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entitled 'Aviation Assistance: Information on Payments Made Under the 
Disaster Relief and Insurance Reimbursement Programs' which was 
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September 17, 2003:

Congressional Requesters:

Subject: Aviation Assistance: Information on Payments Made Under the 
Disaster Relief and Insurance Reimbursement Programs:

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[Footnote 1] (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 and briefed you on the first phase 
of the work you 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.[Footnote 2] 
Since then and pursuant to the second part of your request, we 
monitored DOT's progress in administering the disaster relief and 
insurance reimbursement programs and provided periodic status updates 
to your offices.

On September 3, 2003, we provided our final briefing addressing the 
second aspect of your request. Specifically, for the $5 billion 
disaster relief program, we discussed the process DOT employed to help 
ensure that the payments it made were only for the direct and 
incremental losses stemming from the terrorist attacks. We also 
provided information about the losses claimed by the major air carriers 
and payments made by DOT to these carriers and others that applied for 
assistance. For the insurance reimbursement program, which was 
administered by the Federal Aviation Administration (FAA), we discussed 
the process FAA used to determine and reimburse air carriers for 
insurance premium increases resulting from the September 11, 2001, 
disaster. We also provided information on the total payments made under 
the program. Finally, we discussed FAA's expanded in-house aviation 
insurance program and the potential impact to the federal government. 
The briefing slides, which provide more detail on our analysis, are 
enclosed.

Results in Brief:

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.[Footnote 3] 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.[Footnote 4] 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.[Footnote 
5] FAA utilized insurance providers' invoices to substantiate the 
premiums being charged immediately before September 11 and to evidence 
premium increases following September 11.[Footnote 6] 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.

Scope and Methodology:

Our review primarily focused on the major air carriers. DOT defines a 
major carrier as an air carrier whose annual operating revenue exceeds 
$1 billion. To achieve our objectives we performed various procedures, 
which are described in detail in Appendix I of the enclosed slides. We 
did not audit the major air carriers or the underlying records 
supporting the claims for disaster relief payments. Also, we did not 
assess the reasonableness of the pre-or post-September 11 premiums 
charged to carriers for war risk insurance coverage. We conducted our 
review from September 2001 through August 2003 in accordance with 
generally accepted government auditing standards.

Agency Comments:

We requested comments on a draft of these briefing slides from the 
Secretary of Transportation or his designee. On August 26, 2003, DOT 
provided us with oral comments expressing the department's general 
agreement with the facts presented. DOT provided some technical 
comments, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from its date. At that time, we will send copies to the Secretary of 
Transportation, the Administrator, Federal Aviation Administration, 
and interested congressional committees. We will also provide copies to 
others on request. The report will also be available at no charge on 
the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 
512-9508, or Phillip McIntyre, Assistant Director, at (202) 512-4373. 
You may also reach us by e-mail at calboml@gao.gov or 
mcintyrep@gao.gov. Other key contributors to this assignment were 
Jeffrey Jacobson, Ruth Walk, and Doris Yanger.

Linda Calbom:

Director, Financial Management and Assurance:

Signed by Linda Calbom:

Enclosure:

List of Requesters:

The Honorable Robert C. Byrd:

Ranking Minority Member:

Committee on Appropriations:

United States Senate:

The Honorable Ernest F. Hollings:

Ranking Minority Member:

Committee on Commerce, Science and Transportation:

United States Senate:

The Honorable John D. Rockefeller IV:

Ranking Minority Member:

Subcommittee on Aviation:

Committee on Commerce, Science and Transportation:

United States Senate:

The Honorable Ron Wyden:

United States Senate:

The Honorable Lloyd Doggett:

House of Representatives:

Enclosure:

[See PDF for images]

[End of section]

(190038):

FOOTNOTES

[1] Pub. L. No. 107-42, 115 Stat. 230 (2001).

[2] The briefing slides and a summary of our analysis were included in 
our October 5, 2001, correspondence to you. See GAO-02-133R Financial 
Management: Assessment of the Airline Industry's Estimated Losses 
Arising From the Events of September 11.

[3] The formula amount is calculated by dividing the carrier's 
available seat miles (ASMs) or revenue ton miles (RTMs) by the universe 
of ASMs/RTMs (a reflection of market share) multiplied by available 
compensation.

[4] Public Law 108-7, sec 333, 117 Stat. 414 (2003)

[5] War risk insurance provides coverage to carriers for losses 
resulting from war, terrorism, or other hostile acts. These policies 
typically provide coverage for the aircraft and liability.

[6] The Act specified insurance increases were to be measured against 
the rates in effect during the period September 4-10, 2001.