The Senate Commerce Committee’s Subcommittee on Aviation has scheduled a hearing to review the impact of Hurricane Katrina on the aviation industry for Wednesday, September 14, 2005 at 10:00 a.m in Room 562 of the Senate Dirksen Office Building. The Subcommittee will hear testimony regarding jet fuel markets, airport infrastructure, and Hurricane Katrina’s impact on the National Airspace System.
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Click here for video of this hearing.
U.S. Senator Daniel K. Inouye
The effects of Hurricane Katrina will impact our nation for a long time, and the decisions made by this Congress in the coming months will provide critical support to the country as we recover from this disaster. There is no question that our aviation system is critical to the success of the American economy and our capacity to compete in the global marketplace. However, this industry was struggling long before Katrina made landfall. The storm made a bad situation worse. Make no mistake, this Congress will not let our aviation system collapse. Our actions in recent years - from direct financial bailouts to generous loan guarantees - demonstrate our commitment to keep the planes flying. I have followed this issue closely, and given Hawaii’s reliance on air service, I consider it one of my leading priorities. While I strongly support a thorough examination of Katrina’s impact on the aviation industry, I hope this Committee will also consider the litany of pressing issues that this catastrophe has raised. Our citizens are hurting and their confidence in government is deeply damaged. They have many questions, and so do I. Why it is that our first responders still cannot communicate with one another? What are we doing to ensure that our cities can evacuate the tens of thousands of residents without transportation? How can we reign in gas prices and eliminate attempts to gouge consumers? What are we doing to address our growing, long-term dependence on oil? These questions get at the heart of national public policy and the very purpose of government, and all of the issues they raise are in our jurisdiction. This Committee needs to scrutinize these issues, because they directly impact the livelihood and physical security of every American: Gas prices and attempts to gouge customers: As of Monday, gas prices officially reached an all-time high, even as adjusted for inflation. There is no doubt that these astronomical prices are having a sustained, detrimental impact on our economy, not to mention the finances of every American household. We need to work with the Federal Trade Commission (FTC) to ensure that there is no price gouging involved - during this disaster or any other. Transportation assets for mass evacuation: Tens of thousands of New Orleans’ most needy residents did not have resources to flee the city, and yet assets like trains and motor carriers were not dispatched in advance to aid the evacuation. We learned that Amtrak trains, which were poised to evacuate 600 people per trip, along with other assets marshaled by the Department of Transportation, sat idle, falling victim to the Federal Emergency Management Agency’s (FEMA) disorganization. Communications interoperability: Four years after the September 11 attacks on America, our first responders still cannot communicate with one another in a crisis. This is almost unfathomable. It is a problem that must be solved immediately if we are to effectively manage the chaos of either a large-scale terrorist attack or the next natural disaster. Coast Guard’s exemplary, and independent, performance: The Coast Guard proved to be one of the few agencies that rose to the challenges Katrina presented, rescuing over 30,000 victims in the early stages of the aftermath. The Coast Guard maintains a level of independence that proved critical in its response efforts. In fact, Homeland Security Secretary Michael Chertoff appointed Coast Guard Vice Admiral Thad Allen to direct the Katrina recovery efforts. FEMA, which was an independent agency before being merged into the Homeland Security Department, is now 3 appointees removed from the President, despite its life-and-death, highly time-sensitive functions. Fuel-efficiency standards: Katrina has demonstrated, yet again, our economy’s inherent dependence on oil, both foreign- and domestically-produced. It may very well be our country’s Achilles heel, but it should not be this way. One of the most immediate and effective things we can do to remedy this dependence is to increase the fuel efficiency standards of our automobiles in a meaningful way. The technology currently exists to double our oil efficiency, and employing this technology would not only reduce our national dependence, it would reduce fuel costs for every American. The time has come to make this happen for the sake of our long-term economic strength, not to mention our long-term foreign policy. Insurance coverage: As the President discovered first hand on Monday when he toured the Gulf region, insurers are not coming through for Katrina’s victims. This industry, which is so quick to come to Congress for help when times are tough, is not doing the same for its premium-paying customers, who are in desperate need of assistance. We need to take a serious look at the way property and casualty insurers are living up to the agreements they make with their customers. This Committee has examined disaster insurance before, and we need to do so again. Given the gravity and long-term impact of Katrina’s aftermath, our Committee must address these issues. Government’s central purpose is to protect the physical and economic security of every American, yet Katrina has exposed numerous failures and vulnerabilities at all levels of government that need to be corrected immediately. We must do our part to resolve these problems before another catastrophic natural disaster or, even worse, a large-scale terrorist attack.
U.S. Senator Ted Stevens
Aviation Subcommitttee Hearing
on the Impacts of Hurricane Katrina on the Aviation Industry
September 14, 2005
Chairman Stevens Questions and Answers with Witnesses Chairman Stevens: Thank you very much, Mr. Chairman. Mr. May, one of the things we are doing on the Committee is reviewing all of the laws that apply, that come out of the Committee, and determine whether there are roadblocks in them that prevent our making waivers and doing things that would give us a chance to have some application of current revenues and current appropriations to the recovery, or use current authorities without having massive new legislation. Have you examined any of the laws, present laws about conditions or requirements under those laws that currently are preventing the airlines from taking steps that are necessary in view of the disaster and the recovery from the disaster? Mr. May: Mr. Chairman, I’ve noted a couple of things in my testimony and certainly relief on the 4.3 cents is one. We suggested to the Department of Transportation that we be permitted to impose fuel surcharges separate and apart from the actual ticket price. They took some action yesterday to put out for a notice of comment and rule making whether or not to eliminate those rules all together. We appreciate the direction that Secretary Mineta has taken on that point. I think there are a number of areas that Ms. McElroy has identified this morning that are specific to the regional side of this business, part of which is owned and operated by my carriers, part of which operates on a separate basis. We’d be happy to reexamine some specific areas in the regulatory process that may be of some benefit and submit that to the Committee as Senator McCain has suggested. Chairman Stevens: Staff informs me that last year, the airlines all together paid $15 billion in federal taxes, but they lost $10 billion overall. Have you looked again now at these taxes? You’ve asked us to suspend the one. Mr. May: Yes, sir. Chairman Stevens: The airlines are the only entity in the country that collects from their customers their cost, or at least partially, their cost of security. Have you looked at that? Should we reduce that or in anyway find someway to reduce the cost of the security program in order to free up more area for your increase in fares? Mr. May: Senator, we pay, as you have just noted, a little bit north of $15 billion a year in taxes and fees. That includes some $3 (billion), $3.5 billion a year directly to DHS, TSA. I think we are one of the only industries that directly undertakes funding of TSA and DHS. We do it through five different taxes and fees. We have seven different taxes and fees that underwrite the lion’s share of the Aviation and Airport Airways Trust Fund. I think it would be fully appropriate for this Committee to take a long, hard look at that entire funding equation and make a determination as to what ought to remain, what ought to be jettisoned, and how we can help reduce the overall impact of 26 percent on an average $200 ticket, which is far greater than any other industry in the United States pays in taxes and fees, greater even than alcoholic beverages and tobacco products, where taxes are used a disincentive to consumption. Chairman Stevens: We provided that some of the airports could take over their own security if they desire to do so. To my knowledge only one did. Have you had any contact with the airports to see whether they could take over the security and reduce the cost? Mr. May: I think that the airports have had a long-working relationship with TSA on that very issue. I think the Senator is correct that there was only one airport that took advantage of that opportunity to date. I’m not sure, Senator, that there is a huge dollar difference if it is privatized or federalized. I think the dollar impact is roughly the same. Chairman Stevens: What about your costs, the airlines’ cost, of the modernization of airlines per se, the passenger portion? That’s substantial, isn’t it? Mr. May: We find that the hassle factor, if you will, imposed by TSA is having a direct impact on our potential customers. A number of people are driving or using other modes of transportation as opposed of going through the hassle factor. At the same time, there are significant costs that get imposed on the carriers, sort of the unreimbursed costs – from catering security to direct security at airports to costs of inline EDS, etc. We have suggested for some time that we need to take a hard look at how TSA is funded and make a determination as to whether or not it ought to be through the carriers themselves, either through fees imposed in taxes or unreimbursed expenses or airport-derived expenses or through general tax revenues. Chairman Stevens: It just seems to me there are a lot of chiefs stirring this stew and I wonder if we ought to go into depth on the overall structural relationship of government to airlines. And, part of it is in the tax base and that’s hard to deal with, but I do think we ought to take really a long look. We don’t have the time now during this disaster period, but I think we ought to take a long look at totally revamping of the relationship of government to the airline system and deal with some of those taxes in a way of trying to find some way to reduce the redundancy in the management that comes from county and local and airport executives and entities themselves, the ownership concept. All of those things are leading to problems. I know I’m taking a little bit more time. I’d like to ask Mr. Miller about the problem, you said that one of the problems was as I understand it, you had to go to too many entities to deal with disasters and you would like some way to go directly to the coordinator and you suggested I think that we should go into some concept of regional pre-positioning of disaster equipment. Could you enlarge that a little bit? Mr. Miller: Yes, Mr. Chairman, what we found out is that during the immediate times following that natural disaster that there is a need for a lot of equipment, building materials, supplies, but that we have to work through multiple state agencies in order to get those supplies in there. The airports that are responding want to respond to that airport, they want to get there as quickly as they can, but there are protocols that have to be followed. As I stated, Bruce Frehlich was required to contact the Mississippi EOC, which would then contact the State of Florida or Georgia or South Carolina to initiate a request for a specific airport. We feel that if we had one point of contact within FEMA, they could be making those contacts for us. They could be asking those airports to respond. They could be issuing the mission numbers that would allow those airports to respond as quickly as possible. The state emergency operation centers are so involved in all the community-wide disaster relief that we do tend to get overrun. We do feel that to make it easier for them and for us that a direct point of contact within FEMA would help to facilitate the response from the other airports. Chairman Stevens: We’ll follow-up on that. Lastly, Ms. McElroy, all of us, at least I am not familiar with this 24 cent Highway Act provision you were talking about. Ms. McElroy: What I have been informed from the carriers is because of concerns about jet fuel, which has the lower tax rate, concerns about that being fraudulently purchased by other consumers. But, a change was made to increase that tax rate and then the airlines filed for a return of the overage that they paid, if you will, over the 4.3 cents. It’s my understanding from talking to the major carriers that they’ve been able to use ticket tax revenues owed to the government to offset those fuel payments and as a result it hasn’t caused the cash crunch it has for some of the very smaller regional airlines. I’d certainly be willing to provide you additional information, specifics. Chairman Stevens: Can you get us a one-pager? Ms. McElroy: Yes, sir. Chairman Stevens: So we can talk to the tax people – the Finance Committee and Ways and Means about that. Ms. McElroy: Yes, sir. We’d very much appreciate that. Chairman Stevens: Thank you very much, Mr. Chairman. Closing Statement Chairman Stevens: Let me interrupt you. We’ve got to go vote. David Russell here is General Counsel. We’re putting together a package now that goes to the leadership, an assessment group, and they’re going to review and try to get clearance on both sides of these rifle shots that Senator Lott is talking about – individual things we can do within the jurisdiction of this Committee to make it easier for people to deal with this disaster and the recovery that we would like to see the airlines have. If you have any suggestions at all, get them to David Russell. Those will be discussed now next Monday and it’s going to be a package that moves pretty quickly we hope. We don’t know yet, but we hope that we’ll get some support on it. But, I urge you to let us know if you think there is anything we can do to help you get through this period. One last comment – the ANWR bill was vetoed in ’96. If we had that pipeline filled now, we’d have at least 1.2 million more barrels of oil today than we have. It’s coming up now again. I would urge the industries that are affected by this lack of supply to help us convince the Congress to go ahead and do what Congress said it would do in 1980 and that is let us explore that 1.5 million acres on the Arctic Slope. At a time of the last major disaster we had 2 million barrels of oil a day in that pipeline. There’s less than a million barrels a day right now. It’s a national crime in my opinion. Mr. May: Mr. Chairman, you would note that we included ANWR in our testimony for the first time and we we’ll be happy to share our ideas with both you and Co-Chairman Inouye and his team
Dr. Tom DeFelicePast PresidentWeather Modification Association
Witness Panel 1
Mr. Frank MillerAirport DirectorPensacola Regional Airport
Airport Hurricane Recovery
Senate Panel Testimony
September 14, 2005
Pensacola Regional Airport is a small hub airport with 1.6 million total passengers and with a staffing level of 50 employees. On September 16, 2004, we were in the path of Hurricane Ivan, one of 4 hurricanes to strike the state of Florida in a six week period. Pensacola Regional Airport closed its airfield on Wednesday, September 15th, at 3:30 pm due to tropical force winds coming in advance of Hurricane Ivan, a Category III hurricane. The hurricane made landfall in the early morning hours of September 16, 2004 with 130 mph sustained winds. As the hurricane-force winds subsided in the mid-morning hours of September 16th airport personnel inspected the airfield operating environment, made repairs, and by 12:45pm re-opened the airfield for emergency relief aircraft only. Roads and highways leading into Escambia and Santa Rosa counties were impassable due to fallen trees, debris and damaged bridges; in response to this Pensacola Regional Airport was designated as the primary staging area for disaster relief supplies, filling this role for the first 4 days of disaster relief operations. During these four days a mixture of C-17 and C-130 military aircraft began major relief operations, and 24 various civilian and military helicopters conducted numerous missions from the airport on an around-the-clock basis. With temporary flight rules in place over the airport, Pensacola Regional Airport operations personnel assumed control of the airfield and issued 219 aircraft landing authorizations. Consumable materials such as unleaded and diesel fuels were a critical component for recovery vehicles and equipment but due to the airport’s limited storage capacity at the fuel farm, the airport quickly became dependent on outside suppliers after exhausting its internal reserves. This put us in direct competition with all the other requesting agencies working through the local emergency operations center. Competing with these other agencies for a finite supply of fuel was challenging given the continuous need for fuel to support electrical generators for the airfield and buildings, tenant-operated aircraft servicing equipment, and personal vehicles of key personnel such as police officers, operations and maintenance personnel, and air traffic controllers to ensure their ability to get to and from the airport. Seven airports in the southeast sent 27 airport-trained personnel to provide immediate assistance to Pensacola. The personnel were electricians, HVAC technicians, building maintenance technicians, airfield operations personnel, dispatchers, law enforcement officers and fire fighters. The amount of time these personnel stayed in Pensacola varied, but one team stayed in Pensacola for a full week. Hurricane Ivan disrupted commercial power and water to the airport for a total of 8 days; nearby hotels that were habitable were filled to capacity with displaced Pensacola residents. Immediately following the hurricane, there was an on-going demand to provide a safe and sanitary off-duty environment for the response teams for sleeping, showering and eating. The airport has an integral role in the recovery of a community, providing the airfield infrastructure to support airlift relief operations. Hurricane Ivan’s toll on Pensacola Regional Airport made it apparent that airports affected by hurricanes would be dependent upon assistance from other airports for personnel, supplies and building materials to recover and begin commercial operations. Community-wide disaster relief efforts made it difficult, if not impossible, to rely upon local assistance. Any local assistance would not be airport-knowledgeable and unable to work independently of local airport personnel. Initiated by the Savannah/Hilton International Airport, a mutual aid network is being established that recognizes the need for other airports to provide disaster relief to affected airports and thereby minimize the time to resume commercial operations. Pensacola’s experience with Hurricane Ivan also highlighted the need for a single outside point of contact or a clearinghouse for assistance. This clearinghouse coordinates the assistance to the damaged airport and thereby relieves the affected airport personnel from taking numerous calls offering assistance and to assure relief efforts were coordinated and controlled. Savannah/Hilton Head International Airport accepted the role as the clearinghouse, to receive requests for aid and to disseminate those requests to the airports in the mutual aid network. Although not fully established when Hurricane Katrina hit the Gulf Coast, the Southeast Airports Disaster Alliance Group initiated its relief efforts with Savannah Hilton Head providing the agreed upon clearinghouse services. As the relief efforts evolved Pensacola Regional Airport, as the closest fully operational airport to Gulfport Biloxi, became the logistical hub for the airport response teams going into Mississippi. We provided final briefings for navigating anticipated road detours, topped off fuel tanks, procured and loaded additional supplies, and coordinated housing with local hotels for rotating teams. Similar activities were occurring in Houston for aid to the New Orleans airport. The first lesson learned with Hurricane Katrina: One airport must serve as the clearinghouse to coordinate mutual aid assistance while a second airport becomes the logistical hub for the response teams. During the first two weeks following Hurricane Katrina the Airports Disaster Alliance Group has worked through a learning curve as it provides relief assistance to Gulfport Biloxi. Lessons learned: • The airport clearinghouse needs a direct FEMA point of contact. This point of contact must be identified 72 hours prior to the forecasted landfall and be available immediately after the storm to work with the clearinghouse to provide mission numbers for each airport sending response teams into the affected area. Mission numbers are critical to ensure teams are able to access the affected area through any ground checkpoints that may be present, to ensure aircraft can transit the Temporary Flight Rule (TFR) area established over the airport, and to ensure reimbursement protocols are established for the costs incurred by the responding airports. During the Gulfport Biloxi relief effort airports were delayed while awaiting the official calls for assistance. The Gulfport Biloxi Airport Director was required to contact his State EOC to request support from a particular airport; his State EOC then called the responding airport’s State EOC to officially initiate the request for assistance. FEMA can and should intervene to make direct requests to the airport clearinghouse, initiating specific relief requests without going through multiple state contacts, and providing the necessary mission numbers at the time of the request. • Hurricane response equipment and supplies generic to any storm event should be purchased and stored in trucks at a location in the southeast U.S., ready and available to be dispatched immediately after a storm. These trucks should be dispatched and report to the nearest airport identified as the logistical support airport and which shall serve as the base for responding teams. An on-going FEMA presence at this airport would serve as the facilitator for the airport relief efforts. Examples of supplies to be stored in these trucks include emergency generators, water, MRE’s, satellite telephones, and building supplies. • Temporary housing for the responding teams is needed to provide the safe and sanitary off-duty living environment. Response teams cannot rely on the availability of local housing. Trailers capable of housing 5-7 people with an independent water supply should be stored at the same location as the relief supplies and trucks and be a part of the supplies and equipment sent into the area for airport relief effort As the Airports Disaster Alliance Group evolves it is clear that we have the technical expertise to provide on-site and immediate relief that will help an airport recover and resume operations; but it is also clear that our efforts require federal support to provide the necessary coordination with State and local relief efforts, and to provide the necessary supplies, equipment and materials necessary to conduct disaster relief operations. Thank you for the opportunity to speak this morning
Dr. Howard K. GruenspechtDeputy AdministratorU.S. Energy Information Adminstration
Ms. Deborah McElroyPresidentRegional Airline Association
Statement of Deborah C. McElroy
Regional Airline Association
Before the Committee on Commerce, Science and
Transportation Subcommittee on Aviation
United States Senate
The Impact of Hurricane Katrina on the Aviation Industry:
September 14, 2005
Introduction and Background Good morning. Mr. Chairman and members of the Subcommittee, on behalf of the 45 airline members of the Regional Airline Association, thank you for inviting me to appear before you today to discuss escalating fuel costs and impacts on regional airline operations and Essential Air Service in the wake of Hurricane Katrina. I am Deborah McElroy, President of the Regional Airline Association, or RAA. RAA represents regional airlines providing short and medium-haul scheduled airline service connecting smaller communities with larger cities and hub airports operating 9 to 68 seat turboprops and 30 to 108 seat regional jets. Of the 664 commercial airports in the nation, fully 479 are served exclusively by regional airlines. This means, at 72 percent of our nation’s commercial airports, passengers rely on regional airlines for their only source of scheduled air transportation. Of those communities, 99 communities in the lower 48 states as well as three in Hawaii and 33 in Alaska receive subsidized air service by regional carriers through the Essential Air Service Program, or EAS, which was enacted as part of the Airline Deregulation Act of 1978. The EAS program was crafted to guarantee that small communities served by certificated air carriers before deregulation would maintain a minimum level of scheduled air service after deregulation. The program has been in effect each year since 1978 at various funding levels and through several eligibility criteria adjustments that take into account distance from nearby hub airports and other factors. Most recently, in Fiscal Year 2005, the EAS program was funded at $104 million. The House appropriation for FY06 was $105 million and the Senate Appropriation at present stands at $110 million. RAA estimates the program will need a full $127 million in order to function as enacted during FY06 and we remain committed to working with Congress to ensure that the larger EAS appropriation – critical for the program – is enacted. With your permission, I will return to this topic. First I would like to discuss some characteristics of regional airline service. Many of you already know that the majority of regional carriers operate in partnership with the major airlines under code-sharing agreements. In fact, in 2004 99 percent of the 135 million passengers transported by regional carriers traveled on code sharing airlines. Code sharing agreements, which provide benefits for passengers, regional and major airlines, have two broad methods of revenue sharing. The first, prevalent among larger regional carriers operating regional jets, occurs when a major and regional airline enter into a “fee for departure” or “capacity buy” agreement where the major compensates the regional airline a predetermined rate for flying a specific schedule. Within this arrangement are mandatory standards for customer service, on-time performance and baggage handling requirements and incentives rewarding excellent performance. A second arrangement, common to smaller, turboprop operators, occurs when major airlines pay regional airlines a portion of passenger ticket revenue. This is referred to as “pro-rate” or “shared revenue” flying. While regional airlines with pro-rate agreements are most vulnerable to cost increases and the recent fuel cost crisis, it is important to note that fee-for departure carriers also suffer when fuel costs increase this dramatically. Even if the regional airline is compensated by the major airline for fuel costs, the majors must take those increased costs and the market’s profitability into consideration when route and capacity decisions are made. Major carriers have no choice but to eliminate regional routes that lose money for long periods, even if those routes contribute some connecting revenues to the mainline system. As you know, most of the major airlines are experiencing some of the most daunting challenges in the history of the industry. They cannot afford to continue unprofitable routes and when this service is discontinued, regional airlines and passengers in small communities suffer as well. With jet fuel costs expected to rise by more than $9 billion this year, regional airlines are being hit hard. In July 2005, jet fuel averaged $1.66 per gallon – 52 cents more than in July 2004. According to one RAA member, this meant that the 592 gallons of fuel required for a 40 seat regional jet to fly approximately 600 miles cost $1,024 in July 2005 compared with $600 just one year before. The effect of Katrina has produced an even more dramatic jump in fuel costs so that even with load factors at an all-time high, the U.S. airline industry collectively is struggling financially due to the unprecedented jump in oil prices and an even more dramatic increase in the price of jet fuel. Regional airlines are providing critical service to smaller communities with airplanes that use much less fuel than larger aircraft. Turboprop aircraft are among the most fuel efficient aircraft for short-haul routes and RJs have some of the most modern, fuel efficient engines in the airline industry. Like our major airline counterparts, regional carriers have sought to minimize fuel burn by tankering fuel, lowering cruise speeds, safely altering approach plans and reducing onboard weight, making every effort to manage escalating fuel costs with an eye toward conservation. Nonetheless, fuel now ranks as the second highest cost for airlines, ranking just behind labor. Regional airlines with both types of compensation arrangements are certainly feeling the strain. But Essential Air Service carriers, whose rates are set at two-year levels by the Department of Transportation (DOT), are seeing major troubles as well. There were problems before Hurricane Katrina devastated the gulf coast on August 29, 2005, but that tragedy has made a bad situation even worse. Hurricane Katrina Fuel costs were already devastatingly high for U.S. carriers before Hurricane Katrina crippled oil and gas operations in the Gulf Coast and shut down most of the output from the region. Because my colleague from the Air Transport Association went over these numbers in detail, I will focus on service impacts, except to underscore the fact that Katrina initially wiped out 19 percent of domestic refining capacity, including 13 percent of the nation’s daily jet fuel production. Further, oil imports are down 10 percent because of Katrina’s extensive damage to Louisiana's major oil-import terminal. By September 1, jet fuel prices had risen 49 cents per gallon to $2.36, from $1.87 on August 17. While recovery efforts and action by various federal agencies have led to the price of jet fuel being $2.00 per gallon today, this cost remains untenable for major and regional carriers alike. Some lawmakers have suggested that carriers pass along fuel increases to passengers. But competition has not become less intense just because fuel prices have skyrocketed. In fact, regional airlines compete not only carrier to carrier. In short-haul markets, we compete with the automobile. Data from the most recent DOT Inspector General’s “Aviation Industry Performance” report indicates that scheduled flights in markets of 249 miles or less declined 26 percent when you compare July 2005 to July 2000. For regional airlines, significant fare increases can mean significantly fewer passengers. Business passengers, who constitute more than 65 percent of regional airline travelers, have embraced advances in communications technology, making traveling more elective than ever and highly price-sensitive. Airlines may be able to enact fuel surcharges, but these surcharges would still fail to recoup the losses incurred due to the recent spike in fuel costs. Further, given the numerous differences in pro-rate agreements for smaller regional airlines, it is likely that the increase in revenue from their pro-rata portion of the fuel surcharge would not fully compensate them for their increased fuel costs. Essential Air Service The Essential Air Service program is administered by the Department of Transportation, where “best and final” competitive proposals are submitted by regional carriers. The Department selects carriers and establishes EAS subsidy rates based on that bidding process. If a carrier is the only airline serving an EAS eligible community and wishes to exit the market, DOT regulations require it to file a 90 day service termination notice. DOT may hold that carrier in the market during this period, while a subsidy eligibility review or competitive bidding process is undertaken. Likewise, carriers operating EAS subsidized routes must also file a 90 day service termination – subject to even more onerous hold-in policies – in order to trigger a renegotiation of rates if costs increase significantly during the lifetime of the rate agreement. As part of the EAS application process, carriers negotiate in good faith with DOT on subsidy rates that remain in effect for two years. As part of the competitive bidding process, EAS carriers must project costs and profits over this two-year timeframe – no easy task in today’s volatile cost environment. In cases of unexpected cost increases, EAS carriers have no tool to renegotiate rates and must instead enter into the unpalatable process of filing notice saying that the carrier intends to terminate its service in 90 days to begin the process for seeking compensation rates that cover their increased costs. This inevitably causes ill-will between an airline and community, in some cases fostering a sense of unreliability that ultimately undermines the use of the air service and further drives up subsidy rates (as fewer passengers traveling causes air fares to climb). And the process also forces carriers to operate at a loss for 180 days while DOT reopens the competitive bidding process. This is true despite a cornerstone of the original EAS law which provides that no carrier should ever be forced to serve any community at a loss. During deliberation of Vision 100, the most recent FAA Reauthorization bill, Congress noticed the destructive effects of rising fuel costs on the EAS program. Under the leadership of this Subcommittee, Section 402 of Vision 100 included a provision giving DOT flexibility in its rate-making process in those instances where carriers experienced “significantly increased costs.” With an eye to preventing deliberate cost underestimation, Congress included an index where “significant increase” is defined as a 10 percent increase in unit costs that persists for two or more consecutive months. Unfortunately, DOT has declined to use the tool Congress afforded it to reconcile fuel cost increases and EAS subsidy rates, citing the need for a specific appropriation. As a result, carriers are losing money on EAS routes in unprecedented numbers. As just one example, in July 2004, the fuel cost for a Beech 1900 on a one-hour (block time) flight was $133.41. In July 2005, the fuel cost had increased to $202.12, nearly 52 percent higher. Only two months later, for the week ending September 2, fuel costs for that flight were $272.51, up 35 percent from July. These figures utilize jet fuel purchasing formulas commonly employed by regional airlines, based on cost data tracked in the Energy Information Administration’s Weekly Petroleum Status Report. It is important to note that these figures calculate base fuel cost only – they do not include “into plane fees” and federal, state and local fuel taxes. The overall losses across all EAS carriers are staggering and the program, as we know it, is in jeopardy. In fact, we estimate that current fuel cost increases for all carriers in the program will drive up program costs significantly even if not one more community becomes eligible in the next fiscal year. Yet, according to the DOT website, there are currently 60 EAS-eligible, single-carrier markets which could come into the program. (While more than 60 communities are technically “eligible” I am referencing those that received service pre-deregulation and do not meet other disqualifying factors such as distance to nearby airports). Of those 60 communities, anywhere from 15 to 30 could begin to require subsidy should the carriers file termination notices. Given the significant reductions in small community service and substantial cost increases affecting the airlines, it is reasonable and responsible to plan for more than half of all eligible communities to soon require subsidy. Under even the most optimistic scenario, therefore, the DOT will need at least $127 million in Fiscal Year 2006, to run the program. This Appropriation should also contain a line-item directing DOT to utilize the rate-adjustment tool afforded by Vision 100 to accommodate dramatic fuel cost increases. Early versions of a Senate appropriation sought to fix this problem by prohibiting newly eligible communities from collecting subsidy; yet such a prohibition runs counter to the original intent of the law, which guarantees air service to eligible communities. RAA stands ready to help Congress enact further EAS program reforms as the next FAA reauthorization takes place. We are eager to discuss a rewrite of the eligibility criteria, realizing that some rules set nearly three decades ago no longer apply. Nonetheless, the most important thing Congress could do right now to help passengers in EAS communities and the airlines is to release the full authorized amount of $128 million for the EAS program in FY06 and to require DOT’s cooperation in making real-time rate adjustments for cost increases. Request for Congressional Action • Considering the staggering impact that increased fuel costs have brought for U.S. regional and major airlines alike, RAA requests, along with our colleagues at the Air Transport Association, that Congress provide a tax holiday on the $4.3 cents-a-gallon tax on jet fuel. Further, we request that any fuel surcharge charged by carriers be exempt from the existing 7.5% passenger ticket tax. • We further request that Congress reconsider changes to the jet fuel tax rate that were made as part of the American Jobs Creation Act enacted last year and the additional proposed change included in the Highway bill that would require airlines to pay 24.4 cents up front for fuel purchases and file for a rebate from the Internal Revenue Service (IRS). This system, which places the burden on airlines to apply and wait for a refund of the difference, with tax on jet fuel at $4.3 cents per gallon, is causing a severe cash crunch for smaller regional airlines. Changes already implemented by the American Jobs Creation Act brought the upfront costs to 21.4 cents per gallon with the highway bill poised raising the burden even further. Regional airlines do not have any ticket tax payments to offset the fuel tax payments because, in modern code sharing relationships, we do not issue the tickets. We urge you to amend the law and, in the interim, to require IRS to refund the taxes on a monthly basis. This tax and refund procedure places a tremendous burden on airlines and impacts cash flow at a time when carriers are already struggling mightily from fuel costs. • Finally, we urge you to work with your colleagues on the Appropriations Committee to educate them on the need to appropriate the full, authorized amount of $127 million dollars to keep the important EAS program afloat during this period of dramatic fuel cost increases. The fuel cost increases resulting from Hurricane Katrina have further injured the financial state of EAS carriers who, without rate adjustments and compensation for increased fuel costs, cannot continue to sustain service at a loss. Only a full appropriation of $127 million can prevent service losses at multiple EAS points across the nation. Conclusion Thank you for the opportunity to testify on this important issue today. I look forward to responding to your questions at the conclusion of the panel.