Summary

As a result of the September 11, 2001, terrorist attacks on the United States, the airline industry incurred significant losses resulting from the temporary shutdown of the nation's airspace and passengers' apprehensions about flying following the attacks. The Air Transportation Safety and System Stabilization Act (the Act) provided, among other things, $5 billion in emergency assistance to compensate air carriers for their direct and incremental losses stemming from the attacks. The Act also authorized the Department of Transportation (DOT) to reimburse air carriers for increases in their insurance premiums. On September 28, 2001, we completed the first phase of the work Congress requested, concluding that there was a reasonable basis to assume that the airlines' financial losses related to September 11 would exceed the $5 billion made available in the Act. Since then and pursuant to the second part of the request, we monitored DOT's progress in administering the disaster relief and insurance reimbursement programs and provided periodic status updates to Congress.

DOT designed and implemented a structured claim review process to help ensure that the $5 billion in disaster relief funds were used only to compensate carriers for their September 11 related losses. A team of DOT accountants, economists, and aviation analysts with support from the department's Offices of the General Counsel and the Inspector General administered the disaster relief program, reviewed carriers' loss claims, and determined carriers' allowable September 11 related losses. As specified in the Act, each carrier was compensated the lesser of allowable actual losses or the market share formula amount. The major air carriers claimed losses of $5.6 billion related to the terrorist attacks. These carriers have been paid $4.1 billion or 88 percent of the total $4.6 billion distributed. As of August 26, 2003, DOT reported that most air carriers had received their final payments pursuant to this program, although a small number of claims remained open due to unresolved issues. All the major carriers except Federal Express have received their final payment. Federal Express has an administrative appeal and a lawsuit pending with regard to its payment. Overall, the major carriers recovered approximately 73 percent of their claimed losses, although 8 of the 14 major carriers had all their September 11 losses compensated. The remaining 6 carriers' losses were only partially compensated because their allowable September 11 losses exceeded the amount determined by applying the market share formulae prescribed in the Act. Industry wide, 355 of the total 448 applicants receiving assistance were paid based on the formula. Because 93 carriers had actual losses less than their formula amount, DOT will not distribute the entire $5 billion provided in the Act. DOT advised the Congress of this fact and in February 2003 the Congress rescinded $90 million. DOT officials plan to return any remaining unused funds to the Treasury upon the completion of the program. With regard to the insurance reimbursement program, the FAA implemented a systematic review process to determine the increases carriers experienced in their war risk insurance premiums following the terrorist attacks and to reimburse the carriers accordingly. FAA utilized insurance providers' invoices to substantiate the premiums being charged immediately before September 11 and to evidence premium increases following September 11. For each of the major air carriers, we verified FAA's reimbursement determinations by independently recalculating these amounts. In total, 183 carriers were reimbursed $68 million for their increased insurance costs. The major carriers received $58 million, or 85 percent, of this total. Soon after the terrorist attacks, insurance providers generally cancelled carriers' war risk insurance coverage but then offered to reinstate the policies at a substantially higher cost and with reduced coverage limits. For the major carriers combined, the total annual cost for war risk coverage jumped from approximately $12 million prior to the attacks to more than $700 million immediately afterwards. This led to the Secretary of Transportation's determination that war risk insurance was not available commercially on reasonable terms and conditions and thus FAA was authorized to begin temporarily selling war risk coverage to air carriers operating domestic flights. Under current legislation, FAA may continue to provide war risk coverage through August 2004 with a possible extension through December 2004. In its 2003 Accountability Report, FAA reported that it had extended $113 billion in coverage to 71 carriers, thereby increasing the federal government's risk exposure. Meanwhile, air carriers have begun to explore other options including a risk retention group to provide more affordable coverage in anticipation of FAA's offering of war risk insurance terminating in 2004.