Copyright 2002 Federal News Service, Inc.  
Federal News Service
September 24, 2002 Tuesday
LENGTH: 29275 words

HEADLINE: HEARING OF THE AVIATION SUBCOMMITTEE OF THE HOUSE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
 
SUBJECT: FINANCIAL CONDITION OF THE AIRLINE INDUSTRY
 
CHAIRED BY: REPRESENTATIVE JOHN MICA (R-FL)
 
LOCATION: ROOM 2167, RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: DONALD CARTY, CEO, AMERICAN AIRLINES; LEO MULLIN, CHAIRMAN, DELTA AIRLINES; PHILIP BAGGALEY, MANAGING DIRECTOR, U.S. INDUSTRIALS, STANDARD & POOR'S; JOSEPH LEONARD, CEO, AIRTRAN AIRWAYS; ED WYTKIND, EXECUTIVE DIRECTOR, AFL-CIO, TRANSPORTATION TRADES DEPARTMENT; AND RICHARD ANDERSON, CEO, NORTHWEST AIRLINES
 


BODY:
REP. MICA: (Sounds gavel.) Good morning. I'd like to call this hearing of the Subcommittee on Aviation to order. Welcome, everyone.

And the subject of today's hearing is the financial condition of America's airline industry. The order of business will be as follows: We will begin with opening statements from members, and I will recognize members accordingly. We'll move from that to -- I believe we have just one panel today -- everyone on one panel. We'll recognize our witnesses, then go to questioning.

We'll begin today's proceedings with my statement. Ladies and gentlemen, I think as we all know, America's aviation industry cannot and should not become the final victim of the September terrorist attack on our nation. Unfortunately, as we meet here today, the majority of our American airlines face severe cutbacks in operations, some staggering and historic losses and even bankruptcy. The events of September 11th dramatically impacted an industry that, unfortunately, was already facing financial difficulty. Today's hearing will focus attention and seek, I hope, some viable solutions to the enormous challenges facing our airlines.

Air travel has, in fact, become part of the American way of life --even a special part of the unique freedoms we as Americans enjoy and sometimes we as Americans take for granted.

Our aviation and air passenger service has also very closely woven itself into the very fabric of our nation's economy. American businesses, tourism and just ordinary citizens use our air passenger service as a routine and vital link to carry out their travel, an essential transportation that makes our United States economic engine, in fact, run.

Each day somewhere in the neighborhood of two-thirds of all of the world's air traffic and passenger service takes place just in the United States. Millions and millions of jobs depend on this industry. And that's why I believe this hearing today is especially important.

In the past year, our major airlines have lost between $7 billion and $8 billion. Hundreds of thousands of jobs have been lost, and the industry -- major airlines have lost some 90,000 jobs. Air travel in my area -- and I represent Florida; Florida is so dependent on tourism, and its air travel and tourism is down some 8 to 9 percent.

Some airlines, with these staggering losses, are on the verge of collapse, and, in fact, at the end of their ability to seek conventional financing. They do need our help. But let me say, quite frankly and firmly today, there will be no bailout. Let me repeat that: There will be no government bailout.

That being said, I believe that we have an obligation, as the federal government that sets policy for the industry, to look for ways in which we can, in fact, assist this beleaguered industry. Okay, so then we ask ourselves, what can we do?

First of all, if we take even an elementary examination of our airline books, the financial sheets, that, in fact, will reveal some startling information that liability and insurance rates are one of their primary costs of doing business, and they have absolutely skyrocketed.

Some airlines, before 9/11, were paying several million dollars per year for this insurance coverage. Now they're paying hundreds of millions of dollars, and some can't even find available coverage. So we must examine capping liability and extending important war-risk coverage. And I think that needs to be done on an immediate basis.

We must also review some of the non-productive security mandates that are still imposed on airlines, even after the federal government has federalized aviation security. Airlines need financial questions to be answered relating to some of these security costs. We've required hardened cockpit doors, and a question remains about payment reimbursement, reimbursement for screening equipment that has literally been confiscated by the Transportation Security Administration, property that these airlines own, and other non- reimbursed expenses for security.

Security is extremely important, and we're not going to back away from any of our security requirements. The question is, how do we fairly assess those costs?

Also looming is the prospect of a war in the Middle East. Unfortunately, with 60 percent of our oil now coming from imported sources, a conflict in that region could spike, dramatically spike, aviation fuel prices that, in fact, could substantially impact the already bleak bottom line of our industry's balance sheet.

Today we need to listen to industry leaders and also the experts that we've assembled so that we can learn what solutions and what remedies, in fact, make sense. We must also take care to protect taxpayers' interests in this whole process and also be sensitive to the millions of jobs so dependent on this vital industry to our nation.

It's quite a responsibility, I believe. I don't think we have an option other than to succeed. We can't fail.

With those comments, I'm pleased to recognize the ranking member of our subcommittee, the gentleman from Illinois, Mr. Lipinski.

REP. WILLIAM LIPINSKI (D-IL): Thank you, Mr. Chairman. I've served on this subcommittee for the 20 years that I've been in Congress, and I don't think there's ever been a more important hearing. Based upon the testimony that I have read, the American aviation industry, the finest in the world, is really in a very, very critical stage. And I think that there's a number of things that have to be done and there's a number of things that can be done. And I think it's the responsibility of our subcommittee to get those rolling.

With those words, I'm going to yield the balance of my time to the ranking member of the full committee, the gentleman from Minnesota, who has been on this subcommittee even longer than I have, Mr. Oberstar.

REP. JAMES OBERSTAR (D-MN): I thank the gentleman from Illinois and you, Mr. Chairman, and Mr. DeFazio, for working to bring this hearing together.

"Failure of an established carrier can have a domino effect throughout the air transport issue, the aerospace industry and the whole economy. The harmful effects of recession and high fuel prices pale in comparison to the destructive competition in the industry today" -- words said at a committee hearing in 1981.

"Today we begin again hearings on the financial condition of the airline industry, a subject this subcommittee has visited and revisited in the past" -- words I said in 1993.

And again, in 1995, referenced at a subsequent hearing on the financial condition of the airlines, "Ninety-three and '94 were years of good performance for the national economy, but that one or two years cannot overcome the succession of disasters that befell this industry, with cumulative losses of $13 billion that cannot be overcome in one year of profitability" -- words I expressed in 1995.

It seems about every few years this committee might not have a whole lot to do if we didn't have financial problems in the airline industry. We continue to revisit it and we continue to try to find ways to address their problems.

Clearly, back in '93, had we enacted legislation to regulate leveraged buyouts and establish fairness in competition with computer reservation systems, many of the years of losses would have been less damaging or maybe not years of losses for certainly some carriers in the industry.

But act we must, and address these questions we must, because upon this industry represents about 9 percent of our gross domestic product, about a $700 billion sector of the national economy, rests the quality of life in the nation's communities, communities that we all represent, the jobs in those communities, the mobility of this nation, the movement of people and goods.

Now, we will hear from our airline representatives today that this industry is loaded with tax burden. They'll cite the airline ticket tax and the passenger facility charge and the security fee that is being imposed and the costs and the funds that they have committed in this committee hearing room a year ago to pay their fair share of security upgrades in the industry.

But they also should be telling us and telling the public the benefits that come from the airline ticket tax that the passenger pays, in the end, of upgrading our air traffic control system, modernizing the technology of air traffic control, the speed of the flow of aircraft through our system.

They should also talk about the benefits of the passenger facility charge that have upgraded taxi ways, runways, terminals, made airports easier to pass through for air travelers, about the fee they properly collect for collecting the fee, and the (float?) that they get for collecting that fee.

There are substantial benefits from all these charges that the airline industry bears, and air travelers pay a very large portion of the cost of our air traffic system and of its security. I think more ought to be paid from our national defense authorization in appropriations for the security at nation's airports, substantially more. This is, after all, a national defense initiative.

The attack on Pan Am 103, the attack on TWA on the runway in Cairo, the attack on the World Trade Towers and the Pentagon, was not an attack on U.S. carriers; it was an attack on the flight of the United States and the federal government. The defense budget ought to pay for substantially more security costs than we are paying.

And if there's one initiative that we can take and I think should take is, in view of the impending war -- clearly the president is intent on getting us into a conflict with Iraq, and whatever your views on it are, the point is that in the aftermath of the launch of Desert Storm, fuel prices didn't just increase; they doubled. And passenger traffic over the Atlantic into the Middle East dropped by over fifty percent. Now if your main cost doubles, and your main revenue source drops in half, then you got a serious problem, and they did and they lost eight billion dollars in roughly a year.

So we ought to provide some sort of a fuel hedge, seems to me. The best thing the president could do is negotiate with those who are going to benefit from another Gulf War ought to negotiate a hedge of quantity of fuel at current average prices, so that we don't drive this industry out of existence, and remember the further lesson of the Gulf War is that our civil reserve air fleet, aircraft were carrying passengers and equipment into the Middle East and coming back empty, while their competition, El Al and Lufthansa and British Airways and others, were in the Middle East bringing passengers to the United States that our carriers were not allowed to carry. So not only did you not -- did you lose commercial traffic; you also lost the back haul on a military mission. Those issues ought to be addressed as well.

I look forward to the witnesses' testimony this morning and to seeing if there are some steps we can take to ease the pain that certainly lies ahead and the current burdens that the industry is experiencing, from recession, downturn in the national economy, the fears of the traveling public coming back.

But I also would like to just quote my good friend and colleague, Mr. Clinger, at our '93 hearing. "For reasons I find difficult to comprehend," he said, "carriers seem unable to muster the discipline to reasonably price their product" -- something members at the table have to contemplate.

Thank you, Mr. Chairman.

REP. MICA: I thank the gentleman. I'm pleased to recognize the former chair of this panel, the distinguished gentleman from Tennessee, Mr. Duncan.

REP. JOHN DUNCAN (R-TN): Well, thank you, Mr. Chairman. I thank you and Mr. Lipinski for calling this very important hearing, especially important at this time. There are no easy businesses, but I think that running a major airline is certainly one of the most difficult businesses in this world.

There are so many things beyond the control of the airlines themselves that have such great effect on the operation of these businesses. Weather is a big factor; oil prices; personnel and human factors; so many things that can't be easily controlled or controlled at all.

And I noticed in Aviation Daily just this morning, they said -- it was referring to some airline stock prices being at a 20-year low, quote, "due to rising oil prices and threat of war in the Middle East." I wish that we weren't going to war in the Middle East, and I don't really think we should at this point, but that decision -- realistically that decision has been made, and so we have to all get ready for it. But certainly that's going to have a big effect, especially at this time.

Another thing that makes this industry so difficult is that -- is the public perception. I've said before that if somebody has -- if 99 out of 100 flights that people go on are good flights, on time, early and so forth, and they have one real bad one, the one they'll talk about to everyone is the one bad flight that they had. And so that is harmful.

But I think people need to realize that a significant portion of the good life that we have in this country is because we have had the best and strongest and most efficient aviation industry in this world. And I think that we all owe a great debt of gratitude to the men who are here on this panel today and to the companies they represent, and we need to try to find realistic ways that we can to help them through this extremely difficult period.

I do agree with the chairman, however. There can be no bailout. We're facing -- unfortunately we're facing a deficit of -- I've seen two official estimates, $157 billion and $165 billion. That deficit is going to go up because of the costs of the war. And so the chairman is right; we can't do any major or direct type of bailout. So we need to look for other ways. Taxes may be one.

I personally think that -- and I said at the first, if you go overboard on security measures, you're giving unnecessary victories to the terrorists. And I think we've gone overboard with the Transportation Security Administration. Before the events of 9/11, the tragic events, we had 28,000 or 29,000 screeners. They told us we'd need to go to 33,000.

Then, almost as soon as we passed that bill, they said 40,000. And then a few months later they go to the staff of the Appropriations Committee and say they need 72,000 employees. They did scale that back down to 67,000. And everyone in the Congress, I think, was so shocked by that that the Appropriations Committee came in and put a ceiling of 45,000.

But just to show you how it works, at the Knoxville airport there was a front-page story that said we're going to go from a force of 70 to 75 screeners up to 160. That is totally ridiculous. I had just yesterday, flying out of Knoxville, an employee of Congressman Jenkins said she missed a 7:00 flight yesterday morning because there were 22 screeners there and it took so long for her to get through security. And surely we need to get some common sense back into the operation of this security business at the airports so that we at least decrease the hassle factor.

But I'm looking forward to hearing the suggestions of the witnesses today. We've all got to work together to do what we can to help this very vital industry through this very difficult time. And I commend you, Mr. Chairman, for what you've done. And I want to work with you and Mr. Lipinski to help ensure that we have a strong and vibrant aviation industry and airline industry for many years to come.

Thank you very much.

REP. MICA: Thank you. I'm pleased to recognize Mr. DeFazio.

REP. PETER DEFAZIO (D-OR): Thank you, Mr. Chairman. Thanks for holding this hearing and appreciate the witnesses being here today.

I believe that this committee would have been here today with this or a similar group before it inevitably without 9/11. So I'm not going to say that the immediate and long-term problems of the airline industry are a result of 9/11. They were in a dramatic downturn, losing money before 9/11. It made things worse. And some of the things we've done since 9/11 as a reaction have made things worse, and we need to deal with that. And I would hope that that will be addressed by the witnesses and by this committee.

But I think what we're confronted with here, really, is the ultimate failure of the promise of deregulation. We were going to have huge, you know, selection for passengers. Everybody would have multiple airlines to choose among. Prices would come down. We'd all benefit. What a tremendous day this would be.

But then the large incumbent carriers, of course, felt threatened by the new entrants, so they developed an extraordinarily expensive system of fortress hubs and spokes. Yes, it was to provide efficiency, but it was also to drive out the new entrants and dominate the industry.

And it is unbelievably expensive to maintain. The majors still have a market advantage. They still get higher revenue per seat mile, especially with their unbelievably opaque pricing system; again, a product of deregulation, which nobody understands. An airline can have as many as, you know, 150 seats. It could have 30 different fares on that one plane, every fifth passenger paying a different fare.

You know, so there are -- these problems have been created; extraordinary dependence on business travelers. Business is in bad shape. The dot-com boom has evaporated; corporate corruption. Maybe there's fewer of these guys flying around on their corporate jets. But the people they used to employ don't have jobs, so they aren't buying the business tickets. So we've created an extraordinary dependence there.

Again, these are longer-term problems and structural problems of the industry. And I think it raises questions, particularly representing a district with the second-largest city in my state, of whether or not we're going to continue to have a system of universal air service.

I believe it's absolutely essential and in the public interest of this country that we maintain a universal system. But can we maintain it with the current system of total hands-off deregulation? I believe not. And I believe that that's a longer-term issue that this committee is going to have to revisit.

Yeah, we have the totally lame essential air service program that provides buses for people to get to airports or something in a few cities. That is not getting to the heart and the issue of universal air service, which is evaporating for too many Americans.

Yeah, if you live in one of the 10 major cities or one of these areas that isn't a totally dominated hub, you may have seen some benefits from deregulation, but most Americans haven't. And this committee has got to begin to investigate these issues and look toward a longer-term solution.

But before us today, and more immediately -- and I hope and I know the witnesses will address the immediate results of 9/11, the additional costs that come from that, the costs of security. I think it's a fair question. Who pays for security, if you can maintain a system of universal air service, whether or not it should be paid solely by the passengers or principally by the passengers, is a legitimate question to debate.

The issue of insurance -- of course, insurance is the only industry, aside from professional sports in this country, that's exempt from anti-trust law. So the airlines, like everybody else in America, is getting screwed by the insurance companies, but that's not new.

It may be a bigger question than this committee can deal with, but some sort of interim measures by the federal government to help with the cost of terrorism insurance and maybe a longer-term solution of dealing with the price-fixing and price-gouging by the insurance industry; again, beyond this committee.

The inefficiency of the current security system, the so-called hassle factor, which is attributed to be a large cost, is certainly something this committee ought to be able to deal with with effective oversight. It's been quite some time since we hauled those responsible in the administration for administering the system in here, to rake them over the table a little bit and ask how we're going to make this work a little bit better.

So I think there are some extraordinary questions before us today. But just back to my original point, we would have been here.

We were headed here before 9/11. This is an industry that is plagued with structural and long-term problems that we need to address. Certainly the things we're going to take up today are important for the short-term survival, but they will not assure the long-term survival of a system of universal access to aviation service in this country.

Thank you, Mr. Chairman.

REP. MICA: Thank the gentleman.

Let me recognize Ms. Kelly. Mrs. Kelly.

REP. SUE W. KELLY (R-NY): Thank you, Mr. Chairman. And I thank the witnesses for being here today.

I think the critical importance of this industry to our overall economy is pretty well understood by this committee. If there's things that must be done now to ensure that our jobs are protected and that the aviation system remain viable, I think we need to explore all those possibilities. But we in Congress I don't believe can place ourselves in the situation where we're simply propping up business models that don't reflect market reality. I don't think we should be preoccupied with short-term fixes while fundamental flaws in this industry are allowed to exist and fester.

People have spoken here about security and the long lines in security and the lack of the business models being able to sell as many tickets as they have in the past. Yes, the economy is down. Yes, there are long lines in security. But quite frankly, I am a person who has had someone, while I was passing through security, steal things from my luggage. I'm not the only person who has had that happen. I'm not the only person who has had some other problems with regard to getting tickets. I can no longer get a ticket from one of my local travel agents; I have to do it on line. I can't get a cardboard ticket.

There are things that I believe the industry itself needs to look at to change these business models. When they come to Congress asking us for more money, I think we need to work on it. I hope we can work together to find ways to address the difficult circumstances that the airlines find themselves in right now. I think we need to protect the jobs. And I think it makes sense for us to work together, but I wanted to see, hopefully, some strong changes with regard to the way airlines are doing business. I think it's very important that we all -- that we take steps to make sure this is a stronger, more resilient industry that better meets the needs of the flying public.

So I look forward to your testimony, and I thank you, Mr. Chairman, and yield back the balance of my time.

REP. MICA: I thank the gentlelady, and recognize the gentlelady from the District, Ms. Norton.

DEL. ELEANOR HOLMES NORTON (D-DC): Thank you, Mr. Chairman. This is a most important hearing to hold, and I appreciate your convening it, especially at this time. I regard this as one of the two or three most important industries in the United States.

One of the reasons -- it was indeed one of the reasons why I fought to be a part of this committee, not only, of course, because of what the industry itself does, but because it has incredible ripple effects throughout the economy. Certainly you cannot be a great power -- we used to say -- without having a lot of airlines; now we're getting to the point where we're going to perhaps say you can't be a great power without having at least one airline. (Laughs.) I mean, are we coming to that? And I think that this hearing is important to make us focus on what appears to be the collapse of much of this industry. We had to rescue this industry after 9/11. As my good friend, Mr. DeFazio said, however, it needed rescue way before 9/11, only it's the kind of rescue the government does not and cannot give industry.

I have an incredible conflict, so I'm going to double back, but I need to leave before the committee an important issue that I think only I could raise, because it arises in this region. The president has a bill called Leave No Child Behind. Well, we've left a little section of the industry behind.

And I just want to bring it to the attention of the committee while I am here. General aviation in this region has been down since 9/11 -- that is to say, private planes coming in and out. Now understand that this a region where the government of the United States is located, and it is the region that is one of the economic engines of the entire country. It is a region that was hit hard by 9/11, so obviously, not having general aviation really hurts in such a critical region. Understand that general-aviation private planes can fly from Baltimore, from Dulles, and are up everywhere in the country, including New York, where the twin towers are (sic) located. This is irrational.

But if we do no take hold of an issue like this, security officials will rule the day. And the Secret Service wanted National Airport closed permanently. It is only because regional members of the House and Senate made everybody look closer, think deeper. And of course, National Airport has been opened after a three-week closure. The company that runs general aviation here fortunately has other -- operates out of other airports, as well. So it's up and running. God help the minority contract that trade went to as the contractor for National Airport, because he is compelled to keep general aviation open here for the convenience of the government, so that public officials of the federal government can fly in and out, for governors of the states to -- can come here, getting not one penny, of course, in the normal course of business. It's an untenable situation.

The -- (inaudible) -- of the federal government -- they're taking, if ever I've seen it -- we've written -- we in the region have written letters when Secretary Mineta, when officials in the TSA, when officials of the FDA have come here. We have cross-examined them. At the present time, I'm in the process of organizing a letter from senators and representatives in the region to the president of the United States. I think only when civilian officials take control of a security issue instead of leaving it entirely to security officials do we move forward with commerce and with life as we have known it. I draw this to your attention not because it is a major -- has a major effect on the industry but because it is important to raise this issue in order that it is, in fact, attended to. We don't believe there's any region -- reason for general aviation to be closed here. The industry has said it will abide by any rules and regulations, no matter how stringent.

A rule came forward in May. And then the security people got into it and said, "What if," and the rule was never issued.

We cannot allow industry or any part of it to be shut down by security officials without forcing them to come forward and overcome the presumption that industry should be open. And if they can't overcome it, then of course we always go with security. I may well be seeking the bipartisan assistance of this committee in the future. I thank you.

REP. MICA: I thank the gentlelady, and as she'll conclude, I'll be glad to sign her letter to the president, because I agree with her on the issue.

Let me recognize the gentleman from Georgia, Mr. Isakson.

REP. JOHNNY ISAKSON (R-GA): Thank you, Mr. Chairman. Out of respect for our guests and also the importance of their testimony, I'll defer any statement to the questioning time, except to welcome them and in particular Joe Leonard of AirTran and Leo Mullin of Delta, whose companies and their individual leadership contribute tremendously to the economy of my state, Georgia, and in fact the economy of the entire country. So welcome to all of you.

REP. MICA: I appreciate the gentleman's brevity and recognize -- hopefully for shorter statements -- first the lady from Texas, Ms. Johnson.

REP. EDDIE BERNICE JOHNSON (D-TX): Thank you very much, Mr. Chairman, and thank you for your leadership in holding this hearing. I will file my complete statement --

REP. MICA: Without objection, that will be made part of the record.

REP. E.B. JOHNSON: Thank you.

REP. MICA: Ms. Tauscher -- Ms. Tauscher, since she's yielding, we'll go to you.

REP. ELLEN TAUSCHER (D-CA): Thank you, Mr. Chairman.

Welcome, gentlemen.

I think it's very, very important that we continue our dialogue to find out what we can do to make better what was a system that I think was a business model that was broken on September 10th -- I don't think irreparably fractured, but certainly got onto the disabled list, perhaps permanently, after September 11th. And I think there's many things that we need to do, much work we need to do.

My concerns are obvious. I'm concerned about people in my district in Northern California that are getting furloughed. I'm concerned, obviously, about the exorbitant security costs of airports in Northern California, where they can't figure out how to put security machines that are too heavy for the floors, and they can't figure out how to route passengers, and they can't figure out how to pay for it. So you're not the only one that's trying to figure out how to pay for things.

And here in Congress, where we have a 435-member frequent flyer club called Congress, we, I think, understand perhaps better than anyone else how important your industry is to the economy and the psyche of the American people. Mobility is a cornerstone of our rights as an American people, and it clearly has fallen to its knees subsequent to September 11th, but I think that it's important that we get on with this hearing. It's important that we hear from you.

I have supported a number of the different stabilization packages, but my concern continues to be that as someone who spent 14 years on Wall Street, I can't put the thumb of Congress on the scale to provide for airlines that had financial problems on September 10th unless I see some tremendous change in the business models and some optimistic positioning for the future. I can't use American taxpayer dollars to fix things that shouldn't be fixed because the markets aren't working. We need to return to a time when we have markets that are rational and make sense and we have cost effectiveness. So, I hope that we can all work together on that.

Mr. Chairman and Mr. Lipinski, I thank you for the hearing. I yield back.

REP. MICA: Thank the gentlelady. The gentleman from Texas, Mr. Culberson.

REP. JOHN CULBERSON (R-TX): Thank you, Mr. Chairman. We want to thank you for putting this hearing together. It's vitally important, I think, for all of us in Congress to hear this testimony, and I will be very, very brief. I do want to compliment the witnesses and in particular Mr. Mullin and Mr. Carty's testimony.

And I -- but I want to draw the committee's attention in particular to Mr. Mullin's testimony beginning on page 10 where he points out quite correctly, in agreement with my colleague from California's statement that it is airline management's responsibility to deal with the marketplace factors in the current crisis. But I want to emphasize it, certainly from my perspective, and I hope the entire committee will focus on what we can do in Congress to lessen the burden of excessive taxes, regulation, the -- all the taxes, fees, regulations, and costs that we have imposed on you is our responsibility, because it does seem to me that certainly security is the responsibility of Congress and reducing the costs that we have imposed on you are our job, and I hope all of us on the committee will do everything in our power to help lessen those burdens on you.

I was also very pleased to see in Mr. Carty's testimony that you endorse the idea of, for example, a trusted traveler card -- I think a concept that's vitally important to bring business travelers back to fly regularly. So, I look forward to working with you and doing everything in my power to free you from excessive costs and regulations and taxes and let you guys focus on the free market problems that you face.

Thank you.

REP. MICA: Thank the gentleman. The gentleman from New Jersey, Mr. Pascrell.

REP. BILL PASCRELL: Thank you, Mr. Chairman. The chairman, there were two articles, several articles in the New York Times this morning, one about withholding substantial capacity in references to the utilities out in the West Coast that fleeced consumers, and today we might be talking, hopefully, about excess capacity. The industry has excess capacity. I would like to hear today, defining that term, and what the industry intends to do about it, because it would seem to me that's at the very center of some of the problems that the industry is having, and both sides of the aisle, I believe -- I speak for myself -- are very sympathetic to the plight of the industry. The weak economy has obviously hindered the prospects for a rebound. I mean, just folks are not flying.

And I am sympathetic to the plight of unemployed workers. We made some decisions last fall, and I think they were good decisions -- the $5 billion of leverage, the $10 billion of loans, I thought they were good decisions. But we chose not to do anything, really, for the 100,000 employees that were laid off. In fact, as today, those -- that number remains pretty much constant. In reviving and helping to revive the industry, which we want to do. Where, though, do the workers fit into this? And I think we want to hear this. And we -- we go back to your brochures of '99 and 2000 and there's beautiful pictures in the brochures about the CEOs and the employees. I happen to read them, by the way, when I fly. You may say, "Get a life," but, you know, there's some things that you've taken time to put in there, and I think they're important. What happened to the workers, and where one year later, where are they now? Where are those 100,000 workers?

I truly believe that improved security with full TSA implementation of federal screeners and 100 percent baggage check will provide the public with the assurances -- the public doesn't have those insurances as we sit here today. We cannot postpone these goals any longer than necessary.

And I have concerns about the ability of our budget to face these new costs. You know what's going on just as well as we know what's going on. I mean, how do we address that? And there are other industries that have been waiting in the wings to be sitting where you're sitting here. You know, where does this end? We need to be sensitive to that. It doesn't help that the administration chooses to refuse the contingency funding for TSA. We're winding up talking out of both sides of our mouth here. We're pretty good at it. We need to address it, and let's be honest with the American people and with the industry.

Every budget has consequences. And as we continue to fight terror and secure our homeland, critical funds must be expended. I'm afraid that we may have put ourselves in an economic straight jacket, so I'm interested to see today how you will bring light to the subject. And I wish you well. We need you flying. We need people to be assured and we need to be -- have folks back working at their jobs.

Thank you, Mr. Chairman.

REP. MICA: Thank you. The gentleman from Texas, Mr. Lampson.

REP. NICK LAMPSON (D-TX): Thank you, Mr. Chairman. Just a brief comment, and I'll submit my record -- my statement for the record, if I may.

I'm most interested in hearing comments regarding regional airports, the domino effect that could have adverse effects, to see continued decreasing routes flying into and out of various regional airports. So, I'll be interested in hearing your comments, and hope someone will spend a little bit of time mentioning the affect to those kinds of communities.

Thank you, Mr. Chairman.

REP. MICA: Thank you. And your complete statement will be made part of the record. The gentlelady from Nevada, Ms. Berkley.

REP. SHELLEY BERKLEY (D-NV): I thank you, Mr. Chairman, for holding this very important hearing. And welcome, gentlemen. I'm most anxious to hear your testimony.

I represent Las Vegas, Nevada. The economy of my district depends heavily on the vitality of the airline industry. Forty-six percent of the 36 annual -- 36 million annual visitors we have in the Las Vegas area arrive by air.

After September 11th, I strongly supported the immediate passage of the stabilization act to help the airline industry recover from the effects of the terrorist attacks. To say that I've been disappointed with its execution is an understatement. I have serious questions about the implementation of the loan guarantee program by the Air Transportation Stabilization Board. To date, only one carrier, America West, has received final approval, and USAirways has received conditional approval. National Airlines, a Las Vegas based airline, along with three other smaller airlines, were declines. And I can't speak for the other smaller airlines, but I can speak for National when I say that they met every deadline requested, they met every requirement requested, they met every criteria that was requested from the board and still they were denied. Smaller airlines are an important part of the competitive market and should receive the same consideration as the larger airlines. National is the third largest carrier at McCarran Airport and an integral part of the southern Nevada economy.

I hope that this subcommittee will look into the ATSB's actions because this board plays a vital role in the financial situation of several airlines seeking loan guarantees. I'd like to know what the board's criteria is for granting loans and whether or not their decisions have been arbitrary and capricious because frankly I'm beginning to wonder why I approved these loans and I've -- and remain a very big supporter of the loan guarantee program, but if the airlines aren't getting the money that they need in order to keep flying, and I believe that's in the interest of our national security and our national economy, then I can't see the point of why we passed the legislation in the first place. So, as long as we passed it, let's use it. Let's keep these airlines flying, and let's get on with the business of this nation.

Thank you very much.

REP. MICA: I thank the gentlelady. Are there other members with opening statements? There being no further opening statements, then we'll turn to our first panel of witness. Our first of panel of witnesses, and only panel today, consists of Mr. Leo F. Mullin, who is chairman and CEO of Delta Airlines. Mr. Donald J. Carty, he's chairman and president and CEO of American Airlines. Mr. Philip Baggaley, and he is managing director, U.S. Industrials, Standard & Poors. Mr. Joseph Leonard, president and CEO of AirTran Airways. Mr. Edward Wytkind, he's executive director of the Transportation Trades Department of the AFL-CIO. Also on the panel but not giving an opening statement, but I understand available for questions, is Mr. Richard H. Anderson, who is CEO of Northwest Airlines.

I'd like to thank our panelists for joining us today. We won't run the clock since we just have one panel, and you've also had to endure some long opening statements. This works both ways. (Laughter.) But, it does give everyone a flavor of everyone's opinion, and that's what this whole process is about as we try to find some good solutions. But, I welcome all of you. Thank you for your participation.

And we'll turn first to Leo Mullin, who is chairman and CEO of Delta Airlines. Welcome, sir. And you are recognized.

MR. LEO MULLIN: Thank you very -- thank you very much, Mr. Chairman. To chairman and members of the committee, we appreciate the opportunity to testify before you today on behalf of the Air Transportation Association airlines. As you mentioned, I am here today with fellow ATA members, Don Carty, chairman and CEO of American Airlines, and Richard Anderson, CEO of Northwest.

You may recall that I testified before the full committee in a similar capacity a little more than 12 months ago, shortly after our nation was rocked by the brutal terrorist assault of September 11th. Even today, it is difficult to contemplate the implications of September 11th in any terms other than the immense human suffering and loss. But the enormity of events has resulted in profound changes in almost every aspect of our personal and business lives, extending far beyond anything we contemplated in those first few days and weeks.

My purpose today is to detail for this committee how some of those post-9/11 changes, specifically the government's decision that heightened aviation security as an appropriate national response to the war on terrorism has inadvertently placed heavy financial burdens on U.S. carriers. Before I begin that discussion, however, let me state clearly that our industry is not here today to ask for aid related to the economics and competitive challenges of our industry. Several of you have used the term "bail-out" to refer to such aid. We are not requesting that aid here today -- I want it to be very explicit as we move forward. Instead, we're asking Congress for financial relief from the high security costs stemming from the war on terrorism which airlines are now bearing, costs which fall to no other U.S. industry.

I came here on September 19th, 2001 because the immediate financial impact of the September 11th attacks had severely destabilized our industry. We estimated at the time that our losses associated with the tragedy for the shut-down period, plus the huge expected revenue losses for several weeks thereafter, would likely exceed $5 billion. Now, while the airlines expected the financial damage to continue through 2001 and at least the first half of 2002, we limited our request to only the most immediate and direct damage from the terrorist attack. Our plan was to bridge the gap until revenue recovered through difficult but necessary self-help initiatives, such as cuts in fleet capacity, staffing, and capital expenditures, and we have followed-through in those areas and more. Also, in order to ensure our access to necessary capital funds up until mid-2002, we forecast revenue to return to expected levels, and we requested a $12.5 billion loan guarantee program to help us to assure we could have access to those private capital sources.

Mr. Chairman and committee members, we remain enormously grateful for your support of our request, which resulted in the Air Transportation Safety and Systems Stabilization Act of 2001 and provided $5 billion in cash aid, and $10 billion in loan guarantees. Also at those hearings, it became clear that September 11th marked a see-change in how we as a nation must think about aviation security. Consequently, Congress moved again quickly to create a new federal aviation security system as part of our larger restructuring of national security. The resulting Aviation and Transportation Security Act has played an instrumental role in restoring the public's confidence in air travel.

Now, one year later, I had hoped to be able to report positively on our progress in dealing with the enormous security issues and in restoring the industry's financial health. Unfortunately, I cannot. While much has been done that is positive, our industry's viability is seriously in question, much more so than last year, and the industry's capacity to perform it's expected role in serving the public interest is in jeopardy. This hearing affords the opportunity to discuss the dimensions of this very large challenge and to continue the urgent dialogue on what to do about it. And to that end, I propose to arrange my testimony around four key messages.

One, because the repercussion of 9/11 have extended beyond anyone's expectations, our industry is experience an unprecedented financial crisis, even with assistance from the stabilization act. Two, while it is airline management's responsibility to deal with economic or competitive factors, the industry's ability to address the current crisis is seriously limited by the staggeringly high cost of well-intended post-9/11 actions by the government related to security. Three, the airlines are not asking Congress to assist with economic or competitive challenges, but we do request that the government relieve the industry of government-imposed security costs stemming from the nation's war on terrorism. Four, because aviation is key to our nation's economic health, swift congressional action is crucial to allow any meaningful possibility of appropriate industry recovery.

I'll begin with the first point, which is that because the repercussions of 9/11 have extended beyond anyone's expectation, our industry is experiencing an unprecedented financial crisis, even after assistance from the stabilization act. Prior to September 11th, the airline industry was moving through a period of serious economic challenge, as several of you have noted. Yet, on September 10th, the prevailing sense was that almost all airlines would manage their way through the business down-turn. Then came September 11th. In addition to the horrific human impact, the event also directly affected our industry, depressing revenues and triggering an extremely severe financial crisis. I've attached some charts, to which I will call your attention.

Referencing exhibit one in the charts attached to my statement today, you can see that in 2001, industry losses for the nine major airlines totaled $7.4 billion. And as the footnote indicates, these losses would have reached nearly $10 billion without the aid provided by Congress. You can also see that Wall Street estimates for 2002 losses currently reach as high as $7 billion. This latter number is one of the most discouraging numbers in this presentation, since the expectation had been that losses would be substantially reduced for 2002 as the industry fought its way to recovery.

On the next page, exhibit two shows that by June 2002, airline debt had grown by $18 billion, 21 percent since January 1st of 2001. The industry, in effect, has funded its losses with huge debt increases. As debt has grown, the crucial balance between debt and equity has deteriorated, so that the average carrier now has a debt to capitalization ratio in excess of 90 percent, far higher than the average ratio for all publicly-held corporations. Except for Southwest, the bonds of all other carriers are now rated as junk bonds by Standard & Poors.

In the face of such challenges, airlines have acted quickly to cut losses by adjusting operations to meet the new demand environment. Since September 11th, the major U.S. carriers alone have trimmed costs by $14 billion in a series of difficult steps illustrated in the chart marked exhibit three. The six major hub and spoke carriers have cut operating expenses by $8.7 billion, 13 percent. We removed 15 percent of available seat miles from the system, and 267 aircraft sit idle from the fleet. These cuts unfortunately have reduced service from many cities and towns, and for the international carriers even eliminated service to some countries.

Commensurate with these reductions, in a step that has been most difficult, 70,000 airline employees from the major carriers have lost their jobs -- it did reach 100,000, as was noted in earlier testimony -- fully 16 percent of the people working for the hub and spoke carriers. And we've cut capital expenditures by $5 billion, which affects the economic health of the industry to supply goods and services, and puts important technology based customer service improvements on hold.

Even as the industry has struggled, another source of financial stress has occurred as the result of the fall in financial investments, namely the increasing need to deal with under-funded pension plans, as shown on exhibit four. At the end of the year 2000, assets in airline pension plans amounted to $34.9 billion. At this year, the 2000 gap reflected normal fluctuations that occur in pension assets and liabilities, and so the $34.9 pretty much matched the $36 billion for that year. But by 2001, reflecting the drop in the stock market and changes in interest rates used for asset and liability estimates, that gap had grown to $12 billion. Now, and in the upcoming year at least, substantial expense and cash contributions to pension plans will be required by many airlines during a time when the industry can least afford such contributions. We can hope that financial markets improve soon, since that recovery would clearly help relieve this problem, but in the near term, it will cost the industry a lot to deal with the pension funding issues.

Now, including all the issues I've noted, the impact of this aggregate crisis is already evident. USAirways is in chapter 11, and United Airlines has indicated the possibility of a similar outcome. Other airlines grow increasingly vulnerable each day. Given the cost- cutting efforts the industry has undertaken, the obvious question is why have the airlines not returned to profitability, especially in light of the assistance rendered by Congress?

The most obvious reason for the industry's continued losses is that while costs have been cut, revenue remains severely depressed. As indicated earlier, airlines had expected a significant revenue drop in the wake of September 11th, but we also anticipated continued improvement, with a return to previously forecast levels by mid-year of 2002. Instead, 2002 revenue for the major U.S. airlines, excluding Southwest, was down hugely -- 24 percent compared to the normal year, which was 2000. Revenues now, ladies and gentlemen, are now at 1996 levels. This reflects the development of a deeply troubling trend indicated in the chart marked exhibit five.

For 20 or more years prior to 9/11, airline fares correlated closely with GDP, fluctuating near .95 percent of GDP. But following September 11th, this connection appears to become unhinged, with revenue amounting to only .7 percent of GDP. This is a huge change, and there is no indication that the correlation will improve in the near term. While economic factors may play some role, this clear and dramatic de-linking strongly suggests that the revenue shortfall is closely associated with the events of 9/11 and its aftermath. The $5 billion from the stabilization act was essential in meeting the industry's immediate cash needs following 9/11, including the cost of the shutdown and the extreme short-term revenue losses.

The act also established a loan guarantee program, providing assurances to private capital markets of backstop (?) government funding, and also serving as a final safety net. The task of distributing the loan guarantees was assigned to the Air Transportation Stabilization Board, the ATSB, which subsequently set three criteria -- that the applying airline must have no access to private capital; the carrier must provide a viable business plan that ensures repayment; and the carrier must provide a major contribution to the nation's air transportation system. The closing date for loan applications was set at June 28th, so the application period has now ended.

So far, only America West request of $380 million has received final approval. And in addition, USAirways was given conditional approval for a $900 million loan. In both these cases, the loan board has or will require stock purchase warrants as part of the transaction. The primary applications still pending are United's request for $1.8 billion, and American TransAir's request for $149 million. At this point, it appears that the ATSB will fund around $3.2 million (sic) from the $10 billion designated, with full expectation of repayment consistent with the board's three criteria.

As a result, the Airline Stabilization Act has accomplished its intended mission -- helping airlines through the immediate aftermath of September 11th, and providing lending support through mid-year 2002. However, because no one would have foreseen the industry revenue would continue to suffer the after shocks of 9/11, more than a year later the industry crisis is not passed.

Now, as I noted in my second point, it's airline management's responsibility to deal with the marketplace factors in the current crisis. Major reductions in fleet capacity, capital expenditures and expenses and, most regrettably personnel, give evidence of the hard steps already taken. However, the industry's ability to address the current crisis has been seriously limited by the high unanticipated cost of well intended post-9/11 actions by the government related to security.

Mr. Chairman, as I proceed to discuss this point, let me say once more that our industry supported the Aviation and Transportation Security Act and the decision to federalize the responsibility for the aviation portion of our nation's broadened security concerns. Since its passage, important improvements have been made, and we in the industry are deeply supportive of the federal press for improved security. However, when the impact of each well-intentioned federal security decision is viewed as a whole, a startling degree of financial burden imposed on the airiness following 9/11 becomes clear. At Delta Airlines we analyzed the cost of revenue lost for our airline in categories shown in Exhibit 6, and found a magnitude of the post- 9/11 financial impact of government policies extraordinarily surprising. Let me briefly review these figures. First, the new security tax of $2.50 per segment, 250 million. The security tax imposed on airline tickets to help offset the federal cost of security was intended to be passed on to passengers. But airlines have no current pricing power, simply because our supply of seats so far exceeds passenger demand. Airline customers do not have to accept price increases, and they don't, shopping instead on the Internet for the lowest price. Airlines by necessity end up absorbing the new tax, which converts what was intended to be a price add-on to an expense which directly hits our bottom line.

Increased terrorism insurance -- $150 million. As the chairman noted, terrorism insurance was essentially a throw-in item for our airline insurance program prior to September 11th. It cost Delta only $2 million in 2001. Following 9/11, premiums rose an incredible 900 percent, increasing cost by $150 million.

The next has to do with mail. The loss shown in the chart is due to the elimination of the airline's right to carry mail over 16 ounces in the hold of our airplanes, as well as restrictions on the number of shippers that we can serve.

The next item is unreimbursed cost for cockpit door fortification: $20 million. The government has paid a portion of the initial cockpit door modifications, but 20 million remains unfunded.

The loss in seat revenue as part of the federal marshal program: 35 million, from federal marshals occupying space in the cabin closest to the cockpit, generally high premium first-class seats which the airlines can no longer sell.

In other mandated but unreimbursed security costs: $60 million, including the cost to increase ramp security, maintain checkpoints for document verification, screen catering suppliers and materials and the like.

The DOT-imposed fee for passenger screening costs adds another $40 million, in that the DOT has chosen to exercise discretionary authority in the security act to impose monthly fees on the airlines as additional government reimbursement.

Adding these categories together, the estimated 2002 impact on Delta is a staggering $660 million. Now, the numbers presented are Delta numbers. Airlines have not yet made a full survey to date to judge the industry-wide impact. However, given that Delta represents over one-sixth of the industry, we can roughly extrapolate to the rest of the industry by multiplying Delta's numbers by about six. And the resulting rough estimate for the post-9/11 security-related impact on the U.S. airline industry would be about $4 billion. That's a staggering number. But it's even more staggering given that this amount alone could account for on the order of 35 percent of the industry's pre-tax operating losses for the year based on analyst estimates.What's more, the $4 billion does not take into account the significant revenue losses resulting from passengers deterred from air travel by the increased hassle factor of the airport security requirements. And based on Delta's market research, lost revenue as a result of the hassle factor, though difficult to estimate, could well be almost as large as the security-related costs.

Turning then to the third point, Mr. Chairman, we are not here today to ask Congress to assist with economic or competitive challenges, but to request that the government relieve the industry of the security costs stemming from the nation's war on terrorism. Economic and competitive challenges, I repeat, are appropriately the responsibility of each airline's management team. But we can meet these challenges successfully only if the Congress removes the national security burden now placed on airlines, security burdens which to our knowledge no other industry has been asked to shoulder.

We are here today to ask you to consider a seven-step legislative agenda. One, eliminate the security assessment tax imposed following September 11th. Two, provide terrorism or war risk reinsurance for at least one year. Three, immediately authorize airlines to carry U.S. priority mail. Four, obtain reimbursements to the airlines for unfunded security mandates. Five, give the TSA the flexibility to implement new baggage screening processes, including EDS and ETD (sp), in a manner that is security effective but also customer focused and cost efficient. Six, eliminate the monthly security fees the airlines are currently paying to the DOT. And, seven, for any armed pilots program or cabin crew self-defense training ensure that associated costs are not levied on the airlines.

We ask you in the support of the rapid implementation of these initiatives for two important reasons. First, we believe -- and we believe the government has generally expressed through legislative intent, that increased aviation security should be viewed as an appropriate national security response to the September 11th attack on America that targeted airlines. As a result, these costs should be funded through the national security funding mechanism, as several of you have mentioned, not as taxes or costs imposed specifically on airlines.

Secondly, and as my final point for today, we ask for that help because aviation is key to our nation's economic health. The statistics are well known, and some of you have mentioned them. Airlines are a vital infrastructure for U.S. commerce, carrying 620 million passengers and 22 billion ton miles of cargo each year. Air travel makes a significant contribution to the $700 billion travel and tourism industry, which employs approximately one of every seven people in the U.S. civilian labor force. We directly provide a million jobs. We pay $17.7 billion in taxes. And we provide an essential social and business link between America's cities and smaller communities.

Removing the national security burden from the airlines is crucial, not only to my industry but to the millions of people, businesses and organizations that depend on a secure, healthy and efficient air transportation system.

In summary, Mr. Chairman and members of the committee, we are not asking for special treatment. We are asking for an end to special treatment and for relief from the government-imposed cost on the war on terrorism now uniquely borne by our industry. Thank you very much.

REP. MICA: Thank you for your testimony. We will withhold questions until we have heard from all of the witnesses. The next witness is Mr. Donald J. Carty. He is chairman and president and CEO of American Airlines. Welcome, sir, and you are recognized.

MR. CARTY: Thank you, Mr. Chairman. Chairman Mica, Ranking Member Lipinski, and members of the subcommittee, thank you very much for the opportunity today to discuss the really unprecedented financial crisis that is facing the airline industry. I will try to keep my remarks somewhat shorter, because so much of what Leo says I absolutely agree with.

Of course none of us that are in this room today is ever going to forget the events of last September 11th. In the aftermath of those barbaric attacks, our industry was literally flat on its back. And without Congress acting swiftly and decisively, many of us simply would not have survived.

Like Leo, I only wish I could say what a difference a year makes. But unfortunately I cannot. Impossible economic conditions coupled with a substantial cost imposed on airlines by an often customer- unfriendly post-9/11 security regime, seriously jeopardize our industry's continued viability.

Airline losses, as several of you have said, are likely going to total $7 billion for 2002, and that of course follows a staggering $7.7 billion net loss for 2001 -- and that was after accounting for the $5 billion in direct federal aid.

At American we have lost $1.8 billion since last October. Business travel of course has been slow to pick back up, and as a result revenues are way down, pushing some into bankruptcy and others to the verge of it.

To survive, airlines have had to take on massive debt, and as a result our balance sheets, as Leo alluded to, are deteriorating very rapidly with the average U.S. carrier not at that 90 percent leverage level. Share values are at 20-year lows. And so far airlines have announced the layoff of tens of thousands of employees. U.S. communities have literally lost service. And most capital projects have been eliminated or drastically reduced. New aircraft orders stopped, resulting in cascading economic woes throughout the manufacturing sector. And, if nothing changes -- more layoffs, more airline bankruptcies and route cutbacks are almost surely on the horizon.

On the face of this crisis -- and the challenge is of course as several of you alluded to that existed before 9/11, most airlines have moved decisively to reduce costs. And in fact change fundamentally various elements of our business models. In my written testimony I have outlined some of the things we at American are doing to reduce costs over the next several year, with a target of some $3 billion annually. That presents roughly 15 percent of our current costs.

What is so troubling to us today is that while we as an industry are feverishly working to reduce costs -- and we are -- government actions, however well intentioned, are significantly pushing up our costs and reducing our revenue. And this year alone the impact of these new federal taxes, restrictions and mandates will be well over three and a half billion by our estimate -- very similar to the number that Leo alluded to. And that does, as he said, include the billions of dollars that we are losing due to the hassle factor. Without relief, our efforts to control our own costs will likely prove futile. And thus more painful new cutbacks, employee furloughs, labor concessions and bankruptcies will be unavoidable.

Now, I know that some people view airlines as always coming to Washington with hands out. And I don't know of any other industry, however, that would trade places with us on the amount of federal taxes and fees we have to pay. Today federal taxes and fees on tickets account to just over $51, or 26 percent of a $200 roundtrip ticket involving a single connection. Now, that 26 percent federal tax and fee burden compares to 11 percent on a bottle of rum and 9 percent on a pack of cigarettes, and 0 percent of bus and rail tickets. Moreover, in addition to the taxes on tickets, airlines also pay a federal fuel tax of 4.3 cents a gallon. The overtaxation of our industry has gotten to such a point that airline employees from across our industry have increasingly joined management in expressing a clear message, and that is that we are paying our share -- enough is enough. And these employees know that these increases in our federal tax burden only serve to offset our cost reduction efforts in other areas, and inevitably increase the pressure on us to further reduce our own costs, including of course labor.

And as for the security challenges we as a nation face, I believe that security is better than it's ever been -- and it's getting better. The bottom line, however, is that providing for the security of our nation's citizens in fighting the war on terrorism are national security issues and fundamentally government functions. As such, given that the government determines what structure needs to be in place to secure our nation's airways, it should pay for it.

Now, absent that, our industry's recovery efforts are going to continue to be threatened by the fact that we are shouldering much of the cost of post-9/11 aviation security regime. A direct cost of our industry that we estimate, as I said, is over three and a half billion for 2002. That includes a billion-six in the security segment tax; 900 million in increased costs for insurance that the government requires us to hold; and nearly 400 million that it costs us to continue providing services, such as screening catering supplies, for which TSA has simply not reimbursed us. Now, if you add to that the three and a half billion in cost, an estimated two and a half to three and a half billion in annual revenue that we as an industry are losing due to the many air travelers that often decided not to fly in order to avoid the much-publicized security hassle at airports, and I think you can understand our cause for alarm. Clearly our nation needs to make the most of its limited security resources. The job of identifying individuals who might pose a threat to our aircraft will be made easier and less costly once the government designs process whereby our employees who have had extensive background checks, and even travelers who have voluntarily been subjected to rigorous background screening, are able to more quickly move through security.

And on this front, all of us in the airline industry have been very encouraged by the recent comments of the new head of TSA, Admiral Loy, on his strong desire to move forward with such a known traveler program, because reducing the hassle factor for our best and most frequent travelers, many of whom have simply stopped flying, is one of the most helpful things that Washington could do to help our industry.

Nevertheless, it isn't going to be enough. Failure by the government to act on these issues will most certainly keep our industry on the edge of collapse, no matter how much more cost-cutting we do. In this regard I want to wholeheartedly endorse the legislative agenda that Leo lays out in his testimony. Again, I thank all of you very much for the opportunity to testify today. And, like my colleagues, I would be happy to answer any questions the chairman or members of the subcommittee have.

REP. MICA: Thank you. And we will withhold questions. We'll hear from our next witness, who is a managing director with Standard and Poor's, Mr. Philip Baggaley. Welcome, and you are recognized, sir.

MR. BAGGALEY: Thank you. Good morning, Mr. Chairman, members of the subcommittee, ladies and gentlemen. Thank you for the opportunity to testify this morning. You've heard from the other --

REP. MICA: Can you pull that up a little bit closer? I don't think we can hear you very well up here. Thank you.

MR. BAGGALEY: Thank you. You've heard from other witnesses that the U.S. airline industry is facing a financial crisis. My job as an analyst at Standard and Poor's is to judge just how bad the situation really is and how likely these airlines are to file for bankruptcy.

What I hope to offer this morning is some perspective in the form of answers to the following questions: How severe are the current financial difficulties of the U.S. passenger airline industry? Why are some airlines able to remain profitable while others report huge losses? And, third, what can airlines do to restore their financial viability?

First, just how bad is the current situation? Now the airline industry is cyclical, and it endured a very difficult period during the early 1990s following the Persian Gulf War. In fact, I recall testifying before this subcommittee -- and some of the congressmen who are here today -- regarding what was then the industry's worse downturn ever. As of the middle of last year, U.S. passenger airlines were already experiencing a similar downturn -- recession, mounting costs and excess capacity were causing losses at most of the large hub-and-spoke airlines, though not yet on the scale of a decade earlier. The events of September 11th made that situation dramatically worse, and turned a normal contraction into a full- fledged crisis.

In the months that followed during the remainder of 2001 and into early 2002, the airlines began to recover, aided by federal cash grants, drastic cost-cutting, and an upturn in passenger revenues. By the end of the first quarter most airlines were still losing large amounts of money, but the trend was positive, and some talked of earning a small profit during the summer period.

Unfortunately, the recovery in revenues has since stalled out. Although the deficit against last year appears to be narrowing, that trend is misleading. Recall that airline results were deteriorating in 2001; so an improvement on that performance becomes progressively easier from month to month. In September of 2001, revenue per available seat mile, a standard measure of revenue generation, was a full 29 percent below the September 2000 level. By May 2002, the year-over-year shortfall had narrowed to only 6 percent. However, if you compare that to 2000, the last relatively healthy year for the airline industry ,the cumulative shortfall over two years is 17 percent, and that statistic has remained at roughly 17 percent below the levels of 2000 in each succeeding month through August.

The revenue picture of course could get worse. If United States takes military action against Iraq, passenger traffic is likely to fall off again. Just how much is hard to say, and will depend on the speed and success of the military campaign, and whether any further terrorist attacks occur.

Now, airlines have been bowing heavily to fund losses and maintain a cash reserve, as you have heard from other speakers. Even in the past case a return to modest profits in 2004 -- I wouldn't call that a very good case, but it's the best one -- they will emerge from a downturn with a substantial burden of debt and leases. The comparison with the early 1990s is instructive. Chart number one in my testimony shows debt net of cash as a percentage of revenues for Southwest Airlines and for six other large U.S. airlines -- American, United, Delta, Northwest, Continental and U.S. Airways combined. This ratio measures a company's fixed financial obligations relative to its size and higher is worse in this case, as in the case of the measure of leverage -- that's the capital that was cited by the other speakers.

First, it's clear that Southwest is much less indebted than the other airlines, and remarkably has been able to continue its improvement even during this difficult period. For the six large hub- and-spoke airlines the important point is that the net debt as a percentage of revenues, an estimated 125 percent for the first half of this year, is already higher -- that is worse -- than the last high point of 111 percent in 1992. That ratio will continue to worsen, at least through the end of this year and possibly into 2003. And I should point out that that does not include pension unfunding and added obligations. Even if their losses stop, these airlines are financially vulnerable going forward.

Let me now turn to the second question I posed: Why are some airlines able to remain profitable while others report huge losses? The short answer is that the profitable airline -- low-cost carriers like Southwest and many regional airlines -- have much lower costs than the large hub-and-spoke airlines. The big airlines do have a revenue advantage, and it is more than offset by their huge cost disadvantage. Table one in my testimony shows revenues and cost per available seat mile for U.S. Airways and Southwest in the second quarter of this year. U.S. Airways' hub-and-spoke network and its strong position in key East Coast markets enabled it to generate 20 percent higher revenue per available seat mile, even in a weak economy. However, its cost advantage is a huge 64 percent, and labor costs per available seat mile is more than twice as high as that of Southwest. The changes currently underway at U.S. Airways will narrow that difference, though not eliminate it entirely.

This comparison prompts my final question: What can the airlines do to restore their financial viability? With revenues still weak, and most airlines incurring heavy losses, managements are considering changes to the airlines business model -- and some outside observers have suggested that a major overhaul is in order. More consolidation, drastic changes in the fair structure and abandonment of the hub-and- spoke system have been suggested.

Although each of these has its detractions, the drawbacks unfortunately outweigh the advantages. And, unfortunately, the painful prescription for recovery consists mostly of more cost- cutting. And I should note that the airlines have been working hard at this already.

Table two in my testimony lists major cost items for United Airlines as a percentage of total pre-tax expenses in the second quarter. And I should point out that little of the added effective security measures appears in these reporting expenses. Mainly it's effect is to depress revenues.

Labor is by far the largest item, at 41 percent of the total expenses. As you well know, that is one place where the company's management is seeking help. Some other reductions will come from concessions by suppliers and selected creditors. Just how United reached this point, and what roles previous management and its unions played is no longer the immediate issue. How to fix the problem is.

U.S. Airways has taken the most drastic steps to put its house in financial order, both before and during bankruptcy. This past week the last of their organized labor groups, reluctantly, but I would say responsibly, agreed to major sacrifices to help turn around the company. U.S. Airways is in continuing negotiations with creditors about reducing rental rates on aircraft. It is also worth noting the shareholders have already taken their lumps. Their stock is virtually worthless.

The Air Transportation Stabilization Board is playing an important role here as well, with a $900 million loan guarantee that will, if all goes well, help U.S. Airways exit bankruptcy.

Now, I am not recommending bankruptcy as an optimal strategy for U.S. airlines. The point is that substantial cost reductions are needed for many large airlines one way or another. They don't need to reduce their costs to the Southwest level, but they need to narrow the difference. This is not only the best chance for survival now, but also the best long-term strategy in an increasingly price-competitive market.

To conclude, let me summarize the answers to the questions I posed at the beginning of the testimony. First, most of the U.S. airline industry is in serious financial condition and could deteriorate further. Second, the main reason why some airlines have managed to remain profitable is their much lower cost structure. Third, the large hub-and-spoke airlines need to reduce their costs in order to reduce losses and remain competitive for the long term. Thank you for your attention.

REP. MICA: Thank you for your testimony. We will now hear from Mr. Joe Leonard, chairman and CEO of AirTran Airways. Welcome, and you are recognized, sir.

MR. LEONARD: Good morning, Mr. Chairman. I am here to represent both AirTran Airways and the Air Carrier Association of America. The Air Carrier Association of America is basically the little guys, and the airports that are underserved around the country belong to our association.

Without your support of the Airline Stabilization Act of last year, the commercial airline industry would almost certainly have collapsed, and the nation's economy would be in much greater peril than we face today. I thank you for your leadership last year, and for the work to address the dramatic challenges that faced us since the 9/11 environment.

All carriers, large and small, full fare and low fare, will agree that the crisis in the airline business today is more than just the cyclical ups and downs that have characterized our industry in the past. In my view today's crisis is the result of a poisonous combination of factors. These include September 11th and the security costs and hassle factors associated with that; a weakened economy; and a decline in business travel; the unsustainable high cost of major air carriers, and the consistent unwillingness of the government regulators, particularly DOT, to enforce the anti-competitive rules that are already on the books.

The handful of low carriers, like AirTran, are today frequently cited as the path to a brighter future. It is true that my airline, which is one of the most successful low-cost carriers in the nation, returned to profitability in the second quarter of this year, and we are faring better than the large network carriers. This is in large part thanks to our aggressive cost control measures, including pay cuts for management and voluntary agreement changes with our pilots and mechanics unions to accept temporary pay reductions in the days immediately following 9/11.

I've heard the comment several times today about models that don't work. Our business model does work, and it works very well. But our success in the past is balanced against an increasing array of forces that could destroy the ability of low-fare carriers to provide the competition that is essential to the well-being of the traveling public.

The things that Congress and the executive branch do in the next few weeks, or don't do, could have considerable consequences on the future of aviation, as much so as did the 1978 deregulation act.

Since most of the issues have been covered, I'd just like to briefly cover a couple that are important to the low-fare airlines and have a more significant bearing on the low-fare airlines. The first is taxes and fees.

We're taxing the airline passenger at the highest federal rates of any service or product, including liquor and cigarettes. This forces the fare levels up and discourages travel by many, particularly the person that's looking for a bargain or particularly for the person who couldn't otherwise fly unless there's a low fare in the marketplace.

Don mentioned 26 percent on his $200 ticket. I don't have many $200 tickets, so in my case a $100 round-trip ticket, which is well above my average, the fees and taxes are approaching 40 percent on those tickets. Many of the taxes are fleet fees, segments and security fees, passenger facility charges. So the amount paid in taxes is disproportionately higher for the low-fare airline and the person buying low fares.

On top of these charges, most recently airports across the nation are starting to increase landing fees and other charges to compensate for their own declining revenues. Again, all of this disproportionately has a negative impact on low-fare carriers and the passengers seeking low-price tickets, and particularly in the short- haul markets.

It seems that when it comes to aviation, we've all forgotten the fundamental law of economics. When you raise the tax on a product or service, people buy less of it and the tax revenue suffers as well as the revenue to the airlines.

The second subject I'd like to focus your attention on today is alliances. I implore you to not stand by and allow the current financial crisis to be used by the large airlines as an excuse for alliances that will institutionalize market domination and paralyze real competition.

The alliances ultimately mean that competition is stifled. Prices go up, capacity goes down, and you increase the likelihood that mid- and small-size cities will lose transportation altogether.

Let's take a look at the proposed United-U.S. Air alliance that is before the DOT and DOJ right now. It would allow dominance at 31 cities in the eastern part of the United States, with market shares exceeding 30 percent; in Boston and LaGuardia, over 60 percent; 60 percent at Dulles, 40 percent at Reagan National.

Each of these airports already have slot requirements or limited facilities that constrain competition. The alliance means that low- fare carriers will have even less of a chance to impact those markets, and the consumer will suffer as a result.

Even worse is the concentration levels found in the proposed Delta-Continental-Northwest alliance. That combination would dominate 60 of 76 airports in the eastern part of the nation and control more than 50 percent of the cities in almost a third of those airports. At New York's three airports, they would control more than 40 percent of the seats.

By no stretch of the imagination or the law can it be argued that concentration levels of those levels would enhance any competition. These alliances should either be blocked by the Department of Transportation or the Department of Justice or they should come with a price -- make the slots and facilities available to competitors and require route divestitures when appropriate.

Last year, when United and U.S. Air attempted this sort of consolidation through a merger, even they recognized the need to alleviate concentration and outlined a divestiture of assets theoretically designed to increase competition. Their proposed divestiture was found by the government to be inadequate to protect the consumer and elected to not let that merger proceed. Now, the alliance structure would provide the consolidation with zero protection to the public interest.

To illustrate the point, last week Delta announced expanded service at Reagan National with 20 daily non-stop flights to eight new cities, all with regional jets. On the surface, that appears to be a benefit to the consumers. Where did Delta get the slots to provide those services? Were they auctioned off in a public process, these public assets? No, they weren't.

We believe they acquired the slots from Northwest Airlines. Was that asset transferred in a public proceeding? No, it appears to be a private deal between two potential alliance partners who are not likely to compete with each other in their major hubs.

DOT has done nothing on this transfer, and there's no reason to believe that it will. But this bold step, even before the approval of the proposed alliance, now tells us a great deal about what we can expect if Delta and Northwest and Continental alliance is unconditionally approved.

The third item and final item I'd like to talk about is military conflict. We must prepare the commercial aviation system to deal with the consequences of a conflict in Iraq or our nation's economy will be terribly affected. The recent devastations of airline market values is a clear indication of how the capital markets already are responding to the prospect of war.

In the event of a conflict, we expect that fewer customers will fly, and fuel and other costs will rise. The industry will need substantial and immediate help so that the airlines with viable business plans, like Air Tran, can assure competition in the future.

There are a number of ideas being explored to deal with this. Leo was very articulate in laying those out. One additional that I would like to offer is that I think congressional authorization should be given now to the Air Transportation Stabilization Board, the authority to immediately reopen the period for airlines to apply for loan guarantees in the event of a military conflict. There may be a number of airlines that did not apply for loans before but may want to avail themselves and may need to avail themselves to them if, in fact, a war begins.

Mr. Chairman, in summary, I believe that all of us involved in aviation -- the air carriers, the regulators and the policymakers -- must be smarter now than we've ever been in the past. We must respond decisively to the situation that exists today and we must be prepared wisely to deal with the situations that we are likely to face tomorrow.

This is not a time to turn a blind eye to the long-term impact of the consumer with quick-fix actions, such as alliances or relaxation of a handful of pro-protective practices that exist today. It's not the time to increase fees on consumers, make their life less convenient, or ignore the prospect of conflict in Iraq.

Mr. Chairman, Mr. Lipinski and other members, I thank you for your vision in calling this hearing and exploring these issues, and I look forward to working with you in any way I possibly can.

REP. MICA: Thank you. And let me recognize our final witness, Edward Wytkind. And he is executive director of the Transportation Trades Department of the AFL-CIO. Welcome, sir, and you're recognized.

MR. WYTKIND: Thank you, Mr. Chairman. Thank you, Mr. Lipinski, and members of the subcommittee and full committee.

I'm glad to appear before you on behalf of our 35 member unions in the transportation sector of the AFL-CIO. America watched with disbelief and horror as the events of September 11th played out. As you know, 33 pilots and flight crew members died on board the aircraft used as weapons of destruction. Several hundred more union members, from firefighters and police, whose courageous acts still inspire us, to those who simply went to work that day, perished as well.

Immediately after 9/11, our members in the airline industry were the first to bear the brunt of the economic consequences of that horrendous act of terror. A year later, the industry has not rebounded, as we've heard today, and tens of thousands of workers are either laid off or face the uncertain future of downsized and possibly bankrupt airlines.

At the outset, let me state that no one cares more about the state of the aviation industry than the hard-working employees of the nation's airlines. We cannot lose sight of a simple fact: For an airline worker and his or her family, the survival of this industry means the ability to pay the mortgage, send the kids to school and protect retirement security.

In this slumping economy, when a worker gets a pink slip, the economic security that he or she fought so hard to obtain can disappear without warning. And for the millions of Americans who rely on air transportation service, we must stop this industry's financial tailspin and do everything we can to ensure their safety and their security.

We must also look to the continuing weakness of the overall economy. More than 8 million Americans are out of work. Thirty-five percent of the jobless have been out of work for 15 weeks or longer. Nearly 430,000 workers ran out of unemployment benefits in July, an increase of 67 percent over last year. For those workers, they have the dubious distinction of making the top 10 list of worst months of unemployment insurance exhaustion since the Labor Department began tracking the data three decades ago.

Aviation industry workers, including employees of the airlines, the airports, of course, Boeing, and aerospace suppliers and others, have been among the hardest-hit. Some 100,000 airline-industry workers are out of work or are facing imminent layoff. Another 30,000 Boeing workers are laid off. And 51,000 other employees in the entire aerospace industry are also laid off.

But the multiplier effect is staggering. The numbers of the combined workforce of the airline industry continues to appear in different forms, but suffice to say that the total workforce, if you include all related job sectors, approaches 11 million in America, which means that, depending on which number you use, one airline worker translates into as many as 18 jobs in the U.S. economy.

This desperate situation is what inspires us to demand action by Congress and the president to extend unemployment benefits and to provide assistance to the millions of working men and women who face a future with little hope of obtaining long-term employment and the very real prospect of losing health-care insurance.

One of our most bitter disappointments was the inaction of our government to help the thousands of aviation-industry workers who, through no fault of their own, lost their jobs following 9/11.

The same rationale that led Congress to enact emergency legislation providing $15 billion in relief should have inspired action to do the right thing for workers who endured economic hardship of unprecedented proportions. Yet, despite promises made, very little has been done to help the jobless in this industry.

And our members do wonder why their government, Congress and the president have not addressed the desperate needs of airline workers in their darkest days, as the labor movement had advocated when the airline assistance bill was pending, and why now Congress appears poised to adjourn without taking action to help the unemployed.

Last fall Congress passed a package of assistance for the airlines. We keep hearing numbers of $15 billion, though, as I'll remark in a minute, that hasn't been the case. We supported that package. And while the legislation failed to provide relief to the jobless, as we had fought hard for, and many in this committee fought hard for, the bill did create a framework that was expected to give air carriers a chance to recover from the staggering losses associated with 9/11.

Unfortunately, the loan guarantee program administered by the Air Transportation Stabilization Board, the ATSB, has not lived up to the expectations of Congress. The fact is that nothing in the emergency relief legislation was intended to saddle air-carrier applicants with such onerous requirements that would actually deter them from taking advantage of this important assistance.

Moreover, it was not the intent of Congress to allow the ATSB to exercise such broad powers to directly intervene in the collective- bargaining affairs between management and labor. And to this day, only one applicant, America West, has secured a loan guarantee, and only a fraction of the $10 billion loan guarantees has been utilized.

What is clear is that all the applicants have been subjected to a bureaucratic and unwieldy process, as well as grossly unrealistic demands for employee wage concessions that did not reflect the will nor the intent of Congress when it acted quickly last fall to shore up the failing finances of this industry. In other words, the ATSB has failed to, quote, "bridge the gap," as Mr. Mullin stated earlier in his testimony.

Regarding the airlines' legislative proposals for relief from what they term as excessive federal taxes and fees, let me offer just a couple of observations. We believe Congress should consider these economic relief proposals. We must stabilize the finances of this industry and halt the alarming rate of reduced service to so many communities and layoffs.

We agree with the contention that certain costs, such as the deployment of new security measures and the staggering price for war- risk insurance, cannot be financed without additional assistance. We should consider whether the industry is being saddled with costs that should be a federal responsibility, should be a part of our national defense, as Mr. Oberstar stated earlier.

Obviously nothing is more important than the security and safety of air transportation. And until we answer the typical wary air traveler's questions about safety and security, the economic state of this industry will continue to erode. We must restore faith in the safety and the ease of air transportation. The nation's airline passengers and the nation's workers deserve nothing less.

We applaud you, Chairman Mica and Congressman Lipinski, for advocating for prompt credentialing of aviation workers and an improved screening process for all workers. That will pay some dividends. We will join the airlines and the airports in calling on adequate funding for the extraordinary costs associated with meeting the nation's airline security needs.

Worker training is especially important, as this committee has already addressed, as training under existing practices and existing mandates do not cut it in the world we live in since 9/11.

To sum up, the future of this industry is uncertain at best. What is certain is the importance of air transportation to this country. In the weeks and months ahead, we will advocate for policies that reverse the shaken confidence of air travelers. We will insist on ample federal resources to cover the cost of national security.

We will join the debate over the fees and taxes paid by the airlines and consider what costs are intrinsically linked with defending America's homeland security and thus should be borne by our government. We will defend the collective bargaining rights of airline employees to manage through these very turbulent times.

We will demand a fair and even-handed implementation of the federal airline relief program. And we will continue to push Congress and the president to further extend unemployment benefits for laid-off workers and to consider the millions of American workers who face a loss of health-care coverage in this reeling economy.

The labor movement is committed to stabilizing the finances of America's airlines and securing our airways for the passengers and for our members. This industry is extremely crucial to our economy, to every community in America, and to millions of working men and women. And we're pleased to be here. Thank you for having us, and we look forward to working with you to address all these issues.

REP. MICA: Thank each of you for your testimony and providing witness information for the panel today. What we're going to do, since we have had some opening statements that are lengthy, and also lengthy comments by our witnesses, we're going to go ahead and run the clock now five minutes, even on the chair.

So what we can do is get a fair shot at having everybody participate in this discussion. Then, if others have additional questions, you're welcome to stay and participate. So, with that, I'll start the first questions and, again, thank each of you.

We've heard some testimony about costs incurred by the airlines that contribute to their current financial problems. Mr. Mullin, I believe you testified that the cost you estimated was around the $4 billion mark. Mr. Carty, I think you said three to three and a half; something like that.

Our expert from Standard & Poors, Mr. Baggaley, would you say that the estimate that they're providing in testimony today is -- I know you haven't done a complete analysis of this, but does that sound about right?

MR. BAGGALEY: That sounds broadly plausible. I don't know the exact numbers they're working from, but certainly they are very substantial costs.

REP. MICA: Okay. So it appears that about -- if the losses are about $7 billion, that somewhere in the neighborhood of 50 percent would be attributable. Mr. Carty, Mr. Mullin, do you agree on that?

MR. CARTY (?): I would just add, the $7 billion is --

REP. MICA: We're talking about $7 billion to $8 billion industry losses, and you're looking at about --

MR. MULLIN: If you pre-tax that effect, it's roughly $9 billion to $10 billion. So it's about 35 to 40 percent of the pre-tax loss would be the correct way to look at it.

MR. CARTY: Mr. Chairman, just clarification on our testimony. That was the cost piece. The estimate the industry is using on potential loss of revenue due to hassle factor runs two and a half to three billion as well.

REP. MICA: So we haven't added that in. But we're looking at a serious percentage; probably 50 percent of your estimated loss that we have some direct responsibility for.

Let me just say incidentally, Mr. Leonard, I think your idea of opening the -- reopening the loan guarantee program if we do get into conflict is something we should look at. I asked the staff. They told me preliminarily that that has been done by rule, I believe. And that could be reopened. But that's something we may want to revisit. I'm not sure what the balance will be, but they've only given one loan and one conditional loan. That is a standby measure, and I think we can work with the administration as a backup measure in case we do get into difficulty; a very good suggestion, and I welcome that.

MR. LEONARD: Thank you.

REP. MICA: Okay, let's look at the costs. And from the sheet that was provided by Mr. Mullin, I guess the biggest -- well, the security tax is supposed to be passed on to passengers. And I know that, particularly for the low-cost carriers, is a bigger percentage of the ticket. But one of the things -- and I don't think we're going to get away from that, folks. You're going to have to figure out a way to pass that fee on and identify it. I just don't see the support for that in Congress.

But one of the things that I think is the next-biggest ticket items in cost is increased insurance costs. Now, some folks have attributed it to greedy insurance companies. But, in fact, there are some -- I think we're getting down to the point where we don't have even insurers that are willing to participate. Is that what you're seeing, Mr. Mullin? And is this your second-biggest cost or biggest direct cost that we can impact, war risk? And tell us again how much -- I saw somewhere a 900 percent increase in -- is that correct?

MR. MULLIN: Yes, sir. We paid last year at Delta Airlines roughly $2 million for terrorism insurance. And now our run rate is $150 million a year. That so equates to that very substantial --

REP. MICA: Nine hundred percent increase for liability and insurance coverage. So that is something we could do. Right now I understand the war risk is sort of renewed every couple of months, and you asked for at least a one-year extension. So I think that's something we could help on.

There are a host of other areas where we've imposed restrictions -- Postal Service rate restriction -- that we could look at, at some ways in which you could enhance those revenues. And I think we can look at that. Cockpit doors -- I think the testimony you've provided, we're contributing about $100 million. But there's a deficit of, what -- is it a quarter of a billion?

MR. MULLIN: We've estimated for the Delta in end-year that the number was 18.

REP. MICA: But for the industry. I believe I read somewhere that it was a quarter-of-a-billion-dollar shortfall for the industry.

MR. MULLIN: Yes.

REP. MICA: Now, that's something else. And I think we have to be fair in this process. We took over aviation security, we imposed certain mandates, and we should help meet our obligation for that. Air marshal, we'll have to look at, and other unreimbursed security costs.

I did meet with Admiral Loy this morning. I know he's met with other members of the panel. And we are doing everything we can to eliminate the hassle factor, which you've attributed to $2 billion or $3 billion in costs; get rid of the three stupid, dumb questions: "Have you packed your own bags? Have they been with you at all times? And has anyone given you anything to carry on board?" I can repeat them quite well. (Laughter.)

We've talked about getting rid of the hassle at the front of the line, where you have airport personnel checking an itinerary that most people make up on their computer, and it's sort of a useless task. And we're looking at other things that were imposed but don't make sense but add costs. So hopefully help is on the way to deal with the hassle factor. And I feel pretty confident that Admiral Loy will assist us in that.

Of course, the biggest cost is labor cost. I applaud labor for making some concessions. I know it's tough. But having lived through Eastern Airlines and other carriers, where management and labor can't come to terms, I've seen a lot of people unemployed. And that's not what we want here. So if labor will continue to play their part -- and it's still 40 percent of the major airlines' costs; it's lower for Mr. Leonard and some of the others, I guess. But we'll need those concessions.

You've been charged by some folks by saying that you have not addressed the fundamental cost and productivity issues that are at the root of your problems. You've got two major carriers. Mr. Mullin and Mr. Carty, how do you respond to those charges?

MR. MULLIN: Well, I think the airlines have been extremely aggressive in taking what we have called self-help. I mentioned the hardest fact of all, which is that currently, in the hub and spoke area, 70,000 employees have lost their positions. And as Don Carty mentioned in his testimony, given the economic factors that we face, that may even go higher. All of us have reduced capital expenditures tremendously. We have cut cost with respect to our suppliers. There's been a tremendous amount of self-help that has been undertaken. And -- and what we're talking about here, in terms of getting some aid on the security-related aspects -- (inaudible) -- relieve us of the burden to go even more cutting into the bone on that. I think quite clearly, as private sector organizations, that if we continue to face the stress that we have, all of us are going to fight as hard as we can to stave off the terrible problems associated with bankruptcy down the road. And I think a number of us have a very good chance of making that, but it's going to take very, very hard, tough steps. And it will be made all the more tough without the kind of assistance that I think all of us have outlined in our testimony.

REP. MICA: Thank you.

MR. CARTY: Mr. Chairman?

REP. MICA: Just briefly?

MR. CARTY: I think -- yeah, I think, Mr. Chairman, some degree of criticism is justified, that during the economic bubble we've recently been through, we, like many industries, didn't do as much to self-help as we should have. But I can tell you, at American, we've got a $3 billion objective, and that -- and a big, big piece of that is associated with productivity, whether it's electronic ticketing, self-check in at airports, whether it's complete re-engineering of our administrative process in payables and payroll, and HR -- in our human resources department -- whether it's redesigning the hub and spoke system to make our people more productive and our equipment more productive, we are highly focused on productivity.

Several of you made the point that we need to re-engineer our business model. I can tell you, at American, that's what we're spending all our time doing.

REP. MICA: Thank you. Let me yield now to our ranking member, Mr. Lipinski. Thank you.

REP. LIPINSKI: Thank you, Mr. Chairman. Mr. Mullin, your chart over here that starts with "new security tax, $265 million," and goes up to "total pre-tax impact is $660 million." If we were to in one way or another -- legislation, regulation -- get rid of the $660 million in this period of time for 2002, would Delta Airlines make a profit?

MR. MULLIN: No sir, it would not. I have indicated in my testimony that these numbers account for just the cost aspects, omitting any effect of the hassle factor, would account for on the order of 40 percent or so of the pre-tax losses of the industry, and that would hold for Delta. It would take care of 40 percent of those losses, but it would sure give us a fighting chance to take care of the rest.

REP. LIPINSKI: And Mr. Carty, have you done this for American Airlines or something similar to this?

MR. CARTY: We've done something similar. I don't have the details in front of me, Congressman, but order of magnitude, Leo's numbers are right on. I mentioned that our estimate for the industry, and we (too got a cut out of it ?) -- for the industry which was north of $3.5 billion. And as Leo said, he's about a sixth of the industry, so the numbers kind of tie -- the numbers kind of tie up.

REP. LIPINSKI: Okay. Let me -- the ATA, I have a document here from the ATA, and I want to see if I'm reading this correctly. The ATA says that the loss for the industry would be six-billion-277- million dollars. Everybody agrees on that?

MR. MULLIN: For this year?

REP. LIPINSKI: Yes.

MR. MULLIN: Yeah. The most recent analyst estimate just in the last week has reached over seven billion.

REP. LIPINSKI: Okay.

MR. MULLIN: It's being updated negatively as we speak.

REP. LIPINSKI: Well, but we'll just -- we'll just stick to six--

MR. MULLIN (?): Fine.

REP. LIPINSKI: -- billion, 270 -- just say -- we were -- The ATA also estimated that the loss of the entire industry would be six billion -- $6 billion. So, somebody in the industry I think would be making $277 million profit -- I suppose that's Southwest and maybe -- Mr. Leonard, will you be making a profit?

MR. LEONARD: We certainly believe we will --

REP. LIPINSKI: Okay.

MR. LEONARD: -- but it will be small.

REP. LIPINSKI: Probably Jet Blue will be making a profit. Okay. Getting back, Mr. Mullin, to your chart over here, if we were able to do something in regards to the insurance cost, that would certainly be helpful to you.

MR. MULLIN: Yes sir.

REP. LIPINSKI: And as the chairman mentioned, the Postal Service, it would be helpful to you, and the flight restrictions would be helpful to you. The air marshals, are the air marshals still sitting in first class in most planes?

MR. MULLIN: Yes sir.

REP. LIPINSKI: Who determines where they sit? The airline or the air marshal folks?

MR. MULLIN: They do.

MR. CARTY: They do. It's -- it's largely driven, Congressman, by the notion that they need to be near the cockpit. And, of course, first class cabins are near the cockpit.

REP. LIPINSKI: Okay. A lot has been mentioned about the taxes and the fees, you know, that the airline industry pays. But to the best of my knowledge, you know, there is no tax or fee that you pay that -- other than your corporate tax when you make a profit -- that doesn't go for somehow improving the aviation system. Would everybody agree on that? I mean, we're not taking any money out of the airline industry and subsidizing the railroad industry, or the trucking industry, or social security, right?

MR. CARTY (?): I think it's a technicality. One might argue that you're taking some out to protect national security as opposed to just feeding the -- obviously this security is in place not just to protect airline passengers, it's in place to protect our nation, and places like the World Trade Center and the Pentagon. And those taxes, I think one might argue, are all about national security rather than about air transportation.

REP. LIPINSKI: All right, well before we went into the national security cost over here, all the fees, taxes that you were paying in before we had this emphasis on national security, all of that certainly was going for the aviation industry -- improvements in some way, shape or form, correct?

MR. MULLIN: Yes.

MR. CARTY: Yes.

REP. LIPINSKI: You're nodding your head. Okay, thank you. I appreciate that. The airline industry, according to testimony before our subcommittee, said that they are paying $750 million to a billion dollars a year for security in the past. Correct?

MR. MULLIN (?): Correct.

REP. LIPINSKI: Okay. I want ask the two gentlemen from the major carriers, how much do you think that you should contribute towards aviation security in the present time, now that we have taken over -- the federal government has taken over aviation security? Do you believe that you should contribute anything to that aspect of aviation, or should it all be borne by the general public?

MR. MULLIN: We generally do believe we should be contributing, and of course, strongly believe that we are. If you -- if you look, for example, at the charts that I have supplied for you, and through this new security tax we are supplying at Delta, 265 -- or extrapolated to the industry, $1.6 billion associated with the security tax --

REP. LIPINSKI: But -- but would -- but, I think the chairman said, and I agree with the chairman, that it was our assumption that that was supposed to be passed on to the flying public. Now, you maintain you can't pass it on to the flying public, I believe because of the fact that they're not that enthusiastic about flying at the present time. Let me ask the question, then who -- you know, who are you losing those passengers to?

MR. MULLIN: I'd say that the -- we are losing it to a brand new competitor, the automobile. In fact, the -- the harshest traffic effect has been on the under 300-mile traveler, where because of the hassle effect at the airports, we have made the automobile a very strong competitor to a degree that it has not been before. And I think that all of us who have short-haul traffic -- I certainly speak for Delta on this -- in the Northeast part of the United States, the -- the impact has been most profound as it pertains to the automobile.

MR. CARTY: I would say, Congressman Lipinski, that also a number of people are just staying home. Based on our business model, we stimulate new traffic with our very low fares, and we see a significant fall-off in people that just aren't flying. They aren't traveling. They're not driving. They're not doing anything. They're staying at home.

REP. LIPINSKI: It would seem to me the tremendous amount of money that's being spent on aviation security by the federal government and by the airlines at the present time have to motivate some people, though, give them enough security to also get on planes and be willing to fly. I would think it would have improved the -- the load factors.

Yes, Mr. Anderson.

MR. ANDERSON: Mr. Lipinski, if you look at the actual enplanement numbers for the industry, our enplanements as an industry in 2002 will be down nearly 100 million enplanements -- 75 to 100 million enplanements as compared to 2000.

REP. LIPINSKI: Okay.

MR. ANDERSON: So there just are -- there are far fewer people flying today.

REP. LIPINSKI: I think my time is up, Mr. Chairman.

REP. MICA: Thank you. Mr. Duncan.

REP. DUNCAN: Thank you, Mr. Chairman. Let me say that Mr. Lipinski is correct that most of these taxes and fees are going to finance improvements, I suppose, but also, I think because of the -- the very difficult situation that we find ourselves in, I think that we should at least try in this committee and in other committees to get some temporary relief of some sort from at least some of these taxes and fees because we are in a different environment today than we've had -- than we've been in for a while. And certainly the percentages that were given, whether it's the 26 percent that Mr. Carty estimated or the 40 percent that Mr. Leonard mentioned, it's an extremely high burden to bear.

Also, several people, most of the witnesses mentioned the effect of going to war in Iraq. I hope that everyone, all of you and everyone here will use their influence to urge that when we get into Iraq that we get in and get out as quickly as possible because we've got to try to hold down the harmful impact of this war on our economy down to the lowest extent possible.

Also, I've -- I said earlier in my statement that I think we're going almost ridiculously overboard in some ways on security. But to -- but last year at the hearing before the full committee, the airline industry representatives estimated they were spending approximately one billion per year on security. Now we're hearing today estimates of four billion. And that is a tremendous increase, particularly in an industry that has seen the decrease in enplanements that Mr. Anderson has just mentioned.

Let me -- let me ask, though, Mr. Carty, you -- you said in your testimony that labor is by far the leading cost driver for the airlines, and as you can see, we at American are highly focused on increasing the productivity of our workforce. Following the labor, fuel is the airlines' number two cost driver. To say the least, there is very little we can do to control the price of oil. The looming specter of war with Iraq has of course led to further upward pressure on oil prices.

Let me ask you this. I know you've laid off a very large number of people, and I know that's been very painful to you. What have you done to increase the productivity? I'm just curious about that. You say you're working to increase the productivity. And also, have the remaining workers made concessions to lower that percentage some? And along with that, is -- are you going to have to -- are the major airlines going to have to re-invent themselves or remake themselves into low-cost airlines --

MR. CARTY: Well, let me --

REP. DUNCAN: -- what we call low-cost airlines?

MR. CARTY: Let me -- let me try to deal with those questions sequentially. Productivity-wise, we have made a great deal of progress, and we're making more. An awful lot of that progress is going to come through automation, where we take activities and processes in the company, whether they be administrative functions or airport functions, and we provide automated solutions, self-service devices, electronic ticketing, all of -- all of the changes that technology allows us to do to take largely the very simple process work out of our job and make all of our ground employees more productive.

The other thing that we have done at American is reexamine the way we schedule our airplanes, with a little more focus on the productivity of our people and our assets, and a little less focus on connecting times and hubs. And you've seen some of that written about.

We are also engaged in a very aggressive way in looking at the productivity of our mechanics, where we're trying to equip them with automation to allow them to do their manual checks, to order parts, to bring parts to them in a way that it will make them more productive. So, like so much U.S. industry, we're largely going to be throwing technology at -- adding -- improving productivity.

The -- as for the question of concessions, we have not been involved in concessionary negotiations with our employees. Our biggest single labor expense, of course, is our pilot group. And our pilot contract has now been open for an extended period of time, and the consequence is that we pay our pilots considerable less than the airlines that had recent pilot settlements. So, as long as that contract is open, that will be the case. And I think for both we and our pilots, as we work through that negotiation, what we're both trying to do is assess where is the industry norm going to settle down in these really troubled times. And given that that's our kind of lead employee group from a -- from a cost point of view, we're going to try to settle that before we end up deciding what, if anything, needs to be done in other work groups.

And to your last question, we're going to have to remake ourselves into lower cost -- into low-cost carriers. I think -- I think it's a bit of a complex answer, but I don't think that American, or Delta, or United, or Northwest are going to become Southwest Airlines. We have a business model that has various successful aspects to it. We do a very different thing. We serve everything from very small communities to very large international destinations, which, by definition, changes the kinds of airplanes we use and the way we have to schedule them. On the other hand, as someone pointed out earlier today, I guess it was Philip, that while we attract a revenue premium because we -- because we have that business model, our cost premium exceeds our revenue premium. So, what we must do is re- engineer our costs so that whatever cost premium that kind of business activity drives is inside the envelope of our revenue premium, and we can have the kind of profitability results that a Southwest or an AirTran or another -- another kind of carrier would have. It's not our objective to become them, but there are some things we can learn from them.

REP. DUNCAN: I've got some other questions, but I see my time's run out on me before I realized it. Thank you, Mr. Chairman.

REP. MICA: I thank the gentleman. Mr. DeFazio.

REP. DEFAZIO: Thank you, Mr. Chairman. To Mr. Mullin, just since there's been a lot of discussion of the hassle factor, I really -- and I discussed this with you last week -- now that there's some questions raised, because as I look at the ATA chart, and we've had some problems with numbers, as you know, from ATA, the billion dollar security cost that went down to $300 million, and whatever happened there I don't fully understand, but in this case it says that the total costs on this chart, which have a hassle factor of 2.5 billion, are extrapolated from data provided by your airline. Now, I didn't realize that before. So -- so all of these things that we're saying are industry-wide, so how did -- how did you determine the hassle factor? Did you go out and do a scientific poll of people who didn't fly, or -- I mean, how, you know, how did you come up with the hassle factor number? I'm just curious.

MR. MULLIN: Yes sir, that's exactly what we did. We took the -- we took the revenues essentially for the first part of the year and then did market research, did extensive market research, to try to judge what portion of the revenue drop was associated with economic factors and what portion was associated with hassle factor. And in order to do that, we interviewed a very large number of passengers, as market research techniques would suggest we do, and for that number, for Delta it came out about 27 percent of the revenue variance between one year and the next was associated with the hassle factor.

REP. DEFAZIO: Then the hassle factor being particularly security?

MR. MULLIN: Security related. I mean, the hassle factor has to do with both the -- how should I say -- the ordeal of going through it in the first instance, but even more importantly, the inability to count on the amount of time that it will take you to get through the airport.

REP. DEFAZIO: And what -- and what percent of that 27 percent were high-revenue business travelers?

MR. MULLIN: These were largely high-revenue business travelers.

REP. DEFAZIO: Okay. So that's a significant --

MR. MULLIN: That's a huge part.

REP. DEFAZIO: (Inaudible) --

MR. MULLIN: -- by far the largest portion of that.

REP. DEFAZIO: Okay. That's -- that's helpful. Now, just on the issue of the increased insurance costs and the war risk, I mean, I'm willing to support some sort of a continuation of a federal program here, but I would ask the three CEOs who are here, would they in exchange, or realizing that there is a long-term problem with insurance, and being advocates of the free market and competition, would you then support in exchange for an extension of a federally supported program a removal of the unwarranted anti-trust exemption from the insurance industry? You don't enjoy an anti-trust exemption. No other industry in America enjoys an anti-trust exemption, but insurance does and they can legally price fix. Now, would any of you, being advocates of competitive industry, support that position?

MR. CARTY: Mr. DeFazio, I -- I'm afraid you know more about that subject than I do. I was not even aware they have antitrust --

REP. DEFAZIO: If it's a given -- if it's a given -- if it's a given that they have an anti-trust exemption, would you say --

MR. CARTY: I'd sure want to understand it --

REP. DEFAZIO: Mr. Mullin?

MR. MULLIN: I -- I'll have to take a pass on that too.

REP. DEFAZIO: Okay. This has been a problem for about 25 years in this city. Everybody takes a pass when -- you know, we get the docs in here, they want exemptions, you know, from liability. We got -- you guys want help here. But when we get all the big guys at the table, they -- it seems that insurance industry never gets nicked. Mr. Leonard, how about you? You were pretty tough on the competition issue. Would you think -- should we have a competitive insurance industry in America?

MR. LEONARD: Well, I don't, but I, like Mr. Carty, am not an expert in that area.

REP. DEFAZIO: Okay. All right. All right. Well, I'll give you all some information and maybe I can get some support on that. I have a bill for that. (Laughter.)

I'd like to go to the competition issue. And I think Mr. Leonard's testimony was pretty provocative, and I want to offer, particularly Mr. Mullin, an opportunity to respond since he was one of the targets. And do -- do we have a problem with lack of competition, Mr. Mullin, if -- if you move into this alliance? And he was very harsh and talked about extraordinary market dominance and market power and pricing, which goes to a whole host of non-competitive issues, which I don't have time to get into, but this is just one.

MR. MULLIN: I completely disagree with Mr. Leonard on that point. I think that if one looks carefully at his testimony, a lot of that appears to be reflective of almost a merger or an acquisition having taken place. These are marketing alliances. In fact, our relationship -- Northwest and Continental in the proposed Delta- Northwest-Continental, is governed by the -- by the anti-trust laws. We're not merging. We have to compete with each other just as we did before, and there are very strict rules on that. I think also, and perhaps I will yield to Richard Anderson to talk about that, but certainly from my perception as an outsider, the Continental-Northwest alliance, which has been existent, in existence for the past two to three years, has produced substantial customer benefits and competitive. I think -- I think these alliances are extraordinarily positive and have very few, if any, of the attributes that Mr. Leonard had provided.

REP. DEFAZIO: Okay, I am going to run out of time here. Mr. Leonard, do you want to briefly rebut that?

MR. LEONARD: Well, yeah --

REP. DEFAZIO: -- discussion with my panel members, because you guys are --

MR. LEONARD: I think it's -- you know -- childish to believe that these folks are going to compete with each other as alliance partners the way they compete with their non-alliance partners. And I believe they'll coordinate schedules. They are certainly not going to be going after each other on price. And there will be fewer choices for the consumer, and ultimately higher prices in the marketplace.

REP. DEFAZIO: Okay, Mr. Anderson, quickly, because I'm --

MR. ANDERSON: Well, it's just wrong. And it's just wrong because these airlines are still covered by the Sherman Act. This transaction was not reviewed by the Department of Justice because it is not a merger. And in fact Northeast, Delta and Continental remain competitors. We do not jointly price. We do not jointly handle capacity.

And, lastly, I would be remiss in not pointing out a booklet that Mr. Leonard gave to me at my headquarters in February of 2000 where he proposed that AirTran's strengths complement the Northwest-KLM- Continental alliance.

REP. MICA: I thank the gentleman. The gentleman from Georgia, Mr. Isakson.

REP. JOHNNY ISAKSON (R-GA): Thank you, Mr. Chairman. First of all I want to remind the members a year ago almost to this day Mr. Mullin testified here today, and I wanted to commend him on his actions subsequent to that, particularly with regard to management compensation and the treatment of employees in that immediate period. And, Mr. Leonard the same. If you read Mr. Leonard's testimony and look at the numbers, the action they did with the management compensation and their worker compensation has contributed largely to their profitability. Mr. Baggaley clearly says the business model has got to change. Ms. Tauscher made the most intelligent remark of any of us when she acknowledged at the beginning that the business model was broke on the 10th of September of 2001. With that business model changing -- Mr. Carty, you said you thought you were changing your model? Is that correct?

MR. CARTY: Correct.

REP. ISAKSON: Mr. Mullin, do you see it? And when I say this I am saying it in the contrast of an AirTran moving -- Delta moving toward some of the concepts of a low-fare carrier which is going to force low-fare carriers to do some of the things Delta does. They have to meet in the middle, because they -- am I correct with that?

MR. MULLIN: I think that the -- first of all, I think the low- cost carriers have taught al of us a lot. And as you would know, Congressman Isakson, given your residence is in Georgia, and as our respective representative, that Delta is giving a lot of thought as to how to do a better job of competing against the low-cost carriers. I mean, it's been widely announced. And as Joe Leonard has stated, he is going to be profitable this year; so is Southwest; so is JetBlue. They're doing real well. So we have got to adjust to that reality and take them on, and we will be.

REP. ISAKSON: The only reason I mention that -- I ran a business that ran on traditional models for years, until a discounter with a different price structure for labor came into the marketplace and I (aged tremendously ?). And finally after I stopped beating my head against the wall I realized I needed to change some of the ways I was doing business, which in turn it then forced them (some differences ?) -- which leads me to Mr. Wytkind. The liability for being the last person to testify is slow readers like me get to read your testimony before you even made it. (Laughter.) And I wanted to ask you a question. And you left this second half of a compound sentence out of your verbal testimony, so you didn't say this, but I had already read it. Yet, a sentence that you did say, which began "we will defend the collective bargaining rights of aviation employees" -- and you put a period there. But in the printed part it says, "comma, and oppose industry attempts to vilify our members who struggle to manage through these difficult times." If that sentence is in the printed record, it's going to be there. I want you to explain what "industry attempts to vilify your members" means.

MR. WYTKIND: We have been very disappointed, and we are actually pleased with today's hearing because the focus has been properly on the state of the industry, not on the state of relations between labor and management. We have been very disappointed in the attempts by some in the industry to use the current environment in a way to modify and dramatically alter the way in which labor and management coexist in this industry under existing law. And the result of that has been an unfortunate alienation of the work force at a time when this industry has to rally together to weather what we are dealing with today. And it is also created a kind of acrimony -- the exact opposite of what this industry and its workers should want at the present time. So that was the reference to it. I didn't mention it. One, I summarized. And, two, the focus of this hearing is obviously the state of the economics in this industry, and I wanted to direct my comments to that. But it is an issue that we are very concerned about.

REP. ISAKSON: Well, you exercise good judgment in your judgment in terms of what you said. And the reason I pointed it out was not in any way to point a finger at you, except to say if the former statements by these gentlemen and Mr. Baggaley are true, and the long- term viability of the industry is going to depend on the business model changing, it is going to take a cooperation effort with management and labor to get there or you will never get there. You will kill the goose that laid the golden egg, so to speak.

So I just wanted as an observation on my part -- and I want to compliment you on making the decision to leave that out, because that's going to help us to get to those common grounds in the future where we find a new business model.

MR. WYTKIND: But there is one point that can't be lost, and that is this history -- this industry is intertwined with many, many ups and downs in the economy and in air travel, and the employees in this industry have always managed through those changes, through those very wrenching times like the reference to the eventual destruction of Eastern Airlines and what that meant for so many workers. And so I would argue that it is already happening. We are seeing what is going on with some of the carriers right now, and they are talking to one another.

REP. ISAKSON: And my time is up. I just want to observe that Mr. Mullin's estimate of four billion in the hassle factor is correct. And I think there is something that Congress can immediately do,and that is we have to push TSA on the trusted passenger card and the uniform identification system that is voluntary. It wouldn't generate $4 billion in new revenue, but it would certainly put a major dent in the hassle factor, and I commend Mr. Culberson for --

REP. LATOURETTE (?): Would the gentleman yield on that quickly?

REP. ISAKSON: I'll be happy to.

REP. LATOURETTE (?): And, if I could, to Mr. Mullin, I agree with him there, and I have been an advocate for that, and we have now got I think a new head of the TSA who might be open to it. It would be helpful if you could provide the data that establishes this, because this is such a big number. If we could examine that and use that to advocate, because I mean that's the biggest -- on that chart that's the biggest single number. And if we could address that -- and particularly with your high revenue passengers with the trusted traveler card, I mean we would be making a lot of progress here. So --

MR. MULLIN: I'll be happy to get back to you on that.

REP. MICA: Okay, without objection, Mr. Oberstar moves that the record be open for an additional two weeks for testimony, and we appreciate your submission of that information for the record. Without objection, so ordered. Recognized.

Now, Ms. Johnson, the lady from Texas.

REP. JOHNSON: Thank you very much, Mr. Chairman. This has been a very worthwhile hearing. In the Dallas-Fort Worth area -- and obviously all of us think about our areas when we look at a problem industry -- the Dallas-Fort Worth International Airport generates $11.2 billion each year, and it is considered the economic engine of the area. It's the largest employer in the Dallas-Fort Worth area. And the more I hear about productivity, the more I know that people are going to be eliminated in lieu of technology. I am really concerned about what is going to be best for the industry now. I know the war risk coverage, tax relief -- what would be the most helpful? I can't help but realize how important the industry is. I also feel a great concern for the employees who will continue to lose jobs. There is hardly any way that the industry is going to rehire many of the people they lay off. The more the productivity is increased, that really comes down to the bottom line of eliminating the need for more human beings, and that's just as troubling.

I'd like Mr. Carty, who is a very important figure in our area, being president and CEO of American Airlines -- the airlines for the Dallas-Fort Worth area -- what would be the best direction for us to be of assistance, and what impact would increased productivity have on the employee?

MR. CARTY: Thank you, congresswoman. I think the things that we touched on today are probably the things that we require the most help - -this committee and Congress on. As to the productivity issue, we like every other company is trying to manage it in a way in which natural attrition, some growth in our businesses, allow us to absorb that productivity rather than result in redundancies. We have had some limited success in this crisis period in doing that, but you will recall in the 20,000 jobs that we had to eliminate post-9/11, we were able to mitigate 7,000 of them by voluntary programs and so on and so forth. In this most recent round of cuts we are doing the same thing. We are working very hard in mitigation. And I know of the 7,000 we have over 2,000 of those jobs being mitigated.

But what you would really like to accomplish is not to be making those productivity gains in this kind of crisis. You would like to be making them in a more normal environment so you can take advantage of them naturally either through attrition or by growing into that productivity. And that really is a corporate objective of ours to try to manage this in a way that doesn't cause personal disruption in people's lives, and in fact eliminates the worst part of their work, because the most redundant routine, uninteresting part of the work is the work that lends itself to that kind of automation. So we are working on it, but it's a tough environment to work on it.

REP. JOHNSON: You know, I know that this is a touchy subject, but I would like your comment on the many security procedures, and identify those procedures you think that are important and those that are unnecessary and maybe an overburden to the passengers.

MR. CARTY: Well, again, I think we have touched on a couple of them today. I think some of the overburdening ones have to do with the fact that we don't have a trusted traveler program, so we are subjecting people that we don't need to subject to a security process, and consuming vast amounts of TSA resources in doing so. When you're looking for a needle in the haystack, you really want to look at the part of the haystack that there's a possibility the needle will be. And I don't think we have done as good a job as an industry and government in doing that as we can. And I am delighted to see Admiral Loy's efforts in that regard.

Another good example of that is when you are not confident that you are doing security screening at the checkpoint very effectively, what do you do? You do it again at the gate. Well, that probably isn't the right solution, either from a security point of view or from an expense point of view. What you would really like to do is do it right at the security checkpoint -- probably focused on a trusted traveler program, and eliminate all of that manpower that is doing a redundant task at the gate. And, again, I think Admiral Loy has focused on that. We have in place today in the country I think two experiments at airports with no gate screening. And we have done some things to enhance the checkpoint screening, but JetBlue's involvement and experiment in Long Beach, and American as of this morning is involved in an experiment in Los Angeles, which is of course quite a bigger experiment. And I think Admiral Loy intent is that if those work well it will improve customer service, drive down the hassle factor, drive down his cost of doing security, and then you can further enhance it with a trusted traveler program. I think that would be a great thing for all of us.

REP. JOHNSON: Thank you very much. Thank you, Mr. Chairman.

REP. MICA: I thank the gentle lady. Let me recognize the gentleman from Illinois, Mr. Kirk.

REP. MARK STEVEN KIRK (R-IL): Thank you, Mr. Chairman. I agree with Mr. Lipinski that we have got to do something. About a mile of runway laid is one of the most productive investments a community can make in jobs and future growth.

I represent thousands of America and United employees -- probably more frequent fliers per capita in my district than any other. So I would like to bring it home for and ask an open question. I am going to violate the rules: I don't know the answer to this question. (Laughter.) Mr. Baggaley, what do you think is going to happen to United Airlines?

MR. BAGGALEY: Well, I -- (laughter) -- I think we'll know a good deal more about that when the group of organized labor offers their suggestion to management. There are several scenarios. If they offer a program which includes fairly expensive labor cost concessions as part of a broader program, I would expect that management would be able to work with them and probably they would get a loan guarantee from the Transportation Stabilization Board. If it is a more limited program, I expect they'll be debating back and forth with management -- possibly debating with the Air Transportation Stabilization Board, and that United will in fact file for bankruptcy later this autumn.

REP. KIRK: I guess that's a follow-up question in a bankruptcy scenario, and maybe for some other airlines -- are we talking about a vast sea of aircraft in Southern California then at the Palm Desert facility are sitting idle, or --

MR. BAGGALEY: Well, there's a substantial lake there at least, and it may turn into a sea. I should point out that filing for bankruptcy is not the same thing as shutting down, and I wouldn't expect United to shut down. It would probably scale back in size. There are certainly risks in that, particularly if you are talking about a conflict with Iraq. They could go into bankruptcy and then run out of cash. But the most likely course would be that they would reorganize in bankruptcy, have to scale back a fair amount, but emerge on the other side.

REP. KIRK: Well, Mr. Chairman, I think the --

REP. LIPINSKI: If the gentleman would yield for a moment, we can resolve this problem by including in the Aviation Security Technical Corrections bill a mandate that the stabilization board grant a loan to United Airlines.

REP. KIRK: If I could join you on that, Mr. Lipinski.

REP. LIPINSKI: You certainly may.

REP. KIRK: I think that we need to take some decisive action, especially on the insurance side, to make sure there is an insurable risk. Right now I can see that it is almost impossible to do that on the liability side. We certainly hope that labor and management can work out some of these for some of our big carriers. But I do see a substantial public interest in making sure we don't do lasting economic harm.

Thank you very much, Mr. Chairman.

REP. MICA: I thank the gentleman. The gentleman from New Jersey, Mr. Pascrell.

REP. PASCRELL: Thank you, Mr. Chairman, and thank you for holding this hearing -- a very, very productive hearing. Mr. Mullin, you were in a Wall Street article yesterday. I want to refer to that article, because you are quoted basically here. You said -- for the record, I assume correctly -- correct me if I am wrong -- that you would not be seeking a bail-out of the industry.

MR. MULLIN: Correct.

REP. PASCRELL: -- which you stated a number of times today. But you said that when it comes to security as a national security item the security should be paid by the government. Now, do you -- are you suggesting that the federal government is responsible for all airline security as of 9/11?

MR. MULLIN: I am suggesting that the government should be responsible for national security generally. My comment, which was approximately correct, referred to the fact that the airline industry, because of its unique involvement in the tragedy of September 11th, has been singled out for unique government attention with respect to security, and a large portion of that cost of that security has been borne by the airlines themselves.

REP. PASCRELL: I can accept that, and I understand you need to help and we are going to help.

MR. MULLIN: Right.

REP. PASCRELL: But I have a very serious problem I think you should know about, and I can only speak for myself. To me there should be a baseline, a threshold of security which should have been in place by the airlines before 9/11.

MR. MULLIN: Yes.

REP. PASCRELL: And you know and I know for various reasons it was not. And we need to address that in order for us to come up with a better solution, it would seem to me.

MR. MULLIN: I would accept your general point, sir. I think that there is security that is not national security that should be our responsibility.

REP. PASCRELL: You can go back into the records for the last 10 years -- recommendations were made to the industry. These are not meant to criticize us. I mean, we have got to put it all on the table if we are going to work it out as we expect the workers to work it out. A hundred thousand of them laid off, but we want them to work it out. I mean, you know, that's very interesting. I find that very, very interesting.

And I'd like to ask my good friend Ed Wytkind: What do you think we should be doing to help the aviation industry workers? What do you suggest?

MR. WYTKIND: Well, first and foremost, to deal with the immediate hemorrhage that occurred right after 9/11 that hasn't eased a year later, there needs to be something done to create the right safety net for the unemployed. We have not dealt with the fact that we are approaching a half a million workers who have exhausted unemployment benefits in the United States, and a substantial number of them are airline workers.

Two, we have to continue to debate and consider whether we can find ways to help people with their health care. We really have a health care crisis in America, and we cannot allow more and more workers to go without health care, with their families struggling to figure out how to pay for staggering health costs.

But three, let me comment on two things that are important -- and they have been alluded to throughout the hearing. One is I agree with Ms. Johnson when she said that the words like "productivity" and "reengineering" really do often add up to lost jobs and unfair and frankly unworkable demands on employees. I disagree with the comments at the other end about the stabilization board in its deliberations. I think that the way the stabilization board has carried out its agenda has been frankly border-line irresponsible in trying to deal with the fact that you have an act of Congress that said dole out $10 billion in loan guarantees. And every time we try to get a loan guarantee for an applicant, it is not happening because they erect more and more obstacles. And, as I said earlier, they are reaching into the collective bargaining process in a very inappropriate way.

REP. PASCRELL: Let me ask you this quick question. You've heard today of we are trying to ease the process of folks getting on the planes, and the frequent fliers. But what about your employees? Has that become a problem? Is that hurting us in any way for them to get access into the airports themselves?

MR. WYTKIND: Oh, absolutely. The trusted traveler program needs to include trusted employees. You have got workers going through an unbelievably comprehensive criminal history check requirement, and those workers are going to ultimately get some sort of universal pass to go into airports. They cannot be held up in this security process to a point where you can't even get the crews to the aircrafts or that the CEOs at the other end of the table can fly the planes. I mean, the reality is that that hassle factor has to also include ensuring ease of movement within the airport facilities for the employees.

REP. PASCRELL: Mr. Leonard, it didn't fall on deaf ears when you addressed the issue of competitive fairness. That has to be part of the mix, Mr. Chairman, of what that means and whether the federal laws - -we are abiding by those federal laws. We know we have the antitrust laws. But you know as well as we know how many of them are implemented and what we follow and don't follow. So I want you to know that did not fall on deaf ears.

And when I look at this list-- from new security taxes to the insurance, to the federal air marshal, opportunity cost cuts, the door fortification, the freight restrictions, there are some things that I absolutely would agree that we have to come to terms with here. But there are some things that I think are the express responsibility of the industry. And I still didn't get an answer to what excess capacity means. And I read about it as much as I could, but I never got an answer, Mr. Chairman. Perhaps since my time is up I could get an answer some time in the near future. Thank you.

REP. MICA: You could provide the answer into the record, without objection. I'll turn to Mr. Oberstar now.

REP. OBERSTAR: This has been a most interesting hearing, but a bit of deja vu -- a little as Yogi Berra said. A few preliminary items. And that is, Mr. Wytkind, on the House floor last October during the debate on the airline financial assistance legislation -- we were on the floor twice on that -- once three days after September 11, Chairman Young, Mr. Mica, Mr. Lipinski and I -- until one or two -- one or one-thirty in the morning trying to get this legislation passed. It was stopped on a procedural motion. And then we spent the weekend crafting what became the stabilization legislation.

We tried intensively in discussions -- the House, Senate leadership and the Department of Transportation, Mitch Daniels for OMB speaking for the administration -- to get employee relief. We couldn't come to an agreement on that. But on the floor Speaker Hastert took the floor, said there would be prompt consideration of employee relief, including financial assistance, retention of health insurance, training for new careers. My memory doesn't fail me: None of that has happened. Is there any prospect for any of that? Any of those pieces of that package coming up --

MR. WYTKIND: Well, I too -- I wake up in the middle of the night thinking about that battle, because it was a poor reflection on what we as a country should believe in. But there were very strong commitments made on the floor of the House. We fought very hard. The nation's airline workers will never forget how hard you fought for them in that debate. But ultimately we did nothing. The U.S. Senate tried to pass a bill that was pushed very hard by Senator Carnahan, who championed the effort in the Senate, and it was stalled in a filibuster, as everything does over there. And in the House, despite commitments made, nothing has been done, and we still have every day more and more workers losing their health care and losing unemployment insurance. And something has to be done.

And to make the last point, there is some pending -- there are pending efforts as you all wind down this Congress, but I can't predict whether they will get done. We are pushing very hard for it, but there are only a few days left of business. So our hope is that the Congress will not go home without helping the unemployed in this country.

REP. OBERSTAR: Thank you. I would say not for lack of good will or good effort on the part of the speaker, but on the part of other members of his leadership team --

MR. WYTKIND: I agree with that.

REP. OBERSTAR: -- this initiative or these initiatives have been blocked. Are there any of these items, Mr. Wytkind, in the labor assistance sector that would provide financial relief to air carriers if we can include them in a technical corrections bill?

MR. WYTKIND: Well, what's clear is, as Mr. Carty said earlier, there are a lot of issues that the employers are dealing with their employees on. And the reality is that these assistance programs are designed to provide a safety net. The safety net is gone. These workers have nothing. They've got some of the best health-care coverage in America and they don't receive it.

So the reality is yes, in dealing with this very difficult time that the industry is going through, of course it's going to help tremendously for the government to step up to the plate and provide workers with the kind of relief they need. Ultimately, though, what we want is a job, not government assistance. And our focus is going to be in the coming weeks and months to make sure that we stabilize this industry, because it is a high-wage, high-skill sector of this economy that we're going to fight for every day.

REP. OBERSTAR: Well, now, in restructuring for right-sizing or other such financial terms, as a worker, I think -- I know when I was working in the mines, going through college, or at the Raleigh Ready- Mix plant in Chisholm, they said, "Well, we've got to do some restructuring." That meant, "You lose your job." And it makes it a lot easier to downsize -- that is, cut jobs -- if those who are cut have a safety net. And if that's a cost savings to industry and government can provide for it, then there ought to be some ways we can work creatively together.

Mr. Baggaley, nine years ago one of your colleagues, Julius Maldutis, a frequent witness before this committee, said, "Economists believe that because aviation is a high fixed-cost sector with low added costs for each additional passenger to a flight, will always be tempted to offer unduly low fares to fill up their planes, regardless of the impact on profitability." Do you think that applies today, in today's marketplace?

MR. BAGGALEY: I would agree with most of that, but not the final part. Airlines are definitely a high fixed-cost business, and the marginal cost of adding the last passenger is not very large. However, the reason why they charge the low fares is because there's no other way to fill up the seats. And if it's unfilled, they don't have any revenue whatsoever.

Actually, the capacity additions of the industry in general during the upturn of the 1990s were not as excessive as they were in the late 1980s, going into that downturn. So actually, that is one lesson that was, to some extent, learned.

There is a problem with excess capacity, and one of your colleagues asked about that. However, that's mainly because of a large failure of demand due to the recession and the events of September 11th. A good deal of capacity has been put in the desert, and we expect to see further retirements. But I wouldn't say that's the largest problem in the industry. I'd say the shortfall in the revenue and in some cases the cost structure are the main problems.

REP. OBERSTAR: The industry is here addressing government- imposed costs and looking for relief from those costs. They've got a list of six-point-nearly-three billion dollars' worth.

What we also have to separate out from this is what, in their own practices, are contributing also to problems, financial problems of this industry? And shouldn't those be addressed concurrently? Not that we should mandate them, but we ought to see some movement in the right direction of addressing, as my colleague, Bill Clinger, said some years ago, the problems of an industry that doesn't seem to be able to -- how did he put it? -- to reasonably price their product.

MR. BAGGALEY: Well, certainly I'd agree that the problems that they're facing are a combination of those which were fundamental to the industry going into the crisis and the extraordinary circumstances that have occurred recently. And there has been actually a good deal of cost-cutting taking place.

I think we need to distinguish between cutting costs by reducing flying, which is what they've done to a large extent, but that doesn't reduce the cost to fly a particular seat. You're just doing less flying. And what they're turning to now is trying to re-engineer the process so they can reduce the costs of producing that flying. Don Carty mentioned some initiatives in that area. However, the other item which is being addressed at U.S. Airways and United, as part of the re-engineering process, asking for help from labor.

REP. OBERSTAR: Now, the airline members -- I think the first lesson of the Gulf War was the exploding cost of fuel that resulted the moment -- began when Iraq invaded Kuwait in 1990. Northwest Airlines' business plan, if I may call upon that because I recall it so well, anticipated the largest fuel increase in the previous 10 years before the LBO occurred, which was a 50 percent increase in fuel price, in the worst recession, which resulted in a 7 percent unemployment rate.

But in the aftermath of the Iraqi invasion, fuel prices doubled, and the recession went to an 8 percent, 9 percent unemployment rate. And passenger traffic in that market -- that is, the North Atlantic/Middle East market -- dropped by half, in addition to which aircraft called into service in the Civil Reserve Air Fleet were not allowed to bring back-haul passengers.

Now, if the numbers are right, your fuel cost for last year was in the range of $10 billion, collectively, and somewhere around $6.8 billion so far this year. If you have even a 50 percent increase, that could go to $15 billion, or a doubling, go to $20 billion. Now, what do you think government can do or should do -- or have you even given it any thought? -- about fuel in the event we go to war in Iraq? And I think that that's a dead certainty, given the president's statements.

MR. CARTY: Yeah, Congressman, it is a chilling prospect for all of us. I should say, at the outset, I don't think there's any industry who, as an industry and through its employees, has been more supportive of these kinds of international issues and these kind of international events. I think the Gulf War, as you pointed out, is a great example -- (inaudible) -- program; the number of reservists that were called up out of the airlines to participate.

But on the other hand, the prospect is financially chilling, because even as Congressman Duncan suggested, if this were of a short duration, I think you can look at the Gulf War, which was a short duration -- we had two months of kind of doubled fuel prices. We had a couple of months with a 20 percent drop in our international traffic.

It was most acute in, obviously, the Gulf states. But the North Atlantic traffic dropped by 40 and 50 percent. Our domestic traffic dropped by an additional 10 percent. And we survived that because, at the time, we had balance sheets that were somewhat healthier than they are today. And today we are here talking about a crisis without such an event. So we are doing a lot of thinking about it.

I think Joe Leonard's suggestion was a very good one. I think we would certainly be looking to Congress to consider things like the fuel tax. We'd certainly be looking to the administration to think about things like the strategic oil reserve to cushion these kinds of things. And I think we need to do some more business-case planning on this, because we do have the data from the Gulf War.

And as an industry, at the ATA we haven't embarked on doing some work on things that we think the government could do to help us, if that were to come about, because such an event really would put a financial burden on this industry that would inevitably sink several carriers.

And I think you're seeing that now reflected in the financial markets. Part of the reason the stocks have dropped to a point where they are contemplating bankruptcy of carriers, even with good liquidity and reasonable prospects the next 12 months, is that there is now a war overhang in the market, and it's a realistic one. So we've got (to have?) some suggestions for you, and we need to (round those out?).

REP. OBERSTAR: You know, to think about it, that's an additional five-plus-billion-dollar cost to this industry and availability of fuel that is critical. Secondly, the Civil Reserve Air Fleet, the DOD estimate -- the best I've been able to get out of them is they'll need 500 aircraft. That was somewhat more than they needed 10 years ago.

You've got 715 to 900 aircraft in the Civil Reserve Fleet. Many of those are parked in the desert, those old DC-10s that are fuel- costly and so on. They're going to need you. So we need to make sure this is a healthy industry and it isn't further burdened and cost- whipped in this process.

Now, there are four items -- Postal Service -- Mr. Chairman, if I may have just a few more minutes to go through this -- Postal Service, freight, flight-deck doors and insurance costs. If you add those up, your numbers are $1.5 billion, $1.6 billion of costs.

It seems to me we ought to be able to address the revenue stream on Postal Service and deal with the security issue, possibly require the Postal Service to do the screening by explosive-detection systems of mail, and to screening perhaps for anthrax and other biological weapons, and get the mail back on the airplanes.

MR. CARTY: Yes, Congressman. We agree with that. There has been some effort by the post office to help make this happen. But there's been a fair amount of tension between the TSA and the post office as to what would need to happen to allow us to put the mail back on. And while that debate has gone on for several months now, of course, we continue to be without the revenue.

MR. ANDERSON: Mr. Congressman, a test was commenced yesterday with the post office. And our hope is, with the cooperation of the post office and the TSA, we could get the 16-ounce rule lifted fairly quickly. It's a substantial amount of money for all of us in terms of being incremental revenue on our passenger flights.

REP. OBERSTAR: And freight as well. It seems to me we ought to be able to address the security issues raised by freight. And this is the forum. This is where we have to resolve the differences between U.S. Postal Service and TSA, not out there in the marketplace. This is where we have to get those done; and freight as well.

The flight-deck door cost, it seems to me, is a national security cost. As I said in my opening remarks, there are many of these security costs that ought to come out of the DOD budget and not out of passenger charges, airline passengers should pay. So is that a relatively sound number, $110 million cost?

MR. ANDERSON: Yes.

REP. OBERSTAR: Now that TSA and FAA have certified doors for all type and model of aircraft?

MR. ANDERSON Correct. The STCs, the supplemental type certificates, have been issued by the manufacturers for each aircraft type, so we know the labor hours and the parts involved. So those are firm estimates.

REP. OBERSTAR: And Mr. DeFazio addressed the insurance cost earlier. Part of that is war-risk insurance; maybe some other insurance costs. Have you developed some specific proposals for relief from insurance costs that we could address in legislative fashion?

MR. ANDERSON: Yes, Mr. Oberstar. We have proposed that, with respect to the issue of war risk, both for primary liability and for third-party liability, that the government provide the insurance to the aviation industry.

REP. OBERSTAR: Is that $903 million in the ATA document an incremental cost above what you've traditionally been paying?

MR. ANDERSON: In 2001, prior to 9/11, the major airlines, including all (hull and ?) liability insurance and war-risk insurance, we paid an aggregate of $225 million. Right after 9/11, our war-risk insurance was immediately canceled, and those same premiums went up to $1.05 billion for less coverage on war risk. And, in addition, in order to get the industry back flying again, the Federal Aviation Administration provides third-party war risk above $50 million per flight for a much lower fee.

REP. OBERSTAR: Well, if we could address those, Mr. Chairman, I think we get to about half of the subtotal cost, and more than that if you take up the new security charge. I don't see any reason to provide relief from the passenger security charge.

A year ago passengers were falling all over themselves to say, "We'll pay whatever it takes to take off and arrive securely," and so was this industry sitting at that table. There's been some dispute about how much of it you should have to pay. But that, I think, would provide very substantial relief for this industry.

REP. MICA: I thank the gentleman. I think we're all getting pretty much on the same page on resolution. Mr. DeFazio, did you have additional questions?

REP. DEFAZIO: I could, Mr. Chairman. (Laughter.)

REP. MICA: Not too long, but go ahead.

REP. DEFAZIO: No, no. Thank you, Mr. Chairman. I'd just follow -- Mr. Anderson, maybe I misunderstood when I looked at the charts and graphs. You're saying your underlying liability, absent war risk for the industry as a whole, went up by a factor of more than four times.

MR. ANDERSON: Yes. The actual number was -- this was actually in a letter that we had sent to the administration; I just had it here --

REP. DEFAZIO: Okay, so --

MR. ANDERSON: The actual -- the 2002 premiums are $1,051,000,000 for the same -- for actually less coverage. In 2001 the U.S. major airlines paid $225.9 million.

REP. DEFAZIO: Okay, so that excludes war-risk coverage.

MR. ANDERSON: Yes.

REP. DEFAZIO: You know, I neglected to ask you about supporting my removal of the anti-trust exemption from the insurance industry. (Laughter.)

MR. ANDERSON: Well, you know, I think everybody ought to be subject to competition, because we surely are in this industry, and it's brutal.

REP. DEFAZIO: The chairman would share your sentiment on that, being a free-market guy. So we will look at that. (Laughter.) If I could go to another --

MR. ANDERSON: Especially if they go back down to 225. (Laughter.)

REP. DEFAZIO: Oh, I think we could do better than that, because they weren't competitive at 225. They were price-fixing. So if we could go to -- and, again, you know, a major loss for the airlines goes to the loss of business travelers. And we talked about the hassle factor; I look forward to getting some more information exploring that. And I know -- well, we're going to get information regarding how that number was established, subsequent to a question I asked.

So -- but in any case, looking again at business travelers, and also the support for a competitive industry brings up something where we probably don't have agreement, which is both how tickets are priced -- as I understand it, on average, business travelers pay six times more than leisure travelers across the industry. Is that fairly accurate? I've seen that number repeated a couple of times.

MR. CARTY: That's a model that would be typical of most of the industry, yes.

REP. DEFAZIO: Okay. So they're your cash cows. And so normally one treats one's cash cows well. I note that part of the -- that a lot of sea note business travelers have recently converted to lower- fare tickets, and now the industry is acting to restrict their capability of utilizing those tickets in the hope of driving them back to higher-cost tickets.

The problem is, I don't think they have a lot of confidence in how products are priced. And part of that goes to whether or not this is an opaque market or not. I mean, in competitive markets, theoretically consumers have all the information they need to make rational choices, which would include all the price selection. They don't have that.

And so I'm not trying to drive the business travelers back into the higher-priced tickets in the current situation is going to work real well with them or sit real well with them. And whether or not that becomes a new part of the hassle factor and drives more of them to get in their cars and drive even longer distances, I think, is yet to be seen. But if I could, a couple of questions.

What could we do to make pricing more, you know, accessible to all? And maybe Mr. Baggaley could perhaps address this, to get a more neutral stance. I mean, you know, I noted that the airlines are apparently about to invest more money in Obitz -- in Orbitz, excuse me -- Orbitz. And I guess I would question whether having a proprietary system, in addition to their own web site and restricting fares to other marketers of fares, you know, really restricts the choice of business travelers. What do you think about all this pricing structure that we have that no one can decipher?

MR. BAGGALEY: Well, I guess I'll respond from two perspectives. As an analyst, I understand the economic rationale for it. As a consumer, I'm as confused as anyone else.

I would say it is an industry where there is actually a lot of information available to the consumer, so much so that it is difficult, I think, for many people to wade their way through it. But particularly with the web-based applications to search for fares, there is more information actually available now than there was before.

Where the prices are particularly high, it's because there is either limited competition or the customers who want to use those tickets are more focused on the schedule or other factors than the price, and the airlines are able to take advantage of that. But I can't say I have a prescription for a fix to the system.

REP. DEFAZIO: So lack of competition and scheduling, you think, are the two major factors which support the high prices for the business-travel ticket, the restricted ticket.

MR. BAGGALEY: In certain markets there would be limited competition, but a lot of it is just that business travelers are focused more heavily on things like schedule convenience --

REP. DEFAZIO: Sure. Okay.

MR. BAGGALEY: -- and flexibility and so forth, and less so on price. That difference has narrowed. It used to be more dramatic. And part of what's happened recently is they've become more price- conscious.

REP. DEFAZIO: Just one quick follow-up to Mr. Carty on that. Given, in your testimony, you talked about how now we're going to take people to hubs but they're going to sit there for hours -- though they didn't quite say it that way, but there's going to be less congruity -- how is that going to sit with these business travelers, who he just said are very concerned about schedules? I mean, I have not been a fan of hub-and-spoke for years. And I raised this a few years ago with ATA in another hearing,, but could you address how you think that's going to sit with, and how that's going to help with the hassle factor, if business travelers now end up going to a city where they don't want to be, halfway to where they want to be, and they have to wait for two or three hours for a connection?

MR. CARTY: Well, what -- what we've done isn't as dramatic as you've just described. Over the years that led up to where we are today, one of the most important things that drove the consumption of air travel was elapsed time. How long does it take to get from Hartford to San Diego, knowing that you had to connect? And, the way people bought tickets was through travel agents, and the way travel agents selected the flight was who was the first flight on the screen. It was shelf space. The first flight on the screen was the one with the shortest elapsed time. So, we peaked these hubs more and more and more to create a shorter and shorter average connect time. That doesn't mean the consumer really cared about the three-and-a-half- minute difference, or the seven-minute difference, but it did mean that that's the way the travel agents sold the product. Now, the world has changed. First of all, the travel agent doesn't sell as much of the product. The consumer buys a lot himself on the Internet. Second of all, the travel agent sells the product for different reasons. He has a big relationship with one carrier versus another carrier. A corporation makes the selection frequently because they have a business deal with one carrier versus the other carrier. And so suddenly the importance of really tight elapsed time is diminished. Our average connect time is going to be elongated by 10 minutes in these schedules.

REP. DEFAZIO: Yeah, well, I'm pleased -- I'm pleased to hear it will be as little as 10 minutes. I was discussing with a colleague in the gym this morning how he drives five hours because his -- coming from a smaller city, he would now have a four-hour layover as, you know, I would have now a three-hour layover in Portland to connect across the country.

One -- one cautionary note here. The support for your industry, particularly among members of Congress, as someone said, the 435 frequent travelers, is driven by their constituents and by their own personal experience. And, we hear most, obviously, from higher (destination ?) individuals, business travelers, frequent travelers, those people raise things with us the most. If we don't maintain the integrity of a universal system, if we try and cut off all the small and mid-sized cities in America and give them second, third and fourth class service and concentrate on the high profit centers, there's going to be, you know, a minority of this Congress who are willing to support even sensible initiatives for this industry.

And I thank you, Mr. Chairman.

REP. MICA: I thank the gentleman, and yield for final questions to Mr. Lipinski, our ranking member.

REP. LIPINSKI: First of all, I want to say that I think hub and spoke is a great idea -- (laughter) -- I mean, particularly when you have -- (laughter) -- two principal carriers in this country operating out of the hub and spoke that you fly out of.

We're talking about the federal government paying for more and more of the cost of aviation security. Many of the states and the airport authorities, and the cities that run airports, have had a lot of increased security expenses since 9/11. Do any of you panelists have any thoughts in regards to the federal government reimbursing these states airport authorities and cities for their added expenses?

MR. LEONARD (?): Yes, Congressman. Under today's rate and charges mechanisms at most airports in the United States, the additional burdens placed on the airport by the TSA and the new regulations in the post-9/11 environment -- the burden of those fall on the local airport and the people that operate from those airports, whether you're a parking operator, an airline, or a concession operator, because most of the local airport authorities do not use -- in fact, I don't think there are any left in the United States that rely on any local tax dollars to fund the operation of the airport. So, the extent to which the Transportation Security Administration imposes costs on local airports, either by requiring more law enforcement officers, by requiring new security systems, or requiring thousands of square feet of office space for TSA employees and equipment, those costs must be borne by the federal government as part of a national transportation safety network. And we would urge the committee to be certain to take into account all of those costs, which in many respects are far in excess of the direct screening costs when -- when taking into account the relief we ask for here today.

REP. LIPINSKI: I'm certainly happy I asked that question. That was a magnificent answer you gave on behalf of city, states and airport authorities. Mr. Mullin, I want to ask you, just the hassle factor on your chart, where does the hassle factor come in on your chart? Which one is it? I didn't find it earlier?

MR. MULLIN: It was not included with my submission. It was included with ATA submission. But it is -- it is estimated as being about 2.5 --

REP. LIPINSKI: I understand that. No, I was just comparing their chart and your chart and I was trying to match up --

MR. MULLIN: I did -- I did not --

REP. LIPINSKI: You didn't include yours?

MR. MULLIN: I did not.

REP. LIPINSKI: Okey dokey. Well, during one of the times that Congressman DeFazio and I met earlier in the cloakroom during the course of this hearing, we were discussing one of our favorite topics -- which we're going to start working on very shortly -- and we certainly want to have your input when we start working on it early next week, and that is the re-regulation of the aviation industry, and with that, I'll bid you all a fond adieu. Thank you. (Laughter.)

REP. MICA: That will be an interesting discussion, I can assure you. (Laughter.)

REP. LIPINSKI: We're going to introduce that legislation after we take over in January. (Laughter.)

REP. MICA: You heard it here, so this is your opportunity to choose sides.

REP. LIPINSKI: They've already chosen sides. I'm not concerned about that.

REP./MR.: I think the regulated rate of return might look pretty good to some people right now.

REP. MICA: I can't let this hearing be just lost in utter confusion, so we're going to have to proceed. I do want to thank all of the witnesses for their testimony, for cooperating with our panel. We do have a very serious situation. We're in a state of crisis with the aviation industry, which we're so dependent in our economy and on jobs and well-being of the country. So, I think -- I think, though, that this hearing has helped us reach some consensus. It's my hope that in the next 24 hours, working in a bipartisan fashion, we can come up with some proposal that's acceptable to both sides of the aisle here, work possibly with the Senate -- we'll see if that's possible. But we do have some serious challenges that need to be addressed by this subcommittee and by the Congress in a responsible fashion. Again, a long hearing -- (inaudible) -- panel. We appreciate your --

REP. LIPINSKI: Mr. Chairman, would you yield for a moment?

REP. MICA: Yes.

REP. LIPINSKI: I -- the chairman was talking about developing some legislation in the 24 hours dealing with the hearing this morning. And I would like to compliment him, because he's been pushing Mr. Oberstar, Mr. DeFazio and I already this morning to agree upon some points for the technical corrections dealing with the aviation security, and I want to compliment him. And I think that we all appreciate his leadership on this matter. And it's normally very strong, but today it's even been much stronger than ever, and I think we've got half the bill -- better than half the bill probably already agreed upon.

REP. MICA: Well, I'm pleased to hear that, and we want to continue working --

REP. OBERSTAR: Mr. Chairman --

REP. MICA: -- Mr. Oberstar --

REP. OBERSTAR: -- before you conclude, the elements that I pursued with the panel in my -- during my time, are elements that I think ought to be included in our consideration, in addition to which personnel factors, airline employee considerations -- (inaudible) -- the support of labor, which will be an important factor on our side, are some matters we ought to include. And I -- and I think also that we ought to get some increased security out of this initiative as well, including resolution of the positive passenger bag match issue, including connecting flight. I want to lay that on the table.

REP. MICA: I thank the gentleman. We certainly will consider all of the proposals that have been made here. Again, I hope we can craft something that will address the serious situation we find ourselves in. We don't want another person to lose their job. We don't want another airline to needlessly be lost. It's important to our economy and to our country.

So again, I thank all of our panelists for coming out today. I look forward to working with you.

There being no further business before the Aviation Subcommittee, this hearing is adjourned.

END

LOAD-DATE: October 1, 2002