Statement of Faye Malarkey

Vice President, Legislative Affairs

Regional Airline Association

Before the

 

U.S. Senate

Committee on Commerce

Aviation Operations, Safety, and Security Subcommittee

 

 

 

July 17, 2007

 

 

 

 

 

 

 

Chairman Rockefeller, Senator Lott, and Members of the Subcommittee, thank you for the opportunity to testify before you today.  I am pleased to testify on behalf of the Regional Airline Association.  We thank you for holding this important hearing. 

RAA represents 41 U.S. regional airlines transporting 97 percent of regional airline passengers.  Our member airlines operate 9 to 68-seat turboprop aircraft and 30 to 108-seat regional jets and link together more than 600 communities in the United States. 

At more than 70 percent of these communities, regional airlines provide the only source of scheduled airline service.  Nowhere is the importance of regional airline service more apparent than at the more than 140 rural communities across the country that receive scheduled air service through the Department of Transportation’s Essential Air Service Program (EAS). 

 

Because of continuing financial pressures in the post 9/11 aviation industry, at least 40 additional communities have been forced onto the EAS roles and 17 EAS communities have been dropped from the program altogether in the past five years.  The smallest airports -- those with between one and three daily departures -- have seen a 21 percent decline in daily departures between September 2001 and September 2006.  Thirteen of these airports have lost service altogether.  Airports with between three and six daily flights in September 2001 have experienced a 33 percent decline in departures since then, with eight such airports losing service altogether. 

As Members of this Subcommittee know, EAS was initially created as part of the Airline Deregulation Act of 1978.  The program has been in effect each year since under various funding proposals.  Many members of this Subcommittee will remember that, in 1999, DOT issued several service termination orders, triggering broad opposition from communities and air carriers.  This highlighted the need for a sufficient and stable funding stream for EAS. 

 

Thanks in large part to the strong leadership of this Committee, EAS has received funding increases which have helped it keep pace with changing market realities. 

 

Unfortunately, the proposal contained in the FAA’s own reauthorization bill this year would severely cut and potentially dismantle the EAS program as funding would fall by $59 million from current enacted levels, effectively forcing out a third or more of the communities that now use the program.  The proposal further caps EAS subsidies at current levels and prohibits the addition of new EAS points for communities that lose air service in the future, telling residents of these communities that convenient, reliable air service is a luxury, and one they can't have.  For the others, DOT would set up a tiered system to grant reduced subsidies to communities in descending order of distance from nearby hub airports, starting in Alaska and continuing until the funding runs out, which is sure to happen long before DOT’s obligation to EAS communities has been met. 

 

If enacted, this proposal would jeopardize rural air service in an unprecedented way because it fails to reflect the fact that, of 140 current EAS communities, 85 -- 36 in Alaska alone -- are further than 210 miles away from a medium or large hub airport.  Dozens more are further than 150 miles away from the nearest medium or large hub airport.  Yet, under the DOT’s proposal, even many remote communities would lose air service as the funding level proposed by DOT is simply too low to continue the program in any meaningful way.

 

Congress promised small communities, back in 1978, that deregulation would not leave them behind; rather, communities receiving scheduled air service before deregulation would continue to receive scheduled air service after deregulation.  The vehicle for this promise has been EAS, and while we recognize the usefulness of reform, we urge Congress to reject proposals that significantly cut, eliminate, or undermine this important program. 

Rather than accept proposals to cut the program in half, this Committee has elected instead to increase funding by $6 million per year in its FAA proposal, bringing authorized appropriations to $133 million next year.  We are deeply grateful for your leadership.

 

One of the greatest factors contributing to diminishing small community air service is the continuous and staggering affect of fuel cost increases.  Turboprop aircraft are among the most fuel efficient aircraft for short-haul routes and, like our major airline counterparts, regional airlines have sought to minimize fuel burn by tankering fuel, lowering cruise speeds, safely altering approach procedures, and reducing onboard weight.  We are making every effort to manage escalating fuel costs with an eye toward conservation.  Nonetheless, fuel is now the highest cost for many regional airlines.

As part of the competitive EAS application process, carriers negotiate in good faith with DOT on subsidy rates that remain in effect for two years.  In doing so, EAS carriers must project revenues and costs over this same two-year timeframe – no easy task in today’s volatile cost environment.  In cases of unexpected cost increases, EAS carriers lack a mechanism to renegotiate rates and must instead enter into the unpalatable process of filing 90 day service termination notices in order to begin the convoluted process of seeking rates that cover increased costs.  This inevitably causes ill-will between airline and community and fosters a sense of unreliability that undermines community trust in and use of the air service. 

One of the fundamental tenets of the EAS program held that no carrier should be expected to serve any market at a loss.  Yet, in cases of unexpected cost increases, carriers are unable to provoke rate changes without filing such service termination notices, after which each carrier must continue to provide the service, at a loss, for 180 days while DOT undertakes the competitive bidding process. 

In recent months, crude oil has risen dramatically.  For example, one EAS carrier, Great Lakes Aviation, has experienced annualized, system-wide fuel cost increases of over $4 million.  To put these numbers into perspective, please consider this:  EAS contracts currently have a two-year lifetime.  A winning carrier who negotiated a competitive contract one year ago would have based cost projections on then-current fuel rates of $1.80 per gallon.  That same carrier would now be providing the service with fuel costs at nearly $3 per gallon.  Because EAS carriers are strictly limited to five percent profit margins, climbing fuel costs can quickly turn once-profitable routes into losses.  

Congress has already addressed this issue.  In Section 402 of Vision 100, this Committee worked to include a rate-indexing mechanism where DOT could make real-time rate adjustments during periods of significantly increased carrier costs.  In order to prevent deliberate cost underestimation, Congress required carriers to demonstrate “significant increases,” and defined these as 10 percent increases in unit costs persisting for two or more consecutive months.

DOT has been unwilling to implement the program to date, citing a lack of funds.  RAA therefore respectfully asks this Committee to include language in its FAA bill to require DOT to make these real-time rate adjustments. 

Recently, DOT has stated that the Essential Air Service program is not facing any crisis in funding.  RAA respectfully disagrees.  The demonstrability of funding needs and expenditures related to the EAS program is closely tied to management of the program.  When DOT cuts service levels or eliminates points in order to lower programmatic expenditures without reinvesting in the program, it generates excess cash in the EAS coffers.  This practice produces balance sheets that suggest the program is over-funded.  In order to fully explore these issues, RAA requests that Congress require an audit on unspent, obligated EAS funds currently retained on the EAS balance sheets.  Further, RAA requests that leftover funds be reinvested in the EAS program to raise service levels at more viable routes, thereby allowing passengers to best utilize service that has been granted. 

As Congress considers potential eligibility criteria changes, we also ask that the same standard is applied.  Reforms to the program should be aimed at enhancing the program and protecting rural air service; not gutting the program. 

 

 

Part of the nature of the Essential Air Service program, as you know, is that carriers compete rigorously for contracts.  Even in cases where an incumbent carrier desires to continue serving a given market, DOT has the right to select another carrier.  In cases where DOT awards service to a new carrier, RAA believes DOT should be required to give the incumbent carrier a date certain when it may exit the market, without exception. 

 

The current practice, where DOT holds the carrier in markets in 30 day increments, is untenable.  This practice means a carrier cannot sell tickets in the EAS market beyond 30 days, nor can it make plans to utilize its aircraft elsewhere.  We urge Congress to end this unfair situation by mandating that DOT adopt a date certain component for incumbent carrier market exits when it selects an alternate carrier to serve the market.

 

As you know, DOT contracts have a two-year lifespan.  Post 9/11, carriers possessed excess aircraft inventory sufficient to facilitate competitive bidding on new EAS routes.  With more and more turboprop aircraft being sold overseas, there are fewer aircraft available in the United States for this type of service. 

 

Unfortunately, airlines’ ability to commit aircraft in a diminishing market has likewise grown more difficult.  Aircraft financing models are ill-suited to short, two year-year commitments.  In fact, one reason there are so few new-entrant EAS carriers, may be attributed to the lack of financing for aircraft with short-term commitment levels.  

 

We are pleased that this Committee has expressed interest in upgrading EAS contract terms beyond the current, two-year program.  By upgrading the EAS contract terms to four or five-year service commitments, existing carriers would be better able to renew current contracts, a significant barrier to market-entry would be removed, and all carriers would better able to finance aircraft for longer-term obligations. 

 

 

There has been some recent discussion about the use of Very Light Jets as rising operating costs of current EAS carriers have translated to higher program costs.  Ironically, the rising costs in question have occurred as a result of compliance with single-level-of safety standards imposed on the industry in 1997.  While RAA does not advocate a return to separate regulatory standards for 19 seat operators, the government should not forget that the bulk of increased operating costs on these aircraft have resulted from this regulatory change. 

 

Further, the business models of those smaller aircraft remain unproven.  The VLJ business models that do exist promise direct, non-stop service to destinations that would bypass the hub and spoke system.  They would therefore fail to connect passengers to the existing air transportation system in favor of limited service.  The fares for VLJs are another great unknown, with most advocates acknowledging that they are fairly expensive.

 

We strongly caution the Congress against advancing this unproven technology as a solution to EAS shortfalls.  The Congressional commitment to rural communities during deregulation was a continuation of scheduled air service.  It is inappropriate to place the burden on passengers and communities to secure air service through expensive, untested, and potentially unreliable sources.   

The FAA proposal, which treats commercial airline passengers differently based on size or type of aircraft, discriminates against passengers from smaller communities.  Further, the proposal undermines the notion of a national system of commercial aviation.  Regional airlines provide 14,000 flights daily. To ignore the crucial service regional airlines provide in smaller communities by dismissing regional airline flights and passengers as a mere “blip” on a radar screen represents more than an oversimplification.  With respect to commercial air service, one blip can contain 250 cost bearing sources while another contains only 19.  

 

Looking beyond EAS, we share an important goal with this Committee.  That goal is advancing an FAA Reauthorization bill that makes modernization of the ATC system a priority.  We applaud this Committee for its work on this shared objective. 

 

As you know, we do have concerns about policy impacts stemming from the proposed user fee element, which we believe will prove harmful to small and medium-sized communities if not adjusted. 

 

We are therefore truly appreciative of this Committee’s invitation to work with us further on those issues and we pledge to work hard to find common ground.  We are willing to pay our fair share for the extremely important objective of modernizing our ATC system.  We simply seek an adjustment to the user fee language to ensure it treats passengers equally, regardless of the point at which they access the system.  We are confident that, together with this Committee, we can address these specific concerns while moving forward with FAA reauthorization this year. 

 

Conclusion