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THE FUTURE OF THE SMALL COMMUNITY ESSENTIAL AIR SERVICE PROGRAM
Thursday, May 25, 2000
House of Representatives, Committee on Transportation and Infrastructure, Subcommittee on Aviation, Washington, D.C.
The subcommittee met, pursuant to call, at 10:01 a.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. [chairman of the subcommittee] presiding.
Mr. DUNCAN. I would like to call this hearing to order.
Mr. Lipinski is meeting with the heads of United and USAir concerning their proposed merger, and will be back with us shortly.
I want to welcome everyone here to the Aviation Subcommittee's 33rd hearing of this Congress. Today we will be focusing on the essential air service program. This is a program that was created in 1978 as part of the Airline Deregulation Act. It was designed to ensure that small communities did not lose their air service as the regulatory structure that had protected them was dismantled.
The essential air service program was supposed to last for only ten years; however, it was renewed for another ten years in 1987 and then was made permanent in 1996.
Over time, funding for the program has fluctuated. It peaked at $42 million in 1983, dropped to $22 million in 1991, went up to $38 million in 1992, and fell back to $22 million once again in 1996. In 1996, Congress passed legislation that was supposed to solve the funding program once and for all. That legislation guaranteed $50 million per year for essential air service subsidies.
Since these subsidies were running only about $22 million per year at the time, $50 million seemed to be more than enough; however, since 1996 the cost of essential air service has increased dramatically. Next year, the Department of Transportation expects these costs to exceed the $50 million guarantee.
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I became concerned last year about the escalating costs of the essential air service program. At that time, I emphasized that I support more flights to small communities and noted that there is widespread support in Congress for this program and for attempting to obtain more service to smaller communities.
However, I wanted to make sure—and I think we have an obligation to make sure—that any money spent by the taxpayers is being used prudently and not simply spent because it was just available, and that is why I asked the GAO to conduct its review. I still feel the same way. It is important that people who live in small communities have access to the national air transportation system.
AIR 21 provided money to ensure that the infrastructure was available and improved to support more flights to these communities. We want to do whatever we can to make sure that small communities can take advantage of all of the good things that we are attempting to do through the recently-passed AIR 21 legislation.
However, the essential air service program does appear to be in serious trouble. The GAO report shows that costs are increasing dramatically. Congress authorized an additional $15 million in AIR 21, but there is no assurance, of course, that this money will be appropriated.
There are many factors, such as additional regulatory requirements, higher fuel prices, and the shift to larger aircraft which may put increased pressure on the program's costs. When these costs exceed 50 million, either more money will have to be appropriated or air service is going to have to be cut back, and, of course, neither of those options is desirable. That is why it is important for us to hold this hearing to see if changes need to be considered, to ensure that the essential air service program fulfills its purpose within the available budget.
We also might want to look at other ways to protect air service or promote air service to small communities.
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We have assembled a panel of experts who have a wealth of knowledge and experience on this issue, including Mr. Brad Mims, who has worked with this committee many times, and I always appreciate his friendship. He has been with us working on both Capitol Hill and at the FAA, and, of course, now at the Department of Transportation.
We will also hear from John Anderson, who heads up a unit at GAO which has prepared a comprehensive report on this issue. Mr. Anderson has been here with us several times before.
We will hear from Doug Voss, the president of the leading provider of essential air service; the manager of the Decatur Airport, which depends on the essential air service program; and John Coleman, who also has appeared several times before this committee and was responsible for the essential air service program when he worked at the Department of Transportation.
We appreciate the time that each of you has taken to be with us today and we look forward to your insights on this program.
I now recognize my good friend, Mr. Lipinski.
Mr. LIPINSKI. I thank the chairman very much. I apologize for not being here to hear all of his opening statement, but I am sure he covered absolutely everything. I want to thank him for having this meeting today. I really think it is a very important subject.
I will put my statement in the record and I will yield back the balance of my time.
Mr. DUNCAN. Thank you very much.
Mr. Moran?
Mr. MORAN. Mr. Chairman, thank you. I appreciate your interest and Mr. Lipinski's interest in this issue. Essential air service is a program that matters greatly to the citizens of the State of Kansas and to many of us who represent rural areas of the country, and I am delighted to have you take the focus of how to adequately address the issues of providing commuter service, air service, commercial service in places that we rural folks come from, as well as your interest in trying to focus the dollars in the most effective way.
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I am anxious to hear the panel and look forward to working with you on this issue.
Mr. DUNCAN. Thank you very much.
Mr. McGovern?
Mr. MCGOVERN. Mr. Chairman, I appreciate your holding this hearing today on an issue that is also important to my part of the country, as well, and I will submit a formal statement for the record.
Mr. DUNCAN. Thanks very much.
Mr. Miller?
Mr. MILLER. I would like to take this opportunity to thank you for holding this very important hearing. As a member of both the Transportation and Budget Committees, I am concerned about the cost effectiveness of the essential air service program. A 41 percent increase in subsidies over the last five years is a substantial increase, one which really warrants these hearings today.
In 1980, essential air service programs assisted 400 communities, now only 89 communities rely on this program, yet the cost of this program has increased significantly. At the same time, discount carriers such as Southwest and America West are increasing their service to smaller communities through use of regional jets. By focusing on filling all available seats, and keeping their planes in the air, these carriers have been able to decrease ticket prices substantially.
I know in communities such as Carlsbad, Monterey, Bakersfield, and Santa Barbara, they are able to connect with major hubs such as Los Angeles, San Francisco, and San Diego. The main competition of the discount carriers is not other airlines, but Greyhound Bus and automobiles.
I look forward to hearing about this today and the things we can do to improve the performance we have and to decrease these costs.
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Thank you.
Mr. DUNCAN. Thank you very much.
Ms. Johnson?
Ms. JOHNSON. Thank you, Mr. Chairman. Let me express my appreciation for your holding the hearing.
I have no real formal statement, but this issue is very foreign to me, and you just kind of take things for granted if you are from a large urban area, so it will be interesting to hear the testimony of the witnesses.
Thank you.
Mr. DUNCAN. Thank you very much.
Mr. Petri?
Mr. PETRI. No statement.
Mr. DUNCAN. Mr. Baldacci?
Mr. BALDACCI. No statement.
Mr. DUNCAN. All right. We will now proceed with the first panel. The first panel is: Mr. John H. Anderson, Jr., who is director of transportation issues in the resources, community, and economic development division of the U.S. General Accounting Office; and Mr. A. Bradley Mims, Deputy Assistant Secretary for Aviation and International Affairs at the U.S. Department of Transportation.
We will begin with Mr. Anderson. You may proceed with your testimony.
TESTIMONY OF JOHN H. ANDERSON, JR., DIRECTOR, TRANSPORTATION ISSUES, RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY: STEVE MARTIN, AND SONJA BENSEN; AND A. BRADLEY MIMS, DEPUTY ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF TRANSPORTATION
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Mr. ANDERSON. Thank you, Mr. Chairman and members of the subcommittee. We are really pleased to be here today to talk about our recently issued report on the essential air service program.
The program was established as part of the Airline Deregulation Act of 1978 to ensure that air service would continue to be provided to small communities.
My testimony today focuses on three main topics: one, changes in the number of communities and passengers receiving EAS service; two, changes in the level of subsidies provided; and, three, reasons why the subsidy levels have changed.
I will summarize my statement and ask that my full statement be entered in the record.
With me today are Steve Martin and Sonja Bensen, who did all the hard work for this report and testimony.
Under the EAS program, DOT awards subsidies to air carriers willing to provide air service to communities that would otherwise not receive service. Eligible communities may receive a subsidy if they are located further than 70 miles from a medium or large-hub airport and their subsidy per passenger does not exceed $200. Communities more than 210 miles from a medium or large-hub are not subject to the subsidy per passenger limit.
Between 1995 and 1999, the total number of communities receiving subsidized service decreased from 95 to 89. In 1999, of the communities receiving service, 68 were located in the continental United States. The map now before you shows the locations of these communities and their proximity to hub airports. About half of these communities are not subject to the subsidy per passenger restriction. The next map shows the 20 communities located in Alaska that receivedservice.
Between 1995 and 1999, the number of passengers served by the EAS program declined by 4 percent, from 617,000 to 590,000; however, the change in number of passengers served varied widely by community. In both years, the air carriers providing the service flew aircraft that were relatively empty. On average, there were about three passengers on each 19-seat aircraft.
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Now I would like to turn to my second topic: changes in the level of subsidies provided.
As the figure before you shows, between 1988 and 1999, the overall number of communities receiving service generally decreased, while total subsidies increased. More specifically, between 1995 and 1999, subsidies increased by 47 percent, rising from $31 million to $46 million.
Most of the increases were for communities within the continental United States, where subsidies increased by 41 percent. During this period of time, the number of communities receiving service decreased by eight, and the total number of passengers declined by about 4 percent. As a result, the average subsidy per passenger increased from about $56 to $82.
To get a better understanding of how cost and service changed, we examined the communities in the 48 States and Hawaii that received service in both 1995 and 1999. As the next figure shows, while passenger traffic and air traffic capacity for these communities changed very little, subsidies per community and per passenger skyrocketed. For communities in Alaska, increases in the total subsidy level and average subsidies per passenger were more moderate.
Finally, I would like to talk about why subsidies increased. Overall, they increased because higher air carrier costs were not offset by a rise in passenger revenues. The airlines that we spoke with all reported that compliance with FAA's safety initiative increased their cost to varying degrees. In addition, costs increased because of unique circumstances associated with particular markets.
For example, an increase in airport fees at Denver International Airport affected service to 16 communities. Also, changes in consolidation in the airline industry undoubtedly affected the cost of providing air service to smaller communities.
DOT officials reported that fewer airlines now compete to serve any given route because of dwindling interest in the program among carriers.
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While airlines' costs increased, the stagnant demand for EAS service limited air carriers' abilities to raise additional revenue. In addition, some carriers had difficulty competing for passengers because of the availability of low fare jet air service at nearby airports. For example, subsidized service was suspended at Keene, New Hampshire, in part because local residents were driving to Manchester to take advantage of the low fares offered by Southwest Airlines and U.S. Airways Metro Jet.
In summary, the EAS program has generally met its objective of ensuring that communities continue to receive service; however, if program costs continue to rise, DOT could have difficulty in providing service to all qualified communities. If this occurs, program officials will have to limit its subsidies or look to the Congress for solutions.
Mr. Chairman, that concludes my prepared statement. We would be glad to respond to questions.
Mr. DUNCAN. Thank you very much, Mr. Anderson.
Mr. Mims?
Mr. MIMS. Good morning, Mr. Chairman and members of the subcommittee. I am pleased to appear before you today to discuss the EAS program and to use this hearing as an opportunity to outline some of the serious challenges that the Department of Transportation is facing in our effort to maintain responsive scheduled air service at small communities.
Let me start by saying that I don't think that anyone here would disagree with the notion that, on average, airline deregulation has been a boon to the flying public, producing many benefits in terms of lower fares and more service. However, what is also clear is that not all have benefitted equally, and that some, in fact, have been hurt. In particular, residents of smaller communities can supply evidence that their access to cheaper, more frequent service has been, at best, uneven.
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With the development of hub and spoke systems, many small communities receive better service in more markets today than before deregulation because they are generally connected by nonstop flights to hub airports that offer nonstop services throughout the country. Moreover, the number of communities being served by more than one carrier has grown.
In many cases, the use of equipment, although smaller than before, is better matched to the levels of traffic at individual communities and has produced qualitative improvements in service, in terms of greater frequency and better connecting opportunities.
Of course, for the very smallest of communities, the EAS program provides a safety net and a guaranteed link to the national transportation system.
The program had and continues to have built-in economic mechanisms designed to promote efficiency, while guaranteeing communities a safety net of minimum air service requirements. Among these mechanisms are the competitive bidding process and the two-year rate renewal term, which ensure that a community's service will be periodically subject to the bidding process.
The development of 15-to 19-seat turboprop aircraft, which were specifically designed for carrying feeder traffic between small communities and nearby hubs, was a key ingredient in the development of more efficient operations at such communities. More recently, however, the program has been through some rough times, and until very recently it had a very poor prognosis, since it was scheduled to end on September 30, 1998.
Moreover, over the past decade it has been subject to year-to-year uncertainties about funding levels, which you had mentioned already, Mr. Chairman. Both of these factors have served to make commuter carriers increasingly wary of participating in the program and to discourage major carriers from offering advantageous marketing alliances to those carriers who have chosen to participate.
A lack of interest among carriers inevitably leads to an inefficient program characterized by erosion in the quality of service, a decline in ridership, and a general undermining of the Department's competitive bidding process. The end results, which we have all been living with for several years now, are under-utilized services at a high price to taxpayers.
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I would like to touch on a number of developments in the last few years that have placed a great deal of strain on the program and which have now pushed us to the very limit of our budgetary resources.
First of all, the cost of complying with the commuter safety rule—and while we had increased costs there, Mr. Chairman, I am not going to point a finger at that rule and say that that was a bad thing, because, again, we moved from the 135 to 121 for the commuter industry, and I think that that was the right thing to do to get everybody in the same level of safety and deal with the same rules on safety. It did definitely have an impact.
The disappearance of the 19-seat aircraft in favor of larger, more-expensive aircraft; the additional cost of operating small aircraft into DIA, which was mentioned before; and it is a hub for 22 of the 74 subsidized EAS communities in the lower 48 States, compared to Stapleton; also, the dwindling number of commuter carriers and their code share parents to participate in the EAS program; the cost of restoring markets that had deteriorated from the deep subsidy and service cuts in fiscal year 1996 and 1997; and, most recently, the effects, both in terms of subsidy and service reliability, of the industry-wide pilot shortage. I know Mr. Voss will touch on that subject when he appears before you.
Let me assure you that we will continue to administer the program to the best of our ability in the face of these challenges.
Mr. Chairman, I will have to point out very strongly that Mr. Dennis DeVany, who is the head of this program, has done a yeoman's job in dealing with the ups and downs of the budgetary cycles over the years, and he and Mr. Coleman have made sure that this program, for the most part, has stayed on track.
But if we are to continue to meet the program's goals, we need the help of the Congress. As you know, legislation has passed authorizing a new program to help small-and medium-sized cities attract new or improved service, and, when funded, that program might also have secondary effects that would improve nearby small communities' access to the national air transportation system.
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Other legislative ideas can help, and particularly any that would lower the market barriers for new entrants or that would encourage major carriers to enter into more-advantageous marketing alliance with independent commuters.
At this point, Mr. Chairman, I would like to stop and take any questions that you or the members of the committee may have, and I thank you for the opportunity to appear before you this morning.
Mr. DUNCAN. All right. I am going to go for first questioning on our side to Mr. LaHood for any questions or comments that he has.
Mr. LAHOOD. Mr. Mims, I want to thank you and other officials at DOT for your prompt response to language included in AIR 21 that calls for a return of essential air service between Decatur, Illinois, and O'Hare, and I understand that a notice has been published seeking an airline that would be interested in providing. The folks from Decatur are here today, as you may know, and I wonder if you could provide any update on that. As I am sure you know, this is a critical factor in their transportation program in Decatur, and we have worked with the community extensively on this and there has been a lot of heartburn and anxiety in the community over the fact that airlines have pulled out, so I am not sure. If you don't have a report, if you could provide one for the record I would appreciate it.
Mr. MIMS. Thank you, Mr. LaHood. I have a very short response to your question. No, we have not received any proposals as of yet, but we understand that Air Wisconsin, a United Express co-partner, is considering the service in those communities.
In addition, Midwest Express has submitted a recent request for slots at Washington Reagan National Airport, and contemplates service from Indianapolis with Quincy Indianapolis feeder service operated by Skyway Airlines, and that is a Midwest Express code share affiliate.
But we will continue to work with the community. Again, I think we are looking for a proposal from Air Wisconsin. I will make sure that my staff will share any information that we receive, as soon as we receive it, with you and the members of the community.
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Mr. LAHOOD. One other issue I want to raise with you. We recently had a meeting in Senator Durbin's office with officials of American Eagle and American Airlines and the Springfield, Illinois Airport. I don't expect you to be knowledgeable. I just want to raise this issue.
American comes in and, after providing air service in that community for a period of time, announced that they are completely pulling out of the community and going to Champagne, Illinois. It is just a slap in the face that the home community of the senior Senator from Illinois, for really no good reason, as far as we could tell—you know, I know that we are all touting the wonderful aspects of deregulation, but for a community the size of Springfield, which is the State capital and has a number of businesses there and a number of people that travel to Chicago, this is a real blow.
Now, I am not saying there is anything you can do about it. I want to bring it to your attention. It is a very, very unhappy situation. You know, if they would have come in and given some pretty good, logical reasons it would have been different, but—I don't know if you have any comments on it, but I want to bring it to your attention because it is a serious problem for the State capital of Illinois.
Mr. MIMS. I was quite surprised, Mr. LaHood, when that was announced, as well. Just everything that you have mentioned went through my mind, as well. I just couldn't quite understand why they pulled out. I am sure they have business reasons and other service reasons why they did, but it just didn't quite make sense to me.
I would like to take a specific look at that particular situation, and if we could report back to you and—
Mr. LAHOOD. That would be great. The same day they announced they were leaving Springfield, they announced they were going to Champagne, Illinois, which is a much smaller community. People are just, you know, sort of baffled and puzzled by the whole thing.
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In any event—
Mr. LIPINSKI. Mr LaHood, would you yield just for a moment?
Mr. LAHOOD. Of course.
Mr. LIPINSKI. Getting back to Decatur for a moment, Jim Goodwin and Steven Wolfe were just over in the cloak room over here talking about their merger, but the Decatur situation came up. I am almost positive I heard him correctly that there would be a United commuter carrier going into Decatur to fly in through O'Hare. If I didn't hear him correctly, I apologize, but I am 99 percent sure I heard him say that, and this certainly would be an excellent time to speak to United about something coming out of Decatur into Chicago O'Hare.
Mr. LAHOOD. Well, I have no doubt that, if your announcement is correct, Mr. Lipinski, you would do very well politically in Decatur, because they are salivating for air service there, and the folks from Decatur are here today, and they have worked very, very hard to try and regain some air service, so I thank you for that.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. LaHood.
Mr. Costello?
Mr. COSTELLO. Mr. Chairman, thank you, and I thank you for calling this hearing today.
Mr. Mims, I, too, want to thank you for responding—both you, personally, and the Department—to the EAS provisions of AIR 21, and also, in particular, to Decatur, Illinois. And I want to thank my colleague, Ray LaHood and David Phelps, both of them for bringing it to our attention, the Illinois delegation.
I have three quick questions, and we have limited time.
Number one, Mr. Mims, in your testimony on page five you suggest that Congress may want to change the criteria as far as the eligibility is concerned for EAS eligibility, and I wonder if you may want to elaborate. You specifically say that the criteria no longer reflects current marketplace realities, and I wonder if you might comment and follow up on that.
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Mr. MIMS. Well, for us, we would like to just take what we consider a more common-sense approach to dealing with eligibility requirements. There are isolated communities that would remain in the program, regardless of what we did, but, you know, the balance of communities we think would—we would look to some kind of cost/benefit or traffic generating ability test for some communities, secondly, in dealing with this program and dealing with good performers in the program. We deal with bonus money for carriers that exceed certain performance measures, again to encourage them to stay in the program and to expand service and opportunities where we could be flexible.
We would pay for high-end service for a year or two on a use it or lose it basis for various communities. There are a number of things that I want to get my staff together with counsel and staff on the committee to see if we can come up with some, again, common-sense solutions to give us more flexibility in dealing with some of the eligibility problems.
Mr. COSTELLO. You just answered my second question. I was going to ask if you had prepared a list of recommendations for this committee, and if you have not already done so I would—
Mr. MIMS. That was just a brief one. We have some others that we would just like to get together and present to the committee.
Mr. COSTELLO. What authority does DOT or the FAA have in working with airlines to try and persuade them to come into airports like Springfield, Decatur, and other EAS airports around the country? What limitations do you have?
Mr. MIMS. We don't have any real authority, if I can put it that way. What we will do is just use our bully pulpit to talk to various carriers. In some instances, some of the carriers don't really know the guides and the guidelines of the EAS program. So what we would like to do is work with those carriers to educate them with regard to providing service to various communities that had yet to receive the service. They could make the assessments that they would like to make.
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Mr. COSTELLO. As you know, in AIR 21 we had a provision and an authorization for a pilot development program in order to help under-served airports attract service by marketing plans and other measures, and I, of course, supported that very strongly, as well as members of this committee.
I wonder if you might give us a status report, from your perspective, as to where that development pilot program is.
Mr. MIMS. Well, our staff has begun to put together the basic framework of the program. We are in the process of working to deal with the funding of the program. But our guys are well on the way to dealing with a basic structure.
What we would like to do at the appropriate time is come up and share with the committee staff where we are and deal with various concepts that we have already come up with at this particular time.
Mr. COSTELLO. I realize that the funding question, of course, remains open until the Appropriations Committee finalizes its numbers and it goes to the President, but, as far as the guidelines are concerned, when can airports and airport operators around the country expect to know what the criteria is to be eligible for marketing funds and other services under this pilot program?
Mr. MIMS. Our guys—and Mr DeVany just informed me that he wanted to try to wait to see how the funding—how the appropriations were going to look before we put anything out on the street. But, again, I think we can give you a basic feel for where we are in the very near future, and I would be willing to get back up and give the committee a briefing on where we are.
Mr. COSTELLO. Does the ''very near future'' mean before the end of this fiscal year or by October 1, the beginning of the next fiscal year?
Mr. MIMS. I would like to do it before the end of this fiscal year. I would say in the late summer, if we could possibly do it then.
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Mr. COSTELLO. So we could tell airport operators who are interested in this program that a guideline should be available late summer or early fall?
Mr. MIMS. Yes. I would like to do that.
Mr. COSTELLO. Thank you, Mr. Mims.
Mr. Chairman, thank you.
Mr. DUNCAN. Thank you very much, Mr. Costello.
Mr. Hutchinson?
Mr. HUTCHINSON. Mr. Chairman, I will yield at this time back to the Chair and wait for the next panel.
Mr. DUNCAN. Okay. Thank you very much.
Ms. Johnson?
Ms. JOHNSON. Thank you very much, Mr. Chairman.
Mr. Mims, I am trying to think through how this process might be in terms of reestablishing some of the smaller markets. Have you seen a shift in the population in these markets, because it seems to me that there are larger suburban populations that are developing, but not larger rural populations, and most of the small airlines were kind or rural oriented, weren't they? How are you going to address that? Will it be with an overall plan, or based upon any community plea?
Mr. MIMS. I think that we are going to take a look at whatever population shifts there are, I think, overall, Ms. Johnson. I would like to take a look at what is going on in our rural communities. I know that we have been working with Mr. Moran on this particular issue and that he has a very significant rural population, and it has basically kind of remained stagnant or has decreased, and we are trying to get a feel for how we are going to approach that situation and, again, deal with the escalating costs that are associated with providing adequate air service in places where the population is dwindling.
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Ms. JOHNSON. A good example, I think, is my State, which is Texas, which has a lot of land mass, and in the rural areas more land than people, but someone has to represent all of the people, so we have people that need airplanes to get around their districts, but for the most part those are private planes.
We know that each of us go in and out of these areas every week, but if we are the only passenger does that warrant a service line that is subsidized?
Mr. MIMS. Well, that is a good philosophical issue that we are going to have to explore. In those places or approaching those places or serving those places that make absolutely no sense to provide service and that are not cost beneficial in any way, we are going to have to make a tough determination.
I know that in some cases here, with some of the members of our committees, we have had to make some very tough decisions about curtailing service and ceasing service in some communities that have received service for a long time.
Again, to go back to an answer that I gave Mr. Costello, I want to see if we could receive some flexibility to try to figure out a way how to route ourselves and be able to make sure that we are able to provide an adequate route structure to provide service to communities that, again, have very little population and put those people into the national air transportation system.
Ms. JOHNSON. I know that many of these airports don't even have control towers, and I don't know the shape of the runways, but that limits a larger flight line, I guess, from stopping in to pick up a passenger, but that is a challenge, and I just didn't know what direction you might be going in trying to address that.
Mr. MIMS. Again, we are looking for additional flexibility to, again, meet and be able to serve those places and serve them safely, as you are alluding to. We just want to make sure there are procedures in place for pilots to land in those particular kind of communities, but yes, we want to provide service and we want to provide adequate and very safe service to those communities.
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Ms. JOHNSON. Have you thought of a Greyhound service?
Mr. MIMS. You know, that is a very interesting question, because we did have the president of Greyhound come in to talk with me to deal with issues of feeder service, which would be seamless in its operation with commuter carriers and with some of the major carriers in some of the larger cities. We are exploring that, as well. I am glad you brought up the suggestion. I would like to look into that further to see if we could work with Greyhound and some of the other providers of ground transportation to see if we can do a multimodal kind of thing in addressing this problem.
Ms. JOHNSON. Thank you very much.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Ms. Johnson.
Mr. McGovern?
Mr. MCGOVERN. I just would like to get some clarification on something. I represented an area in Massachusetts, Worcester, which is—
Mr. MIMS. I have been to your airport.
Mr. MCGOVERN.—the second-largest city in not only Massachusetts, but New England, an under-served airport. And our airport director says that they are ineligible for this because they are too close to a hub, and yet it is one of the most under-served areas in New England.
I guess, when we are talking about expanding eligibility, are you thinking in those terms, too?
Mr. MIMS. I was just getting ready to say yes, but, again, doing it in a way that makes sense. You know, for many communities, as you said—I know Boston is approximately an hour away and Logan is more than an hour.
Mr. MCGOVERN. But when you add in the big ditch, it is, like, nine hours away, so it is—
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[Laughter.]
Mr. MIMS. We would like to do what we can to provide a common-sense solution to service or to a community like Worcester, because, again, it is tough to get to Boston, in many instances, and we would like to make sure that a community of that size is also fed or would be able to feed into a larger hub in a very adequate way. So I would like to, again, work with members and staff of the committee in providing service to your community.
Mr. MCGOVERN. I appreciate it. Thank you.
Mr. DUNCAN. Mr. Baldacci?
Mr. BALDACCI. Mr. Chairman, first of all, I think I would like to request that this committee also conduct a review of the USAir/United proposed merger. I think it is directly related to the lack of air service or the potential lack of air service and its impact.
As you know, we had a subcommittee hearing in Bangor, Maine, in terms of the lack of service and the quality of service, and I think you and the staff were making that one of the stops, and the hard work of this committee in getting AIR 21 passed and the pilot program, which Mr. Costello referred to, as the under-served areas will go a long way towards that.
I would like to be on record as suggesting that we do hold a hearing on that, because I think it is directly related to what is going to happen with essential air service and the demands there, because if we end up with—in Bangor, for an example, where USAir is now expanding its service, in a consolidation with United end up with more of a monopoly there in terms of that, there will be a diminishment of that service and more of a demand for either the pilot program or increased appropriations for essential air service.
One of the things that I feel very strongly about is, as we watch the deregulation of the telephone industry and we have gone forward on the e-rate to try to work in under-served areas to make sure that everybody gets connected, I think it is vitally important to make sure that we watch the consolidation and mergers taking place and have an understanding of the impact, because it is going to be directly related to the kind of resources that communities are going to be looking for.
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I have got to tell you, in Bangor we are just beginning to again regain the level of service, and I just don't want to certainly go back down that road again, not that we didn't mind the trip to Maine, but—
Mr. DUNCAN. Well, if the gentleman will yield?
Mr. BALDACCI. I will yield to the chairman.
Mr. DUNCAN. I agree, Mr. Baldacci, that we should hold a hearing on the proposed merger between United and USAir. In fact, I told Mr. Goodwin and Mr. Wolfe just a few minutes ago, when I met with them, that I thought we should hold a hearing on that, and I will be seeking approval to hold a hearing on that situation. I certainly agree with you.
Mr. BALDACCI. Thank you very much, Mr. Chairman. I will look forward to working with you on that issue and the other members of the committee, and I will reserve the balance of my time.
Mr. DUNCAN. Thank you very much.
Mr. Lipinski?
Mr. LIPINSKI. I want to get a jump on that hearing, Mr. Chairman, so I think I will ask this panel over here a lot of questions about the proposed merger between USAirways and United Airlines. I am quite sure that the panelists would be more than happy to answer all the questions I have today.
[Laughter.]
Mr. LIPINSKI. I already pulled that one on Brad Mims when he walked up here to say hello this morning. I asked him if he was prepared to answer all these questions I had on the United/USAirways, but obviously I was being facetious. But I certainly think that the chairman is correct—we should have a hearing in regards to that particular merger. I have a feeling there may be a few others coming down the road, based upon this one, also.
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But, getting back to the subject of the day, if a community—I understand there are three communities that are eligible for essential air service that do not have it at the present time. Is there any kind of recruiting that goes on by the Department of Transportation to get people into those communities that are eligible but that do not have it?
Mr. MIMS. Yes. We have issued RFPs to the industry to serve those communities—I believe one in Nebraska, one in South Dakota, and Minnesota.
Mr. LIPINSKI. South Dakota, Minnesota, and Nebraska.
Mr. MIMS. Yes. And we have issued RFPs to the industry to serve those communities. Again, we do our best to use our bully pulpit to go out and encourage the carriers or giving carriers to provide EAS service in those communities.
Mr. LIPINSKI. That is good to know that you actually do go out and try to use the bully pulpit to persuade people to serve these communities.
I have another question. There are only these three that are eligible that don't have service, and if it were to be a problem of the airlines feeling they are not going to make sufficient money going into it, which I am sure would be the reason they wouldn't serve it, is there any provision where a community, itself, can subsidize the air service? I mean, right now, you know, we have got the money out of the essential air service, but say—and you can give up the $200 a passenger. Say there is a community that is—the airline said, ''We want $250 a passenger,'' and the community would be willing to come up with the other $50 per passenger, is that permissible?
Mr. MIMS. According to our staff here, yes, that is permissible for the community to be able to subsidize.
Mr. LIPINSKI. Are there any communities that do that at the present time?
Mr. MIMS. Several have in the past, and, as a result of AIR 21, provisions in AIR 21, they do not have to pay.
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Mr. LIPINSKI. They do not?
Mr. MIMS. I am not real clear on this.
Mr. LIPINSKI. Okay.
Mr. MIMS. Can I get back to you?
Mr. LIPINSKI. You certainly may. Absolutely.
[The information received follows:]
[insert here]
Mr. LIPINSKI. The fact that the air carriers are using larger planes to serve these markets would indicate to me that the cost of subsidizing these markets is going to continue to grow over the course of time. Is there any ability that the Department of Transportation has to forcibly persuade the carriers to continue to use the smaller, less-subsidized aircraft in these markets?
Mr. MIMS. I don't know. I don't think we have that ability, Mr. Lipinski. What many of the carriers do is they try to create the mix of aircraft that they need for their entire system, and oftentimes they are able to make more money and be more efficient with an R.J. or a larger turbo aircraft than they would with the workhorse of the small community, the Beech 1900, which are the 15-to 19-seaters. But, in looking at their larger fleet mix, as you noted, many are moving towards the more-expensive aircraft, and we don't really have the authority to demand that they hold on to those Beech 1900s.
Mr. ANDERSON. Mr. Lipinski, if I could just interject?
Mr. LIPINSKI. Yes. Absolutely.
Mr. ANDERSON. When we looked at this, you know, for the latest numbers that we had for 1999, I believe all but four or five communities were using the 19-seat aircraft, anyway.
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Mr. LIPINSKI. Is that right?
Mr. ANDERSON. Yes.
Mr. LIPINSKI. Okay. Well, if all but four or five communities then are using the 19-seaters, it doesn't seem to me that a larger plane could really be responsible for the rising cost, then. You must have very few—you only have four or five locations being serviced by larger planes. So now I go back. I wonder, then, are these larger planes really responsible for the increase in cost? And if you only have four or five doing it throughout the entire system, it would seem to me that would not be the generator of the accelerated cost.
Mr. ANDERSON. No. I think, from what we found, it is the increased cost for the 19-seaters that were causing this to happen—that, of course, associated with unique circumstances like the Denver situation, and some unique circumstances where some of the carriers were going to replace some of their older aircraft with more modern 19-seat aircraft, that sort of thing.
Mr. LIPINSKI. So, even though all but four or five commuters are using the 19-seaters and they may have been using 19-seaters before, they have purchased new aircraft, and that is what is responsible for the increase and the need for the subsidy?
Mr. ANDERSON. Yes, sir. That is part of it.
Mr. LIPINSKI. Why is Denver so expensive for commuters?
Mr. ANDERSON. I think because their landing fees are so much more expensive than Stapleton's fees were. You know, when they built Denver, it cost a lot more to build than Stapleton, and to recoup some of their costs and that sort of thing, Denver charges much higher landing fees.
Mr. LIPINSKI. Is Denver the busiest—does Denver have more of the essential air service than any other airport?
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Mr. ANDERSON. That is a good question. Steve, do you have an idea? I know when we looked at it, it was 16. Sixteen communities went into Denver, EAS communities, and I believe Mr. Mims indicated with his latest information it was 22, so I am not sure.
Do you have any indication? Is Denver the biggest EAS airport?
Mr. MARTIN. Yes, it is.
Mr. LIPINSKI. So it is the most expensive one for commuters. It is also the most active one for commuters. I think we may have found where the problem is.
Well, let us hope that the Senate, in their infinite wisdom, Senator Stevens finds that $15 million that we had put in AIR 21 that the House appropriators didn't see fit to put into the budget. Let us hope that the Senate finds that 15 million. I have a feeling that Senator Stevens will manage to find it, since I am quite sure that Alaska is seriously involved in this program.
Thank you very much, gentlemen. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Lipinski. I remember several years ago we held a hearing on the costs of the Denver Airport, and that the final costs were about three times what the original estimates were, so I suppose that they have to have higher fees to get back some of those costs.
Mr. Mims, you know the GAO report says that the FAA commuter safety rule is one of the main reasons that these costs have gone up. Do you have any rough idea of how much that commuter safety rule has cost the industry, or if the costs have been surprising to the FAA or the Department of Transportation?
Mr. MIMS. Mr. Chairman, what I would like to do in this instance, I have not been able thus far to get a firm fix on that figure. I hear from one to five and up to $10 million, and I would be remiss if I gave you a figure at this particular point. If you would permit me, I would like to provide a very firm figure for the record, if I could.
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Mr. DUNCAN. Yes.
[The information received follows:]
[insert here]
Mr. DUNCAN. Well, you may have heard in my opening statement that the costs of this program have more than doubled just since 1996, and they have fluctuated around quite a bit, and now they are about to exceed the $50 million guarantee. Does the Department of Transportation plan to ask Congress to appropriate more money for this program? If not, what are your plans? Are you looking at cutting out communities or reducing the number of flights or something else?
Mr. MIMS. For fiscal year 2001, we do have the $50 million base requested, and, again, we are going to deal with various efficiencies in us dealing with this program.
If we get to the point where we are really bumping up against the ceiling, I think that we will try to work our best to find a small pot of funding for 2001. For 2002, we are dealing with that figure right now, and, again, I am glad that we are holding this hearing today because it illustrates the importance of this program and it illustrates that we will possibly need additional resources in the future to meet the demands of the program in 2002, so it will enable me to argue my case for adequate funding for this particular program in the years to come.
Mr. DUNCAN. You know, while it may be a small program in the overall scheme of things on a one-year basis, over a five-year period or a ten-year period it amounts to quite a bit.
Mr. MIMS. Right.
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Mr. DUNCAN. Some people have suggested there are various ways to try to reform the program, and there has been some thought about possibly requiring some sort of minimum percentage. I understand that the average percentage load factor is now less than 20 percent. That is a low load. I mean, on a 19-seat plane, that means the average load would be about four passengers.
Have you considered, say, requiring a 15 or 20 percent load factor as a minimum, or looking at—I know many times around the country communities, through their chambers of commerce or their airport authorities or other things, have gotten companies to agree to purchase certain numbers of tickets, and they have come up with some funding, themselves, from the local communities. Have you thought about trying to encourage communities to do that where these load factors are extremely low?
Mr. MIMS. Right. That is what Mr. Lipinski was getting a little earlier.
Mr. DUNCAN. I am sorry. I was—
Mr. MIMS. But having a community assist in subsidizing service, but the one thing I wanted to do—and I mentioned a little earlier—is that I wanted to get together with the members and staff of the committee to come up with some additional ideas that would give the Department additional common sense—as you mentioned, flexibilities—in dealing with some of these issues.
Again, some cost/benefit ratios, issues dealing with load factors, and other—
Mr. DUNCAN. What about where communities are located very close together, maybe consolidating?
Mr. MIMS. Yes. And bringing, again, communities into one particular location for those flights to be had. Yes. We are also looking into that, as well.
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Mr. DUNCAN. Mr. Anderson, the GAO prepared a very excellent report for us. What do you think the future holds for this program? Are costs going to continue to fluctuate, do you think, and maybe go down? Or do you think they are going to escalate dramatically for some reason because of trends in the airline industry? What do you think the future holds?
Mr. ANDERSON. I think, quite frankly, if I could look into the crystal ball, my prediction would be that costs are going to continue to increase, and, if anything, they could increase fairly substantially, depending upon what happens with further consolidation in the industry, that sort of thing.
I know there has been a declining number of carriers that are showing an interest in the program. I believe there were something like 51 carriers back in 1987 that were competing in the program. It dropped to, I believe, 17 in 1995, and 11 in 1999. So there is a problem there, so I believe that the costs are going to continue, probably, to go up—at a minimum, to go up to cover the increasing cost of wages and inflation and that sort of thing.
Mr. DUNCAN. Well, I think it is a good time to focus a little attention on this program and to have some of the powers that be, such as Secretary Mims and others, to start thinking about ways to make this program better, because I do know that it is very, very important to many, many communities.
On the other hand, as I said earlier, we do have to make sure that the taxpayers get the most bang for their buck and that we operate in an efficient way as much as possible.
Thank you very much. You have been a very fine panel.
We will move now to the second panel today.
Thank you very much for being with us.
Mr. LIPINSKI. Mr. Chairman, at this time I would like to request unanimous consent for Congressman Phelps, who represents Decatur, Illinois, to sit on the panel with us.
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Mr. DUNCAN. Sure. That is perfectly acceptable. I knew Mr. Phelps was coming.
In fact, I think maybe, Mr. Phelps, you want to introduce one of the witnesses on our next panel, and we will call up the next panel: Mr. Doug G. Voss, who is chairman and president and CEO of Great Lakes Aviation, affiliated with United Express; and I believe that Mr. Phelps has a constituent who he would like to introduce at this time.
Mr. PHELPS. Mr. Chairman, thank you very much for holding this important hearing and for allowing me to briefly address your subcommittee. I would also like to thank my good friend, Congressman Bill Lipinski, Illinois colleague and ranking member of this subcommittee, for his help in providing one of my constituents the opportunity to testify here today.
I would like to extend a warm welcome to Mr. Gene Marcinkowski, director of the Decatur Airport in Decatur, Illinois. Gene has been closely involved with the essential air service program, and I believe he is uniquely qualified to discuss not only the benefits of the EAS, but also the dangers inherent in failing to give this program the support it needs to remain viable.
Access to Chicago is critical for the residents and businesses in the Decatur area, and the city must be able to rely on the EAS program to ensure this service.
When the Department of Transportation revoked Decatur's EAS guarantee last fall, rather than subsidizing the service or requiring the carrier to remain until an alternative was found, the problems with the EAS program became all too clear. Fortunately, with the help of many members of this committee, Congressman LaHood, Senator Durbin, and I were able to rectify this situation legislatively, but more must be done to guarantee the continued integrity and effectiveness of the EAS service program, and today's hearing is an important step in that direction.
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Again, Mr. Chairman and members of the subcommittee, thank you for allowing me this time, and I hope you would join me in welcoming Mr. Gene Marcinkowski and the other distinguished members of the panel.
Thank you for the opportunity.
Mr. DUNCAN. Well, thank you, Congressman Phelps. We are pleased to have Mr. Marcinkowski here with us today.
Also, we have our friend, Mr. John V. Coleman, who is a former Department of Transportation official who has been with us, even traveling to several of our field hearings.
Mr. Coleman, we are glad to have you back.
He was responsible for the essential air service program.
We will proceed as usual in the way the witnesses are listed on the call of the hearing, and that means, Mr. Voss, you will be the first witness, and you may proceed with your testimony.
TESTIMONY OF DOUGLAS G. VOSS, CHAIRMAN, PRESIDENT AND CEO, GREAT LAKES AVIATION, LTD., UNITED EXPRESS; GENE MARCINKOWSKI, DIRECTOR, DECATUR AIRPORT; AND JOHN V. COLEMAN, FORMER DEPARTMENT OF TRANSPORTATION OFFICIAL RESPONSIBLE FOR ESSENTIAL AIR SERVICE
Mr. VOSS. Thank you, Chairman Duncan and fellow members of the committee. We appreciate the opportunity to provide some insight from Great Lakes Aviation.
By way of background, Great Lakes is a 23-year-old company, Iowa corporation, that is currently serving 64 cities in 15 States with primary hubs in Chicago O'Hare and Denver International.
Great Lakes first began providing scheduled passenger service in 1981. In April of 1992, we became a United Express carrier. Today the company's fleet is made up of 40 Beech 1900-Ds. Eight of the 30-passenger Embraer Brazilias, and we do provide scheduled mail service out of the Denver hub to points in Montana and New Mexico.
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In January of 1994, at the peak of the company's success in terms of margin of profit being generated and during a peak of interest in the regional airline industry, we did complete a successful public offering, raised $30 million. The company stock does continue to be traded on the NASDAQ.
At the time that we initiated the IPO, the primary reason was to create a capital pool to upgrade aircraft from 19-to 30-seat aircraft. At the time that we raised the $30 million, it happened to be January of 1994. In July of 1994, the company began to experience a series of events over the course of six months that dramatically changed its position within the industry. Frontier Airlines entered four of our major markets in North Dakota at the time and literally wiped out a half a million dollar a month revenue stream, or reduced our revenue stream by approximately half a million dollars per month, but it took away a substantial portion of the profitability of our presence in the upper midwest.
In July of 1994, Northwest, who was in the throes of a near bankruptcy situation, received a significant funding, and sometimes it was described as a bail-out by the State of Minnesota at the time, but following their agreement in July of 1994, they became an extremely aggressive competitor in the upper midwest, and in our particular case, especially given the disadvantages of slots at O'Hare, we were unable to be as effective as we would have liked to, especially in the Great Lakes region—Illinois, Indiana, Michigan, Wisconsin, Iowa.
Also, unfortunately, near Halloween, in October of 1994, the impetus for the commuter safety rule, the accident in Indiana by a part 121 carrier at the time triggered all of the interest in the safety rule. It subsequently set off a chain reaction of events that triggered a sharp reduction, a 17 percent reduction in revenue stream for our entire Chicago hub, of which, over time, it took approximately a year-and-a-half before we could truly identify, return to a near-normal enplanement activity, but the negative media clearly caused a sharp decrease in revenue stream at the time.
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So that $30 million in capital ultimately was being used to allow the company to survive. Over the course of a four-to five-year period, we struggled through a lot of route structure changes in order to make our way back to profitability, and in the years 1998 and 1999 we have returned to a profitable operation. Unfortunately, we are still operating with extremely thin margins.
One of the primary reasons we were successful in this is that, due to United's desire to make some marketing partner relationship changes in Denver, they gave us the opportunity to assume responsibility for a substantially increased presence in Denver. We had been serving 14 markets. Today we serve 41 cities out of the Denver hub.
We currently have investment in aircraft of over 225 million. Over 70 percent of that is now dedicated to the Denver hub. Unfortunately for the upper midwestern markets—in particular, the Chicago EAS markets—where we were not generating profit, a large portion of that investment was moved to the west.
As a part of the shift or the focus to find a way back to profitability, we did discontinue a substantial number of service, some of which was EAS, some of which was service that had been historically profitable, but with the improved market influence of the Detroit and Minneapolis hubs, an inability to maintain profitability in the midwest forced us to reduce our activity, especially again in the Chicago hub.
In the written presentation I have provided you, I have shown a list of revenues and costs. I did this in an available seat mile basis based on revenue per available seat mile and cost. In 1994, for example, our revenue per available seat mile throughout the system as a profitable operation, although this was a year we had initially seen the impact of the Northwest, it was a near break-even. It was 14.6 cents in revenue, 14.5 cents in cost.
Through 1999, through a number of adjustments and presents, the revenue stream has now been improved. It is essentially the same fixed investigation in aircraft. For the last six years, we have virtually flattened the total number of aircraft dedicated to the program, but we generated 24.9 cents in revenue, 24.4 cents in expense, which represents an over 60 percent increase in the cost of providing the product. The majority of this has clearly been influenced by the cost of the transition from part 135 operations to part 121.
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There are a number of major components that have impacted the 121 transition, the most important of which was effectively a change in the cultural approach of the operation. We lost a great deal of flexibility, both in the maintenance side and in flight operations sides, in areas such as the 121 requirement now forces all operations to be conducted under positive controlled airspace, or, in other words, instrument rules. Historically, under 135, and especially at small communities, we could use VFR rules and there were no limitations and no requirement to wait for clearances. That has increased delays, which has increased cost.
Maintenance expense increased dramatically, primarily due to a requirement now where you have an inspector force independent of the maintenance force—in other words, a second set of eyes, as it is known. There was a substantial labor cost increase, and it also has increased the intensity of how the inspections are performed that have triggered additional investment and expense in parts.
The other important thing specific to Great Lakes—and since we are such a large percentage of the program—has been the fact that during that period, especially during this same six-year period, because of the slot rule, our revenue streams were shrinking in a lot of these markets. We could not improve the quality of the service and we could not maintain a competitive position, and that shrunk revenue, further increasing the cost of subsidy.
In 1994, we generated a little over $2.7 million in revenue in the EAS program. To support the same fleet in 1999 took $16.2 million of essential air service subsidy. A significant portion of this, $11 to $12 million, is at the Denver hub.
Current rates, due to some recent decisions that DOT has made, are currently generating an EAS revenue generation forecast for the year 2000 of $15 million.
The other thing the company has been having to do, in an effort to compensate for the increased expense, is we have been increasing fares, which, unfortunately, contradicts the normal activity. You can clearly generate more passenger traffic by lowering fares, but, under the circumstances, especially in markets where we are currently not subsidized, our increased product cost is forcing us to be more diligent in how we price the product.
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In order to keep truly small community service on a rational, progressive path, Great Lakes recommends that the following Federal policies be reviewed:
Given the dramatically-increased cost of EAS capacity, DOT needs additional latitude to adjustment eligibility of communities in the essential air service program.
With the recent improvements, especially in the highway system, all the additional funding that has been brought in to improve the quality of the highways, the fact that we have seen a rise in the speed limits on the freeway system certainly has made the interstate highway system a more-effective competitor to our product.
We certainly support the current rule of the $200 per passenger subsidy cap and think, if anything, it may actually—we would support, actually, a reduction of that.
Money saved by reducing eligible points should be used to increase frequencies at remaining EAS points. One of the most difficult challenges that we face is a constant perception that the quality of the service is poor, when you are only providing 75 to 80, 85 departures a month and you lose—due to weather or mechanicals, or whatever, the percentage of completion is considered unacceptable compared to large carrier industry standards. The multiple-stop service also aggravates the ability to provide what is perceived as a more-reliable service.
In order to improve the interest in the service at these smaller communities, the need to provide at least four, if not five or six round trips subject to nearby competing airports, four, five, or six frequencies is critical to making certain that any consumer that wants to use the product does not have their whole travel day ruined if, for example, you have a community with only two round trips and you cancel the 6:00 a.m. or 7:00 trip. This substantially upsets their travel day. They need the ability to have a redundancy in frequency, with a flight every two to three hours, if the market makes sense.
The third recommendation that we have is really for a complete review of how the rate-making program works. Under the current EAS policies, in order for us to trigger—if, as in the case of the 121 cost increases that have occurred, in order for us to trigger reopening rates, we have to file a 90-day notice, which initially will cause a traumatization of the community. But once we have triggered the rate negotiation and we do go back into that, we do not actually see a subsidy increase for 180 days.
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As in the case of the current or the recent spike in fuel prices, for example, we have seen a situation where we have had a total operational cost of 5 to 6 percent just because of the more than doubling of fuel cost, which just totally wipes out the profitability of participating in the program. This is a very clear example of why there are virtually no carriers remaining in the program and a very few showing any—no carriers showing any interest in entering into the program. The rate-making policies are not real time and very much dysfunctional.
The other thing that we believe that needs to be seriously considered for review is historically the communities viewed increased enplanements as success. Unfortunately, if we don't see corresponding increases in fares, just because traffic has increased does not mean profitability is increased.
The measurement that FAA uses inside of the airport improvement program of using enplanements to trigger varying levels of airport funding is contradictory to what the airlines are having to deal with. Even though you may seen an airport with 10,000 enplanements, the assumption that that service is profitable in many cases is, in fact, distorted, especially given an overall trend within the industry of reduction of yield.
The presence of Southwest and other low-fare carriers is forcing all of the higher-cost carriers to effectively match fares to retain market share, and, under the circumstances, the ability to get fare increases simply can't be achieved.
In summary, the higher cost of providing small communities with capacities suited to their market potential has become the industry's most difficult public relations dilemma. With market presence being equal, the airline with the lowest cost will always win, due to their ability to control pricing.
Southwest has changed the definition of market presence in many areas of the country, including the upper midwest, with its low-cost, all-jet service and usage of an interstate highway system as its commuter network.
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Unfortunately, Southwest's low fares are used as a yardstick to measure the success of all other airline service. Many truly small communities will always feel cheated.
All airlines continue to work hard to keep costs low, but, unfortunately, significant further cost reductions are difficult to achieve, especially given the regulatory barriers that we deal with daily.
In recent years, Great Lakes has been forced, due to financial losses, to discontinue service to a number of EAS communities. Those air service reductions were a product of constantly-changing market forces that Great Lakes deals with on a real time basis. Federal and State government policies that attempt to influence these market forces need to be thought out carefully.
Great Lakes stands ready to assist those who have been appointed by government to provide policy guidance. With your help, we can continue to make affordable capacity available to the small communities who will not see the benefit of low-cost jet service at their local airports.
At this point I open it up to questions.
Mr. LAHOOD [ASSUMING CHAIR]. Thank you, Mr. Voss.
Mr. LAHOOD. Gene, let me add my welcome to you. It is great to have you in Washington and before our subcommittee. As was stated by our friend, David Phelps, it has been sort of a struggle to accomplish some of the things that we have tried to accomplish in Decatur, but hopefully your testimony here today and your availability before the subcommittee will be helpful.
As soon as you are finished, I am going to ask Mr. Voss when he can start flying in, and maybe the two of you can shake hands and we can start air service.
You go ahead and proceed first, and then we will put Mr. Voss on the pen.
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Mr. MARCINKOWSKI. Thank you, Chairman LaHood.
My name is Gene Marcinkowski. I am the director of the Decatur International Airport in Decatur, Illinois. We thank you for holding this hearing on essential air service program and for giving us the opportunity to testify.
We would certainly like to have Decatur weigh in on side of the merger of United and USAirways, caveated that they approve the reestablishment of the Decatur-Chicago link.
Our experience with the essential air service program in recent years exemplifies both the promise and the problems of the EAS program. While in Decatur we have in the past year seen a great deal more of the problems than of the promise, our experience should be instructive to those who would like this program to both better serve communities and to do so at a reasonable cost to the Federal Government.
In 1980, the Civil Aeronautics Board established by order what the EAS levels for Decatur would be, as it did for many communities at the same time. For Decatur, because of historic patterns of air service, it designated minimum service to both St. Louis and Chicago, in each case at a level of not less than two round trips per day with commuter aircraft. In the 20 years since then, air service at Decatur has never been subsidized.
If there is one key to making air service to small communities work, it is consumer confidence. In order for the consumer to book a flight in a small community rather than drive to a hub, they have to have the confidence in the reliability of the schedule and the reliability of the connection. That puts a real premium on continuity.
People typically book airline tickets well in advance. If they don't see continuity and stability in a small community's air service, they begin to doubt that service will be offered when the travel date arrives.
In a small community, when some of your market is not using your air service and is driving to the hub, instead, you rapidly get to the point where there are not enough passengers using the air service to sustain it. In Decatur, we began to see these problems in 1997 and 1998, when the airline serving Decatur-Chicago began experiencing problems of its own, completely unrelated to Decatur. They suspended service system-wide, and we did not insist on subsidy as part of the effort to get them back on their feet and back in the market.
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When they returned to Decatur in October of 1998, passenger confidence and bookings were way down. The community worked hard to rebuild confidence in bookings with our own ''Fly Decatur'' program. By the summer of last year, we had passenger levels up to over 500 per month in the Decatur-Chicago market. We were back on track and growing.
Then the commuter airline changed its mind. They wanted to adopt a different business strategy. They wanted to shift more of its operations to a different hub. Again, it had nothing to do with Decatur. The airline made a series of confidence-damaging announcements—they would cut back from three flights to two, then it wouldn't, then it would pull out entirely and soon, then it would merely file notice to pull out later.
For all Decatur's work to promote our service, consumer and travel agent confidence plummeted. In October we had only 252 passengers to Chicago.
The essential air service program is supposed to provide a basic confidence by providing an absolute guarantee of minimum level of service that consumers can count on. Our case, and too many others, as well, showed that the Federal Government was not willing to live up to the guarantees that it had made. When the airline providing our essential air service to Chicago filed to leave the market entirely, DOT did not hold them in and did not move to back up its guarantee. Instead, it chose to avoid the prospect of paying any subsidy by revoking our EAS designation to Chicago.
When, after 20 years, we finally needed the Federal Government to back up our guarantee, they simply revoked it, instead. This makes the EAS guarantee like the roof that is guaranteed not to leak except if it rains. You have the guarantee, but only until you need it.
The result is that we have once again lost all air service to Chicago. By DOT's refusal to hold the airline in until a better solution could be found, the confidence of consumers in air service from Decatur to Chicago has once again been shattered.
Fortunately for us and for all communities that rely on the EAS guarantee, Congress stepped in and provided the EAS guarantee would not be taken away just when the community needed it. We are very grateful that our Members of Congress—Congressman Phelps, Congressman LaHood, and many members of this committee, and Senator Durbin—all made the extra effort to correct this problem in the reauthorization bill recently enacted.
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What it will mean for us and for all EAS communities is that EAS guarantees once again are real guarantee. That is key to the confidence it takes to build a viable air service in small communities.
DOT has responded expeditiously to the new legislation, has restored our EAS designation to Chicago, and is now taking the lead in seeking an airline willing to provide the service. That is all to the good, but the fact remains that, once again, the confidence level of consumers in this market has been shattered and will take time and effort by the airline, by the community, and by DOT to rebuild that confidence. The damage done to consumer confidence will now result in greater difficulty finding an airline willing to provide this service and a higher subsidy cost paid by the Federal Government.
What we have learned from this experience—and we hope DOT has learned—is that allowing service disruptions in order to avoid paying subsidy is a false economy. It only results in greater difficulty, time, and expense in rebuilding the service after the disruption.
What we need is a chance to build air service in Chicago back to viability, which is to say we want to get to the point where the service supports itself without subsidy. Realistically, that requires several things. We need an airline with a Chicago code share relationship. Small communities need to attract connecting passengers in order to have viable air service. The airline has to offer flights banked at the correct times, and the airline has to offer fares that compete with the alternatives, including the alternative of driving to the hub. The community has to promote the air service, and I can assure you Decatur will do exactly that.
DOT has to understand that what it contributes to small community air service is primarily stability and the consumer confidence that comes from stability. If DOT is just sending out subsidy checks and is not getting stability as part of the deal, it is getting very little for the money it spends.
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We do not under-estimate the difficulties we, other EAS communities, the airlines, and the Department face in working toward viable, self-sustaining air service. During these prosperous times, there are serious challenges to the viability of air service to small communities. A pilot shortage, new regulatory requirements, and especially regional jets have put smaller communities at risk.
We need to keep in mind that the costs of not providing viable air service to small communities are also very high. Even small communities such as Decatur have major businesses that are part of America's competitiveness in the world economy. These companies need to move people and goods around the Nation and around the world. Without connections to a major hub airline, that is simply not possible. Without air service connectivity over a major hub, our local economy would suffer dramatically and cumulatively. If many small communities lose that connectivity, our national economy and competitiveness in the world economy would suffer.
We need an EAS program that builds stability and continuity of air service, that inspires consumer confidence, and that thereby grows passenger volume to the point where the air service is self sustaining. That is the best outcome for everybody and will be the least-costly outcome in the long run, as well.
Again, we thank you for the opportunity to testify, and I would be pleased to try to answer any questions you may have.
Mr. DUNCAN [RESUMING CHAIR]. Thank you very much.
Mr. DUNCAN. Mr. Coleman, thank you for being here. If you want to summarize your testimony or read it, you are welcome to do so.
Mr. COLEMAN. Thank you, Mr. Chairman and members of the committee. I really do want to thank you for giving me this opportunity to talk with you this morning about the status of the essential air service program.
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Since I retired from the Department of Transportation this past December, I am here today as an independent voice. I was fortunate to have had a career, as Chairman Duncan was kind enough to acknowledge, of some 37 years in government service, and a big part of that since 1978, one of my primary responsibilities was to develop and administer the essential air service program.
I have submitted a written statement that includes some suggestions for the future. Let me just summarize the major points I would like to make.
The EAS program has given this Nation's smaller communities over two decades of excellent service, but now it is facing very serious challenges, very serious problems, and is desperately in need of attention, both by Congress and by the industry.
There are two reasons that the EAS program worked so well for many years: the right airplanes and the enthusiastic participation of the commuter industry. Those elements are no longer in place.
In 1978, the average size of a commuter airplane was just under 12 seats. Today, it is approaching 30 seats. The smallest of them, generally the Beech 1900s, are being phased out by many of the commuter carriers. The larger aircraft just are prohibitively expensive for most EAS markets. Largely because of that, the commuter industry has, understandably, lost its enthusiasm for participating in the EAS program.
In 1978, most commuter carriers saw deregulation and the EAS framework as an opportunity to move into smaller markets that the local service airlines had outgrown. Where there continued to be a need for subsidy, there was vigorous competitive bidding.
Today's commuter carriers, like their predecessors, have outgrown the EAS program. With few exceptions, they don't see participation in the program as an opportunity, they see it as a burden.
Although DOT continues to re-bid EAS routes every two years, there is almost never any competitive bidding. The reason is the basic economics of the existing fleet.
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The situation is exacerbated by other upward cost pressures, as other witnesses in this hearing are also noting. Those pressures affect not only the government subsidy burden, but the reliability of the carriers' service, which goes down and, in turn, depresses traffic.
None of these problems are anyone's fault. They are just the facts of life for small community air service.
So we ask ourselves a question: what can be done? For the short term, unfortunately, increased costs can only be covered by an increase in EAS funding, but for the longer term the program really cries out for fundamental change.
First, I think the time has come to move away from the basic premise that every community that had air service in 1978 should continue to be guaranteed air service at its own airport. That is hard medicine, but it does not mean abandoning the program.
However, many communities have demonstrated, by their own travel choices, that the availability of alternative services at other airports is more attractive, and they simply are not using the services at their own airports.
I have suggested five legislative changes: first, requiring the consolidation of services at regional centers where EAS communities are within a certain distance of alternate service; second, establishing more stringent subsidy eligibility criteria; third, giving DOT the flexibility to rechannel EAS subsidies towards enhanced services at an alternate airport that would benefit a larger population within the same geographic region. This idea is consistent with the pilot program that AIR 21 created and authorized. Fourth, mandating ''use it or lose it'' tests for communities that are generating less than a specific volume of traffic; and, finally, as a variation of ''use it or lose it'' test, there is also an existing provision in section 41735 of the law that would authorize enhanced levels of subsidized EAS for individual communities for a two-year period, if that community agrees to forego its EAS guarantee after that time.
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Communities must understand that, as costs keep rising, they risk a complete loss of their subsidy eligibility in any event under the $200 per passenger ceiling in current law; thus, they should have an incentive to be thinking innovatively, as well.
In quick summary, we must recognize that the commuter industry of today has outgrown the EAS program as it is currently structured, and the situation is unquestionably going to get worse if there are not compromises.
I would strongly encourage a focused partnership among Members of Congress, the airline industry, State and local community leaders, and DOT toward mutually-acceptable change. I am confident that the carriers are ready to begin that dialogue, and I would urge that we begin to do so very quickly.
Thank you, again, very much, for permitting me to be here today. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Coleman.
Mr. LaHood, thank you for filling in for me. I will go first to you for questions.
Mr. LAHOOD. Thank you.
Mr. Voss, let me just say, first of all, thank you for what you are doing in both Peoria and Springfield. I think the people there are obviously very pleased with United Express, and particularly the fact of your recent announcement about expanding service in the Springfield area is obviously welcome news, particularly given what American Eagle announced recently.
But let me, if I can, just be very direct. I am sure you will be very direct back. Obviously, Decatur is in a real bad situation. They don't have any air service. Can there be any consideration given by Great Lakes, United Express, to looking at a community like Decatur for air service?
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Mr. VOSS. Well, at this point we have continued to have some discussions with United regarding both Quincy and Decatur. The fundamental problem is that our goal when we restarted the service in 1998 was to try to achieve 1,000 enplanements a month, and, as was mentioned earlier, it did rise to above 500, but it was certainly not profitable for us.
United historically has not chosen to participate in the subsidization of markets that effectively, as in the case of Decatur, had a second designation, and DOT certainly not having historically provided second hub subsidy.
At this point, we continue to have discussions with United. There are certainly political considerations that may change their interest in this some time in the near term, but we did provide subsidy or effectively what is considered called a ''cost plus'' product for United to consider, wherein we didn't take the business risk of providing that service. We lost more than three-quarters of a million dollars in the little more than 12 months that we had restarted the service in Decatur. We simply can't afford to be doing that.
I think that United—and has been the case with all of the Air Wisconsin product, and I think it was mentioned earlier Air Wisconsin was considering looking at this. Their entire product line is operating under a completely different business approach versus that of Great Lakes, and United takes that business risk, but the expense of flying the type of equipment that they fly, their larger 32-passenger Dornier would represent probably a $1.5 million to $2 million a year potential subsidy for United to start that service in there. They may have to weigh that up against the political needs in the near future, but, under the circumstances, I would question the longer-term viability and how long United would continue to want to do that.
Certainly, one of the things you mentioned—and we appreciate your comments regarding Springfield—but, having not only the same problem with Springfield, Lansing, Michigan, has recently seen American Eagle pull out, the assumption that regional jets are going to be the answer to small community air service I think is clearly a major mistake. It is not going to be capable of fixing the political perception of needed small community service. It is simply a much higher-cost product than a lot of people understand.
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Under the circumstances, I think there will, as was mentioned here, in a couple of cases going forward, I think there will be more service discontinuations of turbo-prop as the majors, who have now become so competitively focused on the regional jet product, are going to have to simply discontinue more and more of the turbo-prop product, or find there would need to be some sort of additional incentive to encourage them to stay in that type of product.
But the public is telling the major carriers they want regional jet service. Unfortunately, it is much more expensive than the public realizes.
Mr. LAHOOD. Gene, why don't you sketch out for us a little bit about the dilemma that the communities the size of Decatur face.
Mr. MARCINKOWSKI. Yes. First of all, I would like to thank Mr. Voss for being with us. He is currently invited to return. He has not said yes or no. As we go, a shake would be great.
Talking about a service in our area, for instance, particularly with the Great Lakes setup, they were there for about 14 months. Normally accepted in the industry is about an 18-month to two-year term in a community to see if it works. They had demonstrated and we had demonstrated, I think, over an eight-month time span, about a 5 percent growth rate increase, shooting for—and in 18 months would have reached the numbers they were looking for. They didn't really give us a chance. The game plan had changed. We give them that. The game plan had changed, and we asked DOT to hold on for a while and let us see if we can make this work through the 18 months to two years. That went away. They just cut Chicago and the legislation has restored Chicago, so we are set there.
The major airlines are a point that may have responsibility here. Pricing is always an issue, but, as a future and a going toward a step, the major airlines, for a dominated hub, as Chicago, to get a down-State Illinois city access to Chicago should not be ignored. We should have that accessibility to some place like that.
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This week I had the chance to attend the American Association of Airport Executives conference in Baltimore. There were about 3,000 to 5,000 airport executives at this conference. Jane Garvey quoted the R.J.s as a sort of out-there coming on thing and not the answer, as Mr. Voss had mentioned, but it is in a transition period. We are in a transition period with the program, as Mr. Coleman had stated. There have got to be some changes.
Jane Garvey acknowledged and named that transition period, but we need to make it through this period. We need to see the Appropriations Committee and our Senators—they will hopefully get lots of letters from this conference that was just held. We need to see the 50 million appropriated. We need to see the 15 million supplemental appropriated. And then we are very excited about the application coming out for the air service development program for the 75 million to further enhance this product in a transition period to decide where we go, but just don't dump communities like Decatur and Texas and Kansas and other communities out there.
Mr. LAHOOD. Mr. Voss, let me just—I know my time is up, but let me just see if I have a picture of this.
What you are saying is that the R.J.s just simply are too expensive for communities the size of Decatur, given the cost and so forth, and that they are not going to meet the needs and the bottom line, from your point of view. Is that what you are saying?
Mr. VOSS. I am essentially saying that.
You take an $18 million, 50-seat regional jet and you fly a short stage length, be it Decatur or Springfield, 177 miles, your net overhead just for the fixed cost coverage can run seven to eight cents a seat mile just to cover the debt service on the airplane. Southwest airlines is out there at 7.5 to 8 cent total product cost. It is virtually impossible to compete with that R.J. product against a Southwest efficiency, wherein they concentrate much larger numbers of consumers into far fewer points.
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Under the circumstances, you know, as I mentioned in my document here, our product cost is now running 24.5 to 25 cents a seat mile. Southwest is out there at seven cents.
When people see our fares running three to four times higher than Southwest, the reason is the cost of delivering the product. It is one of the most misunderstood portions of the airline industry. There is this dramatically increased cost associated with flying smaller airplanes, and then the shorter-haul nature of what we do.
More than 50 percent of the cost of providing a service takes place in the first 10 to 15 minutes from departure in that climb-out, and the cycle costs of maintaining it for what, in our case, is many more landings. We are getting 12 to 14 landings a day out of an airplane. Southwest, which is more efficient in using their equipment, is getting seven or eight, but United is down to as few as five or six.
Mr. LAHOOD. Thank you.
Mr. DUNCAN. Thank you, Mr. LaHood.
Mr. Lipinski.
Mr. LIPINSKI. You can go to Mr. Phelps.
Mr. DUNCAN. We will go to Congressman Phelps, but we have a vote that is starting, so we will have to keep these questions and answers very short and quick.
Mr. PHELPS. Thank you, Mr. Chairman. I will be very brief, because I think the testimony of the panel has covered probably a lot of the questions and I don't want to duplicate—
Mr. DUNCAN. I am sorry. We do have some time. I thought when those buzzers started going off it was going to be a vote, but it is not. So go ahead, Mr. Phelps. Thank you very much.
Mr. PHELPS. Mr. Marcinkowski, you had mentioned in your testimony that Decatur currently has service to St. Louis.
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Mr. MARCINKOWSKI. That is correct.
Mr. PHELPS. Is this service subsidized? And how well utilized are we doing there?
Mr. MARCINKOWSKI. Yes, we do have service to St. Louis as that second hub. In fact, we have stepped up the program there and TransWorld express has jumped. Changing an economy of scale for some of these aircraft is one of the problems going forward. They are jumping to a 30-seat aircraft as the economy of scale.
I think what Great Lakes did is indicative of what is going on in the industry, where the 19-seaters are not going to Chicago as the center, and the economy of scale has shifted to the 30. TWE is doing that right now. We are loading those airplanes at about 45 to 47 percent. We have been tracking it very closely, because they have got us on the line to make sure we can make that cut, and we are doing that right now. We are boarding upwards of 45 percent, not doing a three-or four-day—Decatur is not that sort of community—and going forward with its air service.
Mr. PHELPS. I know you haven't had a whole lot of time, and maybe you have had some previous review, but what are your thoughts on Mr. Coleman's suggestions to the EAS program he just outlined.
Mr. MARCINKOWSKI. I think, again, as Jane Garvey had noted, we had a real interesting panel. Will Reece was there, Jane Garvey. Norm Mineta was out there. They were all part of our program at the conference. Probably some sort of action is warranted, and I think that Chairman Duncan's GAO report noted the loss of interest by the air carriers in serving the dominated hubs. That is a causal factor in what is going on, and I think those dominated hubs have to be a participant in any kind of future move in the EAS program, and in the meantime it will transition itself if allowed to do so with that $200 cost limit. We don't need major movement. Let that $200 cost be effective and let it work. I think the program can move forward.
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Mr. PHELPS. Thank you.
Mr. Voss, I guess what puzzles me is a business of your level and an expertise, evidently, when you enter into an agreement with a community such as Decatur, were there not discussions or anticipations of the worst-case scenario at a time when the economy is the best? I know it is eager to want to participate and maybe enhance the profitability of your company, but were there discussions about, ''If we get to this point in time that certain things happen—'' that evidently did, to cause your decision, it just doesn't seem like the community was prepared properly. They were surprised. I guess that puzzles me, without knowing the specifics.
Mr. VOSS. We could talk about not only Decatur, but all our Chicago O'Hare service for hours, but, as a company, we began serving O'Hare in 1985. We were fortunate to build up a pool of slots that at one time would generate a return on investment. As the cost increased with the commuter safety rule, what was a profitable product at Chicago became an unprofitable product.
Mr. PHELPS. But that was a surprise, I mean, out of the air? No pun intended.
Mr. VOSS. Well, I don't know if it was a surprise, but, you know, it was spread out over a long period of time. When we reinstituted the service in Decatur, the AIR 21 bill, the slot relief bills were in motion, and we were anticipating more freedom to improve the quality of schedules much sooner than we did. Unfortunately for Decatur, we discontinued the service here in January and then subsequently saw the relief from the slot rule here in March, effective May 1st.
We reached a point, especially in the seasonal nature of the upper midwest, where we did not want to face losing another $300,000 or $400,000 while waiting the opportunity to obtain slot rules.
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We have now also reached a business point where adding $4.5 or $5 million airplanes—a new 1900 is a $4.5 million airplane. Beech sells them overseas for in excess of $5 million in certain equipment configuration.
Mr. PHELPS. But I know we talk about the spiraling cost of fuel that affects your profit, but in that same time frame it was the lowest cost of fuel. That is something we overlook. So I guess the balance therein is—
Mr. VOSS. The spiking of fuel really kicked off in October. I mean, for us, we have seen an additional $1.5 million in fuel expense in the fourth quarter, about $1.7 million in the first quarter.
Mr. PHELPS. But you don't show—
Mr. VOSS. That further aggravated our interest in continuing to—
Mr. PHELPS. I am just wondering the savings when it was much cheaper. That wouldn't be a balancing act for a company like you to take into consideration for long-term planning?
Mr. VOSS. If fuel was predictable and we could actually forecast fuel to remain at—in January of 1998, for example, we were paying $0.39 or $0.40 a gallon. In March it peaked at over $0.97 a gallon for us. Quite honestly, the volatility of that puts a tremendous amount of risk, especially in this essential air service program, where that large of an increase in fuel, alone, represented more than a 6 to 7 percent increase in our total operational cost.
The structured nature of the EAS rates only allow for a 5 percent return on investment. The fuel cost increase, alone, let alone other issues such as the pilot shortage that was the trending cost, totally wiped out any business logic for remaining in those communities.
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Mr. PHELPS. My point is that unanticipated high cost I know existed, but was it not also unanticipated low cost at the other end to average predictability?
Mr. VOSS. When we initiated the service and we started the service in November or December of 1997, we certainly were dealing with much lower costs—or I guess it was in 1998—than we currently have in the system today. Again, at the time that we reinstituted the service, we were expecting slot rule relief much quicker than it occurred. We were expecting it in three to six months, and, unfortunately, due to the nature of the process, it took a year and a half longer than we had first anticipated.
Mr. PHELPS. One last question. What is the average length of service for your pilot?
Mr. VOSS. Today we are experiencing the attrition of captains who are effectively eligible for major air carriers, they are leaving in a year-and-a-half to a year-and-three-quarters. As recently as two years ago, we were seeing an average of about three to three-and-a-half years. There is no question that attrition at our graduate school level has accelerated dramatically, and it has significantly increased the cost of our product due to substantial increase in cost in training pilots.
Mr. PHELPS. And, finally, Mr. Coleman, how would ''use it or lose it'' work?
Mr. COLEMAN. My suggestion is that the ''use it or lose it'' idea would apply to communities that are really generating very, very little traffic. They are still in the program because they have not risen above the $200 per passenger subsidy cap that exists there now, but they are still generating very little traffic, and they don't suffer from severe isolation.
My suggestion would be that, in that case, they be subjecting to a ''use it or lose it'' test where there would be probably a traffic target.
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Mr. PHELPS. But is there a way to guide these communities to know that they are pretty much predicted to lose it before they get to use it very well?
Mr. COLEMAN. Yes. I think part of the process is there really ought to be some outreach to communities that would be at risk and let them know.
And DOT has done some of that. There have been cases where we have gone out to communities and we have said, while I was still there—and I know Dennis DeVany is doing—
Mr. PHELPS. But in this case of Decatur, for example, just when they were building and boosting—I know I saw that community really do a great job in promoting that, and all of the sudden the rug is pulled out from under them.
Mr. COLEMAN. Decatur is such a different kind of situation, because Decatur has demonstrated over the years that it really is a market. I would like to see the Department have a lot more flexibility in the way that it is able to authorize subsidy payments not only under the EAS program but under the pilot program that I believe Mr. Costello alluded to a little earlier that was created as part of AIR 21, where the Federal Government could help to seed some enhanced air services at places that we believe really are markets and they just need a little bit of a boost to get somebody interested in going in and providing the service.
In a Decatur kind of situation might be more appropriate to use that kind of a course rather than the EAS program.
Mr. PHELPS. Thank you.
Mr. DUNCAN. Thank you, Mr. Phelps.
Mr. Thune?
Mr. THUNE. Thank you, Mr. Chairman and panel, for your excellent testimony.
I would like to just direct a couple of questions, if I might, to Mr. Voss.
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Doug, I know that you serve a couple of airports in cities in our State, and I have indicated to them on many occasions that, if they want to retain air service into those communities, that the community has to make the effort and commit themselves to providing loads—the passengers. The people in the community have to use the service.
I am told that there are a number of communities, when they want to attract air service, will approach their local business community and ask them to commit to the purchase of a certain number of tickets. I am wondering if, in your experience, that is something that happens with EAS communities. Is it something that could happen more? Are there other things that those communities could do to bolster the number of people who are using the service?
Mr. VOSS. There have been various number of methods used to try to stimulate either the kick-off of new service in a community that is not a part of the program, or in the case of certain EAS points where they recognize the danger zone that they are in and they try to stimulate it.
The unfortunate thing about advanced ticket sales is that it is really a false revenue. There is a certain percentage of that traffic that is going to travel anyway, so it doesn't represent a block of funds that is necessarily adequate enough to support the product.
In a 19-seat airplane today, it takes a $2.25 to $2.5 million-a-year revenue stream for one community to generate, both in and out. Unfortunately, that is up almost $1 million from what it was five years ago.
The biggest challenge, as in the case of South Dakota that we have been dealing with, is the fact that we are flying the product with the United code into a Northwest hub, and under the circumstances we do not have a competitive product. United has a very limited presence in the twin cities, and Northwest is not interested in developing competition or developing an EAS product as a competitive force, in that most of the people from Brookings, for example, are driving to Sioux Falls to get on a Northwest product.
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As long as there is no interest on the part of a major carrier at a place like the twin cities to assist in the development, all of the local business community commitments are potentially very much so futile. I mean, we appreciate the energy that gets put into that type of thing, and we have seen some success stories recently. Kearney, Nebraska, is a classic example of a community that went from 250 or 300 enplanements a month to nearly 1,000 a month, and a lot of the credit goes back to the community in a very sophisticated manner in which they pooled the focus on getting that air service to work.
But, in general, the biggest challenge is dealing with what is out there for competitive market forces. In South Dakota's case, be it Brookings or Huron or Yankton, it is extremely difficult to generate a success story without the participation of Northwest in developing a product.
Mr. THUNE. Are there things that—you noted the cost at $2 to $2.5 million revenue per year per community for a 19-seat plane has gone up dramatically. Are there things in—a lot of that is regulation. Are there things that we could do? You are having to comply with the same sort of regulations that the large carriers have to? Are there things that could be done in order to drive down your cost of operation?
Mr. VOSS. One of the most difficult challenges of any airline executive put in the position to try to address that question is that you have to go back and say, ''Okay, what areas of safety would you, in theory, compromise?''
One of the things, as I mentioned earlier, is we lost the ability to do VFR departures, or operate without instrument release from communities like Brookings, where there might be 30 or 40 aircraft operations a day. You really don't have the need for positive controlled airspace in a VFR flight rule condition.
The very culture that was set up with the structure of 121 was designed to serve large airports with substantially greater profit levels, and your product in Brookings is being forced to fit into the philosophy of 747s and 737s in a Chicago hub.
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There has been, without a doubt, cultural change to the industry that makes it difficult to try to pinpoint what cost, in particular, but the very thought process is—the captains of our aircraft used to have a tremendous amount of discretion to deal with conditions that they are dealing in. Today they have dispatch and ATC second guessing, and part of it—I say ''second guessing.'' It is really part of an active effort to ensure levels of safety.
No airline executive really has interest in trying to argue on lowering standards, so you have created a—you know, the industry has a predicament in that any time you try to get relief on a rule that might appear to compromise safety, you know, there is really no interest, especially on the part of FAA, to support anything that might appear to do that. There is a cost/benefit analysis associated with that that is extremely difficult to iron out or to lay out, and used to participate in deciding where the standards should be adjusted.
Mr. THUNE. Do you see any impact from the recently-announced merger of United and USAir that would affect your carrier or the EAS program?
Mr. VOSS. In the discussions that we have had with United, and given the geographic nature of the area that we serve, we do not expect any sort of near-term impact from it.
I think the greatest concern that we have as a regional airline, especially one that is operating a large fleet of 19-seat equipment, is that the fixation on regional jet product is creating a situation where all investment in facilities, be it at Denver or Chicago or Minneapolis, is now focused on the assumption that regional jets are the wave of the future, and we will see increased cost because the assumption—the marketing assumption or the assumption being made by the marketing divisions of the larger carriers, in that eventually all turbo prop product would go away.
If, in fact, that were to occur, you would see 100 to 150 cities in this country not be able to support air service, and so there are challenges in trying to make certain that there is some sort of rationale, and especially in the case of facility design.
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We happen to be in the midst of reviewing our new regional terminal facility for Denver right now, and if you analyze the approach, the marketing department is saying they want covered jet, basically a jet-bridge-like operation that would require a push-back from the gate, clearly designed for much larger aircraft than 19-seat product, and there is no consideration being given to where the 19-seat product would fit.
So the very nature of the pressure from the consumer to focus on regional jets is going to further increase the cost of trying to maintain a safety net for small communities.
Mr. THUNE. I see my time has expired, Mr. Chairman, so I yield back. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Thune.
Mr. Coleman, let me ask you a couple of questions.
First, you have two main suggestions here in your testimony. You say, ''First, I would encourage very serious consideration of legislation to channel subsidy allocations on a more structured cost/benefit basis.'' Presently there are, I think, 89 towns or cities where they are receiving the essential air service subsidies. Do you have any kind of feel or guesstimate or estimate as to how many of those cities would be eliminated if we went to some sort of cost/benefit structure?
You testified that there are some cities and some places where they really just don't need this type of service any more, because I guess people are going to airports, or making other choices.
Mr. COLEMAN. I just think that we need to watch very closely the choices that consumers are making, themselves. I mean, consumers are looking for greater frequencies and lower fares and the most expeditious service, and so on, and I can tell you stories about people who came to our offices at DOT to urge us, on behalf of small rural communities that they represented, to try to persuade us to do more for them, and we would say during the course of the conversation, ''By the way, how did you get here?'' ''Well, we drove to wherever.'' And so you have to conclude that what they are really looking for is something other than, in a lot of cases, the Federal Government can continue to deliver.
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I think it is wise for us to be looking at whether or not, in some cases, we are just throwing good money after bad. There may be quite a few cases where service ought to be consolidated at a more regionalized area, and so I would look at that.
You know, the mayor of the city that would now be hyphenated with another community would probably look at that and say, ''Well, we are losing our air service,'' but I don't look at it that way. I look at it as you are consolidating service somewhere else that would be more useful to more people.
The short answer to your question: yes, I think there would be a fair number of communities whose own airports would no longer have their own direct air service, but there may be something better for them in the longer run.
Mr. DUNCAN. But they would have service very close by if some of this was consolidated?
Mr. COLEMAN. Yes, sir.
Mr. DUNCAN. Secondly, let me ask you, you say, ''I would urge the cooperative campaign between the Federal Government and major airlines toward incentivizing a new generation of feeder airlines.'' Can you be more specific about that and tell us what type of program you envision and how it would operate and roughly how much something like that might cost?
Mr. COLEMAN. One of the things that I had in mind there was—and one of the committee members mentioned it. I believe it was Mr. Lipinski asked the question of whether DOT is doing anything to try to reach out and encourage what I would call a ''new generation'' of air carriers.
My fantasy is that that is what the future holds. You really would like to see a fourth generation of air carriers that might come up and replace the commuter industry as we know it today.
If you look at Regional Airline Association data, you will see that there are over 100 commuter airlines that are members of that organization, and some of them do have smaller airplanes. Some of them are very tiny. There are moms and pops out there. Maybe it is time for them to try to grow into this kind of a program.
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I remember some time around 1980, when I remember my staff and I went out to look at Doug Voss' operation at Great Lakes. It was a very tiny, little airline in Spencer, Iowa, at that time, and look what they have grown into.
So part of what I had in mind here was that all interested parties—major airlines, as well as existing commuters and trade organizations, go out and try to beat the drums a little bit and try to encourage the smallest of the air carriers in the industry to get interested.
Mr. DUNCAN. You know, as in the past, airlines have graduated to larger aircraft and have abandoned smaller markets, and we have seen new airlines come along. Mr. Voss or Mr. Marcinkowski, do you see any movement in that direction now?
All the talk is regional jets are the future of aviation, and yet for some of these essential air service communities, regional jets are a little too big. Do you see trends that look encouraging or discouraging?
We have had some planes like eight-seaters, a lot of 15-seaters, in the essential air service program. Now a lot of these planes are 19-seaters. Are we seeing some movement again towards some of these smaller airplanes? What happened to all those eight-seat planes and 15-seat planes that used to be in the essential air service program?
Mr. MARCINKOWSKI. I will take one to go, if I may.
Mr. DUNCAN. Okay.
Mr. MARCINKOWSKI. Some of those planes—I am coming out of southern California, for instance. The United Express retired their 19-seaters three years ago and they went to 30-seaters, no EAS involvement, but that is what they did. The economy of scale has shifted, particularly in places like Chicago and southern California. Automatically they are trying to throw the small commuter out of San Francisco right now, but that is crazy. Communities don't have access to the large hubs.
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Mr. DUNCAN. What did they do with those planes that they retired when they moved up? Do you know?
Mr. MARCINKOWSKI. Some of those are going—
Mr. DUNCAN. Are other airlines coming along and buying those planes?
Mr. VOSS. Effectively, there is no product that has been built or developed in the last 20 years that is designed to provide regional service with ten or fewer seats. The aircraft that existed in the 1970s and early 1980s were piston-powered airplanes that consumers really didn't have an interest in, wouldn't have an interest in flying in today's environment, nor would major carriers want to be associated with that type of product quality, or what would be perceived as a substandard product quality.
Most of that equipment is now in freight operations or being used for private, personal use.
Mr. DUNCAN. So even these smaller communities where there is not much service, you are saying there wouldn't be any market there for planes of that size?
Mr. VOSS. Well, in order to generate interest in scheduled passenger travel, the product is now much, much more sophisticated than it was in the late 1970s and early 1980s in the era of airline agreements and larger carriers always having a willingness to even look at equipment that could provide five or ten passengers. Today, if you are not, on a per departure into a hub, going to be delivering 19 passengers, it is not considered to be effective use of runways, ATC, airspace, all the other congestive issues.
Under the circumstances, major carriers, which would be a key ingredient to making a flow-through product with loyalty programs of frequent flyer systems and what not, the people are going to be willing to drive substantial distances to get access to the benefits of the major carrier product. That will be the greatest obstacle to making the smaller community service work with smaller aircraft.
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Mr. DUNCAN. Mr. Marcinkowski?
Mr. MARCINKOWSKI. I kind of go on that same issue. It is correct. I would like to say thanks to the committee, particularly Congressman Duncan, who has attentive ears for cargo development. There are other things communities are looking at besides EAS. I know you kicked off that seminar down there. We were down there attending. Our committee folks—Congressmen LaHood, Lipinski, Oberstar, and Shuster, as well as Congressman Phelps and Durbin—really helped us get on track, but the committee is on track. I think that was one of the exciting things that came out of the American Association of Airport Executives' Conference. The people there are really excited about what the committee has done.
What you have in place will tide us over, so we are really urging the funding.
The competitive review coming up for airports and pricing issues is a big part of the history. If we in Decatur are charged two or three times as a local airport around us would be charged, people are going to go to the other airport. It is an automatic issue. So that is an issue that this committee has addressed.
ATC improvements are on board. It is not connected to EAS specifically, but you have got air traffic control improvements out there. If the improvements don't happen, the folks like Decatur and other EAS communities are subject to being taken out of the bottom of the picture. That is really important.
Everything the committee has done I say has been really emphasized and appreciated by the airport executives. It still needs to stay the decision process, a lot with the airline, be it a turbo prop, may need more flexibility as the R.J.s come in. That may be a trade-off. The local community discretion has to remain a viable factor in what happens.
For instance, we have Chicago and St. Louis. DOT says, ''Okay, get rid of St. Louis or get rid of Chicago.'' Well, the community may want to decide which one, if we had to go down to one, what is going on. But the process exists to take essential air service where it needs to go. Let it go out in this transition period, and I think the major airlines are a primary factor.
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For instance, you could make a requirement for someone, not a 737 going through Decatur, someone with the USAir/United merger, as DOT reviews that entry into Chicago, could say, ''Hey, put one a day through Quincy, one a day through Decatur of whatever size is appropriate.'' The major airline could make that happen. The Decatur, the Great Lakes cannot make that happen. The major airlines could. There is a method to go forward in some kind of improvement for the EAS program.
Mr. DUNCAN. All right. Thank you very much. You have been a very informative and helpful panel and we appreciate very much your taking time out of your busy schedules to be here.
That will conclude this hearing. Thank you very much.
[Whereupon, at 12:18 p.m., the subcommittee was adjourned.]
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