PREPARED STATEMENT

OF

AMBASSADOR DAVID L. AARON

ON BEHALF OF THE

U.S. DEPARTMENT OF COMMERCE

U.S. DEPARTMENT OF STATE

FEDERAL AVIATION ADMINISTRATION

BEFORE THE

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

SUBCOMMITTEE ON AVIATION

SEPTEMBER 9, 1999

Thank you, Mr. Chairman, for holding this hearing. We are pleased to be with you this morning. We applaud your leadership in focusing attention on the European Union "non-addition" regulation concerning aircraft engine hushkits and re-engining.

On April 29, the European Union adopted, with a one-year delay in implementation, an aircraft noise regulation that would restrict within the EU aircraft that have been modified with "hushkit" noise-reduction devices or certain replacement engines. The regulation prohibits the registration in the European Union, beginning in May 2000, of aircraft that have been modified with hushkits or through "re-engining". Noise-modified aircraft registered in the United States and other countries outside of the EU may not be operated in the EU after March 2002. Aircraft that are already registered in an EU member state or that are registered outside the EU by a foreign carrier but have been operated into the EU are "grandfathered" under the regulation.

The Administration strongly opposes this so-called "hushkit" regulation. It is inconsistent with noise standards established by the International Civil Aviation Organization (ICAO) and whose international acceptance provides the basis for billions of dollars of investment by U.S. and foreign aerospace manufacturers and airlines. In addition to undermining ICAO's critical role in promoting global aerospace and aviation, the regulation is discriminatory because these hushkits and engines are U.S.-made and found primarily in U.S. fleets. Even though the regulation has not been implemented, its mere existence has caused considerable commercial damage to U.S. airlines (by reducing the resale value of aircraft) and manufacturers (by discouraging sales of hushkits, certain engines and engine spare parts). Finally, the regulation would do almost nothing to reduce actual aircraft noise.

The EU hushkit regulation undermines the critical role of ICAO

The hushkit regulation violates noise ICAO standards by restricting the use of aircraft equipped with hushkits and replacement engines that were specifically designed to meet Chapter 3 standards established in ICAO. These standards were agreed to by the more than 100 ICAO members, including the U.S. and EU member states. On March 22, ICAO Council President Assad Kotaite sent a letter to then-EU Council President Franz Muntefering stating that the EU regulation is inconsistent with ICAO standards and that its impact, in terms of environmental benefits and costs to carriers and their users, had not been fully evaluated.

The EU's unilateral action in violation of ICAO standards threatens the future of uniform, global aviation standards - standards that are essential to the health of the global aviation industry. Internationally agreed upon standards give aerospace manufacturers the confidence to invest billions of dollars annually to develop new technology and give international airlines the certainty necessary to purchase this expensive new technology. Absent ICAO standards, such investments will be harder to justify. Departure from the universality of ICAO standards for aircraft noise could set a precedent that threatens investment in other aspects of aviation, as well.

The role of international organizations such as ICAO is increasingly important in a global economy. Because the hushkit regulation represents a unilateral action by the EU that undermines a critical international organization, combating the regulation is a very high priority for the United States.

The EU hushkit regulation discriminates against the United States

In addition to violating ICAO standards, the EU regulation is discriminatory. It is crafted so as to affect U.S.-manufactured products while leaving untouched aircraft and aircraft engines produced in the EU, including European aircraft that are noisier than the restricted U.S. aircraft. Similarly, the regulation harms U.S. airlines while leaving European airlines untouched.

To elaborate, the regulation restricts aircraft powered by engines that have a by-pass ratio of less than 3 to 1. ("By-pass ratio" refers to air that enters an aircraft jet engine and goes around, or "by-passes", the section of the engine that produces thrust through the combustion of an air and fuel mixture.) By-pass ratio is a design standard, not a performance standard. The use of performance-based -- and the avoidance of design-based -- product standards is an internationally accepted policy. ICAO's standard for noise is a performance standard based on decibels - that is, a volume of noise that can be physically measured.

Because of its troubling reliance on the design standard of by-pass ratio, the EU regulation would permit the continued operation of many aircraft that are just as noisy (as measured using decibels) as the aircraft that would be restricted. Indeed, the regulation would permit the continued operation of some aircraft that are significantly more noisy than those it would restrict.

Why this reliance on a flawed measure of noise - namely, the by-pass ratio? A closer look at the nationality of the companies affected suggests the answer. The EU regulation restricts U.S.-manufactured aircraft while having little or no effect on EU-manufactured aircraft. Similarly it restricts U.S.-manufactured engines while having little or no effect on EU-manufactured engines. A chart attached to this statement illustrates the discrimination graphically. (Rolls-Royce builds a replacement engine for noise compliance, the "Tay 650", but this engine has a by-pass ratio of 3.1 to 1, just above the arbitrary threshold in the regulation of 3 to 1.)

The regulation discriminates against the United States in other ways. One of these concerns the grandfathering provision. Hushkitted and re-engined aircraft registered in the European Union as of the date when the regulation is applied (May 4, 2000) may continue to operate in the EU indefinitely. A change of registry from one country in the EU to another EU member state does not affect this. In contrast, aircraft registered in the United States that would otherwise be grandfathered lose that status if they change registry to another country, including an EU country. The result is that EU airlines are given greater latitude than U.S. airlines in the transferability of their assets, thereby enhancing the value of EU-registered aircraft while diminishing the value of U.S.-registered aircraft.

European air carriers also are given greater latitude than U.S. carriers with respect to leasing of hushkitted and re-engined aircraft. Under certain conditions, aircraft registered in the EU will retain their grandfathered status, even though the registry temporarily changes to a country outside of the EU, if the registry change is for purpose of leasing the aircraft. In contrast, a U.S.-registered aircraft would lose its grandfathered status when leased under the same conditions.

The EU claims that the underlying principle of the regulation is to freeze at existing levels the number of aircraft operated in or to/from the EU that emit -- by the new, unilateral and indefensible EU standard -- unacceptably high levels of noise. According to the EU, the regulation is not intended to reduce the numbers of these aircraft. The non-addition principle, the EU says, applies equally to aircraft registered in the EU (and that operate within the EU) as to those registered outside of the EU (and operate to/from the EU). The discriminatory nature of the regulation belies this assertion.

Genuine application of the non-addition principle would be neutral with respect to country of registry. Provided that an aircraft meets the test of having been operated in or to/from the EU prior to the application of the regulation, a change in its registry neither adds nor detracts from the aggregate number of aircraft that the EU says are of concern. In fact, the regulation targets aircraft registered in the United States and other countries outside the European Union.

Tangible injury to the United States caused by the EU hushkit regulation has already occurred

The injury caused by the EU hushkit regulation to the economic and trade interests of the United States is important because of the European Union's prominence as an export market and competitor for U.S. aerospace manufacturers, and because the balance of trade in aerospace products plays an important role in mitigating our overall trade deficit.

Our aerospace industry is a jewel in the U.S. trade picture. It is at the top of U.S. industries that contribute positively to the U.S. trade balance. Last year, when the United States experienced its worst deficit ever in overall trade, we had a trade surplus of $40 billion in aerospace products. The European Union is the largest export market for U.S. aerospace manufacturers, accounting for about one-third of total U.S. aerospace exports. In 1998, the United States recorded a $7.5 billion aerospace trade surplus with the EU, helping to offset a $27 billion U.S. deficit in total U.S.-EU trade.

Access to foreign markets is crucial for the U.S. aerospace industry. In 1998, about 70 percent of U.S.-built civil aircraft, aircraft engines and parts were shipped to customers outside of the United States. These exports sustain hundreds of thousands of U.S. jobs.

Efficient air services and financially strong airlines are equally important to the United States, creating millions of American jobs, enabling millions of passengers to fly each year, and keeping our nation strong. Last year more than 44 million passengers traveled across the Atlantic, more than any other region in the world. The United States has negotiated 36 open skies agreements and dozens of other important market opening agreements.

Although the date of application of the EU hushkit regulation was postponed until May 4, 2000, U.S. companies are suffering injury now. With its adoption by the Council of the European Union and publication in the EU's Official Journal four months ago, the hushkit regulation is now law. In EU parlance, it has "entered into force". What was a potential threat to U.S. business is now a threat in law.

It is important to recall that this legislation initially was proposed in the form of a directive. EU directives can not be legally enforced until they have been "transposed" into national legislation by the member states. This process can take years. In converting the legislation from a directive into a regulation, the Council short-circuited this dynamic. No transposition into national legislation is needed. Member states have no discretion in interpreting the regulation's intent (as they do with directives). The regulation can be rescinded only through the enactment of new EU legislation.

As a result, the mere threat of the regulation has had a chilling effect on sales of hushkits and replacement engines, most of which are manufactured in the United States. U.S. companies have incurred substantial injury.

• Lost export sales of hushkits and replacement engines: Because the regulation restricts operation in the EU of aircraft modified by hushkits and replacement engines, airlines in Europe have canceled or delayed orders for U.S.-manufactured hushkits and replacement engines. The dollar value of these U.S. exports is significant. For example, one European customer, Omega Air, seeks to re-engine over 65 Boeing 707 aircraft to make them compliant with the ICAO Chapter 3 standard. Omega is not able to secure the financing to purchase these engines, worth over $1 billion, from a U.S. exporter, Pratt & Whitney. Financial institutions are reluctant to provide capital in view of the restrictions imposed by the EU hushkit regulation.

In addition, Pratt & Whitney estimates a loss of $515 million, some of which has already occurred, in canceled orders for hushkit parts and parts for engines that have been hushkitted.

U.S. sales of hushkits and replacement engines also have been curtailed to airlines outside of the EU because the regulation restricts aircraft registered in non-EU countries. Airlines based in countries near the EU (such as in North Africa, Central and Eastern Europe, and the Middle East) that could serve European cities with hushkitted and re-engined aircraft have deferred orders for hushkits and replacement engines.

• De-valued U.S. fleet At the end of 1998, about 1,850 aircraft in the U.S. fleet had either been modified with hushkits and replacement engines (or were candidates for modification) to be ICAO Chapter 3 compliant. The asset value of these aircraft is estimated to be approximately $10 billion. The re-sale value of these aircraft has been diminished because the market has been curtailed, i.e., the EU is no longer part of the total market.

Estimates vary of the precise extent to which the U.S. fleet has been de-valued. Assuming a figure at the conservative end of the estimates, a loss of five percent of the value of U.S.-registered hushkitted and re-engined aircraft , the injury caused by the EU hushkit regulation is on the order of $500 million. This loss in value has degraded U.S. airlines' balance sheets, with a spill-over downward effect on the carriers' ability to access capital.

• Threatened capital investments and U.S. jobs: U.S. companies have invested tens of millions of dollars in aircraft noise modification equipment and technology. These include large companies such as Federal Express and Pratt & Whitney, as well as smaller companies such as Burbank Aeronautical Corporation (about 600 employees) of Burbank, California and Nordam (about 2,000 employees) of Tulsa, Oklahoma. Burbank has invested about $40 million in aircraft noise-suppression technology. Nordam has invested over $60 million since 1987. Imposition of the EU hushkit regulation threatens the ability of Burbank, Nordam and other U.S. companies to recoup the investments they have made in hushkit and re-engining technology. The companies report that they may have to lay-off workers due to the EU hushkit regulation.

EU justifications for the hushkit regulation are empty

The European Union has sought to justify the hushkit regulation on several grounds, none of which can be sustained.

The EU alleges that the regulation does not violate ICAO noise standards because these standards deal only with "certificated" aircraft, and not "recertificated" aircraft such as aircraft modified with hushkits or replacement engines. The EU allegation is not true. Hushkitted and re-engined aircraft are, in fact, certificated within the meaning of ICAO. EU member states accept the FAA certification of these aircraft.

As indicated earlier, Assad Kotaite, the President of the Council of ICAO, wrote to the EU expressing concerns with the hushkit regulation. Dr. Kotaite stated that the EU hushkit regulation appears to be inconsistent with an ICAO noise resolution "in that [the hushkit regulation] would limit to some extent the options available to non-European Union operators attempting to meet the Chapter 2 phase-out requirements in Europe and would also introduce operating restrictions on certain Chapter 3 aeroplanes". He asked the EU to postpone taking action on the hushkit regulation.

A second justification the EU offers for the regulation is the need to respond to political pressures from environmental interests. We understand this pressure because we have it here at home. We agree with the European Commission that more stringent aircraft noise standards should be developed. The hushkit regulation, however, is not the answer because it will not reduce noise. As I indicated earlier, many aircraft will continue to operate that are as noisy or more noisy than the aircraft restricted by the regulation.

The Commission itself has recognized that the objective of the hushkit regulation will not be met, or at least that any reduction of aircraft noise that can be anticipated will be extremely marginal.

Third, the EU maintains that aircraft engine by-pass ratio is a good "proxy" for ICAO noise standards because there is a direct, inverse relationship between noise and by-pass ratio: the higher the by-pass ratio the quieter the engine. In fact, there is no direct, causal relationship between by-pass ratio and engine noise. More importantly, the EU's argument begs the question of why any proxy is needed at all.

Fourth, the EU has stated that the hushkit regulation is required to prevent its market from being "flooded" by relatively noisy hushkitted and re-engined aircraft now registered in the United States. The starting point for this argument is that the United States requires U.S. airlines to have completed the conversion of all of their aircraft from the ICAO Chapter 2 standard to the ICAO Chapter 3 standard by December 31, 1999. This is more than two years earlier than the deadline of April 1, 2002, required of airlines in the European Union. Because of the difference in deadlines, the EU argues, U.S. airlines will be encouraged to dump hushkitted and re-engined aircraft into the EU and other countries outside of the United States (that have the same, later deadline as the EU for the phase-out of Chapter 2 aircraft).

This argument makes no sense. U.S. airlines that hushkit or re-engine Chapter 2 aircraft to make them compliant with the Chapter 3 standard may continue to operate them in the United States after December 31, 1999.

We agree that U.S. airlines will be forced to retire or to sell to non-U.S. customers by the end of 1999 aircraft that comply only with the ICAO Chapter 2 standard. However, the hushkit regulation does nothing to address this issue, because it does not constrain the operation of Chapter 2 aircraft. Unlike the United States, EU member states have decided to permit the operation of noisy Chapter 2 aircraft until April 1, 2002.

Fifth, the EU argues that it should be permitted to depart from ICAO standards because the United States did so first, in advancing the ICAO deadline for implementation of the Chapter 3 standard from April 1, 2002 to January 1, 2000. The argument fails for several reasons. Most importantly, the United States merely advanced the deadline for implementation of a standard. This is a far cry from changing the standard itself, as the EU has done. In addition, the United States provided ten year's advance notice of the requirement for Chapter 3 implementation. The European Commission published the hushkit regulation only a year in advance of its initial proposed implementation.

Finally, the EU argues that hushkitted and re-engined aircraft should be banned because they barely meet the Chapter 3 standard. This is irrelevant. The standard requires manufacturers to produce engines that cross the bar of permissibility, not clear the bar by an arbitrary margin dictated by the EU.

United States efforts to address EU concerns have not been reciprocated

While the Administration opposed the regulation when it was adopted in April, we were pleased that the Council of the European Union postponed its implementation until May 2000. This provided a period for the cooling-off of bilateral tensions and an opportunity for continued consultations to reach a resolution of U.S.-EU differences.

The Administration is disappointed that no resolution has been reached.

Following the hushkit regulation's adoption, the United States agreed to accelerate work on the development of a more stringent, "Chapter 4" noise standard in ICAO. In return, we asked the EU to withdraw the regulation before May 2000, when it is scheduled to be applied. We have abided by our commitment.

However, to date, the EU has not been willing to give us any indication that it is on track to provide an unconditional commitment to withdraw the regulation by May 2000. Rather, the EU offers to introduce legislation aimed only at either modifying the regulation or postponing again the date of its application. Neither option is acceptable. Modification would address only ancillary provisions of the regulation while leaving intact the core provisions that discriminate against the United States. Postponing the regulation would not alleviate the economic damage being done to the United States.

The hushkit regulation in perspective

The European Union's position on the hushkit regulation must be viewed in terms of our overall bilateral trade relationship. The issues under dispute in the hushkit regulation embody many of the same principles at the core of our most important Trans-Atlantic trade challenges. These challenges include EU restrictions on exports of U.S. beef, concerns over third generation wireless technology, and privacy protection for cross-border data flows. The common factor in all of these issues is the need to reconcile different standards. Failure to reach a bilateral accommodation on hushkits will bode ill for the larger issue of standards-related trade tensions.

Two weeks ago Secretary Daley called attention to our worsening trade deficit with Europe. He noted that the United States had a 1999 trade deficit with Western Europe of $36 billion, on an annualized basis, compared with a $21 billion deficit for 1998 (also on an annualized basis). Secretary Daley said that there has been a decrease in U.S. exports to Europe and an increase in European exports to the United States. This growing imbalance may shift the attention of policy- and law-makers away from other U.S. trading partners to Europe.

The hushkit regulation is important also from the perspective of overall U.S.-EU aerospace trade relations. U.S. exporters of civil aircraft and related components face a variety of discriminatory and protectionist measures imposed by the European Union and EU member states which we are discussing with the European Union. To many Americans, the hushkit regulation looks like one more example of European "industrial policy" aimed at hurting our aerospace industry.

Conclusion

The United States is at the forefront of global efforts to protect the environment, including those being pursued through the United Nations Framework Convention on Climate Change. The Framework recognizes the primacy of ICAO in establishing environmental standards, such as gaseous emissions, for the aviation industry.

The Administration is concerned that if the EU hushkit regulation is not withdrawn the outlook for genuine relief from aircraft noise through ICAO -- in contrast to the cosmetic approach of the EU hushkit regulation -- will be diminished. As long as the hushkit regulation remains on the books, there will be a threat to the universality of ICAO standards, standards on which the United States and the EU have cooperated for more than half a century.

We are concerned also that if the regulation is not withdrawn, we may face the prospect of increased trade tensions, repeating those we experienced this past Spring. Withdrawal of the regulation would ease these tensions, avoiding the necessity of the United States having to consider initiating actions to protect our trade interests, either through the World Trade Organization, in ICAO (such as Article 84), or as provided by U.S. legislation.

We would hope that the new Commission being seated in Brussels will be able to take a fresh look at this issue and move forward promptly with steps to begin the process of withdrawal of this pernicious regulation.