**STATEMENT OF**

**MICHAEL W. REYNOLDS**

**ACTING ASSISTANT SECRETARY FOR**

**AVIATION and INTERNATIONAL AFFAIRS**

**U.S. DEPARTMENT OF TRANSPORTATION**

**before the**

**SENATE SUBCOMMITTEE ON AVIATION**

**COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION**

**on**

**Air Service to Small and Rural Communities**

** **

**September 14, 2006**

Mr. Chairman, thank you for inviting me to this hearing. I appreciate
the opportunity to discuss with you air service to small communities,
and the two programs administered by the Department of Transportation
that deal specifically with such service, namely the Essential Air
Service (EAS) program and the Small Community Air Service Development
Program. I can assure you that the Department is committed to
implementing its small community air service programs in the best and
most efficient manner and thereby helping smaller communities meet the
challenges that they face in obtaining and retaining air service.

It is clear that air service in this country has changed dramatically
over the past several years. Many of these changes have been very
positive. The growth of low-fare carriers, for example, has made
affordable air transportation available to millions of people across the
country. The number of air travelers has expanded dramatically, as
hundreds of passengers have taken advantage of the low fares that have
become more widely available. While this is a good development overall
for consumers, we recognize that it can create new challenges for some
small communities. With a greater number of service choices available,
particularly those involving lower fares, many consumers are willing to
drive to places with a broader array of air service options, making it
more difficult for some individual airports to sustain their own traffic
levels. There are, for example, some communities receiving EAS
assistance within ready driving distance of two or three major airports.
This "leakage" can result in a struggling community airport, but not
necessarily consumers who lack access to the national air transportation
system.

Another challenge is the change in aircraft used by carriers that serve
small communities. Many commuter carriers have been replacing their
19-seat aircraft with 30-seat aircraft, due to the increased costs of
operating the smaller planes and larger carriers' reluctance to offer
code sharing on 19-seaters. This trend began at least 10 years ago and
has continued. There are now fewer and fewer 19-seat aircraft in
operation as many carriers have up-gauged to 30-seat aircraft, and, in
some cases, even regional jets. As a result, many small communities that
cannot support this larger size of aircraft are being left without air
service. Additionally, the rise in the cost of jet fuel has made all
carriers more cost-conscious and more selective in initiating new
service and maintaining service where yields are low. Finally, some
changes have occurred in response to the terrorist attacks of
September 11, 2001. Many consumers, leisure and business, have changed
their travel patterns and carriers have altered the structure of their
airline services. Generally, this has meant carriers abandoning the
smaller markets, as evidenced by the fact that we have received notices
to suspend service at more than 100 communities since September 11. In
addition, the financial condition of the network carriers has added
further uncertainty for their regional code-share partner service.

The challenge that we face is one of adjusting the programs to account
for these changes in an efficient and effective manner, giving
appropriate and balanced recognition to the reasonable needs of the
communities, the carriers, the consumers, and the taxpaying public at
large. Mr. Chairman, I do not use the word "challenge" lightly. All of
us \-- the Federal Government that manages programs affecting service at
small communities, as well as the States and the communities themselves
\-- need to reexamine the way we approach small community air service.

We at the Department of Transportation have recognized for a while now
that the way the Federal Government helps small communities address air
service concerns has not kept pace with the changes in the industry and
the way service is now provided in this country. For that reason, we
have initiated some important reevaluations of the programs that we
manage. I want to share with you today what we have done and are doing
to address this issue.

As you know, the Department administers two programs dealing with air
service at small communities. The EAS program provides compensation to
air carriers to provide air service at certain statutorily mandated
communities. The Small Community Air Service Development Program, which
was established by Congress in 2000 under the AIR-21 legislation,
provides federal grants-in-aid to help small communities address their
air service and airfare issues. While initially established as a pilot
program, it was reauthorized through FY 2008 in Vision 100.

#### Essential Air Service Program

Let me first address the EAS program. The laws governing our
administration of the EAS program have not changed significantly since
its inception 28 years ago, notwithstanding the dramatic changes that
have taken place in the airline industry. As currently structured, the
EAS program acts only as a safety net for small communities receiving
subsidized air service by providing threshold levels of air service.
While ensuring some service, this approach does little to help
communities attract self-sustaining unsubsidized air service, as
evidenced by the fact that once a community receives subsidized air
service it is rare for an air carrier to come in offering to provide
unsubsidized air service. The goal of our proposed changes to the EAS
program is to end this dependency and to give communities the ability to
obtain transportation services more tailored to the communities' needs.

With this in mind, the Administration proposed very fundamental and
substantial changes to the program in its last FAA reauthorization
proposal, as well as in the last several budget requests. Those changes
were based on our extensive experience dealing with the communities and
the carriers involved with the program, recommendations from both of
these constituencies, as well as studies by the Government
Accountability Office (GAO) that were geared toward finding "the answer"
to successful service at small communities. Two major themes came
through repeatedly \-- the need for greater participation by communities
in addressing their air service issues, and the desire for greater
flexibility in doing so.

The Administration's proposed revisions to the EAS program would, for
the first time since the program was established in 1978, require
communities to be stakeholders in the air service they receive and thus
have a vested interest in its success. With the proposed reforms, the
Administration would also ensure that the small communities most in need
would be able to maintain access to the national air transportation
system.

Currently, a community's eligibility for inclusion in the EAS program is
based only on whether it was listed on a carrier\'s certificate on the
date the program was enacted -- October 24, 1978. Once subsidized
service was established, there was little incentive for active community
involvement to help ensure that the service being subsidized would
ultimately be successful. I can tell you anecdotally that a number of
EAS communities do not even display their subsidized EAS flights on
their Internet homepages, but some in the past have shown the
availability of air service at nearby hubs, especially if it is low-fare
service. As a result of these and other factors, EAS-subsidized flights
are frequently not well patronized and our funds are not being used as
efficiently or effectively as possible.

Under the Administration's proposal, communities are asked to become
partners in the financing of their air services, but in exchange are
given a much bigger role in determining the nature of that service. As a
result, currently eligible communities would remain eligible, but would
have an array of new transportation options available to them for access
to the national air transportation system. In addition to the
traditional EAS schedule of two or three round trips a day to a hub, the
communities would have the alternatives of charter flights, air taxi
service, or ground transportation links. Regionalized air service might
also be possible, where several communities could be served through one
airport, but with larger aircraft or more frequent flights.

Under the Administration's proposals, community participation would be
determined by the degree of its isolation from access to the national
air transportation system. The most remote communities (those greater
than 210 miles from the nearest large or medium hub airport) would be
required to provide only 10 percent of the total EAS subsidy costs.
Communities that are within a close drive of major airports would not
qualify for subsidized air service, but could receive subsidies
constituting 50 percent of the total costs for providing surface
transportation links to that service. Specifically, communities within:
(a) 100 driving miles of a large or medium hub airport, (b) 75 miles of
a small hub, or (c) 50 miles of a non-hub with jet service would not
qualify for subsidy for air service. All other EAS communities would
have to cover 25 percent of the subsidy costs attributable to the
provision of air service.

The proposed small-hub and non-hub criteria are important. Under current
law, communities located within 70 miles of a [large]{.underline}
[or]{.underline} [medium]{.underline} hub are not eligible for
subsidized air service because they have nearby, attractive
alternatives. Given the growth of air services in this country since
deregulation, our proposal simply recognizes that the same principle
should apply for communities located near small hubs and non-hubs
offering jet service.

We believe that this approach would allow the Department to provide the
most isolated communities with air service that is tailored to their
individual needs. Importantly, it provides communities in the program
greater participation, control, and flexibility over how to meet their
air service needs, and a far greater incentive to promote the success of
those services.

Congress has also recognized the need for reform and made some changes
in the reauthorization bill, Vision 100. One program is the Community
Flexibility Pilot Program. It allows up to ten communities to receive a
grant equal to two years' worth of subsidy in exchange for their
forgoing their EAS for ten years. The funds would have to be used for a
project on the airport property or to improve the facilities for general
aviation, but no communities have volunteered for that program. Another
program is the Alternate Essential Air Service Program. The thrust of
this program is that, instead of paying an air carrier to serve a
community as we typically do under EAS, communities could apply to
receive the funds directly \-- provided that they have a plan as to
exactly how they would use the funds to the benefit of the communities'
access to air service. The law gives great flexibility in that regard.
For example, funds could be used for smaller aircraft but more frequent
service, for on-demand air taxi service, for on-demand surface
transportation, for regionalized service, or to purchase an aircraft to
be used to serve the community. The Department issued an order
establishing that program in the summer of 2004, but to date no
communities have applied. I cannot tell you for sure why, but my guess
is that part of it is that it is just human nature to resist change.
More importantly, while there have been criticisms that the EAS program
does not provide optimum service, I do think that the communities have
gotten very comfortable in knowing that they are guaranteed their two or
three round trips a day no matter what, i.e., EAS is viewed as an
absolute entitlement whether the communities invest any time and effort
in supporting the service or not.

With respect to the EAS program, it is important to note the continued
growth in both the size and cost of the program to taxpayers over time.
As a point of reference, before the terrorist attacks of September 11,
the Department was paying subsidy for 75 communities (plus 32 in Alaska)
and the budget had been flat at \$50 million a year. We are now
subsidizing service at 110 communities (plus 39 in Alaska) and our
budget is \$110 million for fiscal year 2006. Currently, there are
approximately 70 communities that are eligible for EAS subsidy under the
parameters of the existing statute that are served by one carrier
without subsidy support. As most of these communities would be eligible
for subsidy if the last carrier requested to stop service, this
represents a significant potential liability. Moreover, should more
eligible communities now served by multiple carriers get down to service
by a single carrier, the number of communities on the verge of requiring
subsidy support could increase further. That is why an approach along
the lines proposed by the Administration is needed to more directly
address small community air service issues and the Department is fully
prepared to work with this committee in that effort.

**Small Community Air Service Development Program**

The Department is now in its fifth year of administering the Small
Community Air Service Development Program. Under current law, the
Department can make a maximum of 40 grants in each fiscal year to
address air service and airfare issues, although no more than four
grants each year can be in any one state. Until 2006, Congress provided
\$20 million in each year for this program. In 2006, the funding for the
program is \$10 million.

On January 20, the Department issued an order requesting that
communities interested in receiving a grant under the Small Community
Air Service Development Program for fiscal year 2006 file their
applications by April 7. The Department received 75 applications seeking
nearly \$33 million. On August 10, the Department selected 25
communities for grant awards and we are currently working to complete
the individual grant agreements with the selected communities.

Our experience to date with this program demonstrates the great interest
and desire of communities to tackle their air service challenges head on
and to contribute substantially to meeting those challenges. The
Department has received as many as 180 applications for the
opportunities available, although that level has dropped to
approximately 100 applications per year as the number of grant
recipients has increased. In each year, between 2002 and 2005, the
Department has made at least 35 grant awards, and in fiscal year 2004,
the Department made an additional six grant awards using unspent funds
from prior years' completed or terminated grants. This year the
Department issued 25 grant awards.

Following statutorily mandated selection criteria, we have made many
awards to communities throughout the country and authorized a wide
variety of projects, seeking both to address the diverse types of
problems presented and test communities' different ideas about how to
solve them. Some of these projects include a new business model to
provide ground handling for carriers at the airport to reduce station
costs, financial assistance for a new airline to provide regional
service, expansion of low-fare services, a ground service transportation
alternative for access to the Nation's air transportation system,
aggressive marketing and promotional campaigns to increase ridership at
airports, and revenue guarantees, subsidies, and other financial
incentives to reduce the risk to airlines for initiating or expanding
service at a community. For the most part, these projects extend over a
period of two to four years.

This program differs from the traditional EAS program in a number of
respects. First, the funds go to the communities rather than directly to
an airline serving the community. Second, the financial assistance is
not limited to air carrier subsidy, but can be used for a number of
other efforts to enhance a community's service, including advertising
and promotional activities, studies, and ground service initiatives.
Third, communities design their own solutions to their air service and
airfare problems and seek financial assistance under the program to help
them implement their plans. Fourth, while not a requirement for
participation, most communities provide a portion of the cost of the
activity receiving financial assistance.

Over the past four years, the Department has made 150 grant awards.
Communities have been very successful in implementing their authorized
grant projects. Overall, more than 90% of the grant recipients have
implemented their authorized projects and we expect that pattern to
continue.

For example, new services have been inaugurated at many communities;
others have received increased frequencies or services with larger
aircraft. Several communities have begun targeted and comprehensive
marketing campaigns to increase use of the services at the local airport
and to attract additional air carrier services. We have been monitoring
the progress of all of the communities as they proceed with the
implementation of their projects. However, because the majority of the
projects involve activities over a two-to-four-year period, only now are
some of them at the point of completion.

One test of success will be if the improvements achieved are sustained
when the grant projects have concluded. As more grant awards are
completed, we will review the results of those grants to determine if
they can offer greater insight into helping smaller communities with
their air service challenges. An important goal of the Small Community
Program is to find solutions to air service and airfare problems that
could serve as models for other small communities.

As you know, the GAO recently concluded a review of the Small Community
Program. They too have recognized that it is difficult to draw any firm
conclusions as to the effectiveness of the Small Community Program in
helping communities address their service issues because many grant
projects are still in process. Of the grant projects that had been
completed, the GAO concluded that the results were mixed because not all
of the grants resulted in improvements that were achieved and sustained
after the grant funding was exhausted.

The GAO noted that nearly 80 grants were scheduled to be completed by
the end of this year and they recommended that the Department review the
results of these grants before the program is considered for
reauthorization beyond 2008. The Department concurred with GAO's
recommendation and indicated that it would conduct such a review before
the reauthorization process. In conjunction with that analysis, we hope
to learn not only from the projects that succeeded, but also from those
that did not. Both will inform our review of the program and the
guidance that we may be able to develop for the benefit of small
communities overall from a larger group of completed grants under this
relatively new program.

The Federal Government, however, is only one piece of the equation.
States and communities will also need to review their air service in the
context of the changed industry structure and service patterns to seek
fresh, new solutions to maximize their air service potential, including
regional and intermodal approaches and expansion of public/private
partnerships to meet these challenges.

In closing, Mr. Chairman, let me reaffirm the Department's commitment to
implementing the DOT's small community air service programs in the best
and most efficient manner. We look forward to working with you and the
members of this subcommittee and the full committee as we continue to
work toward these objectives. Thank you again. This concludes my
prepared statement. I will be happy to answer any of your questions.