[Senate Hearing 109-231]
[From the U.S. Government Publishing Office]
S. Hrg. 109-231
THE IMPACT OF HURRICANE KATRINA ON THE AVIATION INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON AVIATION
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 14, 2005
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
25-443 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMint, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
David Russell, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
------
SUBCOMMITTEE ON AVIATION
CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska JOHN D. ROCKEFELLER IV, West
JOHN McCAIN, Arizona Virginia, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine BARBARA BOXER, California
GORDON H. SMITH, Oregon MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada FRANK R. LAUTENBERG, New Jersey
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire E. BENJAMIN NELSON, Nebraska
JIM DeMint, South Carolina MARK PRYOR, Arkansas
C O N T E N T S
----------
Page
Hearing held on September 14, 2005............................... 1
Statement of Senator Burns....................................... 1
Statement of Senator Lott........................................ 29
Statement of Senator McCain...................................... 2
Statement of Senator Stevens..................................... 2
Witnesses
Gruenspecht, Dr. Howard K., Deputy Administrator, U.S. Energy
Information Administration..................................... 3
Prepared statement........................................... 5
May, James C., President and CEO, Air Transport Association of
America, Inc................................................... 7
Prepared statement........................................... 10
McElroy, Deborah C., President, Regional Airline Association..... 19
Prepared statement........................................... 21
Miller, Frank, Airport Director, Pensacola Regional Airport...... 14
Prepared statement........................................... 17
Appendix
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
statement...................................................... 35
Lautenberg, Hon. Frank R., U.S. Senator from New Jersey, prepared
statement...................................................... 36
THE IMPACT OF HURRICANE KATRINA ON THE AVIATION INDUSTRY
----------
WEDNESDAY, SEPTEMBER 14, 2005
U.S. Senate,
Subcommittee on Aviation,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:03 a.m. in
room SD-562, Dirksen Senate Office Building, Hon. Conrad Burns,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. I am going to call this Committee to order,
and we have other Members coming. We also have an 11 o'clock
vote. So we are going to hold your statements down as much as
we can and get to hear from our panel this morning, and I want
to thank the panel for joining us.
We have a lot of ground to cover. Ever since Katrina
decided to pay a visit to our southern shores, we have been in
a situation where it is going to take some real work and
working together to get us out of it. As you know, it is our
responsibility as a Subcommittee to start evaluating ideas on
how we can assist the region and the affected industries in the
coming days ahead.
I am hopeful that the panel today can provide suggestions
on how their respective industries can be aided by cutting
through some red tape using waivers or possible legislative
proposals. I know at times like this we have a tendency to
think legislation is necessary when sometimes it is not. It is
just doing the things that we should be doing in order to
assist those who have been impacted by this storm to recover.
The greatest concern to the industry now is fuel prices and
supplies. The Gulf Coast region accounts for about 23 percent
of the U.S. jet fuel production. We witnessed a dramatic spike
in fuel prices in the direct aftermath of the storm.
Fortunately, they have started to come down now but,
unfortunately, they are still at record levels, and we are only
starting to see the onset of tropical storm season which could
have increasingly dynamic effects on jet fuel prices for some
time to come. So we have got some tough months ahead for this
industry regardless of what Congress does or does not act upon.
Both United and US Airways are in bankruptcy. And reports
show that Delta and Northwest are heading into Chapter 11 also,
and that may be closer than we think. If fuel prices maintain
these levels, more will certainly follow.
On a final note, I would like to commend those in the
aviation industry for their response to Katrina and its
victims. The airlift operations were tremendously helpful to
the region, and our thanks goes out to the entire community:
Commercial carriers, business aviation, airports, and general
aviation alike. And I would like to thank this panel for coming
today. We appreciate your time.
Senator McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Well, thank you, Mr. Chairman, and thank
you for the timeliness of this hearing. As we see and are
greeted by this morning's headlines that two airlines are
likely to go into bankruptcy and perhaps some of our witnesses,
particularly, Mr. May, might describe to us what he feels is
the future of the aviation industry with or without Hurricane
Katrina, because the price of fuel had gone up dramatically
prior to the hurricane, which is what has brought two
additional airlines to the brink of, or actual, bankruptcy.
I notice that Ms. McElroy has a proposal to declare a
moratorium on various taxes and fees that are imposed on the
airlines. I do not think we should ignore any option. I guess
that when those fees are suspended we would have to make up for
that shortfall, and I would be interested in ideas as to how we
would do that.
So, Mr. Chairman, I come here this morning with a lot more
questions than answers, and I am sure that our witnesses share
our deepening concern. I think that the airlines have been in
crisis in the past, but I am not sure I have seen anything
quite approaching this and so maybe we ought to try to get some
different ideas.
So, I thank you, Mr. Chairman. I thank the witnesses for
being here today.
Senator Burns. Senator Stevens.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
The Chairman. Mr. Chairman, if we are going to have a vote
at 11 o'clock, I would like to get through all these things if
we could. Thank you very much.
Senator Burns. And, thank you, Senator.
We will roll right along this morning and get into this
discussion.
I think the panel before us is a very important panel. We
have Dr. Howard K. Gruenspecht, Deputy Administrator, U.S.
Energy Information Administration; and Mr. James May, who is
President and CEO of the Air Transport Association; and Frank
Miller, Airport Director, Pensacola Regional Airport; and
Deborah McElroy, President of the Regional Airline Association.
By the way, I got an e-mail this morning from my regional
airline in Montana. They send you their regards.
If we could call on Dr. Howard Gruenspecht, this morning.
He is the Administrator of the U.S. Energy Information
Administration.
STATEMENT OF DR. HOWARD K. GRUENSPECHT,
DEPUTY ADMINISTRATOR, U.S. ENERGY INFORMATION
ADMINISTRATION
Dr. Gruenspecht. Thank you, Mr. Chairman and Members of the
Committee.
I appreciate the opportunity to appear before you today to
discuss recent developments in energy markets and the impacts
of Hurricane Katrina on jet fuel supply and prices.
The Energy Information Administration is the independent
statistical and analytical agency within the Department of
Energy. We do not promote, formulate or take positions on
policy issues.
As we all know, Hurricane Katrina has wrought incredible
devastation on the central Gulf Coast, most importantly in
terms of human suffering, but also in terms of economic impacts
that have spread well beyond the stricken area. The oil and gas
industry, with many facilities in the direct path of the
hurricane, incurred significant losses in production and
processing capacity, of which some were temporary, but others
will continue to affect output for many months to come.
As Senator McCain alluded to, even before Hurricane Katrina
struck on August 29th, crude oil and petroleum prices were
setting records. On August 26th, the near-month price of crude
oil on the New York Mercantile Exchange closed at over $66.00
per barrel, which was $23.00 per barrel or more than 50 percent
higher than a year earlier.
Over the same 1-year period, retail gasoline prices had
risen 74 cents per gallon; retail diesel fuel prices 72 cents;
and spot jet fuel prices between 69 and 77 cents per gallon.
Oil prices worldwide have been rising steadily since 2002, due
in large part to growth in global demand, which has used up
much of the world's surplus production capacity. Refineries
have been running at increasingly high levels of utilization in
many parts of the world, including the United States.
Hurricane Katrina shut down virtually all offshore oil
production in the Gulf of Mexico, along with eight major and
several smaller refineries, import facilities, including the
Louisiana Offshore Oil Port, and several major crude oil and
petroleum product pipelines. At its peak impact, over 25
percent of U.S. crude oil production, 20 percent of crude oil
imports, and 10 percent of domestic refinery capacity was shut
down.
Many of these facilities have since restarted, but about
860,000 barrels per day of crude oil production remains
offline, along with four major refineries with a total
distillation capacity of 880,000 barrels per day. At their
historical yield, these four refineries produce, approximately,
120,000 barrels per day of jet fuel, accounting for 8 percent
of total U.S. gas fuel production of about 1.6 million barrels
per day. Jet fuel consumption, measured as product supplied,
also averages about 1.6 million barrels per day. So there is a
relatively close balance between production and consumption of
jet fuel in the United States.
With 42 gallons in a barrel, a 50-cent-per-gallon change in
jet fuel prices translates into a change of more than $30
million in daily jet fuel expenditures for the Nation as a
whole, not including the ameliorative effects of hedging and
long-term contracts. So, that is a pretty significant issue.
In the immediate aftermath of Hurricane Katrina, crude oil
prices rose briefly to over $70.00 per barrel, up more than
$4.00 in less than 48 hours, but in less than a week had fallen
below their pre-storm levels. The impact on crude oil prices
was undoubtedly lessened by the relatively robust inventory
levels before the storm, by quick assurance that refiners
unable to obtain adequate crude would be able to borrow, by way
of time exchanges, from the Strategic Petroleum Reserve, even
before the coordinated release of stocks by the United States
and other members of the International Energy Agency was
announced on September 2nd.
The more significant price impact, however, was on finished
petroleum products. Spot prices, the level at which large
volumes are sold by refiners, importers, and traders, for
gasoline rose as much as $1.40 a gallon east of the Rockies
within 3 days, while spot diesel fuel prices rose 35 to 40
cents, and spot prices for jet fuel rose around 50 cents a
gallon. The sudden increase in product prices was the primary
driver of an increase in the so-called ``crack spread,''
defined as the difference between the petroleum product price
and the underlying price of crude oil. Crude oil prices did not
change nearly as much as product prices did.
The seemingly disproportionate change in finished product
prices reflects the severity and expected persistence of
Katrina's impact on refining operations in the Gulf.
Additionally, the shutdown of the Capline, a major crude oil
pipeline from Louisiana to the Midwest, reduced crude supplies
for refineries there, causing several to temporarily reduce
operations. And there was also a temporary closure of Colonial
and Plantation pipelines that halted the distribution of
products from the Gulf Coast to the lower East Coast, as far
north as Baltimore, in the aftermath of Katrina.
While recent movements in crack spreads were heavily
influenced by Hurricane Katrina, crack spreads were trending
upwards well before the storm struck. This is true not just for
jet fuel, but for other petroleum products. As U.S. refineries
have operated increasingly close to full capacity, and product
demand continues to rise, the balance of demand must
increasingly be made up from imports. This, in turn, requires a
price differential between the United States and other world
markets to attract the needed imports. This does not increase
the cost of refining products in the United States, but it does
tend to increase the market value of finished petroleum
products relative to crude oil.
Wholesale petroleum product prices, like those of crude
oil, have fallen back from their peak levels, and as of
yesterday, were near their levels before Hurricane Katrina.
Spot prices for jet fuel have dropped by 54 cents per gallon on
the Gulf Coast and 44 per gallon in New York Harbor, and stand
about 1 cent under and 6 cents over, respectively, their levels
on August 26, before Katrina struck. Other petroleum product
prices have shown similar trends; although gasoline prices have
not receded as much as prices for distillate products.
Availability was another issue of some concern in the wake
of Katrina. While there were rumors, or while there were
reported rumors, of imminent outages of jet fuel at certain
airports--I think you will hear about Pensacola--to EIA's
knowledge, no major airports actually ran out of jet fuel.
Inventories are in reasonably good shape. They did decline
in the week after Katrina. We are going to release more
inventory data today after 10:30. So if the questioning goes
on, I'll discuss it, but I cannot before then.
The near-term outlook for oil markets depends on a number
of factors, the rate at which refinery capacity affected by
Katrina can be brought back online in the major factor
affecting petroleum product markets. Although full damage
assessments for the four refineries shut down have not yet been
possible, early estimates indicate that several of them may be
down for several months.
Even if things are fully restored by December, prices for
all petroleum products are likely to remain elevated. Last
week, we released our monthly Short-Term Energy Outlook. We
looked at several cases, fast recovery, slow recovery, and
medium recovery. In the medium recovery scenario, we expect the
average price for refinery sales of jet fuel to be about $2.25
per gallon in September, which is 32 cents above the August
level. We do expect it to decline by the end of the year to the
neighborhood of $2.10. These prices are significantly above the
year ago levels.
Again, we expect some of this Gulf Coast refining capacity
to remain offline well into the fourth quarter, and we probably
will have a need for greater imports of jet fuel in the
remainder of 2005.
That concludes my statement, and I would be happy to answer
your questions.
[The prepared statement of Dr. Gruenspecht follows:]
Prepared Statement of Dr. Howard K. Gruenspecht, Deputy Administrator,
U.S. Energy Information Administration
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to discuss
recent developments in energy markets and the impacts of Hurricane
Katrina on jet fuel supply and prices.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency in the Department of Energy. We do
not promote, formulate, or take positions on policy issues.
Hurricane Katrina has wrought incredible devastation on the central
Gulf Coast, most importantly in terms of human suffering, but also in
economic impacts that have spread well beyond the stricken area. The
oil and gas industry, with many facilities in the direct path of the
hurricane, incurred significant losses in production and processing
capacity, of which some were temporary, but others will continue to
affect output for many months to come.
Even before Hurricane Katrina struck on August 29th, crude oil and
petroleum product prices were setting records. On August 26, the near-
month price of crude oil on the New York Mercantile Exchange closed at
over $66 per barrel, which was $23 per barrel, or more than 50 percent,
higher than a year earlier. Over the same one-year period, retail
gasoline prices had risen 74 cents per gallon, retail diesel fuel
prices 72 cents, and spot jet fuel prices between 69 and 77 cents per
gallon. Oil prices worldwide had been rising steadily since 2002, due
in large part to growth in global demand, which has used up much of the
world's surplus production capacity. Refineries have been running at
increasingly high levels of utilization in many parts of the world,
including the United States.
Hurricane Katrina shut down virtually all offshore oil production
in the Gulf of Mexico, along with eight major and several smaller
refineries, import facilities including the Louisiana Offshore Oil
Port, and several major crude oil and petroleum product pipelines. At
its peak impact, over 25 percent of U.S. crude oil production, 20
percent of crude imports, and 10 percent of domestic refinery capacity
was shut down.
Many of these facilities have since restarted, but about 860
thousand barrels per day of crude oil production remains offline, along
with four major refineries with a total distillation capacity of 880
thousand barrels per day. At their historical yields, these four
refineries produce approximately 120 thousand barrels per day of jet
fuel, accounting for 8 percent of total U.S. jet fuel production of 1.6
million barrels per day. Jet fuel consumption, measured as product
supplied, also averages about 1.6 million barrels per day, so there is
a relatively close balance between production and consumption. With 42
gallons in a barrel, a 50-cent-per-gallon change in jet fuel prices
translates into a change of roughly $30 million in daily jet fuel
expenditures for the nation as a whole, not considering the
ameliorative effects of any hedges or long-term contract arrangements.
In the immediate aftermath of Hurricane Katrina, with the extent of
actual damage still largely unknown, crude oil prices rose briefly over
$70 per barrel, up more than $4 in less than 48 hours, but in less than
a week had fallen below their pre-storm levels. The impact on crude oil
prices was undoubtedly lessened by the relatively robust inventory
levels before the storm, and by quick assurance that refiners unable to
obtain adequate crude oil supplies would be able to borrow by way of
time exchanges from the Strategic Petroleum Reserve, even before the
coordinated release of stocks by the United States and other members of
the International Energy Agency was announced on Friday, September 2.
The more significant price impact, however, was on finished
petroleum products. Spot prices (the level at which large volumes are
sold by refiners, importers, and traders) for gasoline rose as much as
$1.40 per gallon east of the Rockies within 3 days, while spot diesel
fuel prices rose 35 to 40 cents, and those for jet fuel around 50
cents. Even prices on the West Coast were affected, though by lesser
amounts. The sudden increase in product prices was the primary driver
of an increase in the so-called ``crack spread,'' defined as the
difference between a petroleum product price and the underlying price
of crude oil.
The seemingly disproportionate change in finished product prices
reflects the severity and expected persistence of Hurricane Katrina's
impact on refining operations in the Gulf. Additionally, the shutdown
of the Capline, a major crude oil pipeline from Louisiana to the
Midwest, reduced crude supplies to refineries there, causing several to
temporarily reduce operations. Finally, the temporary closure of the
Colonial and Plantation product pipelines virtually halted distribution
of products from the Gulf Coast to the lower East Coast, as far north
as Baltimore, in the aftermath of Katrina.
While recent movements in crack spreads were heavily influenced by
the effects of Hurricane Katrina, crack spreads were trending upwards
well before the storm struck. As U.S. refineries have operated
increasingly close to full capacity, and product demand continues to
rise, the balance of demand must increasingly be made up from imports.
This, in turn, requires a sufficient price differential between the
United States and other world markets to attract the needed imports.
Although this does not increase the cost of refining products in the
United States, it does tend to increase the market value of finished
petroleum products relative to crude oil.
Wholesale petroleum product prices, like those of crude oil, have
fallen back from their peak levels, and as of yesterday (September 13)
were near their levels before Hurricane Katrina. Spot prices for jet
fuel have dropped by 54 cents on the Gulf Coast and 44 cents in New
York Harbor, and stand about 1 cent under and 6 cents over,
respectively, their levels on August 26, before Hurricane Katrina.
Other petroleum product prices have shown similar trends, although
gasoline prices have not receded as much as prices for distillate
products.
Availability of fuels was another issue of some concern in the wake
of Hurricane Katrina. While there were widely reported rumors of
imminent outages of jet fuel at certain airports in the days following
Katrina, to EIA's knowledge, no airports actually ran out of fuel.
Jet fuel inventories, which were in relatively good shape before
the storm, did decline, but have remained adequate in all regions so
far. In the week ending September 2, U.S. total jet fuel inventories
dropped by an estimated 1.6 million barrels, or slightly less than one
day's demand. The East Coast, the region most affected due to the
pipeline shutdowns and its reliance on supplies from Gulf Coast
refineries, accounted for nearly 1.4 million barrels of the decline,
equivalent to more than two days of demand in that region. It should be
recognized that supplies of all petroleum products, including jet fuel,
will remain tight in the coming weeks, and possibly months, although
increased imports may make up some of the overall product shortfall.
While the near-term outlook for oil markets depends on a number of
factors, the rate at which refinery capacity affected by Katrina can be
brought back on-line is the major factor affecting petroleum product
markets. Although full damage assessments for the four refineries
remaining shut down have not yet been possible, early estimates
indicate that several of them may be down for months.
Even if the energy system is fully or near fully restored by
December, prices for all petroleum products are likely to remain
elevated. Last Wednesday, we released our monthly Short-Term Energy
Outlook. For this Outlook, we considered three cases based on the speed
of recovery of the energy system from the effects of Hurricane
Katrina--Slow, Medium, and Fast Recovery scenarios.
In the Medium Recovery scenario, we project an average price for
refiner sales of jet fuel of roughly $2.25 per gallon in September, up
about 32 cents from the August level, which declines to about $2.10 per
gallon by December. This September price would be about 94 cents per
gallon higher than the same month a year ago, while that in December
would represent a year-to-year increase of about 79 cents per gallon.
In line with the impacts seen already in September, and a
significant portion of Gulf Coast refinery capacity expected to remain
offline well into the fourth quarter, EIA's Short-Term Energy Outlook
also reflects our expectation for lower refinery production, lower
inventories, and a need for greater imports of jet fuel in the
remainder of 2005.
This concludes my statement, and I will be happy to answer your
questions.
Senator Burns. Thank you very much.
Now, we will hear from Mr. James May, President and CEO of
Air Transport Association Incorporated. Thanks for coming this
morning, Jim.
STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO, AIR TRANSPORT
ASSOCIATION OF AMERICA, INC.
Mr. May. Thank you, Mr. Chairman.
For the airlines, the most immediate impacts from Katrina
were reduced fuel supplies as you have heard; some airport
closures; and, of course, dramatically increased fuels prices.
Having lost, roughly, 13 percent of refining capacity and the
two major pipelines that serve the East Coast, we were forced
to manage our way through potential shortages in order to avoid
service interruptions. Again, this is something you have heard
a little bit about already this morning.
We, basically, tankered extra fuel where needed, and that
is the process of loading greater amounts of fuel in the
airports so that we would not be drawing down at those most
supply restricted airports. We set up a daily conference call
working with the pipeline folks, the refiners, all the
carriers, and other suppliers to the process so that we could
identify those areas where we had problems, move fuel in. And,
I think the Federal Government did a good job of giving us some
waivers on the Jones Act. IEA had an opportunity to do some
releases.
We moved some tankers around, and while supplies are tight
at some of the airports, I think we are well past that
immediate crisis. We, obviously, were impacted by airport
closures, principally Gulfport/Biloxi, New Orleans. Service in
the region has, largely, been restored with the exception of
New Orleans, which has got commercial service that kicked in
yesterday on a limited basis, and I think we will begin to ramp
up for a period of time.
The more lasting impact from Katrina, however, is the
dramatic increase in the price of jet fuel, which has been
talked about this morning. Unfortunately, it was already at
record highs. Let me put it into perspective for you from the
parochial side of the airlines industry. In January 2002, the
price of jet fuel on the spot market averaged nearly 56 cents a
gallon. Shortly before Katrina, that price stood at $1.87 a
gallon, and today spot is about $1.92. That was yesterday's
price. That is a 243-percent increase over 4 years.
Driving the price of jet fuel is the cost of crude oil, now
hovering in the mid-$60s a barrel, and of the additional
premium that refiners charge to produce jet fuel, the so-called
``crack spread.'' Now, this premium has grown dramatically in
recent years and it exploded after Katrina.
In 2002, it averaged $3.63 a barrel. Shortly after Katrina,
it peaked at $30.00 a barrel.
So, for all of 2005 we estimate that premium, that crack
spread, will exceed $15.00, a 400-plus percent increase over 4
years. Now, no business model at any airline can survive with
sustained jet fuel prices in what amounts to a $90.00 to
$100.00 per barrel range.
The future is not bright. Our latest forecast shows that we
are going to pay $9.2 billion more for fuel in 2005 than we did
in 2004, and in 2005, we burned roughly 19 billion gallons of
jet fuel and spent, roughly, $30.6 billion for that fuel. No
wonder this industry is now projecting a nearly $10 billion
loss for 2005 on top of the $32.3 billion we have already
recorded over the last 3 years.
Now, to cope with this unprecedented situation, this
industry has not simply sat back. We have taken and continue to
take aggressive measures to mitigate fuel consumption, just as
we were doing before Katrina. From 2001 to 2004 alone, thanks
to newer fleets, single-engine taxi, lower cruise speeds,
onboard weight reduction, access to more direct ATC routings,
and a host of other measures, our fuel efficiency jumped nearly
20 percent, and it has tripled since 1971.
We responded by sharply reducing or limiting control costs
in our business; revising long-standing collective bargaining
agreements; streamlining operations; refining and, in some
cases, even reducing hub operations; improving employee
productivity; and overall productivity has risen a little less
than 20 percent since the year 2000, up almost 2.2 million
available seat miles per full-time employee.
We are parking less efficient airplanes. The big six
passenger airlines reduced their operating fleets by over 500
aircraft from December 2000 to present and, unfortunately,
these efforts have resulted in the loss of some 135,000 jobs in
this industry alone. Now, for the same group, capital
expenditures fell by $10 billion over the last 4 years.
Likewise, unit operating costs, excluding fuel, fell from 10.3
cents per available seat mile to 9.2 cents, a 6-plus percent
improvement. These efforts, truly, have been nothing short of
astonishing, and it is clear that if not for the price we must
pay for jet fuel, the airline industry would be profitable
today. In fact, we remain at the mercy of oil markets and the
Federal Government.
Gary Chase of Lehman Brothers is one of the top analysts
for this industry and he said, and I quote, ``The airline
industry has moved aggressively to reduce costs in the face of
unprecedented challenges. On a non-fuel basis, operating
profitability is as good as it was in the late 1990s. Now,
while these facts are exciting, they may also be moot. If oil
prices do not return to historic normals, we see a materially
greater chance for oil above $50.00 than below $40.00 for the
next several years. Unfortunately, high fuel prices are
consuming what would otherwise be an up cycle for this
industry.''
Now, it must also be recognized that at the end of the day,
Katrina's impact is not limited to the airline industry. Every
dollar increase in the price of a barrel of crude puts another
5,500 airline jobs at risk. This industry drives almost $1
trillion in economic activity here in the United States, 10
million jobs. Now, unfortunately, the harm to this industry
caused by Katrina and continuing high oil prices will work its
way into the broader economy, and in that sense we are somewhat
like the mine and the canary for the economy.
What, if anything, can be done to respond? As I said in my
written statement, we have a couple of suggestions. First, we
hope that this Congress will move to grant a 1-year holiday
from what was supposed to be a temporary gas tax imposed during
the previous administration in 1993. That tax was intended to
be dedicated to deficit reduction that was later moved to the
Airport and Airways Trust Fund, and I would hope the Congress
will favorably entertain suspending it for 1 year, while at the
same time ensuring that the trust fund, the Aviation Trust
Fund, remains whole.
Second, I think we should find and produce more domestic
oil in the United States, including reserves from the Arctic
National Wildlife Refuge, and the outer continental shelf.
Other environmentally concerned nations are tapping into their
offshore oil and natural gas reserves. We must do the same if
our aviation network, indeed our entire transportation system,
is to remain sound and competitive in the face of worldwide
demand.
Third, we must add refining capacity in the United States.
In the long term, if we do not build new refineries and grow
overall refining capacity, we are fated to suffer even higher
prices for refined product, including, home heating oil. The
government should encourage the location and development of
refineries across the United States, not just in the Gulf Coast
region.
And, finally, Congress and appropriate federal regulatory
bodies should exercise their oversight responsibilities to
ensure that markets are driven by consumer demand and market
forces, not speculation. Even prior to the run up of oil prices
after Katrina, there was call for the GAO to examine the
Commodity Futures Trading Commission's oversight of domestic
petroleum trading. Consideration should be given to whether or
not the measures in place to limit the impact of speculative
trading are adequate. Likewise, the dramatic growth in the
premium charge for refining crude into jet fuel, the crack
spread, merits review.
Last, I would like to take a moment to touch on the
industry's support of relief efforts after the hurricane
struck. In the days immediately following, we moved into the
New Orleans Airport with an operation dubbed ``Operation Air
Care.'' We moved some 13,000 to 14,000 people over 130 flights,
and what is important about that is this was a fully volunteer
operation, the pilots, the crews. We even had to carry our own
mechanics and ground crews in, and it was a terrific effort. We
were delighted to be part of it.
Mr. Chairman, Katrina serves as a reminder of the central
role that this industry plays not only in our economy, but
society at large. If our nation is to continue to grow and
prosper, the importance of this potent capability that
responded so well in a time of crisis must be recognized and
served by rational policies that foster economic well-being in
growth in the airline industry. This country needs a stable
airline industry capable of providing diverse passenger and
cargo services in good times and bad.
Taxes and fees imposed on the industry should be brought
under control, and the government must adopt an energy policy
that expands this country's oil production and refining
capacity while respecting environmental concerns.
Thank you for your attention.
Senator Burns. Thank you, Mr. May.
[The prepared statement of Mr. May follows:]
Prepared Statement of James C. May, President and CEO, Air Transport
Association of America, Inc.
Thank you, Mr. Chairman for inviting me to talk about the effects
of Hurricane Katrina on U.S. air carriers and their employees. The Air
Transport Association is the trade association for the leading U.S.
airlines. ATA members transport more than 90 percent of all passenger
and cargo traffic in the United States.
Our nation has never experienced a natural disaster of the economic
scope of Hurricane Katrina. Hurricane Camille in 1969, the San
Francisco earthquake in 1989 and the terrorist attacks of four years
ago have served as the unfortunate benchmarks of devastation in recent
history . . . until Katrina. Beyond the human suffering and the loss of
life and property, the common thread from each of these disasters is
the ripple effects they send beyond the directly affected areas and
into the national and international economies. While terrorists
targeted their attacks on governmental and financial centers in an
intentional effort to destroy our way of life, Hurricane Katrina, a
random act of nature, will have a similarly disruptive effect on our
economy, because it crippled a significant portion of our nation's
energy infrastructure. Today we are much more dependent upon oil
produced from the Gulf of Mexico and refined in Texas and Louisiana
than we were in 1969 when Camille struck. And even small disturbances
in the Gulf can have measurable impacts on the prices that consumers
pay for gasoline and airlines pay for jet fuel.
Long before the devastation of Katrina, the airline industry was
struggling under the economic and societal consequences of the attacks
of 9/11, the resultant growth in federal taxes and fees, and, of
course, already record-high oil prices. Air carriers are always among
the sectors of the economy most affected by the soaring price of oil.
While our members and the manufacturers of their aircraft have made
remarkable gains in energy efficiency, it has proven impossible for
conservation measures and technology to outpace the growth in the price
of a barrel of oil. Unlike many industries, we have no alternative fuel
source.
Anyone who follows the news knows that even before Katrina all U.S.
airlines were facing an extremely challenging commercial and policy
environment, with few signs of material improvement. Over the last four
years, the industry--in total--has recorded over $32 billion in net
losses (including federal reimbursements for the shutdown and a portion
of our security costs). In this post-Katrina economic environment of
higher fuel prices and lost revenue from Gulf Coast tourism we are
projecting additional losses of at least $9 billion in 2005--up from
earlier projections of $5 to $7 billion.
These losses have led us to borrow huge sums to survive, with few
assets left to pledge as collateral. For the nine largest airlines,
including Southwest Airlines, net debt stood at $81.3 billion at the
end of 2004, resulting in a staggering net debt-to-capital ratio of
110.1 percent. Compare this to $64.2 billion and 71.7 percent at the
end of 2000. Eleven of the 12 passenger airlines rated by Standard &
Poor's are considered ``speculative'' investments, also known as ``junk
bond'' quality. Only Southwest Airlines is considered investment grade.
Meanwhile, fares are running at late 1980s levels--a fourth of all
domestic passengers now pay $200 or less including taxes for a
roundtrip ticket; two-thirds pay $300 or less. Airline passenger
revenue has plummeted from its historical average of 0.95 percent to
0.70 percent of U.S. GDP--a gap of $30 billion based on today's $11.7
trillion economy.
Long before Katrina, I learned that just when you think it can't
get any worse it does, at least in the airline business. In January
2001, the price of jet fuel on the spot markets averaged 85.8 cents per
gallon. On August 17, as Katrina was building in the Gulf of Mexico,
the price stood at $1.87. Today it is hovering around $2.05 per gallon,
a 239 percent increase over four years. In 2004, the industry paid
$21.4 billion for jet fuel. That tab would have been $5.5 billion lower
at 2003 jet fuel prices and a whopping $8.0 billion lower at 2002 jet
fuel prices.
Moreover, the differential between what refiners pay for a barrel
of oil and what they are able to sell the same amount of refined
product has grown dramatically in recent years, and been driven higher
since Katrina. In 2002 this refining premium, referred to as the
``crack spread'' in the industry, stood at an average of $3.63. In 2003
it rose to $5.90 and then to $9.24 in 2004. This year we estimate a 12
month average in excess of $15.00, which represents a 414 percent
increase over four years.
It is not unreasonable to argue that without the doubling of oil
prices over the past three years the industry would not be in the
economic crisis we find ourselves. But the future doesn't look any
brighter. Our forecast shows that we will pay $9.2 billion more for
fuel in 2005 than in 2004. If these projections prove accurate, the
industry will have faced a 103 percent increase in its fuel costs from
2001 ($14.8 billion) to 2005 ($30.6 billion). When you understand that
the industry has been hit with more than $30 billion in additional fuel
costs and $15 billion in taxes, fees and unfunded mandates for security
since 9/11, and compare those uncontrollable costs to the $32 billion
the industry has lost over that period, it easy to see where the
problems lie. No industry could improve its efficiency and cut its
costs fast enough to keep up with this kind of growth in their
uncontrollable costs.
On Monday of this week, the 12-month forward curve of future prices
stood at $66.19 a barrel for crude oil and $1.98 per gallon of jet fuel
($83.16 per barrel). Now keep in mind that this industry consumed 18.6
billions gallons of jet fuel last year. That means that every penny
increase in the price of a gallon increases our annual operating
expenses by $186 million. Viewed from an employee perspective, every $1
increase in the price of a barrel of crude puts another 5,500 airline
jobs at risk. Indeed, the airlines have shed 135,000 jobs from the
payrolls since August 2001. That's a loss of one out of six employees
and more cuts are likely.
When people say to me, ``But every time I fly the plane is full.''
I respond, ``They're full, alright. Full of cheap fares and expensive
fuel.'' At today's fares and jet fuel prices, the average breakeven
load factor for the industry would need to approach 85 percent,
including all the low-cost carriers. Compare that to 65 percent in the
mid-90s. That means that every single flight on average must be at
least 85 percent full of paying passengers to avoid losing money--not
to make a fortune!
So how are we coping? First, we obviously are taking all possible
steps to reduce or mitigate fuel consumption, just as we were doing
before Katrina. From 2001 to 2004 alone, thanks to newer fleets,
single-engine taxi, lower cruise speeds, onboard weight reduction,
access to more ATC lanes in the sky, and a host of other measures, our
fuel efficiency jumped 18 percent to 45 passenger miles per gallon.
For this same group, capital expenditures fell from $13.1 billion
in 2000 to $3.1 billion in 2004 (up slightly from $2.7 billion in
2003), while unit operating costs excluding fuel fell 6.2 percent from
10.36 cents per available seat mile (ASM) in 2002 to 9.72 cents per ASM
in 2004.
I think that's pretty impressive. But you don't have to believe me.
As Gary Chase of Lehman Brothers observed on March 15:
``The airline industry has moved aggressively to reduce costs
in the face of unprecedented challenges . . . On a non-fuel
basis, operating profitability . . . is as good as it was in
the late 1990s. While these facts are exciting . . . , they may
also be totally moot if oil prices do not return to [historical
norms] . . . [W]e see a materially greater chance for oil
prices above $50 than below $40 over the next several years.
Unfortunately, high fuel prices are consuming what would
otherwise be an upcycle for the industry.''
Let me reiterate this point, were it not for fuel costs the
industry would be profitable.
I'm often asked, ``Why don't your members just raise fares and pass
through high oil prices?'' Well, it's this simple--if we could, we
would. To cover the costs of fuel increases from 2003 to 2004,
passengers would have to pay, on average, an additional $28 per ticket.
Yet fares during this period continued to fall because of the intensely
competitive nature of the industry. Indeed, only recently have carriers
had even modest successes in raising fares in certain markets. These
fare increases are hardly enough to cover the cost of crude oil rising
from $26 a barrel in 2002 to over $66 in 2005. And as Standard & Poor's
Phil Baggaley testified before the House Aviation Subcommittee this
last year:
``Fuel represents a roughly comparable proportion of expenses
for railroads and many trucking companies . . . , but they have
not been hurt by higher fuel prices to nearly the same degree .
. . Part of the difference is due to more active hedging
programs by these freight transportation companies, but most is
due to the fact that many of their contracts with corporate
customers allow them to pass through higher fuel costs in the
form of surcharges. Airlines have tried repeatedly to raise
fares in response to high fuel costs, but with little success.
[T]he problem comes back to a lack of pricing power in a very
competitive market.''
The unfortunate truth for most airlines today is that the economic
principles of supply and demand still apply. If we could raise prices
to cover the soaring cost of jet fuel or the many new taxes and fees
that have been placed on the industry in recent years we would. But
what many of our customers discovered in the post-9/11 world is that
they don't have to fly. Business travelers choose teleconferences or e-
mail instead of a face-to-face meeting if they aren't able to find a
rock-bottom fare. Families will vacation near home as opposed to flying
to Florida's beaches, Colorado's ski slopes or grandma's house. For
short-haul flights, the addition of the TSA ``hassle factor'' has made
taking the car a more viable option. It's important to remember,
airlines don't just compete against each other. They compete against
movie theaters, e-mail, video conferencing, automobiles, trains,
corporate jets and even the local amusement park . . . anything that
can substitute for a vacation or a face-to-face sales call. The loss of
several popular vacation destinations along the Gulf Coast for the
foreseeable future, including New Orleans, will only worsen this trend.
So where does that leave U.S. air carriers? Frankly, we will remain
at the mercy of oil markets and the Federal Government. If the price of
oil stays high and our taxes along with it, I expect more jobs lost,
more flights cut and more airlines in crisis. In the international
arena, our global competitiveness will continue to suffer because our
airlines are paying disproportionately more than their foreign flag
competitors, due to the relative weakness of the dollar. My CEOs will
continue to find ways to wring costs from those areas they can, and
that includes further fuel conservation. But you can only be so
efficient. As I said when I started, the airline industry is one of the
most severely hurt by the soaring price of oil. Since we have no other
options, airplanes will be burning refined oil long after other modes
of transportation have moved beyond it. Not because we want to but
because the principles of aircraft design rule out alternatives.
So, will oil stay above $60? For business planning purposes it is
prudent to assume that it will. And while there is nothing that can be
done in the short term to reverse the continuing damage that high fuel
prices are having on the industry, the government can take step to
help--grant a one-year holiday from the 4.3 cents-per-gallon jet fuel
tax. This tax, imposed in 1993 was intended to be temporary and
dedicated to deficit reduction. It was later redirected into the
Airport and Airway Trust Fund, but remains on the books to this day
while similar taxes on other transportation have been repealed.
For the medium and long term, the solution to the problem is to do
more . . . more of everything. And by more I mean more conservation and
more production--including here at home. I am proud of the efficiency
gains that the aviation sector has made over the past 30 years. If
other industries throughout the world had kept pace, we would not face
nearly the crisis we face today. Yet conservation and efficiency are
only part of the equation. We must find and produce more oil in the
U.S. including from the Artic National Wildlife Refuge and the outer
continental shelf. Other nations that many consider to be more
environmentally conscious than the United States such as Norway, Great
Britain and Japan are tapping into their off-shore oil and natural gas
reserves for both national security and economic reasons. Yet in recent
years, the United States has moved to expand restrictions on this kind
of energy production, including in the recently passed ``Energy Policy
Act of 2005.'' Our nation possesses the most advanced oil production
technologies in the world and these areas can be produced in an
environmentally safe manner. In fact Hurricane Katrina proved how
environmentally safe they are, since there was little or no leakage
from the hundreds of off-shore platforms that were in the path of the
storm, including those that were knocked from their moorings and set
adrift.
Specifically, the administration should immediately begin the
process of leasing for oil production in the remaining area of the
eastern Gulf of Mexico known as Lease Sale 181. Furthermore, Congress
should direct that revenues derived from these new leases be dedicated
to Hurricane Katrina recovery and reconstruction efforts.
As I alluded to earlier, the rapid economic expansion in countries
like China and India will demand more and more oil and keep pushing
prices higher. The ``more of everything'' approach can work there, too.
The United States should encourage those nations to find and produce
more of their own energy as well as help them use it more efficiently
by providing them with technologies to reduce waste.
More of everything also means that as a nation we must be willing
to build new refineries. I know that this issue is outside of this
Committee's jurisdiction, but our nation's stagnant refining capacity
has created a bottleneck in the distribution chain that further
increases prices, as noted above. Hurricane Katrina immediately knocked
out 19 percent of U.S. oil refining capacity and 13 percent of our jet
fuel refining. Had Katrina made landfall further west, the toll on the
refiners would have been even greater and fuel prices would likely be
even higher. While in the short term it is critical for our economy
that these refineries be restored to full operational capacity as
quickly as possible, in the longer term, if we do not begin to build
new refineries and grow overall refining capacity I fear that we are
fated to suffer even higher prices.
New refineries, just like new oil production, should not be
concentrated in one place, leaving them unnecessarily vulnerable to
natural disasters and terrorist attacks. We now know the price we can
pay for putting so many of our energy eggs into one basket--the Gulf
Coast region.
Also, I encourage Congress and the Administration to ensure that
forces are not working within western energy markets to unnaturally
inflate prices. There are simply too many unnatural influences in
global oil markets to allow market speculators to contribute to the
problem. I encourage Congress and the appropriate federal regulatory
bodies to exercise their oversight responsibilities to ensure that
markets are driven by consumer demand and not speculation. Even prior
to the run up of oil prices after Katrina, there were calls for the
Government Accountability Office (GAO) to examine the Commodity Futures
Trading Commission's (CFTC) oversight of domestic petroleum trading. I
believe this to be even more appropriate today.
Some have attacked the airline industry for not being fast enough
to adapt to market changes. I strongly disagree with this view and
point the past three years of aggressive cost-saving moves taken by all
airlines to stay competitive. I also point to the past 30 years of
aggressive efforts by the industry to save fuel and improve efficiency.
We have been and will continue to be leaders in each of these areas.
In regard to the hurricane's impact on airport infrastructure and
the National Airspace System, airports in areas affected by Hurricane
Katrina have recovered relatively quickly from an operational
perspective. There were varying degrees of damage to both airport
facilities and Federal Aviation Administration (FAA) navigational aids,
but in general, airports with commercial service are fully operational.
New Orleans International Airport (MSY) in particular, suffered some
significant damage to the airport roof and adjacent facilities, but
temporary measures have enabled the restoration of commercial service
on September 13. All other commercial airports in the region are fully
operational.
Since I have talked to you about the impacts of the hurricane on
the airlines, I'd now like to tell you of the impact the industry has
had on the relief and recovery operation. In the days immediately
following the disaster, ATA and its member airlines conducted an
airlift of Hurricane Katrina victims out of New Orleans to multiple
evacuee sites around the nation. Known as ``Operation Air Care,'' ATA
coordinated the scheduling of the aircraft and crews contributed to
this vital effort. Over a six-day period beginning August 30,
``Operation Air Care'' evacuated more than 13,000 people on more than
130 flights to at least nine locations. I would like to make clear that
this effort was industry-wide, including carriers that currently are
operating in bankruptcy, and many flight crews that volunteered their
time to help out. I have never been so proud of our industry and our
employees.
In addition to stepping up to help in the relief efforts in the
days after Katrina hit, the airlines also were focused on ensuring that
there was sufficient jet fuel available at all commercial service
airports to allow for uninterrupted service. With 13 percent of jet
fuel refining capacity shut down and the two major pipelines that serve
the East Coast out of commission, swift action was required on the part
of airlines and fuel suppliers. This allowed for the industry to
quickly identify which airports faced potential jet fuel shortages and
to take measures to prevent service interruptions, including
disruptions to relief flights. The airlines, out of necessity, had to
take the Draconian measure of ``tankering'' fuel, which simply means
placing extra fuel on planes going into those airports identified as
facing shortages. This Hobson's choice successfully prevented those
``at risk'' airports from running out of fuel but resulted in those
airplanes flying with greater onboard weight, which increased fuel
consumption, i.e., burning more fuel to get fuel where fuel was needed.
Of course, carrying this extra fuel displaced revenue generating
payloads such as cargo and passengers, making this stop-gap measure
extremely expensive.
This effort also necessitated close monitoring of those airports
from where we were drawing fuel, so as not to create shortages there.
This was a first-stage crisis-control measure that allowed us to meet
our schedules and keep our commitments to our customers. Unfortunately,
with jet fuel prices hitting record highs at the same time, it came at
an incredible cost. As we return to our normal operations, we continue
to face jet fuel prices that were incomprehensible only a few months
ago, and unexpected fuel bills for our efforts to keep the system
running during the past two weeks.
As I look back at ``Operation Air Care,'' I hope that it serves as
a reminder of the central role that the airline industry plays--not
only in our economy but within our society. Using the same people and
machines that allow for our ``just-in-time'' economy to function, that
bring buyers and sellers together, and that reunite grandparents with
grandchildren, air carriers were able to bring much needed bottled
water and relief workers in, and get evacuees out. This massively
potent capability that served the devastated Gulf Coast areas so well
serves an important role every day as the economic and transportation
engine that quickly connects the expanses of our nation to each other
and the rest of the world.
To conclude, for the airlines the saying ``It is always darkest
before the storm'' is reversed. We now face an even darker period than
we did before Katrina brought her 160 mile-per-hour winds and flood
waters to the Gulf Coast. Even higher fuel prices and the loss of
tourism to the impacted areas were, not nor could have, been planned
for. Let me be very clear about this. No business model at any airline
can sustain such a rapid increase in fuel prices.
So, in the immediate term, repeal of the 4.3 cents-per-gallon tax
on commercial aviation fuel will help protect airline jobs, sustain
service to smaller communities, foster competition that benefits
consumers and allow for this industry, which is so critical to the
health of our economy, to begin its recovery.
In the longer term we must take the lessons learned from Katrina
and diversify our nation's oil production and refining so that no
single natural or man-made disaster can have such a broadreaching
impact of our vital energy infrastructure. If we do not, prices are
certain to continue to climb and the record-high gasoline and jet fuel
prices we see today will be remembered fondly by consumers and airlines
as the ``good old days,'' rather than the darkness after the storm.
Thank you.
Senator Burns. Now, we will hear from Mr. Frank Miller,
Airport Director at Pensacola Regional Airport of which Senator
McCain is, probably, pretty familiar.
STATEMENT OF FRANK MILLER, AIRPORT DIRECTOR, PENSACOLA REGIONAL
AIRPORT
Mr. Miller. Thank you, Mr. Chairman. Pensacola Regional
Airport is a small hub airport with 1.6 million total
passengers and with a staffing level of 50 employees. On
September 16, 2004, we----
Senator Burns. Is your microphone on? Push the button.
Mr. Miller. I am sorry.
Pensacola Airport is a small hub airport with 1.6 million
total passengers and with a staffing level of 50 employees. On
September 16, 2004, we were in the path of Hurricane Ivan, one
of four hurricanes to strike the State of Florida in a 6-week
period.
Pensacola Regional Airport closed its airfield on
Wednesday, September 15th, at 3:30 p.m. due to tropical force
winds coming in advance of Hurricane Ivan, a Category III
hurricane. The hurricane made landfall in the early morning
hours of September 16, with 130 mile-per-hour sustained winds.
As the hurricane force winds subsided in the midmorning hours
of September 16th, airport personnel inspected the airfield
operating environment, made repairs, and by 12:45 p.m. reopened
the airfield for emergency relief aircraft only. Roads and
highways leading into Escambia and Santa Rosa Counties were
impassable due to fallen trees, debris, and damaged bridges. In
response to this, Pensacola Regional Airport was designated as
the primary staging area for disaster relief supplies, filling
this role for the first 4 days of disaster relief operations.
During these 4 days, a mixture of C-17 and C-130 military
aircraft began major relief operations, and 24 various civilian
and military helicopters conducted numerous missions from the
airport on an around-the-clock basis. With temporary flight
rules in place over the airport, Pensacola Regional Airport
operations personnel assumed control of the airfield and issued
219 aircraft landing authorizations.
Consumable materials, such as unleaded and diesel fuels,
were a critical component for recovery vehicles and equipment,
but due to the airport's limited storage capacity at the fuel
farm, the airport quickly became dependent on outside suppliers
after exhausting its internal reserves. This put us in direct
competition with all the other requesting agencies working
through the local emergency operations center.
Competing with these other agencies for a finite supply of
fuel was challenging, given the continuous need for fuel to
support electrical generators for the airfield and buildings,
for tenant-operated aircraft servicing equipment, and personal
vehicles for key personnel such as police officers, operations
and maintenance personnel, and air traffic controllers to
ensure their ability to get to and from the airport.
Seven airports in the southeast United States sent 27
airport-trained personnel to provide immediate assistance to
Pensacola. The personnel were electricians, HVAC technicians,
building maintenance technicians, airfield operations
personnel, dispatchers, law enforcement officers, and fire
fighters. The amount of time these personnel stayed in
Pensacola varied, but one team stayed for a full 7 days.
Hurricane Ivan disrupted commercial power and water to the
airport for a total of 8 days. Nearby hotels that were open
were filled up to capacity with displaced Pensacola residents.
Immediately following the hurricane, there was an ongoing
demand to provide a safe and sanitary off-duty environment for
the response teams for sleeping, showering, and eating.
The airport has an integral role in the recovery of a
community, providing the airfield infrastructure to support
airlift relief operations. Hurricane Ivan's toll on Pensacola
Regional Airport made it apparent that airports affected by
hurricanes would be dependent upon assistance from other
airports for personnel, supplies, and building materials to
recover and begin commercial operations. Community-wide
disaster relief efforts made it difficult, if not impossible,
to rely upon local assistance. Any local assistance would not
be airport-knowledgeable and unable to work independently of
local airport personnel.
Initiated by the Savannah/Hilton Head International
Airport, a mutual aid network is being established that
recognizes the need for other airports to provide disaster
relief to affected airports and thereby minimize the time to
resume commercial operations. Pensacola's experience with
Hurricane Ivan also highlighted the need for a single outside
point of contact or a clearinghouse for assistance. This
clearinghouse coordinates the assistance to the damaged airport
and thereby relieves the affected airport personnel from taking
numerous phone calls offering assistance, and to assure relief
efforts were coordinated and controlled.
Savannah/Hilton Head International Airport accepted the
role as the clearinghouse, to receive requests for aid and to
disseminate those requests to the airports in the mutual aid
network.
Although not fully established when Hurricane Katrina hit
the Gulf Coast, the Southeast Airports Disaster Alliance Group
initiated its relief efforts with Savannah/Hilton Head
providing the agreed upon clearinghouse services. As the relief
efforts evolved, Pensacola Regional Airport, as the closest
fully operational airport to Gulfport/Biloxi, became the
logistical hub for the airport response teams going into
Mississippi. We provided final briefings for navigating
anticipated road detours, topped off fuel tanks, procured and
loaded additional supplies, and coordinated housing with local
hotels for rotating teams. Similar activities were occurring in
Houston for aid to the New Orleans Airport.
The first lesson learned with Hurricane Katrina: One
airport must serve as the clearinghouse to coordinate mutual
aid assistance, while a second airport becomes the logistical
hub for the response teams. During the first 2 weeks following
Hurricane Katrina, the Airports Disaster Alliance Group has
worked through a learning curve as it provides relief
assistance to Gulfport/Biloxi.
Lessons learned: The airport clearinghouse needs a direct
FEMA point of contact. This point of contact must be identified
72 hours prior to the forecasted landfall and be available
immediately after the storm to work with the clearinghouse to
provide mission numbers for each airport sending response teams
into the affected area. Mission numbers are critical to ensure
teams are able to access the affected area through any ground
checkpoints that may be present, to ensure aircraft can transit
the Temporary Flight Rule, TFR, area established over the
airport, and to ensure reimbursement protocols are established
for the costs incurred by the responding airports.
During the Gulfport/Biloxi relief effort, airports were
delayed while awaiting official calls for assistance. The
Gulfport/Biloxi Airport Director was required to contact his
state EOC to request support from a particular airport. His
state EOC then called the responding airports' state EOC to
officially initiate the request for assistance.
FEMA can and should intervene to make direct requests to
the airport clearinghouse, initiating specific relief requests
without going through multiple state contacts, and providing
the necessary mission numbers at the time of the request.
Hurricane response equipment and supplies generic to any storm
event should be purchased and stored in trucks at a location in
the southeast U.S., ready and available to be dispatched
immediately after a storm. These trucks should be dispatched
and report to the nearest airport identified as the logistical
support airport and which shall serve as the base for
responding teams. An ongoing FEMA presence at this airport
would serve as the facilitator for the airport relief efforts.
Examples of supplies to be stored in these trucks would include
emergency generators, water, MREs, satellite telephones, and
building supplies. Temporary housing for the responding teams
is needed to provide the safe and sanitary off-duty living
environment. Response teams cannot rely on the availability of
local housing. Trailers capable of housing five to seven people
with an independent water supply should be stored at the same
location as the relief supplies and trucks and be a part of the
supplies and equipment sent into the area for airport relief
efforts.
As the Airports Disaster Alliance Group evolves, it is
clear that we have the technical expertise to provide onsite
and immediate relief that will help an airport recover and
resume operations, but it is also clear that our efforts
require Federal support to provide the necessary coordination
with state and local relief efforts, and to provide the
necessary supplies, equipment, and materials necessary to
conduct disaster relief operations. Thank you for the
opportunity to speak this morning.
Senator Burns. Thank you.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Frank Miller, Airport Director, Pensacola
Regional Airport
Pensacola Regional Airport is a small hub airport with 1.6 million
total passengers and with a staffing level of 50 employees. On
September 16, 2004, we were in the path of Hurricane Ivan, one of 4
hurricanes to strike the State of Florida in a six week period.
Pensacola Regional Airport closed its airfield on Wednesday,
September 15th, at 3:30 p.m. due to tropical force winds coming in
advance of Hurricane Ivan, a Category III hurricane. The hurricane made
landfall in the early morning hours of September 16, 2004 with 130 mph
sustained winds. As the hurricane-force winds subsided in the mid-
morning hours of September 16th airport personnel inspected the
airfield operating environment, made repairs, and by 12:45 p.m. re-
opened the airfield for emergency relief aircraft only. Roads and
highways leading into Escambia and Santa Rosa counties were impassable
due to fallen trees, debris and damaged bridges; in response to this
Pensacola Regional Airport was designated as the primary staging area
for disaster relief supplies, filling this role for the first 4 days of
disaster relief operations.
During these four days a mixture of C-17 and C-130 military
aircraft began major relief operations, and 24 various civilian and
military helicopters conducted numerous missions from the airport on an
around-the-clock basis. With temporary flight rules in place over the
airport, Pensacola Regional Airport operations personnel assumed
control of the airfield and issued 219 aircraft landing authorizations.
Consumable materials such as unleaded and diesel fuels were a
critical component for recovery vehicles and equipment but due to the
airport's limited storage capacity at the fuel farm, the airport
quickly became dependent on outside suppliers after exhausting its
internal reserves. This put us in direct competition with all the other
requesting agencies working through the local emergency operations
center.
Competing with these other agencies for a finite supply of fuel was
challenging given the continuous need for fuel to support electrical
generators for the airfield and buildings, tenant-operated aircraft
servicing equipment, and personal vehicles of key personnel such as
police officers, operations and maintenance personnel, and air traffic
controllers to ensure their ability to get to and from the airport.
Seven airports in the southeast sent 27 airport-trained personnel
to provide immediate assistance to Pensacola. The personnel were
electricians, HVAC technicians, building maintenance technicians,
airfield operations personnel, dispatchers, law enforcement officers
and fire fighters. The amount of time these personnel stayed in
Pensacola varied, but one team stayed in Pensacola for a full week.
Hurricane Ivan disrupted commercial power and water to the airport for
a total of 8 days; nearby hotels that were habitable were filled to
capacity with displaced Pensacola residents. Immediately following the
hurricane, there was an on-going demand to provide a safe and sanitary
off-duty environment for the response teams for sleeping, showering and
eating.
The airport has an integral role in the recovery of a community,
providing the airfield infrastructure to support airlift relief
operations. Hurricane Ivan's toll on Pensacola Regional Airport made it
apparent that airports affected by hurricanes would be dependent upon
assistance from other airports for personnel, supplies and building
materials to recover and begin commercial operations. Community-wide
disaster relief efforts made it difficult, if not impossible, to rely
upon local assistance. Any local assistance would not be airport-
knowledgeable and unable to work independently of local airport
personnel.
Initiated by the Savannah/Hilton International Airport, a mutual
aid network is being established that recognizes the need for other
airports to provide disaster relief to affected airports and thereby
minimize the time to resume commercial operations. Pensacola's
experience with Hurricane Ivan also highlighted the need for a single
outside point of contact or a clearinghouse for assistance. This
clearinghouse coordinates the assistance to the damaged airport and
thereby relieves the affected airport personnel from taking numerous
calls offering assistance and to assure relief efforts were coordinated
and controlled.
Savannah/Hilton Head International Airport accepted the role as the
clearinghouse, to receive requests for aid and to disseminate those
requests to the airports in the mutual aid network.
Although not fully established when Hurricane Katrina hit the Gulf
Coast, the Southeast Airports Disaster Alliance Group initiated its
relief efforts with Savannah/Hilton Head providing the agreed upon
clearinghouse services. As the relief efforts evolved Pensacola
Regional Airport, as the closest fully operational airport to Gulfport/
Biloxi, became the logistical hub for the airport response teams going
into Mississippi. We provided final briefings for navigating
anticipated road detours, topped off fuel tanks, procured and loaded
additional supplies, and coordinated housing with local hotels for
rotating teams. Similar activities were occurring in Houston for aid to
the New Orleans airport.
The first lesson learned with Hurricane Katrina: One airport must
serve as the clearinghouse to coordinate mutual aid assistance while a
second airport becomes the logistical hub for the response teams.
During the first two weeks following Hurricane Katrina the Airports
Disaster Alliance Group has worked through a learning curve as it
provides relief assistance to Gulfport/Biloxi. Lessons learned:
The airport clearinghouse needs a direct FEMA point of
contact. This point of contact must be identified 72 hours
prior to the forecasted landfall and be available immediately
after the storm to work with the clearinghouse to provide
mission numbers for each airport sending response teams into
the affected area. Mission numbers are critical to ensure teams
are able to access the affected area through any ground
checkpoints that may be present, to ensure aircraft can transit
the Temporary Flight Rule (TFR) area established over the
airport, and to ensure reimbursement protocols are established
for the costs incurred by the responding airports.
During the Gulfport/Biloxi relief effort airports were
delayed while awaiting the official calls for assistance. The
Gulfport/Biloxi Airport Director was required to contact his
state EOC to request support from a particular airport; his
state EOC then called the responding airport's state EOC to
officially initiate the request for assistance. FEMA can and
should intervene to make direct requests to the airport
clearinghouse, initiating specific relief requests without
going through multiple state contacts, and providing the
necessary mission numbers at the time of the request.
Hurricane response equipment and supplies generic to any
storm event should be purchased and stored in trucks at a
location in the southeast U.S., ready and available to be
dispatched immediately after a storm. These trucks should be
dispatched and report to the nearest airport identified as the
logistical support airport and which shall serve as the base
for responding teams. An on-going FEMA presence at this airport
would serve as the facilitator for the airport relief efforts.
Examples of supplies to be stored in these trucks include
emergency generators, water, MREs, satellite telephones, and
building supplies.
Temporary housing for the responding teams is needed to
provide the safe and sanitary off-duty living environment.
Response teams cannot rely on the availability of local
housing. Trailers capable of housing 5-7 people with an
independent water supply should be stored at the same location
as the relief supplies and trucks and be a part of the supplies
and equipment sent into the area for airport relief effort.
As the Airports Disaster Alliance Group evolves it is clear that we
have the technical expertise to provide on-site and immediate relief
that will help an airport recover and resume operations; but it is also
clear that our efforts require federal support to provide the necessary
coordination with state and local relief efforts, and to provide the
necessary supplies, equipment and materials necessary to conduct
disaster relief operations.
Thank you for the opportunity to speak this morning.
Senator Burns. And now we will hear from Ms. Deborah
McElroy, President, Regional Airline Association. Thank you for
coming this morning.
STATEMENT OF DEBORAH C. McELROY, PRESIDENT, REGIONAL AIRLINE
ASSOCIATION
Ms. McElroy. Thank you, Mr. Chairman, Members of the
Committee. I will begin by briefly giving some information
about the Regional Airline Industry. These carriers use 9 to
108 seat airplanes, and last year they transported one out of
every five domestic passengers. We serve 655 of the 664
airports in the United States with scheduled commercial
service. At 479 or 72 percent of these communities, regional
airlines provide the only source of scheduled air
transportation. Of those communities, 99 in the lower 48
States, as well as 3 in Hawaii and 33 in Alaska, receive
subsidized air service through the Essential Air Service
Program, EAS. The majority of regional airline service is
provided in partnership with the major carriers under co-
sharing agreements.
In 2004, 99 percent of 135 million passengers transported
by regional airlines traveled on co-sharing airlines. These
partnership agreements, which provide benefits for passengers
and the airlines, have two broad methods of revenue sharing.
The first, prevalent among larger regional carriers operating
regional jets, occurs when a major and a regional carrier enter
into a fee for departure, or capacity buy agreement, where the
major fully compensates the regional airline at a predetermined
rate for flying a specific schedule.
The second arrangement, common to smaller, turboprop
operators, occurs when the major pays a portion of the
passenger ticket revenue. This is referred to as ``pro-rate''
or ``shared revenue'' flying.
While regional airlines with pro-rate agreements are most
vulnerable to cost increases and the recent fuel cost crisis,
it is important to note that the fee for departure carriers
also suffer when fuel costs increase this dramatically. Even if
the regional airline is fully compensated by the major carrier
for fuel costs, the majors must take into account those
increased costs and the markets profitability into
consideration when route and capacity decisions are made.
Major carriers have no choice but to eliminate small
community routes that lose money for long periods, even if
those routes contribute some connecting revenues to the
mainline system.
My colleague, Jim May, has provided excellent data on the
increase in jet fuel costs, so I will not repeat this important
information, but I would like to point out the regional
carriers, like their major counterparts, have taken steps to
minimize fuel burn by lowering cruise speeds, safely altering
approach paths, and reducing onboard weight. We also have
worked in cooperation with the Air Transport Association in
tankering fuel to airports were supplies are limited.
Nonetheless, fuel now ranks as the second highest cost for
regional airlines just behind labor.
Regional carriers with both types of compensation
arrangements are clearly feeling the strain, but essential air
service carriers, whose rates are set at 2-year levels by the
Department of Transportation, are seeing major troubles as
well. There were problems before Hurricane Katrina devastated
the Gulf region, but that tragedy has made a bad situation even
worse. As part of the EAS application process, carriers must
project costs and profits over this 2-year time frame. It is no
easy task in today's volatile cost environment.
Historically, in cases of unexpected cost increases,
essential air service carriers have had to enter into the
unpalatable process of filing notice to terminate service in 90
days to begin the process of working cooperatively with DOT to
seek compensation rates that cover the increased costs. This
inevitably caused ill will between an airline and the
community, and the process also forced an airline to operate at
a loss for 180 days while DOT reopened the competitive bidding
process. This is true despite a cornerstone of the original EAS
law which provides that no carrier should be forced to serve a
community at a loss.
Under the leadership of this Subcommittee, Section 402 of
Vision 100 was enacted, providing DOT flexibility in its rate-
making process in instances where carriers experienced
increased costs, defined as a 10 percent increase or more,
consistent for two or more consecutive months. Unfortunately,
DOT has declined to use this tool Congress afforded it to
reconcile fuel cost increases and EAS subsidy rates, citing the
need for a specific appropriation. As a result, carriers are
losing money every day on EAS routes and this service is in
jeopardy.
RAA stands ready to help Congress further enact EAS program
reforms as the next FAA Preauthorization takes place. We join
our ATA colleagues in requesting that Congress provide
appropriate relief from the 4.3 cent-a-gallon tax on jet fuel.
But there is another issue unique to regional carriers that
we would like Congress to consider. The jet fuel tax change
included in the Highway Bill now requires airlines to pay 24.4
cents up front for fuel purchases and file for a rebate from
the IRS. This system which places the burden on airlines to
apply and wait for a refund of the difference is causing a
severe cash crunch for this nation's smallest airlines. These
airlines, unlike the major carriers, do not have any ticket tax
payment to offset the fuel tax payments, because in modern
code-sharing relationships, we do not issue the tickets. We
urge you to amend the law and, in the interim, to require IRS
to refund the taxes on a monthly basis.
Finally, we urge you to work with your colleagues on the
Appropriations Committee to educate them on the need to
appropriate the full, authorized amount of $127 million to
prevent service loss at many communities across the nation.
Thank you for the opportunity to testify and I will look
forward to responding to your questions.
Senator Burns. Thank you.
[The prepared statement of Ms. McElroy follows:]
Prepared Statement of Deborah C. McElroy, President, Regional Airline
Association
Introduction and Background
Good morning. Mr. Chairman and Members of the Subcommittee, on
behalf of the 45 airline members of the Regional Airline Association,
thank you for inviting me to appear before you today to discuss
escalating fuel costs and impacts on regional airline operations and
Essential Air Service in the wake of Hurricane Katrina.
I am Deborah McElroy, President of the Regional Airline
Association, or RAA. RAA represents regional airlines providing short
and medium-haul scheduled airline service connecting smaller
communities with larger cities and hub airports operating 9 to 68 seat
turboprops and 30 to 108 seat regional jets. Of the 664 commercial
airports in the nation, fully 479 are served exclusively by regional
airlines. This means, at 72 percent of our nation's commercial
airports, passengers rely on regional airlines for their only source of
scheduled air transportation.
Of those communities, 99 communities in the lower 48 states as well
as three in Hawaii and 33 in Alaska receive subsidized air service by
regional carriers through the Essential Air Service Program, or EAS,
which was enacted as part of the Airline Deregulation Act of 1978. The
EAS program was crafted to guarantee that small communities served by
certificated air carriers before deregulation would maintain a minimum
level of scheduled air service after deregulation.
The program has been in effect each year since 1978 at various
funding levels and through several eligibility criteria adjustments
that take into account distance from nearby hub airports and other
factors. Most recently, in Fiscal Year 2005, the EAS program was funded
at $104 million. The House appropriation for FY06 was $105 million and
the Senate Appropriation at present stands at $110 million. RAA
estimates the program will need a full $127 million in order to
function as enacted during FY06 and we remain committed to working with
Congress to ensure that the larger EAS appropriation--critical for the
program--is enacted.
With your permission, I will return to this topic. First I would
like to discuss some characteristics of regional airline service. Many
of you already know that the majority of regional carriers operate in
partnership with the major airlines under code-sharing agreements. In
fact, in 2004 99 percent of the 135 million passengers transported by
regional carriers traveled on code sharing airlines. Code sharing
agreements, which provide benefits for passengers, regional and major
airlines, have two broad methods of revenue sharing. The first,
prevalent among larger regional carriers operating regional jets,
occurs when a major and regional airline enter into a ``fee for
departure'' or ``capacity buy'' agreement where the major compensates
the regional airline a predetermined rate for flying a specific
schedule. Within this arrangement are mandatory standards for customer
service, on-time performance and baggage handling requirements and
incentives rewarding excellent performance.
A second arrangement, common to smaller, turboprop operators,
occurs when major airlines pay regional airlines a portion of passenger
ticket revenue. This is referred to as ``pro-rate'' or ``shared
revenue'' flying.
While regional airlines with pro-rate agreements are most
vulnerable to cost increases and the recent fuel cost crisis, it is
important to note that fee-for departure carriers also suffer when fuel
costs increase this dramatically. Even if the regional airline is
compensated by the major airline for fuel costs, the majors must take
those increased costs and the market's profitability into consideration
when route and capacity decisions are made. Major carriers have no
choice but to eliminate regional routes that lose money for long
periods, even if those routes contribute some connecting revenues to
the mainline system. As you know, most of the major airlines are
experiencing some of the most daunting challenges in the history of the
industry. They cannot afford to continue unprofitable routes and when
this service is discontinued, regional airlines and passengers in small
communities suffer as well.
With jet fuel costs expected to rise by more than $9 billion this
year, regional airlines are being hit hard. In July 2005, jet fuel
averaged $1.66 per gallon--52 cents more than in July 2004. According
to one RAA member, this meant that the 592 gallons of fuel required for
a 40 seat regional jet to fly approximately 600 miles cost $1,024 in
July 2005 compared with $600 just one year before. The effect of
Katrina has produced an even more dramatic jump in fuel costs so that
even with load factors at an all-time high, the U.S. airline industry
collectively is struggling financially due to the unprecedented jump in
oil prices and an even more dramatic increase in the price of jet fuel.
Regional airlines are providing critical service to smaller
communities with airplanes that use much less fuel than larger
aircraft. Turboprop aircraft are among the most fuel efficient aircraft
for short-haul routes and RJs have some of the most modern, fuel
efficient engines in the airline industry. Like our major airline
counterparts, regional carriers have sought to minimize fuel burn by
tankering fuel, lowering cruise speeds, safely altering approach plans
and reducing onboard weight, making every effort to manage escalating
fuel costs with an eye toward conservation. Nonetheless, fuel now ranks
as the second highest cost for airlines, ranking just behind labor.
Regional airlines with both types of compensation arrangements are
certainly feeling the strain. But Essential Air Service carriers, whose
rates are set at two-year levels by the Department of Transportation
(DOT), are seeing major troubles as well. There were problems before
Hurricane Katrina devastated the gulf coast on August 29, 2005, but
that tragedy has made a bad situation even worse.
Hurricane Katrina
Fuel costs were already devastatingly high for U.S. carriers before
Hurricane Katrina crippled oil and gas operations in the Gulf Coast and
shut down most of the output from the region. Because my colleague from
the Air Transport Association went over these numbers in detail, I will
focus on service impacts, except to underscore the fact that Katrina
initially wiped out 19 percent of domestic refining capacity, including
13 percent of the nation's daily jet fuel production. Further, oil
imports are down 10 percent because of Katrina's extensive damage to
Louisiana's major oil-import terminal.
By September 1, jet fuel prices had risen 49 cents per gallon to
$2.36, from $1.87 on August 17. While recovery efforts and action by
various federal agencies have led to the price of jet fuel being $2.00
per gallon today, this cost remains untenable for major and regional
carriers alike.
Some lawmakers have suggested that carriers pass along fuel
increases to passengers. But competition has not become less intense
just because fuel prices have skyrocketed. In fact, regional airlines
compete not only carrier to carrier. In short-haul markets, we compete
with the automobile. Data from the most recent DOT Inspector General's
``Aviation Industry Performance'' report indicates that scheduled
flights in markets of 249 miles or less declined 26 percent when you
compare July 2005 to July 2000. For regional airlines, significant fare
increases can mean significantly fewer passengers.
Business passengers, who constitute more than 65 percent of
regional airline travelers, have embraced advances in communications
technology, making traveling more elective than ever and highly price-
sensitive. Airlines may be able to enact fuel surcharges, but these
surcharges would still fail to recoup the losses incurred due to the
recent spike in fuel costs. Further, given the numerous differences in
pro-rate agreements for smaller regional airlines, it is likely that
the increase in revenue from their pro-rata portion of the fuel
surcharge would not fully compensate them for their increased fuel
costs.
Essential Air Service
The Essential Air Service program is administered by the Department
of Transportation, where ``best and final'' competitive proposals are
submitted by regional carriers. The Department selects carriers and
establishes EAS subsidy rates based on that bidding process.
If a carrier is the only airline serving an EAS eligible community
and wishes to exit the market, DOT regulations require it to file a 90
day service termination notice. DOT may hold that carrier in the market
during this period, while a subsidy eligibility review or competitive
bidding process is undertaken. Likewise, carriers operating EAS
subsidized routes must also file a 90 day service termination--subject
to even more onerous hold-in policies--in order to trigger a
renegotiation of rates if costs increase significantly during the
lifetime of the rate agreement.
As part of the EAS application process, carriers negotiate in good
faith with DOT on subsidy rates that remain in effect for two years. As
part of the competitive bidding process, EAS carriers must project
costs and profits over this two-year timeframe--no easy task in today's
volatile cost environment. In cases of unexpected cost increases, EAS
carriers have no tool to renegotiate rates and must instead enter into
the unpalatable process of filing notice saying that the carrier
intends to terminate its service in 90 days to begin the process for
seeking compensation rates that cover their increased costs. This
inevitably causes ill-will between an airline and community, in some
cases fostering a sense of unreliability that ultimately undermines the
use of the air service and further drives up subsidy rates (as fewer
passengers traveling causes air fares to climb). And the process also
forces carriers to operate at a loss for 180 days while DOT reopens the
competitive bidding process. This is true despite a cornerstone of the
original EAS law which provides that no carrier should ever be forced
to serve any community at a loss.
During deliberation of Vision 100, the most recent FAA
Reauthorization bill, Congress noticed the destructive effects of
rising fuel costs on the EAS program. Under the leadership of this
Subcommittee, Section 402 of Vision 100 included a provision giving DOT
flexibility in its rate-making process in those instances where
carriers experienced ``significantly increased costs.'' With an eye to
preventing deliberate cost underestimation, Congress included an index
where ``significant increase'' is defined as a 10 percent increase in
unit costs that persists for two or more consecutive months.
Unfortunately, DOT has declined to use the tool Congress afforded it to
reconcile fuel cost increases and EAS subsidy rates, citing the need
for a specific appropriation. As a result, carriers are losing money on
EAS routes in unprecedented numbers.
As just one example, in July 2004, the fuel cost for a Beech 1900
on a one-hour (block time) flight was $133.41. In July 2005, the fuel
cost had increased to $202.12, nearly 52 percent higher. Only two
months later, for the week ending September 2, fuel costs for that
flight were $272.51, up 35 percent from July. These figures utilize jet
fuel purchasing formulas commonly employed by regional airlines, based
on cost data tracked in the Energy Information Administration's Weekly
Petroleum Status Report. It is important to note that these figures
calculate base fuel cost only--they do not include ``into plane fees''
and federal, state and local fuel taxes. The overall losses across all
EAS carriers are staggering and the program, as we know it, is in
jeopardy.
In fact, we estimate that current fuel cost increases for all
carriers in the program will drive up program costs significantly even
if not one more community becomes eligible in the next fiscal year.
Yet, according to the DOT website, there are currently 60 EAS-eligible,
single-carrier markets which could come into the program. (While more
than 60 communities are technically ``eligible'' I am referencing those
that received service pre-deregulation and do not meet other
disqualifying factors such as distance to nearby airports). Of those 60
communities, anywhere from 15 to 30 could begin to require subsidy
should the carriers file termination notices. Given the significant
reductions in small community service and substantial cost increases
affecting the airlines, it is reasonable and responsible to plan for
more than half of all eligible communities to soon require subsidy.
Under even the most optimistic scenario, therefore, the DOT will need
at least $127 million in Fiscal Year 2006, to run the program. This
Appropriation should also contain a line-item directing DOT to utilize
the rate-adjustment tool afforded by Vision 100 to accommodate dramatic
fuel cost increases.
Early versions of a Senate appropriation sought to fix this problem
by prohibiting newly eligible communities from collecting subsidy; yet
such a prohibition runs counter to the original intent of the law,
which guarantees air service to eligible communities.
RAA stands ready to help Congress enact further EAS program reforms
as the next FAA reauthorization takes place. We are eager to discuss a
rewrite of the eligibility criteria, realizing that some rules set
nearly three decades ago no longer apply. Nonetheless, the most
important thing Congress could do right now to help passengers in EAS
communities and the airlines is to release the full authorized amount
of $127 million for the EAS program in FY06 and to require DOT's
cooperation in making real-time rate adjustments for cost increases.
Request for Congressional Action
Considering the staggering impact that increased fuel costs
have brought for U.S. regional and major airlines alike, RAA
requests, along with our colleagues at the Air Transport
Association, that Congress provide a tax holiday on the $4.3
cents-a-gallon tax on jet fuel. Further, we request that any
fuel surcharge charged by carriers be exempt from the existing
7.5 percent passenger ticket tax.
We further request that Congress reconsider changes to the
jet fuel tax rate that were made as part of the American Jobs
Creation Act enacted last year and the additional proposed
change included in the Highway bill that would require airlines
to pay 24.4 cents up front for fuel purchases and file for a
rebate from the Internal Revenue Service (IRS). This system,
which places the burden on airlines to apply and wait for a
refund of the difference, with tax on jet fuel at $4.3 cents
per gallon, is causing a severe cash crunch for smaller
regional airlines. Changes already implemented by the American
Jobs Creation Act brought the upfront costs to 21.4 cents per
gallon with the highway bill poised raising the burden even
further. Regional airlines do not have any ticket tax payments
to offset the fuel tax payments because, in modern code sharing
relationships, we do not issue the tickets. We urge you to
amend the law and, in the interim, to require IRS to refund the
taxes on a monthly basis. This tax and refund procedure places
a tremendous burden on airlines and impacts cash flow at a time
when carriers are already struggling mightily from fuel costs.
Finally, we urge you to work with your colleagues on the
Appropriations Committee to educate them on the need to
appropriate the full, authorized amount of $127 million dollars
to keep the important EAS program afloat during this period of
dramatic fuel cost increases. The fuel cost increases resulting
from Hurricane Katrina have further injured the financial state
of EAS carriers who, without rate adjustments and compensation
for increased fuel costs, cannot continue to sustain service at
a loss. Only a full appropriation of $127 million can prevent
service losses at multiple EAS points across the nation.
Conclusion
Thank you for the opportunity to testify on this important issue
today. I look forward to responding to your questions at the conclusion
of the panel.
Senator Burns. And I have one question that I want to ask
of Mr. May and then I have some more follow-up questions. Mr.
May, are your members right now paying higher fuel prices on
their international flights and where they purchase fuel at
foreign airports?
Mr. May. Excuse me. Mr. Chairman, the $9 billion increase
year-over-year from 2004 to 2005 is both domestic and
international. So the answer is, yes, we are indeed.
Senator Burns. Did we hit such a spike on our international
airports as we did domestically?
Mr. May. The answer is no, because of the weakness of the
dollar. Fuel is more affordable, if you will, not as expensive
in Europe as it is here in the United States.
Senator Burns. Senator McCain.
Senator McCain. Thank you, Mr. Chairman.
Mr. May, you would like to see some relief from some of the
taxation, is that correct?
Mr. May. Yes, sir.
Senator McCain. Then your first priority is the 4.3 cents
jet fuel taxes, is that correct?
Mr. May. Senator McCain, we think that tax was intended
originally to be temporary, used for deficit reduction, but has
remained on the books, albeit in favor of the Aviation Trust
Fund, is the best candidate for short-term immediate relief
with the understanding that it is equally important that we
keep the trust fund whole. It scores at about $600 million, and
I think we would hope that the Congress would entertain a one-
time supplemental to the trust fund to keep it whole.
Senator Burns. Are you calling for a permanent or temporary
suspension of the jet fuel tax.
Mr. May. Mr. Chairman, we pay $15 billion a year in taxes
and fees. I would like to reduce that level across the board. I
think in the 2007 Reauthorization, the seven fees that we
currently pay to the Trust Fund ought to be consolidated into
one, and we ought to find a better way to do it. But for the
immediate term, I think a temporary holiday, if you will, of a
year would be the most appropriate course of action.
Senator McCain. I would like for you to stop by the next
time we have an Amtrak hearing and hear the Amtrak people
complain about how much we subsidize the airlines as opposed to
our much needed Sunset Limited.
Let me ask you: Now we have got two airlines going into
bankruptcy. When an airline is in bankruptcy, it no longer has
to fulfill certain requirements, right?
Mr. May. The airline has certain leverages that----
Senator McCain. Or any organization that goes into
bankruptcy----
Mr. May.--it does not have outside of Chapter 11, right.
Senator McCain. Among those are payments in the pension
fund.
Mr. May. That is correct.
Senator McCain. So--and how many airlines do we have in
bankruptcy now?
Mr. May. Sir, we have got United Airlines, U.S. Airways,
and ATA of my membership that are currently in bankruptcy. We
have the prospect of two more today or within a short period of
time, which would mean that some 47 percent of capacity in the
United States is in Chapter 11.
Senator McCain. And all of those airlines are no longer
paying into their pension funds?
Mr. May. Senator, I am not sure that is correct, but I am
not the expert on the pension issues.
Senator McCain. I think it has been reported in the media.
I worry about that. Does that mean that you are--that the
airline industry has taken a position on increasing retirement
age of pilots?
Mr. May. We have as ATA held a position that the retirement
of 60 ought to be maintained.
Senator McCain. That is remarkable. Just out of curiosity,
on what basis? That these pilots, if they stay until the age
62, are too old?
Mr. May. No, I do not think it is based on age or
incompetence at age 60. It has been a standard in the industry
for some period of time.
Senator McCain. So do not change it. It is interesting. I
am sure other members of the Committee have the same
experience; I am approached by pilots in the airports all the
time, and I can tell by looking at them whether they are in
favor of increasing retirement age or whether they are in favor
of keeping it the same.
Mr. May. Well, as the Senator points out----
Senator McCain. The younger ones feel the same.
Mr. May. There is a dispute among the pilot community as to
which way to go.
Senator McCain. Yes, that is what I tell them in response.
Twenty percent--twenty-six percent of the total ticket price
that is paid by a passenger now goes in some form to fees or
taxes, is that correct?
Mr. May. On an average $200 ticket, which is close to the
average today, yes, sir.
Senator McCain. If we do nothing--suppose the Congress and
the Federal Government do nothing. What is going to happen in
the airline industry? Consolidation; airlines going out of
business; limp along and go in and out of bankruptcy as we have
seen; further restructuring and, finally--well, go ahead and
respond to that.
Mr. May. Senator, I think that the industry has taken
extraordinary steps for self-help over the past couple of years
and, as I said in my testimony, were it not for fuel right now,
I think this would be a profitable industry. At the same time,
I think it is unrealistic to suggest that there is not going to
be additional consolidation in this industry.
Both domestically and if Congress changes the law, I think
there will be international consolidation. We, live, work, fly
in a world economy, if you will, but our hope is that this
Congress will take a hard look at not only the overall tax and
fee structure that we have but the impact of fuel, in
particular, on the industry.
Senator McCain. Well, I hope we do, Mr. May, because I,
among others, rely on the board of experts who believe that the
price of fuel is never going to go down significantly due to
increased demand on the part of other nations. Would you submit
to the Committee specific changes that you would like to see
and, as far as any other relaxation--would just the jet fuel
tax do it for you?
Mr. May. No, sir. It is only a small step in the right
direction. I think that Congress needs to revisit the entire
tax and fee equation that applies not only to this industry,
but that is tied inextricably to the appropriate growth and
change necessary at FAA and the overall air traffic control
system.
Senator McCain. I would ask that you would submit to the
Committee a detailed position as to what you would like, what
kind of relief you would like to see----
Mr. May. I would be happy to do that, sir.
Senator McCain.--take place.
I thank you, Mr. Chairman.
Senator Burns. Senator Stevens--oh, Senator Lott has joined
us. Do you have a statement, Senator Lott?
Senator Lott. I will wait until after Senator Stevens.
Senator Burns. OK. Thank you. Go ahead.
The Chairman. Thank you very much, Mr. Chairman.
Mr. May, one of the things we are doing on the Committee is
reviewing all of the laws that apply that have come out of this
Committee and determine whether there are roadblocks in them
that prevent our making waivers and doing things which give us
a chance to have some application of current revenues and
current preparations to the recovery, and use current
authorities without having massive new legislation.
Have you examined any of the laws present about conditions
or requirements under those laws that are currently preventing
the airlines from taking steps that are necessary in view of
the disaster and recovery from the disaster?
Mr. May. Mr. Chairman, I have noted a couple things in my
testimony and, certainly, relief on the 4.3-cent tax is one. We
suggested to the Department of Transportation that we be
permitted to impose fuel surcharges separate and apart from the
actual ticket price. They took some action yesterday to put out
for a notice of comment in rulemaking whether or not to
eliminate those rules altogether, and we appreciate the
direction that Secretary Mineta has taken on that point.
I think there are a number of areas that Ms. McElroy has
identified this morning that are specific to the regional side
of this business, part of which is owned and operated by my
carriers, part of which operates on a separate basis.
We would be happy to reexamine some specific areas in the
regulatory process that may be of some benefit and submit that
to the Committee as Senator McCain has suggested.
The Chairman. Now, for last year the airlines that
altogether paid $15 billion into Federal taxes?
Mr. May. Yes, sir.
The Chairman. But they lost $10 billion overall. Have you
looked, again, now, at these taxes? You have asked us to
suspend the one.
Mr. May. Yes, sir.
The Chairman. The airlines are the only entity in the
country that collect from their customers the costs, or at
least partially the costs, of security.
Mr. May. Yes, sir.
The Chairman. Have you looked at that? Should we reduce
that or in any way find some way to reduce the cost of the
security program in order to free up more area for your
increase in fares?
Mr. May. Senator, we pay, as you have just noted, a little
bit north of $15 billion a year in taxes and fees. That
includes some $3 billion to $3.5 billion a year directly to
DHS/TSA. I think we are one of the only industries that
directly undertakes funding of TSA and DHS. We do it through
five different taxes and fees. We have seven different taxes
and fees that underwrite the lion's share of the Aviation and
Airport and Airways Trust Fund.
I think it would be fully appropriate for this Committee to
take a long, hard look at that entire funding equation and make
a determination as to what ought to remain, what ought to be
jettisoned, and how we can help reduce the overall impact of 26
percent on an average $200 ticket, which is far greater than
any other industry in the United States pays in taxes and fees,
greater even than alcoholic beverages and tobacco products
where taxes are used as a disincentive to consumption.
The Chairman. We have provided that some of the airports
could take over their own security if they desire to do so. To
my knowledge, only one did. Have you had any contact with the
airports to see whether they could take over the security and
reduce the costs?
Mr. May. I think that the airports have had a long working
relationship with TSA on that very issue. I think the Senator
is correct that there was only one airport that took advantage
of that opportunity to date. I am not sure, Senator, that there
is a huge dollar difference if it is privatized or federalized.
I think the dollar impact is roughly the same.
The Chairman. Well, what about your costs--the airlines'
costs of the modernization of airports for, say, the passenger
portion? That is substantial, is it not?
Mr. May. We find that the hassle factor, if you will,
opposed by TSA is having a direct impact on our potential
customers. A number of people are driving or using other modes
of transportation as opposed to going through the hassle
factor.
At the same time, there are significant costs that get
imposed on the carriers, sort of the end reimbursed costs from
catering security to direct security at airports, to cost of
inline EDS, et cetera. We have suggested for some time that we
need to take a hard look at how TSA is funded and make a
determination as to whether or not it ought to be through the
carriers themselves, either through fees imposed in taxes or
un-reimbursed expenses, or airport derived expenses, or through
general tax revenues.
The Chairman. It just seems to me there is a lot of chefs
stirring this stew, and I wonder if we have to go into debt
when the overall structural relationship of government to
airlines, and part of it is in the tax base and that is hard to
deal with, but I do think we ought to take a real long look. We
do not have the time now during this disaster period, but I
think we ought to take a long look at totally revamping the
relationship of government to the airline system and deal with
some of those taxes in a way of trying to find some way to
reduce the redundancy and the management that comes from county
and local and airport executives, and entities themselves, but
the ownership concept. All of those things are leading to
problems.
I know I am taking a little bit more time. I would like to
ask Mr. Miller about the problem.
You said that one of the problems was, as I understand it,
you had to go to too many entities to deal with disasters and
you would like some way to go directly to the coordinator and
you suggested, I think, that we should go into some concept of
regional prepositioning of disaster equipment. Could you
enlarge on that a little bit?
Mr. Miller. Yes, Mr. Chairman. What we found out is that
during the immediate times following that natural disaster,
that there is a need for a lot of equipment, building
materials, supplies, but that we have to work through multiple
state agencies in order to get those supplies in there. The
airports that are responding want to respond to that airport.
They want to get there as quickly as they can, but there are
protocols that have to be followed. As I stated, Bruce Fraylik
was required to contact the Mississippi EOC, which would then
contact either the State of Florida or Georgia or South
Carolina to initiate a request for a specific airport.
We feel that if we had one point-of-contact within FEMA,
they could be making those contacts for us. They could be
asking those airports to respond. They could be issuing the
mission numbers that would allow those airports to respond as
quickly as possible. The State Emergency Operations Centers are
so involved in all the community-wide disaster relief that we
do tend to get overrun. We do feel that to make it easier for
them and for us, that a direct point of contact within FEMA
would help to facilitate the response from the other airports.
The Chairman. We will follow up on that.
Last, Ms. McElroy, all of us are not--at least, I am not
familiar with this 24-cent Highway Act provision you were
talking about.
Ms. McElroy. What I heard from the carriers, Senator, is
that there was--thank you. What I have been informed from the
carriers is, because of concerns about jet fuel which head the
lower tax rate, concerns about that being fraudulently
purchased by other consumers, the change was made to increase
that tax rate, and then the airlines filed for a return of the
overage that they paid, if you will, over the 4.3 cents.
It is my understanding from talking to the major carriers,
that they have been able to use ticket tax revenues owed to the
government to offset those fuel payments and, as a result, it
has not caused the cash crunch it has for some of the very
smaller regional airlines. I would certainly be willing to
provide you additional information specifics.
The Chairman. That is good. Can you get us a one-pager?
Ms. McElroy. Yes, sir.
The Chairman. Or we can talk with the tax people at the
Finance Committee and Ways and Means about that.
Ms. McElroy. Yes, sir. We would very much appreciate that.
The Chairman. Thank you very much.
Thank you, Mr. Chairman.
Senator Burns. Senator Lott.
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Thank you, Mr. Chairman, for having this
hearing so quickly to address the problems and the needs of a
very critical part of our economy, the aviation industry.
I hope that you, as Chairman of the Subcommittee, and you,
Mr. Chairman, will continue as you have been to identify
specific things that, maybe, can be done very quickly to
provide some relief and some help and, as in the case of my own
state, and probably Pensacola has experienced this, too, there
is not enough--the state is only eligible for, like, $5 million
for repairs through AIP. Just some little modification in the
existing law would allow us to get more like $35 or $40
million, which is what we will need to do the repairs at our
airports in the aftermath of Hurricane Katrina, and there are
other areas where I think we can take some small actions or
quick actions that would make a big difference.
I want to thank the industry for the expeditious handling
and management of the effort to get our airlines and our
airports back up and operating. FAA, I think, should be
commended for their efficiency in getting our Mississippi
airports back up and running. Gulfport/Biloxi Regional is fully
operational. Jackson International is only temporarily shut
down. Even Stennis International Airport has been open.
In all of this negativity and complaining, I do think that
the effort that has been made by the Administration, by FAA, by
the airports, and by the airlines deserve credit. We
particularly appreciate, in my state, the fact that Delta and
Northwest and Continental American, they are all back in there,
and they are back very close to a full service. That is very,
very important.
Also, even though you are struggling financially as an
industry, many of your companies have been generously involved
in providing transportation, and supplies, and contributions.
And we do, we recognize that, and we thank your industry. And I
put a list of companies that have done that sort of thing
beyond the call of duty in the Congressional Record when I
first returned last week. And the list is there and it includes
some of the airlines.
Now, with regard to energy: Sir, are we still releasing oil
from the SPRO in view of the disaster decline and supply, and
the spike in price?
Dr. Gruenspecht. I think the bids on the SPRO release were
received last week and they are under evaluation in the
Department, and I think you will hear from the Secretary of
Energy in the very near future on that.
Senator Lott. I would have hoped he would have moved
quickly. It has been 2 weeks----
Dr. Gruenspecht. Well, we already have----
Senator Lott.--and the problem was there before the
hurricane.
Dr. Gruenspecht. Right. And we have a couple things. One,
there have been loans of oil that have already taken place to
the refiners. In terms of the release of SPRO, there is a
process that has to be followed.
Senator Lott. Cut the process in half, please, sir. Get rid
of bureaucratic crap and rules and I mean we need supply. My
hometown refinery, which has the capability of refining 365,000
barrels a day, is shut down. We have got the channel open so we
could bring in oil as soon as they are able to go back into
being operational, but they also had the jet fuel and gasoline
in their tanks which they immediately started distributing but
they have about done all they can there.
I can just--I want the Administration, the Energy
Department, that people are emotionally very distraught by what
they have seen from the hurricane. They do feel very tense
about Iraq obviously, but the thing that is making the people
the maddest has been when they go to the pump to fill up their
tanks. Now, you can give me a lecture about freeing up, supply
and demand, and all that other stuff. It is not good enough. We
had better realize there is a problem with certain farmers,
small businessmen and women----
Dr. Gruenspecht. I understand----
Senator Lott.--with children, and we, at least, need to
improvise. Can we at least say, ``This is bad. We know it is
bad'' and take a look, like we care and we are doing something
about it? And I think the Energy Department needs to be a
little bit more aggressive in jawboning the industry as a
whole; and I do not know--I am not prepared to take irrational
actions. But if we do not get some change in energy prices and
supply and all of that, the American people are going to demand
that we do something and it may not be good. So, pass that back
to the Secretary and the Administration. Cut the baloney in
half. Let us get some action, please, sir.
You know, I have tried very hard to be helpful to the
aviation industry, enjoyed being Chairman of the Subcommittee.
We did pass some specific funding after we went into Iraq. Of
course, we did have specific action after 9/11. We have passed
a temporary pension change a year or so ago. We did quickly
move a new, broad and, I think, good FAA reauthorization. So,
we have made some real efforts, and yet the difficulties
continue or get worse.
And I know that you are in this situation because of bad
laws on the books that we passed in terms of how you handle
labor negotiations, bad management decisions over a period of
years that have now come to roost with the current management
team at the aviation industry. And I think you have some good
people in place now, but decisions that were being made 5 to 10
years ago are now just devastating to industry.
I know that we have unaffordable labor contracts. I know we
have unrealistic pension laws. I know that you have heavy fees
and taxes that are a real drain, and now you have been hammered
with the rising fuel costs and, to cap it all off, Katrina. It
caused millions of dollars of loss by flights that were shut
down and flights that are not flying yet. So, jiminy, it is a
big problem.
Now, I just got very concerned about everybody going into
bankruptcy. I do not see how we can stand to let it happen. We
need more common sense by the industry people, broadly; and we
need to do more in Congress to deal and to have a realistic
plan for the future of aviation.
So, I am hoping that we will do three things: One, that the
Chairman of the Subcommittee and the full Chairman will quickly
pass some changes in the laws that could have quick effect on
helping the industry, everything from the airports and regional
airplanes and the industry as a whole. Two, what broader things
can we do that will have a positive effect? And, three, what is
the long-term plan?
You know, in my own area, which is devastated, we are not
just looking at this as recovery and reconstruction, but we
want renaissance. We want this to be an example that will
really make it a shining recovery and one that we can all
benefit from and the country can learn from. I hope the
industry will be thinking about that too, because we need the
aviation industry.
There are just so many things--I have so many problems with
TSA. You know, I have so many problems with the indefensibility
of your ticketing pricing arrangements. Being from a rural
state and flying into Kentucky a lot, sometimes I do not
understand why you can fly for $200 here and $1,100 somewhere
else but we will get into that another day. I know all the
answers.
Senator Burns. You ought to live in Montana, Senator.
[Laughter.]
Senator Lott. I know the arguments, but now, here is the
second part of that equation. What could we do that maybe would
have a bigger impact? Not just little tweaks, but there are two
things: One, you suggested, Mr. May, the 4.3-cents-a-gallon.
Now, last year or the year before, right at the end of the
session the year before, I guess, last year, we repealed the
4.3-cent-a-gallon tax on railroads and barges.
Mr. May. That is correct.
Senator Lott. Are you the only people now that are still
paying the old 4.3-cent-a-gallon tax we put in place for
deficit reduction?
Mr. May. I think there are variations of that tax that are
still paid by other industries, but we are the only
transportation-related business that----
Senator Lott. Now, this one we put in place for deficit
reduction back in the nineties----
Mr. May. Yes, sir, 1993.
Senator Lott. OK. That money though----
Mr. May. It was supposed to be on a temporary basis.
Senator Lott. Temporary. Well, temporary in the eyes of the
Chinese could be hundreds of years, so----
[Laughter.]
Senator Lott. That money does go in the Trust Fund, though,
right?
Mr. May. Aviation Trust Fund, yes, sir.
Senator Lott. Well, we need all the money we can get in
that trust fund.
Mr. May. Senator, I would encourage--I think we have seen a
great deal of support on this Committee but as you, better than
most, know, there are other Committees of the Congress,
including the Finance Committee, who have jurisdictional
priority on many of these taxes, and there has been some
resistance on that front. We would encourage you to help
communicate your views in that direction, as well.
Senator Lott. What did you say the dollar amount is of the
4.3? $600----
Mr. May. $600 million on a 1-year basis, we are advised.
Senator Lott. One other question: We have met very little
discussion at all about the pension bill. Now, I know your
members are, maybe, divided on this issue. We clearly need
pension reform and we clearly need to correct some of the
stupid things in the pension law where it is turned on its
head, where if you are doing well, you pay less; if you are
doing poorly, you pay more.
The Chairman. Could you let me interrupt you?
Senator Lott. Yes.
The Chairman. You said it would be profitable without that
tax, but you were not talking about the payments you would owe
the pension fund. And can you quantify the pension fund
obligation of the airlines?
Mr. May. No, sir. I would be happy to collect it and
provide that information to the Committee. We would be
profitable were it not--this year we are already going to lose
about $10 billion this year, between $9 billion and $10
billion. The fuel--additional fuel costs impact is $9 billion
of that $10 billion. And then there is a component in there for
Katrina. Our operating results would be significantly better if
it were not for fuel.
Senator Lott. Do we need to find a way to pass this Pension
Reform Bill that has been reported out of the Finance and Help
Committee in the next week?
Mr. May. Mr. Chairman, there are a number of companies that
are in my membership that would love to have me say yes. I am
not taking a position on the Pension Reform issue as you are
well aware because I have got companies on both sides.
Senator Lott. Yes. You sound very senatorial.
[Laughter.]
Senator Lott. You have friends on both sides and you are
with your friends?
Mr. May. That is exactly correct, sir.
Senator Lott. Let me ask somebody else, then. Mr. Miller,
do we need to pass this pension reform? Are you going to take
the same position?
Mr. Miller. I will take the same position, sir.
Senator Lott. How about you?
Ms. McElroy. Our Association has not taken a position
either, predominately because the regional carriers have 401k
programs.
Senator Lott. Yes.
Ms. McElroy. We are younger companies. So it is not an
issue.
Senator Lott. OK. Thank you very much.
Senator Burns. To put a footnote to that, if none of you
have taken positions on pensions, how come we are in such a big
problem with pensions? Somebody has not been taking positions
in the past, I would assume.
Senator McCain. There is a difference in the way they were
funded by company.
Senator Burns. Yes, I know, and I think it behooves us,
though, Senator, to pass that pension package and get it out
there. I really do. When you get right down and talk it on the
street, well, that is the way it is.
Senator McCain. Yes.
Senator Burns. I am not real sure there is a lot of
legislation that we can pass, but I tell you that there are
some things that we can do. We can cut through some red tape,
and ask the DOT and the FAA and a lot of people who are
involved in this thing to work with us and to make it work.
Ms. McElroy, how many members have started filing the 90-
day termination? Are there any starting to file those 90-day
termination notices with the regionals?
Ms. McElroy. In the aftermath of Katrina?
Senator Burns. Yes.
Ms. McElroy. No one has filed yet, but there are several
carriers that are looking at it because of the increase in fuel
costs.
Senator Burns. And, the other day we had a hearing in
Energy Committee about gouging. Would the crack spread indicate
some of that, Dr. Gruenspecht?
Dr. Gruenspecht. Yes, I think the crack spread, mostly
which has increased for all products and then has fallen back
to the pre-Katrina type of situation, primarily indicates the
supply and demand balance in the market.
Senator Burns. Well, I am not real sure that--I am, sort
of, hesitant to--I am kind of like Senator Lott, on this market
driven and spread and this type of thing. I have a hard time
understanding this, but I would imagine when I looked at this
form right here as far as the crack spread is concerned, I
mean, that is a drastic spike. That is an upturn like we have
never seen before in the history of the refining or fuel
business.
The Chairman. Senator?
Senator Burns. Yes, sir.
The Chairman. Let me interrupt you. We have got to go vote.
David Russell here is our general counsel. We are putting
together a package now that goes to the leadership----
Senator Burns. That is right.
The Chairman.--assessment group, and that they are going to
review and try to get joint clearance on both sides of these
rifle shots that Senator Lott's talking about. Individual
things that we can do within the jurisdiction of this Committee
to make it easier for people to deal with this disaster and the
recovery that we would like to see the airlines have, if you
have any suggestions at all, get them to David Russell. Those
will be discussed, now, next Monday, and it is going to be a
package that moves pretty quickly, we hope. We do not know,
yet, but we hope that we will get some support on it, but I
urge you to let us know if you think there is anything we can
do to help you get through this period.
Senator Burns. My notes--and that is the reason we had this
hearing today. I think we have gotten all the information that
we need that is out there, private consultation with each one
of you with regard to the legislation that is going to move and
that will be a part of a larger package of a lot of things that
has to happen and be done by Monday. If you would work with our
staff, with our staff counsel and with our offices individually
the next couple of days or so, we would certainly work on
those.
The Chairman. One last comment: The ANWR Bill was vetoed in
1996. If we had that pipeline filled now, we would have at
least 1.2 million barrels of oil today than we have. That is
coming up now, again. I would urge the industries that are
affected by this lack of supply to help us convince the
Congress to go ahead and do what Congress said it would do in
1980, and that is let us explore that one and a half million
acres on the Arctic slope. At the time of the last major
disaster, we had 2 million barrels a day in that pipeline.
There is less than a million barrels a day right now. It is a
national crime in my opinion.
Mr. May. Mr. Chairman, you would note that we included ANWR
in our testimony for the first time.
Senator Burns. Yes, sir.
Mr. May. And we will be happy to share our ideas with both
you and Co-Chairman Inouye and his team.
The Chairman. Thank you.
Senator Burns. Thank you very much. And we will close this
hearing. But also if you have extra comments or anything like
that, make them known to the individual Members and to the
Committee. Thank you very much. We are adjourned.
[Whereupon the hearing adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
The effects of Hurricane Katrina will impact our nation for a long
time, and the decisions made by this Congress in the coming months will
provide critical support to the country as we recover from this
disaster.
There is no question that our aviation system is critical to the
success of the American economy and our capacity to compete in the
global marketplace. However, this industry was struggling long before
Katrina made landfall. The storm made a bad situation worse. Make no
mistake, this Congress will not let our aviation system collapse. Our
actions in recent years--from direct financial bailouts to generous
loan guarantees--demonstrate our commitment to keep the planes flying.
I have followed this issue closely, and given Hawaii's reliance on air
service, I consider it one of my leading priorities.
While I strongly support a thorough examination of Katrina's impact
on the aviation industry, I hope this Committee will also consider the
litany of pressing issues that this catastrophe has raised. Our
citizens are hurting and their confidence in government is deeply
damaged. They have many questions, and so do I.
Why it is that our first responders still cannot communicate with
one another? What are we doing to ensure that our cities can evacuate
the tens of thousands of residents without transportation? How can we
reign in gas prices and eliminate attempts to gouge consumers? What are
we doing to address our growing, long-term dependence on oil? These
questions get at the heart of national public policy and the very
purpose of government, and all of the issues they raise are in our
jurisdiction.
This Committee needs to scrutinize these issues, because they
directly impact the livelihood and physical security of every American:
Gas prices and attempts to gouge customers: As of Monday, gas
prices officially reached an all-time high, even as adjusted for
inflation. There is no doubt that these astronomical prices are having
a sustained, detrimental impact on our economy, not to mention the
finances of every American household. We need to work with the Federal
Trade Commission (FTC) to ensure that there is no price gouging
involved--during this disaster or any other.
Transportation assets for mass evacuation: Tens of thousands of New
Orleans' most needy residents did not have resources to flee the city,
and yet assets like trains and motor carriers were not dispatched in
advance to aid the evacuation. We learned that Amtrak trains, which
were poised to evacuate 600 people per trip, along with other assets
marshaled by the Department of Transportation, sat idle, falling victim
to the Federal Emergency Management Agency's (FEMA) disorganization.
Communications interoperability: Four years after the September 11
attacks on America, our first responders still cannot communicate with
one another in a crisis. This is almost unfathomable. It is a problem
that must be solved immediately if we are to effectively manage the
chaos of either a large-scale terrorist attack or the next natural
disaster.
Coast Guard's exemplary, and independent, performance: The Coast
Guard proved to be one of the few agencies that rose to the challenges
Katrina presented, rescuing over 30,000 victims in the early stages of
the aftermath. The Coast Guard maintains a level of independence that
proved critical in its response efforts. In fact, Homeland Security
Secretary Michael Chertoff appointed Coast Guard Vice Admiral Thad
Allen to direct the Katrina recovery efforts. FEMA, which was an
independent agency before being merged into the Homeland Security
Department, is now 3 appointees removed from the President, despite its
life-and-death, highly time-sensitive functions.
Fuel-efficiency standards: Katrina has demonstrated, yet again, our
economy's inherent dependence on oil, both foreign- and domestically-
produced. It may very well be our country's Achilles heel, but it
should not be this way. One of the most immediate and effective things
we can do to remedy this dependence is to increase the fuel efficiency
standards of our automobiles in a meaningful way. The technology
currently exists to double our oil efficiency, and employing this
technology would not only reduce our national dependence, it would
reduce fuel costs for every American. The time has come to make this
happen for the sake of our long-term economic strength, not to mention
our long-term foreign policy.
Insurance coverage: As the President discovered first hand on
Monday when he toured the Gulf region, insurers are not coming through
for Katrina's victims. This industry, which is so quick to come to
Congress for help when times are tough, is not doing the same for its
premium-paying customers, who are in desperate need of assistance. We
need to take a serious look at the way property and casualty insurers
are living up to the agreements they make with their customers. This
Committee has examined disaster insurance before, and we need to do so
again.
Given the gravity and long-term impact of Katrina's aftermath, our
Committee must address these issues. Government's central purpose is to
protect the physical and economic security of every American, yet
Katrina has exposed numerous failures and vulnerabilities at all levels
of government that need to be corrected immediately. We must do our
part to resolve these problems before another catastrophic natural
disaster or, even worse, a large-scale terrorist attack.
______
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Mr. Chairman, thank you for calling this hearing and giving us an
opportunity to discuss this important issue. The cost of aviation fuel
is soaring like a rocket. Airlines are being hit hard by high fuel
costs, just as American families are getting slammed by the high price
of gas.
In 1993, aviation fuel cost twenty nine dollars ($29) per barrel.
Last year, the cost more than doubled--and it is still rising. In the
wake of Hurricane Katrina, jet fuel prices soared 22 percent in two
days!
Every time the cost of aviation fuel increases by one dollar a
barrel, it costs the worldwide airline industry one billion dollars!
Those costs are ultimately paid by travelers in the form of higher
fares or service cuts, or by labor in the form of cuts in wages or
pensions.
U.S. airlines lost some nine billion dollars ($9 billion) last
year. The outlook this year is just as bleak. We all understand that
the price of oil is subject to fluctuations in supply and demand. And
we all realize that events like Hurricane Katrina can disrupt the
supply chain.
But I am concerned that the current price of aviation fuel is not
simply a reflection of free market forces. According to the
International Air Transport Association, the refinery margins for
aviation fuel have almost tripled in the past two years--from six
dollars ($6) in 2003 to seventeen dollars ($17) today. We cannot allow
the oil companies and refineries to take advantage of a natural
disaster like Hurricane Katrina by gouging consumers.
Another major factor behind rising fuel prices is the cost of crude
oil, which is propped up by the OPEC cartel. The whole reason OPEC
exists is to set quotas on the production and export of oil, which
drive up the price by artificially limiting the supply. These quotas
are a burden on airlines and everyday families.
But they are prohibited by the rules of the World Trade
Organization. In other words, the Administration is not helpless in the
face of OPEC's cartel. There is something we can do about this. Six
members of OPEC are already members of the WTO, and Saudi Arabia is
seeking to join. I have called on the Administration to take immediate
action to bust up the OPEC cartel by filing a complaint through the
WTO.
I have introduced a bill that would instruct the Administration to
file a complaint against OPEC through the WTO. But President Bush
doesn't have to wait for my bill to pass--he should act immediately to
put pressure on OPEC.
Finally, our national transportation system is especially
vulnerable to disasters that disrupt the supply of oil because of our
overwhelming reliance on automobiles and aviation, and under-
utilization of passenger rail.
This is just one more reminder that we must develop a balanced
national transportation system--and that includes passenger rail.
I'm proud that the full Commerce Committee overwhelmingly approved
an Amtrak bill before the recess that would help correct this
imbalance. That is a step in the right direction.