear from you, the more I like it. Thank you very much.
Mr. DUNCAN. Mr. Pease, thank you very much.
I think you're right and Ms. Harrison, those are some good suggestions. I'm optimistic because if you add the Big Seven proposal they put on the table and start putting that together with the GAO report that came out, and you've got the Coopers & Lybrand study that's coming out, you've got this commission that hopefully we'll go ahead and get the members appointed and they will look into all these matters.
When you add all that together, it should be that in a few months in addition to our 2 days of hearings now and we'll be holding additional hearings later on, we should have more information and more knowledge about where we stand with the FAA and its funding needs and the overall needs and problems of our entire aviation system than probably at any time in our history.
From all that, we should be able to gain some knowledge that will enable us to do some good things.
Certainly the testimony of all of you here today is going to be very helpful in that regard. I thank you very much for being with us today.
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Mr. DUNCAN. That will conclude the hearing. Thank you.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
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