Copyright 2001 Federal News Service, Inc.  
Federal News Service
September 19, 2001, Wednesday
LENGTH: 2829 words

HEADLINE: PANEL II OF A HEARING OF THE HOUSE TRANSPORTATION AND INFRASTRUCTURE COMMITTEE
 
SUBJECT: AIRLINES' FINANCIAL FUTURE
 
CHAIRED BY: REPRESENTATIVE JOHN MICA (R-FL)
 
LOCATION: 2167 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: HOLLIS HARRIS, CHAIRMAN AND CEO, WORLD AIRWAYS; KERRY SKEEN, CHAIRMAN AND CEO, ATLANTIC COAST AIRLINES
 


BODY:
REP. MICA: The second panel consists of Mr. Kerry Skeen, chairman and CEO of Atlantic Coast Airlines, representing the Regional Airlines Association. The other panelist on the second panel is Hollis L. Harris, chairman and CEO of World Airways, representing the National Air Carriers Association. I want to welcome both of the panelists. Thank you for your patience and understanding. We do want to hear from, again, as many people from the aviation industry as possible.

And we'll now recognize for opening statements Mr. Kerry Keen (sic), chairman and CEO -- Skeen of Atlantic Coast Airlines.

If we can take the conversations outside the committee room, please, we want to hear from Mr. Skeen. Thank you.

Mr. Skeen, welcome, and you're recognized.

MR. SKEEN: Thanks very much.

Mr. Chairman, Mr. Oberstar, and distinguished members of the committee, thanks for inviting me to appear before you today. I testify before you today as chairman, chief executive officer of Atlantic Coast Airlines.

You may not know Atlantic Coast, because we partner with Delta Airlines as Delta Connection, serving the La Guardia and Boston areas of the country, and we also serve as United Express in another operation of our holding company -- as United Express, at Washington- Dulles.

Total, we have 118 aircraft, provide service to 66 cities, and we employ over 4,000 people. Most of them reside right down the road in Northern Virginia, where our headquarters are, at Dulles.

So our employees -- our bases are Washington-Dulles, Boston, La Guardia. So we have certainly been touched by the actions of the past week.

Before getting into my formal testimony, I would like to echo what has been said many times here today, and that is, the employees of Atlantic Coast Airlines -- we do extend our most sincere thoughts to the victims, families, rescue workers, and also the employees of United Airlines and American, in terms of those lives who have been changed forever by the acts carried out last week. Our employees live and work in this area, and none of us will ever forget this tragedy.

I am going to -- there has been so much dialogue today, and we have been here for several hours -- I am going to cut my presentation short and make comments on things that I have heard today. I think you would probably appreciate that. You have my printed testimony, and please refer to that. So --

REP. MICA: Without objection, your entire statement will be made part of the record. Please proceed.

MR. SKEEN: So this, well, we move into basically my ad lib part of my presentation, if you'll bear with me here.

I am the founder of the company. And you've talked about -- I've heard things today about the employee side, participation. I have a big stake in how our company performs. Since the tragedy -- we're a publicly traded company on the Nasdaq -- our stock is down. Don't know what it's doing today. It opened lower. It's down about 50 percent from where it was before the tragedy. Atlantic Coast Airlines has been really a high flier. And you can take that as a pun, also. Our company has grown the last five years at a compounded annual growth rate of over 35 percent, and I'm very proud of the track record we have in returning that wealth to our employees through numerous profit-sharing and incentive plans to all our employees that participate -- they all participate-- as well as our shareholders. So when we talk about has there been pain incurred by the management and employees, financial pain, yes, that answer is a very loud yes.

Also, in terms of my particular case, since executive compensation has been brought up, our board met yesterday, and the top five executives of the company did agree to a pay cut, as well as we suspended all bonus compensation, even bonus compensation to the senior group that we had already accrued this year. So there is real sacrifice being made. And we don't do press releases over that. That's something we share with our employees and we share with our partners at both United and Delta.

The story, I think, that is more real relevant to this group is the regional jet phenomenon. And you've heard me speak before you on other occasions. And we are a part of what has been one of the most remarkable transformations in this U.S. transportation industry, and that is regional jet technology coming in and replacing turboprops. And I was happy to hear -- I'm really sorry we've taken so long today, because so many of you flew in on my airline, from the comments from the gentlemen from Charleston, to Knoxville, to Bangor. All those were, even though they probably didn't know it was the Atlantic Coast because the airplanes either had a United paint scheme or a Delta paint scheme, but that was Atlantic Coast Airlines. So I regret that it's taken so long, because you should get out there and fly some more because it is very difficult to see the drop in passengers. And it is real, and you have heard that today, and I won't say any more about that.

But on the regional jets, we operated -- last year we had 60 turboprops in our fleet. We're on track by the end of 2003 to be totally phased out of those turboprops and replaced with regional jets. We have 81 regional jets on firm order today to complement the 77 we already have. And my biggest fear, because of this crisis that faces this industry, is it is going to be difficult to finance and insure those regional jets, which means loss of service to smaller, mid-size communities, what we specialize in.

I was glad to hear Leo Mullin's comments, since I am a partner of Delta Air Lines, and his bullishness on the value of the regional jets of the Delta system and his desire that that will play a major role in helping Delta return, hopefully, to profitability. So I'm very pleased with that. But our ability to finance those aircraft as well as insure -- we've already had three of our aircraft financings fall through since that last week. But we had commitments from credit committees before we had gone to contract that called and reneged, or backed out -- whatever you want to call it -- of that commitment. So it is real.

On the insurance issue, that is real to us as well. We are very concerned. We were notified yesterday of notices for cancel and re- write of our liability insurance, huge increases in rates coming our way. And the magnitude -- the magnitude of a small carrier -- got to read my notes to make sure, here. I've got to refer to my script a little bit. You're looking at a carrier the size of Atlantic Coast Airlines that our insurance on liability, not whole, is approximately $ 2 million. The rate's being thrown around, and we haven't seen anything firm, would increase that to $ 8 million next year. Staggering. And we're not even sure it will be available in the capacity that we need. And so there is a real fear, real crisis, and that is one area that I encourage you to really step up and assist, and I heard very positive things earlier today.

The other issue is loan guarantees, which has been talked about. So I won't go down that path. But obviously that is needed to ensure that the regional jets can continue to be financed. And the security issue was the third point that I'd like to reinforce. But again, that got a lot of dialogue today, so I think enough has been said. But to security, we have to get flying again, and that is, really, if we can get over this immediate financial crisis. We're not going to get over it if people don't have confidence in the system. So it's very important that we all do our part in trying to make the American public feel safe about flying and hopefully start beginning to get positive, maybe more level, representation from the media in terms of what's going on in the airports. Because it's not all gloom and doom in terms of long lines everywhere you go.

I went out and flew Friday and Saturday -- our system -- to see our employees, as well as see it first-hand. And yes, there were some inconveniences. But I was really pleasantly surprised at the lack of problems that I incurred in terms of delays, getting through the airports. It has to improve, and we've got to be able to demonstrate and convey that to the traveling public, because not only is it security, we serve a lot of markets that, you know, are just an hour or an hour and a half flight away. If they think they have to get to the airport two and three hours ahead of time, they'll get in their car, which is documented a more dangerous mode of transportation, and drive to where they're going instead of flying us, and then the resulting losses that we've talked about, the multiplier effect when our industry does not do well.

So with that, I had a very cohesive presentation, but I felt emotional to just kind of rattle off things that I heard today and what kind of tweaked my interest. So, again, thank you very much for allowing me to be here, and I will conclude my remarks.

REP. MICA: Thank you, Mr. Skeen.

We'll hear now from Hollis Harris, Chairman and CEO of World Airways, representing the National Air Carriers Association. Welcome, and you're recognized, sir.

MR. HARRIS: Good afternoon, and thank you, Mr. Chairman, Chairman Mica. And I was going to recognize ranking member Oberstar, who I've known for many years in the industry, even though he's not here, and to all of you other distinguished members of the committee. I'm Hollis Harris, as has been said, and CEO, World Airways with our headquarters now in Peachtree City, Georgia, a suburb of Atlanta.

And joining me here in the audience is Tom Corcoran (sp) of one of our NACA carriers, Gemini, and Mr. Ron Priddy, who is president of the National Air Carrier Association.

So thank you -- as all the others have said -- very sincerely for holding this hearing, and for what I know is great concern on your part, and support for what is a grave hour in our aviation history.

I've been in the aviation industry for more than 47 years now -- 36 years at Delta, with three years as president; over one year at Continental as chairman, president, and CEO; and I was the CEO and president of Continental holdings; five years as chairman and CEO of Air Canada; and over two years now as chairman and CEO of World Airways. And in my entire career, this certainly is the most serious crisis that the industry has faced, and I think arguably you could say it's the most serious and the worst in the history of civil aviation.

In the interest of time, and as Kerry has said, I'm going to not cover everything because it will be in the record, Mr. Chairman, I assume. And we have turned in my comments, and so I'll pass over the background I had on World Airways -- it is in there -- and I will go on.

I have been asked by my fellow National Air Carrier Association board members to represent their concerns here today in this hearing, in addition to my own.

World is a long-time member of the nation's Civil Reserve Air Fleet program, and -- as are most of the other carriers of NACA. And it's fair to say that these carriers are the backbone of the military's peacetime and contingency airlift system. We are providing whole airplane charters to worldwide destinations. And we are all proud of our -- what we've done in the past, and our airlift response during the Persian Gulf War, and we stand ready to support DOD when we identify and locate the current enemy.

What are our concerns? We have many concerns stemming from the terrorist attack last week, just like our associates. We are focused primarily on security, insurance, lack of revenue, lack of capital, and our people.

The security. We are concerned that travelers have already lost and will not get back their confidence in the industry's ability to provide safe and secure air transportation, certainly not in a timely manner. And in the initial aftermath of the terrorist attacks, we collectively participated with the Federal Aviation Administration to plan and implement changes, just like the big carriers did, changes to our nation's security system for all the airline industry.

And so, during that time, and because of the support and the attention that was given here and the people we worked with, I commend Secretary of Transportation Norm Mineta and the FAA Administration, Ms. Jane Garvey, for the prompt responses that they have made to restart aviation operations. I think we are indeed fortunate to have their leadership and experience during this time of crisis, as well as all of yours.

Much, however -- as we have said and heard here today -- remains to be done. But we support the federal government assuming some of the responsibilities for securing U.S. airports. But we are in favor of a surcharge, as has been discussed here today. I think that would be some of the right way -- one way that would be correct for everybody who uses the system to help pay for the cost of ensuring the safety of the entire operation.

But carriers still need financial assistance to recover from the expense of implementing these emergency security measures that we had during last week and are ongoing.

As far as insurance is concerned, we worry that the industry will have a very real difficulty with the availability and affordability of insurance, and specifically, as has been discussed, war risk, but some of the other coverages also. The insurers who provide liability, war and (allied peril ?) aviation insurance coverage, have given the seven days notice as of next Monday night, Greenwich Time, September 24th. And the insurers have indicated that they intend to offer reinstatement of the coverage prior to the expiration date, pending a modification of the coverage. But in order to reinstate the coverage, an airline must agree to a special surcharge, a $ 1.25 per passenger, and changes in the scope of coverage. And we anticipate that the changes in coverage will be a lower limit primarily for third party bodily injury or third party property damage. And separately, we expect to receive similar surcharges and changes in scope of coverage as it relates to the whole all-risk insurance. We expect -- some of us are passenger charter carriers, and some of us are cargo at the same time, and then we have some members who are just full cargo.

But we expect a similar adjustment in the cargo side, and we all should receive an update on the status by sometime tonight, we have been told.

But as Kerry mentioned, the numbers relative to his operation -- we think that they are going to be four to five times and, in one instance, 10 times more expensive than what we have been paying prior to September 11th.

We believe that we are fortunate that Congress has already provided laws for emergency assistance in these types of circumstances. And of course, as you know, the laws require the president to make a determination that insurance is not available or only available at extraordinary prices. And in a letter from our organization, the NACA -- in a letter dated September 16th, we asked Secretary Mineta to initiate that action, and we provided your offices and the minority staff with a copy of that letter.

Unfortunately, as you well know, there are shortcomings in the law that we need your assistance in fixing. There is no coverage for domestic flights, and there's too little money in the insurance fund to cover modern aircraft whole loss, just one.

Also, we believe there needs to be expanded authority as to the actions that the administration may take. Specifically, we believe the government should be able to cover these significant increases in premium with direct payments to the carriers, which then would pay the premium to the underwriters. In that manner, in our opinion of one way to do it, we are not providing government insurance in these extreme circumstances.

On the other hand, where underwriters will not provide coverage, working with the program we could provide the coverage and must provide coverage, and we are currently working with Aviation Subcommittee staff on this subject -- we, the NACA.

Obviously, there are other approaches you could take, just like a law -- passage of a law that would -- or expansion of the law that would relieve some of our suppliers and so forth, such as airplane lessors and so forth, of the liability that they would be faced with.

On the revenue side, we are concerned as the big carriers that the recent loss of business revenue during the grounding of the industry will have reverberations that imperil the safety of many carriers. We must ensure the survival of the industry in order to support the military, as well the civilian needs for air transport. In a contingency, more than 95 percent of all military passenger movements and approximately 40 percent of all cargo airlift are handled by civil air carriers in the civil reserve air fleet. We must preserve that partnership and capability.

END OF TODAY'S COVERAGE COVERAGE WILL RESUME ON THURSDAY

However, the current financial condition of the airlines that are now in the Civil Reserve Air Fleet operating mode -- are in jeopardy of going out of business, some of these. We were in jeopardy at World before September 11, of running out of cash, and we set out to help ourselves by going to our lessors -- and this subject has been discussed today to get all parties involved in the paying -- we went to the lessors to reduce rates. Boeing has -- on two airplanes we have from Boeing, for instance, they have agreed to negotiate with us, and we are talking about a significant decrease in rate for up to a year. And they have agreed to negotiate with us without putting us into default, which is of great significance to us.

And now -- that was before September 11. Now, with the loss of revenue in our group, from September 11 to September 14, then the situation and the probability and possibility for some of going -- running out of cash before the end of the year, which we cannot allow to happen, is even greater. And so we are concerned that, as that situation has gotten greater, that the investors and other means of getting capital into our -- into the whole industry, but certainly to -- in our companies, some of these small companies, is a major problem. And for that reason, we agree with the large carriers, that in addition to some immediate relief like the $ 5 billion that has been mentioned, we need some sort of long program at something like 0 percent to 3 percent rates, which would be the Federal Reserve window rate, and no payments on premium for 36 months -- some program like that. And the amount of the loan certainly would vary by carrier, but you could provide a line of credit for up to 25 percent of the gross revenues that were projected before the terrorist attack, for the next 12 months of operation. And if you look at that, obviously focus on what some of the previous panel said, that that is something we're going to have to obviously pay back.

And finally, though, and of most importance, we remain worried about all of our employees and their families if relief is not immediately forthcoming. Because if some people run out of cash, all of you know what the results would be. And I realize that labor has already spoken here today -- Mr. Hoffa testified this morning. But I do want to point out to you that all of the NACA member carriers do have collective bargaining agreements among most of our employee groups.

World Airways pilots and flight attendants are teamsters, and some of our other members are represented by the International Brotherhood of Teamsters, and three NACA carriers are also represented by the Airline Pilots' Association. And then there are cabin attendant unions as well. And I point this out only to emphasize the far-reaching impact that this crisis is having on the people of -- the people of this country. And as Leo said, this is not just a business problem; it's a very personal problem for many of our employees.

Unfortunately, the big carriers and some of the small ones have already announced layoffs, and if we do not get help soon, the situation will demand that other carriers do the same. At this point in time, World -- we are not contemplating across-the-board layoff, except on a seasonal basis. Starting October 1 through December 1, we will furlough 130 flight attendants. We only have 1,030 people in our company, over 400 of them are flight attendants, and during the winter, it is somewhat of a seasonal requirement that we furlough some. But we are looking, as we get this operation back up to full speed, to bring them all back by April the 1st.

So, to summarize, we need to take immediate action to expand the government's authority to respond to these unique and critical circumstances. We support the administration's approach on these issues, and under that expanded authority, we support the direct payments to air carriers for insurance, security, and the other critical business needs, as well as the establishment of a long program to assure the viability of the aviation industry and in support of America's response to these acts of terrorism and war.

One last request. When you are considering what you're going to do, please do not forget us little people, especially the thousands of people who work for the little operators. And keep in mind that the small operators in NACA play a big part in the support of our military. And I thank you for your time.

REP. MICA: I thank both of you.

I have just one question, and it really deals with your last statement, Mr. Harris. The little people, or smaller air industry players -- you both feel comfortable that the legislation that's drafted has the potential for assisting both of your interests, both as far as the -- there's two parts to that. One is direct compensation. The second part is the longer-term loans.

But -- so, we will -- probably, your package as we see it, will work out to there being probably a fair amount when it gets down to the bottom of the list on the basic infusion of cash to make up for the lost revenue. And then, hopefully, there will be something that -- whatever formula you come up with for loan guarantees would be helpful to us also.

REP. YOUNG: Thank you.

Let me yield now to Mr. Sandlin.

REP. MAX SANDLIN (D-TX): Thank you, Mr. Chairman. Let me say first that I appreciate the critical part that the smaller airlines and feeder airlines play. And we certainly recognize -- and I fly to Texas twice a week and go through Dallas and Shreveport, Louisiana. And I'd like to say that I experienced the same thing you did -- no delays, no problems, maybe a heightened awareness of security, which is important. And I would like to say thank you to those employees at the American Eagle, in Shreveport, Louisiana, doing such a good job, and all the folks at that airport and at the DFW airport -- Special Services, in particular, and others that made our trips helpful.

You've not talked, and we've not talked much about liability today. And I know that's not an issue -- it was brought up earlier -- but I know you have experience both in big airlines and small airlines. Is there any advice you could have to us on how we could work together as an industry and as a Congress to provide relief to the families and the victims without, you know, further victimizing the victims? Do you have ideas in that regard?

MR. HARRIS: Well, are you talking about now the victims on the ground?

REP. SANDLIN: Yes, sir. Or in -- yes, sir.

MR. HARRIS: I think the insurance -- as American said, the basic insurance that we carriers have had takes care of the passengers and the victims and so forth on the airplane. But I don't know the answer to the third party body and third party property. It is so vast. I don't know exactly where you have to draw the line there.

REP. SANDLIN: Do you think some of the money that we've set aside to help the airlines -- and certainly we want to help the airlines -- should some of that be set aside for a claim fund by the victims? Would that be something to consider or not?

MR. HARRIS: Technically, I'm sure you could put it in the bill and it could be set aside. I don't know -- I really don't know if it's workable.

REP. SANDLIN: Okay. I'm just asking for --

MR. HARRIS: Because of the large number of people involved.

REP. SANDLIN: Right. Well I'm asking for your advice. Do you --

MR. SKEEN: My comment on that, if you don't mind --

REP. SANDLIN: Yes, sir.

MR. SKEENH: -- would be that we played a small part in scrubbing some of the numbers that you heard today from Leo's presentation. And, you know, those type of funds are not in the kind of scaled down request, as I understand it. You would have to check with someone from ATA, but that is my understanding -- that those numbers were not built in to Mr. Mullin and ATA's model.

REP. SANDLIN: I think that's correct, but I was just asking generally, without getting into dollars, if you had any ideas. And you might want to think on that and talk with us later. So I didn't want to pin you down on numbers or (ideas ?), but just something that you might come up with creatively or otherwise to address it.

And I'm interested, as we go forward, do you feel like that the -- are these hearings beneficial to you as an industry, the hearings like we're having today -- the discussion, the debate?

MR. HARRIS: It is interesting that you have given the opportunity to the small carriers like -- that are represented by the National Air Carrier Association. Yes, I think they are beneficial.

MR. SKEEN: Yes, I think they have been, too, especially since I'm a partner to Delta. And I got to hear some very encouraging things from Leo today about -- they're not wavering on their commitment to the small communities and the role the regional jets play. So actually, it was worth every minute I squirmed in my seat back there in the gallery.

REP. SANDLIN: Did ya'll get to talk with the major or larger carriers last week, as this happened, as far as your input or whether or not -- if you had suggestions on what --

MR. HARRIS: We or some of our representatives were in various meetings with them. So we got to make some input like the meeting that was held tomorrow with most of these guys up here. We had -- these two gentlemen were at the White House, so, you know, we've had opportunities to participate. But we haven't been in the calculations.

REP. SANDLIN: In fact, now -- since we've had an opportunity -- because I want to make sure we're using our time well -- since we've had an opportunity today, and we may have other days, to discuss these issues in great detail and get input from the industry -- both large carriers and small carriers, and we'll hear from labor and others additionally -- it's quite likely to assume you will have more relief and a better bill and better legislation than you would have if we had rushed to judgment. Is that correct?

MR. SKEEN: I wholeheartedly agree. I think this has been very beneficial. And it's been a two-way street, and I think I witnessed that with the panel that preceded us. I think it's been very helpful, and hopefully it's been somewhat enlightening to this audience as well. And hopefully we both benefit from that, and the flying public and the American economy will benefit from that.

REP. SANDLIN: We're nearly out of time -- I see the light going, but I think this complete discussion -- we appreciate your input. It's helpful to us in learning how to help you and make the airline more -- make them stable, and protect the workers to have jobs, and protect the public in flying. And I think it's -- I think you would agree with me that it's in keeping with President Bush's desire to move forward in a focused way, to examine all the issues that are before us, and to come up with a good long-term solution to these plans, so -- wouldn't you agree with that?

MR. HARRIS: I agree that it has been probably more beneficial to us than anybody -- the little carriers -- not having done something too rapidly last week, although some said it might have helped the stock market --

REP. SANDLIN: We're out of time. And I appreciate your answers. Thank you all for coming in, and it's --

REP. MICA: Thank the gentlemen --

REP. SANDLIN: -- it's critical to us to be of assistance to you.

REP. MICA: Recognize at this time Mr. Boehlert.

REP. SHERWOOD BOEHLERT (R-NY): Thank you very much.

I'm a little bit sorry that your testimony comes in the 5th hour of this proceeding because we're talking about the continued viability of the U.S. air transportation system. And the regional air carriers, the members of the Air Carriers Association, are a very vital component of that national system. It's not just serving New York, Los Angeles, Chicago, and a few major urban centers. It's all America.

Let me ask -- and I'm pleased to hear, Mr. Skeen, particularly your comments that you feel that your needs have been addressed, not just in the package that's proposed by ATA but in some of the comments made by Mr. Mullin and others and their giving consideration to you. Let me ask you. The insurance question is something that concerns every single person, and I'm wondering this. Is the threat, or promise, or whatever it is of the dramatic increase in your premiums from 2 (million dollars) to 8 million (dollars), I believe you said --

MR. SKEEN: That's correct. And that's just liability, not even --

REP. BOEHLERT: Just liability. Was that sort of a back-of-the envelope calculation, or was that really thought through? My point is this. One of the things we all acknowledge we have to do is pay attention to security in a very precise and very specific and very thorough way. It has always been my experience that when you increase security, for example,in the home, if you increase the security of your home against fire, if you install sprinkler systems, for example, your rates go down. Is the insurance industry indicating to you that they are factoring in the determined effort on the part of the Congress and the carriers to dramatically increase security; therefore, it would seem it would reduce the risk? Are they factoring that into the projected rate increases?

MR. SKEEN: Well, it's hard to speak for their methodology, but obviously, they just incurred very substantial losses. So I think -- you know, what we have been notified of is that it would be in the form of potentially an immediately surcharge of roughly $ 1.25 per passenger for the liability. So it was really not a back-of-the- envelope. It's a pretty easy thing to do because it's based on the passenger, so you project that through next year, and it does represent the increase of $ 6 million on a base of $ 2 million.

REP. BOEHLERT: You know, most of the five hours we've had today, understandably, have been devoted to the financial situation and the need for immediate action to sort of extract ourselves as much as possible from the crisis nature of that financial situation. We're going to have hearings. Mr. Mica's subcommittee will be having a hearing, I believe, Friday of this week on security.

I am committed to the proposition that we have to give serious thought to federalizing security at our nation's airport. And I'm wondering if -- I mean, the present system, particularly it impacts on regional carriers. The present system is sort of a makeshift sort of a system. We have -- we don't have a high degree of professionalism involved in security. It's hit or miss.

Some airports are outstanding, others are not. And in most cases it's not extensive professional training. We're talking about lower wage- scale personnel. And lower wage-scale personnel can be just as dedicated, just as committed as anybody else, but they don't have the training or the experience.

This whole idea of federalizing airport security, is that something that you would care to address for me?

MR. SKEEN: We support that 100 percent. In fact, it's in my printed testimony that we serve -- you know, our bread and butter is serving smaller communities, and the resources in those airports, obviously, are limited as what you'll see in maybe the larger hubs. But it's just -- you know, it makes so much sense because it's really the law enforcement or federal government that holds the intelligence information, really. That gets passed off, then, to the FAA, and that gets passed off to the airlines that are potentially doing the screening or contracting for the screenings. And so it is a very cumbersome method if you're looking at just the effectiveness of actually doing what it's intended to do.

But I think of all the things you've heard today in terms of raising the caliber of the individuals potentially, training, those things, I think they're all needed. And I think you need one central control point, and I do believe that role should be done by the federal government in terms of protecting our customers.

REP. BOEHLERT: Mr. Harris?

MR. HARRIS: I think one of the basic concepts or tenets of government in the whole world is to provide security for their people. And going back to my scheduled passenger days when we first introduced this kind of system, where the carriers pay for it, when I was at Delta, I think now and I thought then it would be better for the airport or some agency other than the airlines, and I think the federal government, like it is in European countries, is the place for it to be, but the next step is I do support getting the populace who is using the using the system to help pay for that.

REP. BOEHLERT: Well, I just happen to think that the first obligation of the government is to provide, as much as humanly possible, for the peace and security of the people. And that security has been tested as never before, at least domestically, and it's been found wanting. We've got to find a different way.

So I thank both of you. I thank you for your patience sitting through these hours of hearings. But I think we're all engaged in something that's very important for the nation, not just selfishly for your company or selfishly for this committee; it's something that deals with something that's extremely important for all Americans. So thank you very much.

REP. MICA: The gentleman's time has expired.

Mr. Pascrell?

REP. WILLIAM PASCRELL (D-NJ): Thank you, Mr. Chairman.

I'm interested, Mr. Harris, with what you started to get into suggesting. There's a proposal on the table right now in terms of formula and how the money's distributed.

MR. HARRIS: Yes.

REP. PASCRELL: You suggested another possible method, and I was just interested in you putting on the record what you see as the difference between what you're suggesting and what we already have before us.

MR. HARRIS: The one other method that I mentioned was that you can get a public document for all the carriers, which is the 10K, which would give everybody's filed revenue for whatever period you chose, like 2000, which was "pre" the -- it's more of a clean period -- "pre" the economic problems we've had this year, and "pre" September 11. So it's an easy number for everybody to understand. So I thought it's as good as what they were talking about as far as ASMs, which certainly is aimed more toward the high-end, big airplane operators.

But as far as World, since we have some big airplanes too, although we're very small in number, we only have 14 airplanes in our fleet now, but they're all long-range and large aircraft, and so we could come out all right on the ASM. In fact, we probably will come out just about the same. But in talking about representing all of the NACA carriers, especially the cargo carriers, I am not sure, because I haven't run the numbers on the all-cargo carriers, like Gemini, that they are going to come out with a formula, especially if you break it down like they were talking about, 80 percent, 20 percent on the revenue ton miles. So I don't see that it's not as good -- to me, it would have been similar to go the other way.

REP. PASCRELL: You heard the first panel this morning, this afternoon, talk about the distribution of money referred to it. So you're not so sure that what is on the table here before us is the most equitable way to distribute the money. Do I get you clearly?

MR. HARRIS: I'm willing to support it, because I can't prove to you at this point --

REP. PASCRELL: Okay. That's fair.

MR. HARRIS: Our number, the number that I have says it's about the same.

REP. PASCRELL: Now, the subject of insurance, which both of you touched on. New terms. Okay. There's a seven-day cancellation. The carrier comes back and therefore is going to work out new terms, new costs, with the airline, hopefully --

MR. HARRIS: Hopefully.

REP. PASCRELL: -- provide a different proposal. Do you think that the insurance under the new proposal should still cover or should cover collateral damage with victims and properties?

Do you think that we should exclude that in order to bring the cost of insurance down? I'm talking about collateral damage. Victims on land --

MR. HARRIS: As far as concept, I would say there should be some coverage. And I can give you a personal experience.

REP. PASCRELL: Please.

MR. HARRIS: When we at Delta had a Lockheed 1011 that crashed at Dallas-Fort Worth, we hit a bunch of cars on the final approach and they were taken care of under the insurance coverage that applied at that time. I think the underwriters have just, probably rightly so, like some of us in the airline operating business, have panicked at the magnitude of what this whole September 11th thing cost. And so at first, you know, they wanted to just cancel everybody right off, which would -- I mean, we couldn't operate without that. We would then have had to have some coverage from the U.S. government for U.S. carriers.

REP. PASCRELL: Well, it's a good anecdotal story. And you would agree with me, therefore, that we should not simply, in an attempt to hold down costs, totally eliminate the concept of collateral damage.

MR. HARRIS: You know, I don't think -- I think that the --

REP. PASCRELL: I've heard that from some of the airlines.

MR. HARRIS: But I think the underwriters are -- you know, they're talking about under the liability part -- and third party coverage that we're talking about, that Kerry mentioned, and I -- they're talking about keeping some third-party people, bodies and also property damage in there but at a lower cap. But they're going to make us pay for it.

REP. PASCRELL: Well, yeah.

MR. HARRIS: And because of that, our numbers -- that Kerry mentioned there, he went up from 2 to 8 million -- our numbers, just for a little carrier like us -- and he has many more airplanes and so forth and many more passengers to deal with -- but those two, just the liability and the war-risk hull insurance for us is about $ 250,000 a year. And you're talking on the hull war risk going up by five times, from, like, one penny per hundred to five pennies -- five cents per hundred. And on the liability part, it's going up at a dollar and a quarter, for just a small operator like us will go from about 150,000 a year to about 800,000.

REP. MICA: The gentleman's time has expired.

REP. PASCRELL: Thank you, Mr. Chairman.

REP. MICA: Thank you.

The gentleman from Maryland.

REP. WAYNE GILCHREST (R-MD): I thank the chairman.

Mr. Harris and Mr. Skeen, Mr. Mullin, on the previous panel, said that it is absolutely critical that this issue that we're talking about now, insurance and liability, be addressed in your legislation as it is a critical element of the overall financial impact of this tragedy on our industry. He had extensive words dealing with the liability aspect of this. And he asked us to consider the following three proposals, which I would like to ask you to comment on.

The first one is to expand the war risk insurance program to include domestic operations; the second one, to include in such an expanded program both hull loss and liability coverage; and the third is to employ the Civil Reserve Aircraft Fleet Program wherever possible to assist in providing airlines with insurance coverage.

Now, of any of those three that you know something about or want to add to that, we'd appreciate your input.

MR. HARRIS: I think we -- I know all three of them, including the Civil Reserve Air Fleet, we agree with that approach (on the ?) 43.

MR. : There is no Civil Reserve Air Fleet insurance. They use the FAA's insurance program.

MR.. HARRIS: Well, as Ron has reminded me, there is no Civil Reserve Air Fleet insurance, but we do use the FAA coverage. We have to list all of our tail numbers that are flying with the FAA, and there is, under the present law, coverage for that kind of flying. But in summary to your question, I would agree with those three components.

MR. SKEEN: Same.

REP. GILCHREST: Mr. Skeen?

MR. SKEEN: The same. Would agree.

REP. GILCHREST: Any added -- additions to this?

MR. SKEEN: Not really. I think that their expertise, quite frankly, is greater than my expertise on that particular subject, so I think -- you know, I don't think it's appropriate for me to try to add to that.

REP. GILCHREST: So it's your sense that the coverage that was to some degree recommended this morning on the first panel to the Congress to include in this legislation would be obviously beneficial for the major airlines and then useful for the size fleet that you have?

MR. SKEEN: Oh, without a doubt. I mean, again, the issue is the availability of insurance, the capacity. You know, and that is a concern, there will be enough capacity. Actually, we were scheduled to go next week over on what's typically an annual road show where you go overseas and in the U.S. and you try to, you know, get your insurance capacity available to be able to get your policies renewed for the previous year. And it's a long process you go through. And you try to, obviously, have more capacity than what you need because then you've got some competition in getting your rates lower. And that is going to be an extremely difficult process this year. And without some positive move from -- you know, from the government, it may be impossible to have the capacity needed to really insure the entire industry. So that is really one of our biggest concerns, in addition to just the costs, you know, the increases going up.

REP. GILCHREST: So you see, besides this initial -- if we want to call it an infusion of cash, a change in the -- some type of legislative language to change the federal government's role in the liability coverage of airlines is just as urgent?

MR. SKEEN: Yes, I would agree with that. And again, I'm not as versed in that as is Leo and that panel, so I would really defer to the ATA position on that.

REP. GILCHREST: Thank you, gentlemen.

Thank you, Mr. Chairman.

REP. MICA: Thank the gentleman.

Mr. Boswell?

REP. LEONARD BOSWELL (D-IA): Thank you, Mr. Chairman.

And it sounds good to me that you -- I know you had to put in a lot of hours, but you're in agreement with what was said in the previous panel. I think that you're in full agreement on the urgency, full agreement on the security measure being -- running in track with this, and I appreciate that.

So I'm just not going to ask a question. I want to make just a statement, Mr. Chairman. In the previous panel, I asked if they would answer the question that Mr. DeFazio had asked, and then ran out of time. And I think it was Mr. Anderson who gave the answer than on their "buy America" purchases and so on, that they made the comment that they did, and I thanked him for it. But I find out -- a piece of paper was passed to me -- that left out some things, like the statement's been made now -- I'll have to affirm this, but 15 percent of Airbus is made in the U.S., whereas nearly 80 percent Boeing is made in the U.S. So I just think that, as part of the record, probably ought to be included, for whatever it's worth. I started out just to get an answer that wasn't answered, by one of my colleagues.

Appreciate you being here.

MR. SKEEN: Thank you.

MR. HARRIS: Thank you.

REP. BOSWELL: I might add that yesterday, whether unscheduled or my schedule, that I got on Comair and got handled very professionally and got here. I felt like I was checked. My legislative director never went through such a check that he ever went through. He -- every piece of clothing that he had in his baggage was looked at thoroughly, and so on.

Anyway, I made the statement in Des Moines, Iowa, that I thought that we ought to be on our business to fly, that folks in your business are professional and doing a good job, and it's safe to fly. And so I'm encouraging folks, which I'll continue to do, and I think everybody in this panel is doing the same thing, that -- let's get back to our business, take precautions. But we're doing that, but let's get back to business.

Appreciate you very much. Thanks for being here.

REP. MICA: Mr. Hayes, Robin Hayes?

REP. ROBIN HAYES (R-NC): Thank you, Mr. Chairman.

I heard you-all talking -- I got the impression you think we need some tort reform as it relates to the insurance industry and what it costs for airlines in the regional -- further comment on that?

MR. HARRIS: Now what specific part of that are you --

REP. HAYES: Well, you've talked about limiting liability. Liability comes from the people who pursue the extremely large settlements that are a part of our culture at the moment.

Let me ask you the same question another way. Do you think the insurance companies are trying to get us to federalize a portion of the liability insurance for those carriers who cover airlines and regionals?

MR. HARRIS: I'm not sure they're trying to get you to stabilize (sic) it, but they certainly are trying to make the carriers pay for the extremely large settlements that they see coming one way or another.

REP. HAYES: I've experienced it in personal liability for aircraft hull, but more particularly liability, insurance. I know exactly where you're coming from.

Are you connected with NATA, the trade organization whose umbrella covers Part 135 operators?

MR. HARRIS: We're World Airways, and I'm on the -- we're on the non-paying board of the National Air Carrier Association, who represents all of the carriers that we can name, which are people like Gemini here and ATA and Omni and Challenge Air. And it is a trade organization.

REP. HAYES: Well, we talked a lot about 121 operators --

MR. HARRIS: We're not a part of the 135. This is 121.

REP. HAYES: Do you have a comment that you could add? We don't seem to be specifically talking about them today. The chairman in Alaska knows the importance of 135 operators, the air charter, air taxi folks. Is their plight considered in the agreements that we've talked about today?

MR. HARRIS: I really don't know. My guess is that I don't think they are -- they obviously, as Mr. Boswell, I think it was, mentioned, he being a pilot and everything, he could fly VFR and -- or he had to fly IFR, not VFR, and he wanted to get that up. That certainly is hurting a little -- an individual operator or the corporate charter operators, corporate jet flying and those kind of airplanes. But I don't think they are as significant a part of the problem that you're addressing, because in my opinion, one man's opinion based on my 47 years experience, there are a lot of other ancillary activities out here that are going to -- probably are asking you to for help. But I think that what the big problem, as was stated by the other panel, is the attack on the airline industry itself. And if you fix the airline industry, it's the engine that drives all these other things, like hotels and rental cars and --

REP. HAYES: I understand. We don't have any disagreement. I'm just saying the 135, the air taxi operator who serves as a supplemental regional carrier, is also a part of this. And I'd just ask if you know if they're included in these discussions with the airline industry.

MR. HARRIS: I do not know if they have been included.

REP. HAYES: Okay.

MR. SKEEN: But I can add, indirectly yes, because -- I had to do some homework back here, but the Regional Airline Association has two members that are a 135 operator -- Scenic Air and Cape Air, which flies to Nantucket and the Vineyard. They are 135 and obviously RAA. The Regional Airline Association has been very involved in the input.

REP. HAYES: And, of course, they flew under a "Tango-November" designation after the major airlines.

There's a rush to federalize security, and I don't have a problem with the concept. The concept to me seems to be standardize and make sure that people who have expertise -- law enforcement, FBI, National Security Agency -- set the standards. What I don't want to see us do -- the federal government is not known for moving with lightning-like speed on different problems, although we seem to be overcoming that in this discussion today. But I would like to suggest that we consider making sure that we get the standards out there that people agree on, are adding the additional security, and make sure that people in place are operating up to those higher standards as quickly as possible while we seek a longer-term solution of who is going to own those agencies. So I simply add that hopefully to move a great idea forward even quicker.

And I, too, appreciate you all being -- one quick question. Regional jets. I know they're made in Canada, I know they're made in Brazil. Are there other suppliers?

MR. SKEEN: We're the operator of the third one. It was a little late to the market, so it doesn't have the market penetration that the Embry Air or the Bombardier, the Canada RJ does. But for Delta, we fly exclusively the Fairchild Dornier 328, and it is an American- headquartered company. The manufacturing is in Germany. So --

REP. HAYES: Yeah, it's in Dulles. I remember talking to the --

MR. SKEEN: Yeah, exactly. They just moved their North American headquarters from San Antonio to Dulles, yes.

REP. HAYES: Thank you.

REP. YOUNG: Thank the gentleman.

Mr. Lampson.

REP. NICK LAMPSON (D-TX): Thank you, Mr. Chairman. On that same point, Mr. Skeen, you have 81 airplanes ordered, you said earlier, I think?

MR. SKEEN: Yes, we have 81 additional regional jets on order. And we fly 77, I think is the count today.

REP. LAMPSON: Who will be the manufacturer of those 81 aircraft?

MR. SKEEN: It is a mix between the Fairchild Dornier; 32 of those 81 would be the Fairchild Dornier aircraft. Well, actually, we've got four more coming for Delta, so it would be 36 of those 81 would be the Fairchild Dornier, the remainder being the Bombardier, the Canada Air regional jet, the 50-seaters.

REP. LAMPSON: Basically, none of them are made in the United States, though.

MR. SKEEN: But --

REP. LAMPSON: Right?

MR. SKEEN: -- unfortunately, there's not a regional --

REP. LAMPSON: -- manufacturer?

MR. SKEEN: -- jet manufacturer in the United States. But I would go back to the same comments made by the previous panel. The Bombardier -- I don't know what percentage, but they are GE engines. And the Fairchild is Pratt & Whitney, and it's the same Honeywell and the same vendor. So there's a lot of U.S. product, but I couldn't tell you what percentage is on there.

REP. LAMPSON: As a nation, I think we ought to be seriously concerned with that -- really, really concerned. Not with your -- you know, the situation you're in, but the situation that our country is in with not being able to manufacture those things. I can imagine us getting to the point someday that we are looking like we did with our shipping industry as with aircraft.

MR. SKEEN: And we would welcome the competition to have more suppliers, so --

REP. LAMPSON: I'm sure.

MR. SKEEN: -- we would echo that sentiment.

REP. LAMPSON: Understood. Understood.

I've spent a lot of time in a lot of airports in the last week, different-sized ones, intentionally trying to learn about those in my particular area with regard to security, because I'm most interested in trying to federalize it, because of pretty much what came out -- the need for that standardization, but also the feeling that it should be a federally operated activity from just about every place that I spoke and listened.

But one of the things that came out, specific comments that came from people in these different-sized airports -- the biggest need is that passengers have the same experience from airport to airport as they go through the security activities. You made a statement that regional air carriers are uniquely impacted by additional security measures. Would you talk about that a little bit? Tell me some of you suggestions, but tell me the differences. What is unique about the regional --

MR. SKEEN: Well, it's the -- you know, the airports in a lot of the communities -- we serve smaller communities, and so the facilities sometimes are a challenge to have just the right processing space. There may be limited carriers because all the carriers share in the responsibility at the larger hubs -- it falls maybe to the burden of one carrier, two carriers at the small, you know, the smaller cities. And so I think the comments made -- that you mentioned and made earlier, is the standardization to ensure that it's the same experience throughout.

REP. LAMPSON: But how can you have the same experience, given the differences?

MR. SKEEN: Well, I think it's the standards, and it's, really, the standards, in terms of the equipment, in terms of the personnel, and whatever standards come out of the committee that Mr. Mineta has, you know, appointed. I think those -- they have to. Because, really, the transportation system, even though there can be a tragedy here, that -- you know, the individual that caused that tragedy could have boarded in a very small market or a very large market.

REP. LAMPSON: And could there be potential difficulties for us to put the same kind of equipment in a little-used airport some place that would give us the same information as in another -- as in a larger airport?

MR. SKEEN: When we get into the technical aspect, I'm treading on thin ice, just in terms of my knowledge in that area. But I would say, no. There's no reason why it cannot be in the smaller airports, except it becomes, again, economic issues, in terms of -- you've got a very expensive piece of machinery at a larger airport, you know, in terms of a per passenger, on a revenue that comes through there it doesn't make up a large percentage of cost. You put that unit in a small station that only boards a few customers, maybe, and the cost per customer could be really expensive. And those are -- you know, those are the real difficult decisions we're faced with.

I think that -- I think it's going to have an impact as we discuss the differences about how we go about federalizing, what are the real needs to accomplish the goal.

MR. SKEEN: I think --

REP. LAMPSON: Yes, sir?

MR. SKEEN: I think the new -- latest state of the art in these X-ray pass-through -- (off mike) -- like in Atlanta, they can -- you can put one single unit of that kind of equipment -- the latest state of the art in a small --

REP. LAMPSON: Yes.

MR. SKEEN: -- in a small airport. But I think, going down the road, if we get into explosive devices and checking checked baggage, then the cost of those would be an even further problem for the small, little airport.

REP. YOUNG: The gentleman's time has expired.

REP. LAMPSON: Thank you, Mr. Chairman.

REP. YOUNG: Mr. Honda? Are you ready to ask questions? You pass? (Inaudible.)

(Audio and technical problems.) (Audio break) -- young lady walked in here, we've had trouble with that. Let's -- (audio break).

I want to thank the panel. You brought some good points up.

I'd like to suggest one thing: that as we review the security problem, I come from a very small area, and the idea that we have to have a uniform unit equal to even Anchorage just does not make me very happy. In the first place, I don't think anybody would be interested in hijacking a plane out of Fort Yukon, because I don't know where they'd be going. But I just hope you have to be a little bit sensitive to the differences of this country and how -- what'll happen.

Secondly, on the security aspect of it, I hope we don't try to just use Band-Aids -- and I say "Band-Aids" because the tragedy, the act of war that occurred last Tuesday, with all the suggestions put in place, probably couldn't have been prevented, unless there was was a different M.O. for the pilots. We have to concentrate on the intelligence end of it, the -- identifying potential problem-makers. And if we don't do that, all the screening systems, all this training and everything else won't take care of the problem.

And as we get into this discussion, I hope if we do write something, it is broad enough that we give the latitude to whoever takes it over, to make sure that we do the other things that are important, because the small airports just -- I don't think that's where it would occur.

With that, I thank the panel, very much so, and good luck to you.

MR. SKEEN: Thank you, Mr. Chairman.

END

LOAD-DATE: September 20, 2001