Statement of Faye Malarkey\
Vice President, Legislative Affairs\
Regional Airline Association**\
\
Before the Committee on Commerce, Science and\
Transportation Subcommittee on Aviation\
United States Senate\
\
**September 14, 2005

**Introduction and Background**

Good morning. Mr. Chairman and Members of the Subcommittee, on behalf of
the 42 airline members of the Regional Airline Association, thank you
for inviting me to appear before you today to discuss issues related to
rural air service in general and the Essential Air Service program in
particular. We see this as a timely opportunity to lay the groundwork
for our common objectives for the Essential Air Service program in
advance of next year's Federal Aviation Administration Reauthorization
and we thank the Committee for holding the hearing at this time.

My name is Faye Malarkey and I am Vice President of Legislative Affairs
with 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 turboprop aircraft and 30 to 108 seat regional
jets. RAA's member airlines transport 97 percent of total regional
airline industry passengers. Of the 664 commercial airports in the
nation, fully 479 are served exclusively by regional airlines. In other
words, at 72 percent of our nation's commercial airports, passengers
rely on regional airlines for their only source of scheduled air
transportation.

The Department of Transportation currently subsidizes service to
approximately 140 rural communities across the country, which would not
otherwise receive scheduled air service, 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 has undergone several eligibility criteria adjustments,
taking into account distance from nearby hub airports and other factors.
Most recently, in Fiscal Year 2006, the EAS program was funded at \$110
million. Current versions of both House and Senate DOT spending bills
have funded EAS at \$117 million. RAA applauds this Committee in
particular for actively working with appropriators to secure these
funding levels. We remain committed to working with Congress to ensure
that the EAS program continues to receive appropriate funding.

Before returning to this subject, I would like to provide some
background information on regional airline service. As you know, most
regional airlines operate in partnership with the major airlines under
code-sharing agreements. In fact, in 2005, 99 percent of the 151 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 at a predetermined rate for flying a
specific schedule. Within this arrangement are operational standards for
customer service, on-time performance and baggage handling requirements
as well as 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.
In some cases, this means the fee-for-departure carriers finds itself
forced to park aircraft.

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 procedures and reducing onboard
weight, making every effort to manage escalating fuel costs with an eye
toward conservation. Nonetheless, fuel remains the second highest cost
for airlines, ranking just behind labor.

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.

*Small Community Air Service*

With the anniversary of the 9/11 attacks just days behind us, a look at
the implications of these events five years later shows the most
deleterious air service reductions have occurred among rural
communities. According to data compiled by Back Aviation solutions, a
comparison of the total number of nonstop flights to and from the
contiguous 48 United States illustrates the most dramatic service losses
in rural communities.  Among the smallest airports, such as those with
between one and three departures per day, there has been 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% decline in departures with eight such airports losing service
altogether.

It is within the context of this decrease in rural air service that we
begin to take up the issue of reforming the Essential Air Service
program during the upcoming FAA Reauthorization process.

**Essential Air Service**

Because of increasing costs and continuing financial pressures in the
aviation industry, at least 40 additional communities have been forced
into the EAS program since September 11, 2001. In the past several
months alone, four EAS communities have lost air service. One of the
single greatest factors accounting for these losses is the staggering
and continuous increase in fuel prices.

As you know, 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 that
carrier to file a 90-day service termination notice. DOT holds 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 rate renegotiation 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. EAS
carriers must project revenues and costs over this 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
notice to terminate service in 90 days in order to begin the process for
seeking compensation rates that cover 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.

One of the fundamental tenets of the Essential Air Service 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 opens the competitive bidding process.

Fuel cost increases remain the single-most dramatic factor behind
service reductions. Take the case of Merced, CA, one of the DOT's noted
success stories of 2005. While the carrier involved with the market
engaged in rigorous cost savings and was able to initially double the
traffic forecast in its original EAS proposal, escalating fuel costs
ultimately caused the carrier to file 90 day notices at Merced as well
as Visalia, CA and Ely, NV, noting:

> "Scenic's need to terminate service at \[Merced / Visalia / Ely\]
> stems primarily from fuel cost escalations that have undermined the
> economic viability of the carriers' EAS operations. As a consequence,
> Scenic has decided to refocus its resources on its historical aerial
> sightseeing operations and discontinue scheduled-service operations."

Congress addressed this issue in Section 402 of Vision 100, the Century
of Aviation Reauthorization Act, by affording DOT a rate indexing
mechanism by which it could make real-time subsidy rate adjustments
during periods of 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. There is little
doubt that situations like the one with Scenic Airlines and Merced /
Visalia / Ely could have been prevented had Section 402 been implemented
to curb the grave financial consequences that EAS carriers are
experiencing as a result of serving markets at a loss due to climbing
fuel prices.

Unfortunately, DOT has been unwilling to implement the program to date,
citing a lack of specific appropriations for the activity. RAA therefore
respectfully asks that Congress include language in the expected FAA
bill to mandate DOT's cooperation in making real-time rate adjustments
for cost increases. Further, RAA requests that Congress request an audit
on unspent, obligated funds and that any leftover funds be redirected to
the EAS program in order to make real-time, retrospective rate
adjustments to carriers facing cost increases relative to section 402 of
Vision 100.

*Eligibility Criteria*

RAA stands ready to help Congress enact further EAS program reforms as
the next FAA reauthorization takes place. We understand that a rewrite
of the eligibility criteria may become necessary as some of the rules
set nearly three decades ago may no longer apply. These decisions,
however, should be based on rational factors and not a funding crisis at
DOT. The most important thing Congress could do right now to help
passengers in EAS communities and the airlines serving them is to ensure
the \$117 million funding level included in both House and Senate DOT
spending bills remains intact as the FY07 Appropriations bills near
completion.

Next, as we consider a potential eligibility criteria rewrite, we ask
that Congress ensure whatever criteria is applied to these decisions be
applied consistently and with an eye toward enhancing the program and
protecting rural air service. We also ask that any community reductions
be revenue neutral. In other words, subsidies recovered from any
communities losing eligibility should not be diverted from the EAS
program but, instead, should be reinvested in the program to help
increase frequency along other viable routes. Given the correlation
between increased frequency and increased enplanements, such a
reinvestment could actually serve to help some communities reduce or
eliminate their subsidy reliance altogether.

*Cost Sharing Recommendations*

As you know, the past several Presidential budget requests have proposed
severe cuts to the EAS program and would establish a \$50 million cap on
program expenditures as well as strip the program of its entitlement
status. The Administration would create three community categories based
on hub airport distance and would establish cost-sharing criteria that
would likely dismantle the program. EAS Communities within 100 miles to
large hub airports, 75 miles to small-hub airports, or 50 miles to
airports with jet service would lose commercial air service and receive
only 50 percent of previous funding for surface transportation use only.
Communities less than 210 miles to a large or medium hub would receive a
25 percent cut funding cut. Communities more than 210 miles would
experience a 10 percent funding cut.

This proposal would severely cut and potentially dismantle the EAS
program as funding would fall by \$59 million, effectively forcing out a
third of the communities that now use the program. The recommendation
sets up a complicated reform that takes the \'air\' out of essential air
service, telling residents of smaller communities that convenient,
reliable air service is a luxury they can\'t have; instead suggesting
surface alternatives.

We share with this Committee an understanding of the critical role air
service plays in driving the economies of smaller communities and
request the Committee's assistance in helping us protect rural
communities against EAS program cuts that would undermine the program.

*Date Certain for Market Exit*

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 to serve that market. In these
cases, where DOT awards the service to a new carrier, DOT must 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.

*Per Passenger Subsidy Cap Adjustments*

Within the past two months, four communities, including Enid and Ponca
City, OK, Moses Lake, WA, and Bluefield / Princeton, WV have lost
service because of the per-passenger subsidy cap in place for EAS
markets. This subsidy cap was set at \$200 per passenger in 1990 and has
not been indexed for inflation since that time. Even without factoring
in increasing fuel costs, some carriers are concerned that the subsidy
cap is outdated and does not account for the true cost of providing air
service to rural communities. While the Association has not yet taken a
position on this issue, we request that any discussion of EAS reform
also examine the benefits and alternatives to adjusting the subsidy cap
to account for inflation as well as to consider a mechanism for indexing
the cap for inflation on an annual basis.

We are eager work together with Congress in order to enact meaningful
reforms to the EAS program and urge the Congress to enact measures aimed
at enhancing service to the smallest communities rather than espousing
proposed funding cuts that, however well intentioned, can only serve to
undermine small community air service.

**Other Rural Air Service Impacts**

*Aviation Security Fee Increases*

As you know, the aviation security fee would increase by 120 percent to
\$5.50 under recent Administration proposals, capped at \$8 for one-way
travel and at \$16 for round-trips under the budget proposal. We applaud
this Committee for its actions in opposing such increases and its
understanding that this tax increase jeopardizes airline jobs and
flights to small and medium-size communities. Passengers traveling to
rural communities would be disproportionately impacted because regional
flights mean multiple flight segments and more tax occurrences.

The new tax would raise the cost of air travel rise by an estimated
\$1.5 billion a year and would bring the total federal security tax on
airlines to \$4.7 billion. Such tax increases would only serve to
further divert resources away from airlines, already struggling to
provide service to small and rural communities. This tax increase will
raise fares for travel to rural communities and makes this service even
more expensive for carriers, putting air service to rural communities at
risk.

We therefore urge Congress to continue to reject security fee increases
that would jeopardize rural air service.

*Demand Management*

At LaGuardia, service to small communities and other regional airline
service will be jeopardized if FAA adopts its proposal to discourage the
use of smaller aircraft at LaGuardia. Although Congress decreed that La
Guardia should be open to all flights serving small and non-hub airports
in 2000, FAA cut back the number of these LaGuardia flights to reduce
congestion caused by the popularity of service between LaGuardia and
these small communities. Rather than encouraging service to smaller
communities with smaller aircraft at La Guardia as Congress directed,
however, FAA is now proposing to create average aircraft size
requirements that would limit small aircraft and the small cities they
serve at La Guardia.

Although the proposed rules contain options for protecting small
community air service, one of the proposals would expand overall small
community service at LaGuardia, and one of the options would protect
service only for smaller communities within 300 miles of LaGuardia. The
more small community service protected under the proposals, the greater
the average aircraft size required for other flights at La Guardia,
thereby encouraging the reduction of competition on routes served with
small aircraft. This is likely to create monopoly routes along routes
where competition exists today and could serve to eliminate service
altogether on other routes.

We therefore ask Congress to exercise its oversight as FAA continues
through the rulemaking process to ensure that carriers are not be
penalized, in terms of fees or slots at LaGuardia, for using smaller
airplanes to serve smaller communities. Such actions at LaGuardia, which
will likely set the precedent for other airport demand management
models, limit service and fare choices of passengers in small or
medium-sized cities.

Regional passengers pay the same aviation taxes and fees as other
travelers and should not face higher ticket prices or limited travel
options because we failed to modernize and expand the airport and airway
system.

**Conclusion**

Mr. Chairman, thank you for the opportunity to testify on this important
issue today and thank you and the Committee for continuing to afford us
this opportunity to shape and protect a program that is important to
both our constituencies. I look forward to responding to your questions
at the conclusion of the panel.