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[Senate Hearing 107-1104]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 107-1104

                FINANCIAL STATE OF THE AIRLINE INDUSTRY

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 20, 2001

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Jeanne Bumpus, Republican General Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 20, 2001...............................     1
Statement of Senator Allen.......................................    10
Statement of Senator Boxer.......................................    14
Statement of Senator Breaux......................................     9
Statement of Senator Brownback...................................    11
Statement of Senator Burns.......................................     5
Statement of Senator Carnahan....................................    15
Statement of Senator Cleland.....................................     7
Statement of Senator Edwards.....................................     8
Statement of Senator Fitzgerald..................................    13
Statement of Senator Hollings....................................     1
Statement of Senator Hutchison...................................     5
Statement of Senator Inouye......................................     2
  Letters dated September 19, 2001, from:
    Governor Benjamin Kayatano...................................     3
    Mayor Jeremy Harris..........................................     4
Statement of Senator Kerry.......................................    12
Statement of Senator McCain......................................     1
Statement of Senator Nelson......................................    11
Statement of Senator Rockefeller.................................     6
Statement of Senator Wyden.......................................     9

                               Witnesses

Cooper, Mark, Director of Research, Consumer Federation of 
  America, Accompanied by Robert Hunter..........................    81
    Prepared statement...........................................    83
Mullin, Leo, President, Delta Air Lines..........................    41
    Prepared statement...........................................    44
Neidl, Ray, Research Director, Airline Analyst, ABN AMRO, 
  Incorporated...................................................    72
Roach, Robert, General Vice President, International Association 
  of Machinists and Aerospace Workers............................    74
    Prepared statement...........................................    76
Pinson, Harry, Manager, Credit Suisse First Boston and Southwest 
  Regional Investment Banking Group..............................    77
    Prepared statement...........................................    79
Skeen, Kerry B., Chairman and CEO, Atlantic Coast Airlines.......    47
    Prepared statement...........................................    48
Walker, David M., Comptroller General, Government Accounting 
  Office.........................................................    17
    Prepared statement...........................................    19

 
                FINANCIAL STATE OF THE AIRLINE INDUSTRY

                              ----------                              

                      THURSDAY, SEPTEMBER 20, 2001

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2 p.m. in room 
SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.

         OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    The Chairman. The Committee will please come to order. 
Again, almost as important as safety, is the sustenance and 
continuation of airline service.
    It strikes me that with the attacks both in Manhattan and 
here in Washington, that we as a Congress or Committee are 
going to have to decide up front that we are going to have to 
save the airlines, and once that decision is made, we have got 
to have a cutoff point of some kind. If you do it in a halfway 
approach, it strikes me that we will just get into a limbo 
year-in and year-out, where we have got to do this to save the 
airlines industry. Let us make the formative decision up front, 
put in a cutoff point, put in what is necessary, and then let 
us see if they can compete.
    Having said that, let me yield to our distinguished senior 
Ranking Member.

                 STATEMENT OF HON JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Mr. Chairman.
    There has been some criticism about moving so quickly to 
consider a bail-out of the airline industry. I think we must 
move quickly. I wish we had more time. I wish we had several 
weeks to contemplate and get all of the facts and numbers.
    I think there are several things we know. One is that the 
aviation sector was already in financial difficulties before 
last week's acts of terrorism, and I think that is an important 
point, Mr. Chairman. The airline industry does cycle with the 
economy, and with a poor economy the airline industry was in 
some significant difficulty before.
    The fact is, now we have got thousands of layoffs, U.S. 
Airways with 11,000, Northwest with 2,000, Continental 12,000, 
American 20,000, United 20,000, Boeing now 30,000 layoffs. I 
think we need to act, and I think we need to act quickly. I 
hope that we will have plenty of time, however, in our haste to 
determine exactly what the best package is.
    I am not sure we would want to go back at this again and 
again and again, so I hope that the testimony today will help 
us fill in whatever information gaps we have.
    Mr. Walker, we are glad that you are here to give us your 
objective assessment, and I must say again I know of no Member 
of Congress that does not want to help the aviation industry, 
but we do have an obligation to the taxpayers as well, and we 
also have the very thorny issue of liability, and I hope Mr. 
Walker will discuss that as well as our other witnesses.
    I thank you, Mr. Chairman, for scheduling these hearings. I 
thank you for your leadership, and I thank you for your deep 
involvement in this very difficult and important issue to the 
American people.
    The Chairman. Well, thank you, sir.

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. Thank you very much, Mr. Chairman. Our 
Nation's air carriers are the backbone of our economy. I 
believe all of us would agree with that. Much of our economy 
depends upon the existence of a healthy air transportation 
system, and I believe that we must provide financial stimulus 
to the airline industry, as Senator McCain has indicated, right 
away, expeditiously.
    The package that has been proposed should give carriers and 
airport authorities the tools to maximize their flexibility, to 
respond to the business landscape that has changed dramatically 
since September 11. These tools include an early draw on 
antitrust exemptions as well as broader definition of airport 
uses that could be funded through the airport trust fund.
    We expect carriers to utilize any resources approved by the 
Congress responsibly and for the good of the Nation. While 
today we are here to focus on the financial state of the 
aviation industry, I would like to take this opportunity to 
discuss the current state of those industries which depend upon 
the airline and aviation industry.
    As an island State, reliable, safe, efficient, and 
affordable air transportation services are of far greater 
importance to Hawaii and its people than to the people of the 
48 contiguous States. According to Government statistics, 
Hawaii relies on airlines for nearly 99 percent of its 
passenger travel. In Hawaii, air service is the only means of 
transporting people and goods from one island to another 
quickly and efficiently. It affects the cost of living and the 
quality of life of each and every one of our residents, whether 
they fly or not.
    Hawaii residents have benefited over the years from the 
substantial number of visitors to and from our islands. 
However, the unprecedented events of September 11 threaten to 
critically change the state of affairs. Airline bookings to 
Hawaii have declined precipitously, as visitors are choosing to 
stay away from Hawaii. The State of Hawaii is bracing for a 44-
percent decline in visitor arrivals for the month of September, 
and a $1 billion decline in visitor expenditures for the next 
3\1/2\ months.
    In addition, the duty-free shops, which generate 
significant revenues for Hawaii's airports, are predicting an 
80-percent drop in business. You may be interested to know, Mr. 
Chairman, that prior to September 11, an average of 5,000 
visitors from Japan arrived in Hawaii daily. These visitors 
spend more per capita than any other visitor group. Since 
September 11, the Japanese carriers have been regularly sending 
nearly empty airplanes to pick up the Japanese visitors and 
return them home.
    For example, just a couple of days ago, eight 747's from 
Japan arrived in Hawaii with an average of 36 passengers per 
plane. All the eight 747's returned to Japan filled to 
capacity.
    Mr. Chairman, I look forward to hearing the testimony today 
on these important issues, and working with my colleagues 
toward a resolution that will maintain the viability of the 
United States airline industry, and the industry that depends 
upon it, and Mr. Chairman, I request that copies of a letter 
from our Governor, Benjamin Kayatano, and the mayor of the city 
and county of Honolulu, Jeremy Harris, be included in the 
hearing record.
    The Chairman. They will be included.
    [The information referred to follows:]

                                         Executive Chambers
                                    Honolulu HI, September 19, 2001
Hon. Ernest F. Hollings,
Chairman,
Committee on Commerce, Science, and Transportation,
Washington DC.

Dear Senator Hollings and Members of the U.S. Senate:

    We in Hawaii join with our nation in extending our deepest 
sympathies to those who have suffered as a result of the tragic events 
of September 11, 2001.
    The terrorist incidents have left few lives untouched, and the 
damage continues to take on new visages with each passing day. Of vital 
concern to our state and many others at this time is the devastating 
impact these events could have on the air carrier industry, and all 
that depends upon it.
    The state of Hawaii, isolated in the middle of the Pacific Ocean, 
more than 2,000 miles from its nearest mainland neighbor, finds itself 
in a unique and unenviable situation.
    As an island state, Hawaii relies on the airlines for nearly 99 
percent of its passenger travel. The only other alternative mode of 
travel to Hawaii is by ship. Unlike the other 49 American states, 
Hawaii has no railroad or truck systems. As a result, the airlines are 
literally Hawaii's lifelines to the rest of the world.
    Tourism dominates Hawaii's economy. A weakened air carrier industry 
would have a devastating impact on our tourism industry, economy and 
quality of life.
    We are aware of Congress's intent to enact emergency relief to 
assist America's ailing air carriers industry through these difficult 
times. We join our sister states in supporting this effort.
    In granting this relief, we urge that an assistance package be 
devised that is equitable. Not only must we ensure the strength and 
viability of the major carriers, but also the regional carriers so 
vital to our community.
    In addition to financial assistance, we also ask for your 
consideration in temporarily easing anti-trust restrictions. These 
regional carriers must work together in certain areas, such as flight 
scheduling, in order to assure their virtual survival.
    Hawaii is counting on your leadership and support in pulling our 
vital air transportation industry through this time of crisis. With 
your help, our air carrier industry can emerge strong and able to serve 
Hawaii and our nation long into the future.
        With warmest personal regards, Aloha,
                                       Benjamin J. Cayetano
                                      Office of the Mayor, Honolulu
                                 ______
                                 
                                        Office of the Mayor
                                    Honolulu HI, September 19, 2001
Hon. Daniel K. Inouye,
Committee on Commerce, Science, and Transportation,
Washington DC.
                      Re: Airline Stabilization Initiatives

    Dear Senator Inouye:

    I am writing for your support of the proposed initiatives to 
stabilize the U.S. airline industry that has been, severely affected by 
terrorist attacks on the United States. The U.S. commercial airline 
transportation system is vital to the economic health of the State of 
Hawaii the City and County of Honolulu and to the well being of the 
State's tourist industry.
    Tourism is the mainstay of Hawaii's economy. In 2000, Hawaii's 
$10.9 billion tourism and travel industry accounted for 27.9 percent of 
the State's economy and generated 181,050 tourism jobs or 32 percent of 
all jobs in the State. The center of the State's tourism industry is 
Waikiki, Honolulu. Honolulu represents 51 percent of all hotel rooms in 
the State and generates 71 percent of all international visitor days 
and 41 percent of all domestic visitor days in the State.
    As experienced during the Gulf War, the economy of the State would 
be severely crippled without a viable tourism industry. Hawaii could 
see an increase in bankruptcies, unemployment and loan defaults. Thus, 
the proposed initiatives to stability the U.S. airline industry are 
critical to the viability of Hawaii's economy and its tourism industry.
    The proposed initiatives include a package of grants and other tax 
relief measures amounting to $24 billion to preserve the airline 
industry, as follows:

   $5 billion to recover revenue losses from the total shut 
        down of the commercial air transportation system

   $7 billion to offset further revenue losses until August 31, 
        2002

   $.8 billion by repealing the 4.4 cent federal fuel tax 
        through August 31, 2002

   $11.2 billion in the form of government grants, rebates and 
        loan guarantees to provide additional liquidity

    Attached is a summary of the proposed initiatives to support the 
airline industry.
    Hawaii's tourism industry is dependent upon having adequate airlift 
or seat capacity from its major tourism markets. In fact, one of the 
Hawaii Tourism Authority's (HTA) strategic initiatives has been to 
increase scheduled air seats to Hawaii, following several years of 
decline. As shown in the following table, HTA has been able to increase 
scheduled air seat capacity to Hawaii by 73 percent over the past three 
years:

               Hawaii Schedule Air Seat Capacity 1998-2000
------------------------------------------------------------------------
                                                              Change
           Year                  Schedule Air Seats          (percent)
------------------------------------------------------------------------
1998                        8,789,685
1999                        8,704,503
2000                        9,334,000 (E)                           7.3
------------------------------------------------------------------------
Source: Hawaii Tourist Authority and DBEDT.

    Hawaii's tourism and travel industry is dependent on having 
adequate air access to its major visitor markets, such as Los Angeles, 
San Francisco, Seattle, Chicago, Dallas, Atlanta and New York in 
mainland United States and Tokyo, Osaka, Seoul, and other cities in 
Asia. To stimulate travel, we can implement aggressive promotional 
programs, underwrite visitor activities and cultural events, reduce 
prices and provide tax incentives to the visitor industry. However, 
without adequate air seat capacity, visitors interested in traveling 
here will not be able to secure air seats to Hawaii.
    In supporting the proposed initiatives to stabilize the airline 
industry, I am also asking you to require the U.S. airlines to maintain 
their level of air service as provided prior to the terrorist attacks 
on September 11, 2001. Hawaii's economy, particularly its 668 hotels 
and 71,506 visitor units, cannot afford to have a reduction in air seat 
capacity. Thus, any financial support to the U.S. airline industry 
should include a provision to maintain the past level of air service to 
Hawaii from its major visitor markets.
    Thank you for your support in maintaining the viability of the U.S. 
airline industry and the economy of the State of Hawaii.
        Sincerely,
                                             Jeremy Harris,
                                                              Mayor

    The Chairman. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing. It seems like we have been talking 
about airplanes all day long. The airline industry has always 
been a fragile industry, even from the get-go, and now, at a 
time when we have had this disaster of 9/11, we are finding, we 
are hearing load factors as low as 25 percent whenever a 90-
percent load factor is required to even break even, and therein 
lies the problem.
    And also another problem that faces us, they have the 
infrastructure that is necessary to keep this society mobile. 
In other words, if you want to look at all the spin-offs, they 
are a necessary part of our transportation makeup that enables 
this country to be mobile and to do a high volume of business, 
both domestically and, of course, internationally, and so I 
think how we approach this is going to be very, very important 
to every segment, every economic segment of the American scene, 
so I am looking forward to hearing the testimony today. We know 
how important this is, and we also know that we will have a 
role to play, and identifying that role will be a very serious 
decision.
    Thank you, Mr. Chairman.
    The Chairman. Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman for holding 
separate hearings on the security issue and on this financial 
issue, because I think they are both very, very important. I 
think this Committee has such a key role to play in assuring 
that our airline and airport security is beefed up, but also 
that the financial security of our aviation industry is 
supported.
    Almost 100,000 people have been laid off in the aviation 
industry, or the announcements have been made that they will be 
laid off. Clearly, we need to take action that would shore up 
this major industry, not just because it is one industry that 
is important, but because it has such ramifications throughout 
the economy. If the aviation industry cratered, the terrorists 
would have won, and we will not allow that to happen.
    I think we need the expertise today that this hearing will 
address. I think we are going to have 100 percent support for 
shoring up our economy and assuring that our system of commerce 
is protected, but how we do it is very important for now and 
for the future.
    I would like to ask the witnesses to especially address the 
liability issue so that everyone can understand the importance 
of this issue, and I would hope, when we address liability, 
that we do not just address September 11. For the future I 
think we need to have a policy in this country, just as we 
would with a declaration of war, with a terrorist act, and what 
the responsibilities would be.
    Lastly, Mr. Chairman, I would just say that a strong 
economy is going to help us with the added military commitments 
that we are going to need in the coming months, and possibly 
years, to really do justice to the problem that we face with 
terrorism. We are going to be in this for the long haul if we 
are going to eradicate terrorism from freedom-loving people in 
the world, and a strong economy is going to be necessary for us 
to finance and have the capability to do the added military 
operations that we will need.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman, and I am not 
looking at the airline executives now, Mr. Walker, but I am in 
a sense talking to them. This is about how, in fact, we can be 
helpful, and what is appropriate and what is necessary, and 
also the matter of doing it with some degree of completeness.
    This is not, in my judgment, a bail-out we are talking 
about. This is a picking out of a particular American industry 
which has overwhelming economic implications not only for 
itself, but for aerospace, defense, and a ripple effect that is 
beyond imagination. Obviously the first consideration, is the 
safety of our passengers, and therefore the viability of our 
airlines financially is critical so that our passengers can 
have a plane to fly on, and to be safe on.
    The airline executives need to understand that even as I 
was walking back from the hearing this morning, examples were 
piling up of people who were coming in here and saying, well, 
we need relief, we are important, too. It was mentioned this 
morning, there was a small dialog on it, in my State the 
question of steel is overwhelming, but I will tell you that the 
reason that I was really happy about coming to the Aviation 
Subcommittee with Senator Hutchison is that I know full well 
that my State of West Virginia has no economic future without 
proper airline service, and I also know full well that if there 
is drastically curtailed airline service, that the very first 
State, or one of the first States that is going to pay the 
price of that curtailment is going to be a State like West 
Virginia, in other words, the so-called end of the food chain 
syndrome.
    Chicago, other places, may do better. We will not. We will 
be the first to be canceled, the first to be delayed, and 
already, today, 44 of our airline's workers, who work with 
airlines in our airports have been threatened with getting cut 
off. So, competition, being able to compete, a relatively poor 
state, difficult topography, airports on top of mountains, all 
of that makes it a very personal matter for me, but we also 
talk for the country, as we have to and need to here.
    I do think, as I said this morning, that the people have 
taken aviation for granted. We have taken aviation for granted. 
We had a hard enough time dealing with air traffic control and 
runway questions, much less questions of trying to shorten the 
amount of time that is allowed for air runways to be started. I 
am not a CEO, but I do know that airlines are companies, and 
that if airlines do not have revenues, they cannot operate, and 
if they do not have passengers, they do not have revenues.
    So this extraordinarily potential downward spiral, the 
beginnings of which we are seeing right now, is a matter of the 
gravest national concern and national security. People have 
said, well, 55 percent of our flights were filled in this past 
week. Those were people returning home. It has nothing to do 
with what is the prospect for the ability of the American 
people to get back on airplanes, and their willingness to do 
so. That we will know much more about by the end of this coming 
week.
    So if your stock value, if the worth of the value of your 
company drops by 40 percent, or 50 percent, the implications 
are overwhelming to every single American citizen, so this is a 
classic and important American problem, and a very, very 
important Commerce Committee hearing. The financial viability 
and future of the American airline industry. People are 
projecting load losses of 60 percent, 40 percent, 20 percent, 
depending upon which year you are talking about.
    How do the American people come back to all of this? We 
discussed part of that this morning. Part of it will be what is 
available, and I will have a series of questions to ask at the 
proper time, but this is--people say, well, safety is what 
affects people. Well, airline financial viability affects them 
in every way, too, because if there are not airplanes to fly, 
or they are not sufficiently financially strong to maintain, 
then the country suffers grievously.
    So I welcome this hearing, and I thank the chairman.
    The Chairman. Senator Cleland.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Thank you very much, Mr. Chairman. The 
events of September 11 were actually totally cataclysmic for 
this country. There will be more casualties than Pearl Harbor. 
Hundreds of thousands more lives were altered forever, lives of 
husbands and wives and mothers and fathers and sisters and 
brothers, and children left without a loved one. The cost of 
the human toll is incalculable.
    There is also an economic cost, Mr. Chairman. The events of 
this day, September 11, have resulted in an economic ripple 
that threatens to severely damage key industries vital to 
America, among them the airline industry, aircraft 
manufacturing, travel and tourism, all of which critically 
affect the economic health of the United States. The airlines 
plan to lay off thousands of employees, and Boeing has 
announced it will lay off one-third of its work force. 
Incredible.
    I saw a Continental pilot who came up to me the other day 
with tears in his eyes expressing his concern for the industry. 
I was in Atlanta just this past weekend, meeting with 
officials, and airlines must have a 60 to 65 percent planeload 
capacity filled even just to break even.
    Yesterday, a Delta shuttle from Dulles to New York carried 
five people. We cannot continue to see this happen. These are 
industries critical to my home State of Georgia. The total 
economic impact on Hartsfield in the State of Georgia is almost 
$17 billion a year. Delta's impact on the State of Georgia 
alone is in excess of $10 billion annually, 5 percent of the 
total gross State product.
    I am not advocating a blank check for the airlines, and I 
believe they have got to provide us certainly with concrete 
information outlining their specific needs. Based upon this 
data, though, I am confident that the Congress, the 
administration, and the industry and other affected groups will 
be able to reach agreement on the appropriate level and type of 
assistance needed at this difficult time.
    Everyone seems to be tied into the airline industry, 
particularly in Georgia, particularly Metro Atlanta. I notice 
that even some company called Adventures Aloft, a hot-air 
balloon touring company in Lawrenceville, Georgia, is feeling 
the effect, so we are all impacted, but any Government aid will 
only be a stop-gap measure until the American public's faith in 
air travel is restored. I think this is the key.
    Only when the American public regains its feeling of safety 
will the airlines experience real economic recovery. To that 
end, I support rapidly instituting some form of federal sky 
marshals on domestic flights. I further believe the security 
screening on airports should be uniform throughout the country, 
with qualified, trained, dedicated federal personnel staffing 
those posts.
    Before September 11, we had a viable airline industry 
operating within an economy which, with all its temporary 
problems, was still the world's strongest. Indeed, that very 
economic strength is part of the reason this country was 
attacked. However, if the airline industry does not receive 
some stabilization from Congress, the American economy will be 
held back, transportation choices of the American people will 
be limited, and we will be in trouble.
    According to a letter sent to Treasury Secretary O'Neill by 
Morgan Stanley, the major U.S. credit rating agencies have 
downgraded the debt securities of U.S. carriers dramatically 
and have signaled that there are likely to be more down-
gradings. Short-term credit markets suggest that unsecured 
airline debt would cost 15 to 20 percent if available in any 
meaningful size.
    Investors are nervously awaiting, Morgan Stanley continues, 
word on whether the industry will be able to secure both 
additional liquidity from the U.S. Government, and relief from 
what will surely be bankruptcy-inducing liability claims 
against carriers for collateral damage and loss of life caused 
by the tragic events of September 11.
    Mr. Chairman, Congress has a national security obligation 
to help these industries to stabilize, and I will support 
efforts to do so.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Edwards.

                STATEMENT OF HON. JOHN EDWARDS, 
                U.S. SENATOR FROM NORTH CAROLINA

    Senator Edwards. Thank you, Mr. Chairman. I will be very 
brief. I just spoke yesterday, or the day before I guess now, 
with Steve Wolf, Chairman of U.S. Air, who has over 11,000 
employees in my state of North Carolina. It seems to me that 
the airline industry has two issues to address.
    First, the short-term losses which I see described on the 
chart the first witness talked about, are very serious losses 
and losses we need to address very quickly. There is also the 
very serious issue of long-term stability, and I hope we use 
this opportunity to have some vision about addressing that 
issue.
    Senator Hutchison mentioned the potential issue of 
liability. I think there is a way to make sure that the people 
who were the innocent victims of this terrorist attack are 
supported, embraced and taken care of, while at the same time 
making sure that the airlines have the sort of predictability 
and long-term security that they need, and I am sure that 
during the course of this hearing, we will talk about both 
short-term cash-flow issues and the issue of long-term 
stability. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I would just make 
two points.
    First, knowing that the Committee was going to hold this 
meeting this afternoon, my phone has been ringing off the hook 
with people saying my workers and my companies have been 
clobbered too, and I would just hope that we would keep that in 
mind as we go forward with this discussion.
    I happen to think that what we should be trying to do is 
structure a process that really goes in several stages. First, 
to get some immediate help to deal with the crisis, and second, 
to be able to evaluate later down the road whether additional 
relief and what types of additional relief ought to follow if 
it is needed and again, I look forward to working with our 
colleagues.
    The Chairman. Thank you. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you, Mr. Chairman, once again for 
having a very timely hearing. I was thinking the other day 
right after the tragedy in New York and at the Pentagon, when 
we in the Congress gathered together in a very strong 
bipartisan fashion and immediately appropriated $40 billion, I 
was struck by that and how fortunate it is that we live in a 
country that can do that. Most countries had they suffered what 
we suffered on September 11, could not come close to 
appropriating $40 billion within a matter of hours to address 
this particular crisis. It shows you the strength of this 
country.
    And the history of this country has always been that when 
industries and individuals are hurting because of circumstances 
beyond their control, we help. And if you look over our 
history, whether you are talking about New York City, whether 
you are talking about a Chrysler Corporation or a Lockheed 
Corporation, as well as in times of crisis throughout the 
world, we have been able to help, and this has been done very 
wisely and I think very effectively. The question here is not 
just throwing money up in the air and hope it falls down where 
it will actually help somebody.
    The question is for us to carefully craft an assistance 
program that helps one of the most important industries that 
this country has, and that's the airline industry. I think it 
is important to distinguish their conditions after September 11 
and prior to September 11. These are distinct and very 
different problems, some that were caused by conditions beyond 
their control and some caused by the government's action in 
closing airports and air space, and some caused prior to 
September 11 by bad economic and management decisions by the 
various companies.
    So how you strike that balance between pre-September 11 
with post-September 11 is indeed a challenge when considering 
the concept of all the tools we have, grants, loans, tax 
subsidies, and I do not think we ought to settle on one, but we 
ought to give the aviation industry the authority and the tools 
that they need.
    I would suggest that perhaps we need some type of an 
oversight board to make sure that this concept really is 
followed from the beginning to the end with people who know how 
these programs should be run, and must be run. I am very 
supportive of the concept and want to help in any way that we 
can.
    The Chairman. Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I think this day of 
hearings in this Committee addresses the most important issues 
as we go forward as a Congress after this disaster. Some of the 
details we will be trying to figure out and discern, we will 
probably never find out as far as this war on terrorism.
    But the issues of aviation affect people in their everyday 
life. They are accustomed to air travel. Some would like to be 
more accustomed to it in rural areas such as West Virginia and 
some places in Virginia and other states.
    The purpose of this hearing, though, is to discuss matters 
of aviation, air travel and our airlines, which are so vital 
for our commerce, for our security as a nation, as well as for 
our way of life.
    Senator Wyden mentioned a standard. Yes, you do have to 
have a standard. You have to have some criteria by which you 
determine whether the taxpayers and the government are going to 
provide loan guarantees or bridge loans, or any of the other 
sort of federal assistance. Clearly a standard has been met as 
far as the airline industry in that they were the only ones who 
were grounded and told to stop operating, which was a wise 
decision by Secretary Mineta. Thankfully he acted as quickly as 
he did. Clearly there were expenses to the airlines whether it 
is salaries or any of the other costs, who were all operating 
with no revenue.
    So I am not going to take any more time other than to thank 
you, Mr. Chairman, and also Senator McCain. I look forward to 
finding a logical way to compensate the airlines for the lost 
revenues from the actual event and from the lost revenues 
thereafter, and to determine what we can do to rebuild a good 
competitive aviation air travel system in this country. This 
system was not in very good shape before September 11, 2001 an 
now it is in worse shape. It is going to take years to get back 
to where it was prior to this event. But what we need to do is 
keep it going for America's security and our way of life. Thank 
you.
    The Chairman. Very good. Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, over 20 years ago I was a 
freshman and voted for the bailout for Chrysler. And in 
hindsight, that was a correct vote, it was a correct vote for 
America. Now as a freshman again, I intend to vote for this 
financial package.
    But Mr. Chairman, I do not want to see this financial 
package going into excessive payments for management, it ought 
to be for what it ought to be for, which is as a major economic 
component of this nation's economy to help get this airline 
industry back on track.
    As a former insurance commissioner of the state of Florida, 
I am also interested that we see that the insurance companies, 
which is a cost of doing business for the airlines, pay out 
what is rightly due and do not unjustifiably cancel their 
coverage in the future for these airlines.
    And third, that we watch what are going to be the new 
charges of premiums as a result of the payouts of millions of 
dollars, even billions of dollars, in their insurance policies.
    So I want us to scrub this with a fine tooth comb. Thank 
you, Mr. Chairman.
    The Chairman. Very good. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, and thank you 
and the ranking member for holding the hearing. I think this is 
a very important topic. I intend to support an overall package 
but I am concerned that we have proper oversight and not be a 
blank check, and we not rush too fast, even though we have to 
move, I think, with some pretty good speed to help a industry 
that is cash oriented. This is an industry that depends on a 
very heavy cash-flow and they have had that shut down, and I 
think we are going to hear from some of the airlines today. If 
the figures I am hearing are correct, the decline (much of 
that) has not recovered and if the people I am talking to are 
accurate, recovery (it) is going to be very slow.
    People got spooked, and I think it is going to take some 
time, so it is something that we need to do to maintain this 
national asset that we have to use. This is our major means of 
moving people around the country in a very free and open 
society and if we do not have it readily available, it really 
is going to hurt the overall economy and our ability to 
operate.
    I want to point out one additional issue that I want to put 
on the table that I do not know is really in many people's view 
screen; the flight schools in the country that have come under 
a great deal of scrutiny, as well they should for what has 
recently taken place. I am hopeful that this is going to be an 
area where we will tighten up and look who is getting flight 
training, understand why they are getting flight training. This 
is something we can use as an asset and in our security.
    There are roughly 2,400 flight schools in the United 
States. Virtually all of them are small businesses. They are 
shut down out of the air right now. They operate under visual 
flight rules for the most part. They are estimating that they 
are losing approximately 12 to $15 million a day. These are 
mostly small businesses that they are operating.
    I raised at the earlier hearing the point that we need to 
get to some point fairly soon where they can get back in and 
use in the air. The commercial airlines are, I think that is 
wise and that is good. I think we need to be careful as we do 
this, but we need to get these folks back in the air, and we 
may have to look at a part of the package working with these 
small businesses. There are 2,400 of them in the United States 
and they are still grounded. They have zero revenue and still 
the capital structure that they are struggling with, and no 
access to major capital markets because they are generally all 
small businesses.
    The manufacturers, aircraft manufacturers in my state sell 
to these individuals, and are they going to be able to continue 
to purchase the planes that they are currently buying? I think 
we have to look at this as another component and piece of this 
package.
    Thank you.
    The Chairman. Thank you. Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Thank you, Mr. Chairman. Obviously this 
Committee is united in recognizing our need to respond to the 
economic impacts of what has happened to the industry in the 
last days, but I echo my colleagues, a number of them here who 
have pointed to the fact that there are sort of two levels or 
two areas of concern that we have to face.
    One is what has happened since September 11, a billion 
dollars of loss and the extraordinary downturn in ridership. 
But the second is, and Mr. Chairman, you have been a leader in 
this for years, and talking about the overall structure of our 
airlines in country, and that is an ongoing problem.
    This is an industry that carries some $26.1 billion of 
debt. Each aircraft costs about $50 million to $250 million; 
that has to be serviced. It is very capital intensive beyond 
that because of labor costs and overhead, et cetera.
    And the fact is, it has to I think ride at about 65 percent 
capacity to break even, and even in the best of times I gather 
is only running anywhere from 75 to 80 percent.
    So it is an industry where all of us have been struggling 
for a long period of time about how you get from here to there, 
what the pricing mechanisms are from certain places, and the 
level of service that troubled all of us as a consequence of 
the overcrowding, the lack of capacity and the infrastructure 
to support it. So this Committee, I am convinced, needs to 
think about that carefully as we go through this process.
    And I want to just put my comment of the morning in 
context. We have to do this as a matter of economy and I 
understand that, and I am not thinking of sort of holding one 
hostage to the other, but what I am expressing is a certain 
frustration that if national security is the concern, and it is 
even as we think of this, and we recognize what happened when 
one sector of our transportation grid was knocked out. We look 
at the prescience of a General Eisenhower, who helped build the 
road system of the country, I just want us to think about how 
we take the best components of the rail, the ones that work 
that we know.
    I am not trying to use this as an excuse for building 
something people do not want, but I am thinking about how we 
ought to make the overall structure, as we expend the 
taxpayers' hard-earned money, that we at least have some 
thinking about that as we go forward to help this industry get 
back on its feet, because of what it means to tourism, to all 
the linkages, hotels, taxis, car rentals, restaurants, all the 
way down the road. It is a critical component of our economy 
and we have to find a way to get back there as fast as we can.
    The Chairman. Thank you. Senator Fitzgerald.

            STATEMENT OF HON. PETER G. FITZGERALD, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman, and I would 
have a full statement I would like to enter into the record.
    The Chairman. It will be included.
    Senator Fitzgerald. I would like to say a few things for 
the record. I appreciate your calling this hearing. I am very 
concerned about the airline employees that live in my state of 
Illinois. Obviously Chicago is a major transportation hub, 
major home for United and American, and I have tens of 
thousands of airline employees.
    I was at the airport yesterday talking to many of them. I 
saw the skycaps lined up outside. They all said that they were 
going to lose their job today. And I am very concerned about it 
and I want to do whatever we can to help.
    But I have to tell you, I approach this hearing with a 
great deal of concern. And that is concern for whether a 
federal bailout is the right and equitable means to deal with 
the problems of the industry. I sit here as a representative of 
the people, not the industry, and while our focus here is on 
the industry, the people too will be substantially affected by 
our actions.
    They may not be in the room, the room may just be filled 
with airline industry lobbyists, there may not be any lobbyists 
for the average Joe back there, but they are working hard at 
jobs across the country and they are depending on us even as 
they work, not to forget them in the fervor of the moment. I 
represent an awful lot of hard working taxpaying Americans, and 
they may potentially take by our actions in this Committee 
anywhere from a 17 to a $24 billion hit.
    The people I represent would have to work awfully hard for 
an awfully long time to recoup that loss. In evaluating airline 
stocks, a market analyst said today, ``It's simple. Either the 
shareholders or the taxpayers take the hit.'' Again she said, 
``Either the shareholders or the taxpayers take the hit.''
    Well, she's right. As the bailout that I have heard being 
discussed is structured, the fundamental fact is that either 
the shareholders or the taxpayers will take the hit. And at 
least to this Senator, it is not intuitive that the right thing 
to do is to shift the cost of the industry decline from the 
investors in airline stocks toward ordinary taxpayers.
    The shareholders are in many instances sophisticated 
institutional investors, and of course the airline executives 
are amongst the biggest investors. They may be people familiar 
with the industry who understand the inherent risks in airline 
stock. They will be protected by a federal bailout.
    The people that will pay, on the other hand, are the 
ordinary Joes, the men and women who just go to work every day, 
feed their families, and may not have a nickel to investigate 
in the market in the first place. And yet, these are the people 
that are being called upon to bear the cost for shareholders 
who have seen their investment go sour.
    Can this be right? And if we conclude this is right, can we 
guarantee to the employees of the industry that there will be 
no layoffs, that the American people will have stepped in?
    I think that all of us realize that what we do here today 
is not just important for this industry but for many others, as 
it will set a precedent for how we deal with similar claims 
from other industries. In my office now, I am fielding calls 
from hotels, restaurants, travel agents and others, for a 
similar bailout package.
    Will we hear from the insurance industry or manufacturers 
and retailers? And if we approve what is before us today, can 
we turn them down, can we say no, we are just going to bail out 
the airline industry. Who finally will bail out the American 
taxpayer?
    So my question today will be, is there another way? Is 
there a way to minimize the destruction without asking the 
American people who have borne so much in the past several days 
to take it on the chin once again. That is one of the many 
questions that I would like to explore today.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Well, in light of what was stated, I feel 
compelled to simply say that it is not as simple as 
shareholders versus taxpayers; there is a lot more in this 
equation for this Senator, which is that people were killed by 
terrorists. We did not declare war but we all say in essence, 
we are at war against these terrorists.
    And the question is, do the terrorists win not only by 
probably selling short, which we do not know if they did, which 
by the way would add another level of repulsiveness to all of 
this, but are we going to be a nation that has a transportation 
system that moves our economy forward? If we do not, then they 
win.
    So I think it is a lot more complicated, because I would 
agree with you if it was just a situation where this happened 
without this incident. I mean, if people had that attitude, we 
would not have moved with Chrysler; I think history has shown 
that worked out. We would not have moved when New York City was 
in crisis. We might not have moved even when particular areas 
get hit with earthquake, flood and fire.
    I just felt I wanted to respond. I also, however, believe--
--
    Senator Fitzgerald. Would the Senator yield?
    Senator Boxer. Let me finish my statement.
    Senator Fitzgerald. OK.
    Senator Boxer. Because I also believe that the Senator from 
Illinois is telling us to think very carefully, which I 
appreciate and I think is necessary. I mean, I want to 
associate myself with his comments that we have to know what we 
are doing. I think Senator Wyden alluded to this. There are 
other industries, we have to be careful.
    I was a little stunned to see that a lot of our airlines, 
Mr. Chairman, can only last 2 weeks, that if things take a turn 
for the worse, they are out of is business in two or 3 weeks. 
That is a stunning revelation to me. If you talk to most small 
business people who go into small business, they have enough 
cushion to hang in there through a recession or through a 
year's time. It is a little stunning to me. So I think we need 
to probe that and we need to look at this.
    I also have the list of the CEO compensation here and I 
think we do have to be careful that we do not forget about 
those skycaps and the people in the lower echelons as we have a 
couple of executives here making 11, $12 million a year, I do 
not want to pump taxpayer money to keep that in there. And when 
one of the airlines people came to talk to me before, I said 
look, I am very sympathetic but I want to hear the sacrifices 
you are going to make at the top echelons while you are asking 
everyone else.
    So I think what I want to say to my friend from Illinois is 
I think it is a good thing that he has these concerns, I just 
do not agree with him that it is as simple as he stated it, and 
I for one am looking forward to supporting very strongly a 
package, Mr. Chairman, that I hope you and Senator McCain and 
other leaders in this Committee will put together that keeps 
this industry going.
    The Chairman. We have important witnesses here. Senator 
Burns.
    Senator Burns. I have already done it.
    The Chairman. You have? Senator Carnahan.

               STATEMENT OF HON. JEAN CARNAHAN, 
                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman. Last Tuesday's 
terrorist attack is having an immeasurable effect on our 
country. We are devastated by the tremendous loss of life and 
property, and sense of security, but we are prepared to take 
the extraordinary steps that are needed to address this 
situation.
    Last week we acted with unity and speed to provide $40 
billion for relief effort and to authorize the use of force. I 
believe that we must also deal promptly and decisively on 
another front; insuring the ongoing stability of the aviation 
industry should be an immediate priority.
    First of all, as we discussed this morning, we need to act 
quickly to heighten security in our airports and on commercial 
aircraft. If we can make America feel safe, they will begin to 
fly again. Unfortunately, improving security will not be 
enough.
    Our nation's airlines are clearly suffering. The Federal 
Aviation Administration's decision to ground commercial 
aircraft last week had a disastrous economic impact. And while 
most airlines began operating again last Thursday, it is 
unclear when carriers will be able to resume their full 
schedules. Moreover, it appears that ticket sales are 
declining, which will further weaken this already distressed 
industry.
    The attackers who took down our buildings must not succeed 
in taking down our airline industry as well. It is our duty to 
provide a meaningful economic recovery package to help 
stabilize the airline industry.
    A number of proposals are currently being considered. They 
include extending credit or guaranteed loans to the airlines. 
It also includes providing direct compensation for losses 
sustained as a result of last week's events. I am extremely 
supportive of these measures.
    But any recovery package must also address the issue of 
liability for the airlines. In a letter sent yesterday to 
Secretary O'Neill, executives at Morgan Stanley said, and I 
quote: ``Investors are waiting word on whether the industry 
will be able to secure both additional liquidity from the U.S. 
Government and relief from what would surely be bankruptcy 
inducing liability claims against carriers for collateral 
damage and loss of life caused by the tragic events of 
September 11.''
    I am fully aware of the complexities involved in addressing 
this matter. I am confident, however, that we can find a 
solution, one that will insure the long-term strength of our 
nation's airlines.
    I also believe that any relief package for the airlines 
must include an additional component. We must in good 
conscience assist our displaced workers. This Congress must 
demonstrate that while we stand ready to bolster the airlines, 
we are also committed to supporting the men and women who are 
the heart and soul of the industry.
    Even if a stabilization package for the airlines is quickly 
approved, a certain number of layoffs are inevitable. Airline 
executives estimate that as many as 100,000 workers could lose 
their jobs in the next few weeks. Mr. Chairman, the problems 
afflicting the airline industry will cast a long dark shadow 
across the homes and cities of America if we do not step in to 
help these displaced workers.
    It is imperative that we act a meaningful relief package 
designed to both reinforce the airline industry and to provide 
support for displaced workers. Thank you.
    The Chairman. Thank you. The Committee is pleased to have 
Mr. David Walker, the Comptroller General of the General 
Accounting Office. Mr. Walker, we are glad to recognize you. 
Your statement in its entirety will be included in the record, 
and you can highlight it as you wish.

      STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, 
                  GOVERNMENT ACCOUNTING OFFICE

    Mr. Walker. I will do that, Mr. Chairman. Thank you for the 
opportunity to testify on this important issue of national 
interest today.
    I would like to give you a context for my testimony before 
I summarize it, because I know a number of the members that are 
represented here today.
    First, I have significant direct experience dealing with 
airlines that are in financial distress as a former executive 
director of the Pension Benefit Guaranty Corporation and chief 
negotiator for that corporation.
    Second, I have flown over two million miles on a variety of 
airlines, and I know that many of you are frequent fliers.
    And third, some of you know that my wife is a flight 
attendant with Delta Airlines, with over 31 years of 
experience. What you don't know is that she was flying on a 757 
last Tuesday morning on September 11 from Boston to the west, 
and there but for the grace of God goes her. And so this is a 
very serious issue for all of us.
    Clearly, while the human toll of last week's events were 
tragic and significant, there were economic implications as 
well. For example, the aviation and related industries have 
suffered significant additional financial losses which are 
projected to continue, perhaps threatening the viability not 
just of individual firms but the industry as a whole.
    The continuation of a strong vibrant and competitive air 
transportation system is clearly in the national interest. A 
financially strong air transport system is critical not only 
for the basic movement of people and goods, but also because of 
the broader effects this sector exerts on the overall economy. 
As a result, the Federal Government may need and want to 
provide financial assistance to this industry.
    In fact as many of you have already stated, it's not a 
matter of if, it's a matter of how. At the same time, as 
several of you have also stated, care must be taken to assure 
that the interests of the Federal Government and the American 
taxpayers' interests are safeguarded in connection with any 
such assistance program.
    Congress is currently considering various proposals to 
provide financial assistance specifically to the airline 
industry. In my longer statement today I include a variety of 
information which I would commend to you, but I outline several 
key principles that might provide certain guidance to the 
Congress and which you might want to keep in mind in debating 
how you might want to structure such assistance.
    These principles are based upon GAO's prior work and 
lessons learned from previous federal financial assistance 
efforts, including those dealing with large corporations such 
as Chrysler and Lockheed, as well as public entities such as 
New York City. They can be grouped into three broad categories; 
clearly defining the problems that need to be addressed, 
tailoring the appropriate tools of government to address the 
identified problems, and protecting the interests of both the 
Federal Government and American taxpayers.
    In summary, the government needs to clearly define the 
specific nature of the problems confronting the industry, 
separating out short-term needs from long-term challenges, and 
industry wants from genuine needs.
    While all airlines are facing major financial challenges, 
government assistance cannot nullify the serious but difficult 
financial positions that several carriers faced prior to 
September 11. As a result, the Congress may wish to consider 
which losses are being incurred that would not have been 
incurred but for the tragic events of September 11.
    Moreover, the Congress may also wish to further distinguish 
between losses that are directly attributable to federal 
actions, such as the closure of the entire national air space 
or Reagan National Airport, and those that are due to consumer 
shifts that may occur and may relate to overall demand for air 
travel.
    It's also appropriate to consider these factors I think not 
only with regard to the timing but the amount and the nature of 
the type of financial assistance that Congress might seek to 
provide.
    The government has a range of tools it can consider to 
address the problems of the industry, from loans and loan 
guarantees, to grants and tax subsidies, to a limitation of 
liability or relief from liability in certain circumstances. 
The selection and design of the tool is critical to targeting 
federal aid on the immediate problems, insuring the sharing of 
responsibility by all industry stakeholders, and promoting 
accountability to the Congress and the American people.
    Federal aid should be used as a targeted and temporary 
action, and it should be designed to restore the industry to 
self sufficient financial position. Because these assistance 
programs can pose uncertain levels of risk to the Federal 
Government, it is important to include appropriate mechanisms 
to protect the government and the American taxpayers from 
excessive or unnecessary losses.
    Specific mechanisms, structures and protections should be 
implemented that are prudent and that provide a prudent use of 
taxpayer resources and manage the government's risk, consistent 
with a good faith attempt to meet the Congressional goals and 
objectives of any federal financial assistance.
    In conclusion, clearly the tragic events of September 11 
have had a dramatic impact not only on many individual 
Americans but on our nation as a whole. Given the clear 
national interest in a sound aviation system, it is appropriate 
that the Federal Government consider measures to assist this 
critical industry in recovering from tragic events of last 
week.
    At the same time, any such assistance needs to be properly 
targeted, managed and overseen in order to protect the Federal 
Government and American taxpayers. The application of clear 
principles to the consideration of federal assistance is 
especially important, since actions to assist the commercial 
aviation sector are likely to set precedents for additional 
parties already coming forward and seeking relief.
    In addition, we must be prudent about the decisions we make 
for this industry because we still have long-range fiscal 
challenges in other areas of the federal budget and the 
economy.
    GAO stands ready to assist the Congress in examining this 
issue, and we have been inundated with requests as you might 
imagine, and we are looking forward to working with the 
Congress to address these and other issues.
    Thank you, Mr. Chairman, I would be happy to answer any 
questions.
    [The prepared statement of Mr. Walker follows:]

      Prepared Statement of David M. Walker, Comptroller General, 
                      Government Accounting Office

    Mr. Chairman and Members of the Committee:
    We appreciate the opportunity to testify on an issue so important 
to the national interests. On September 11, 2001, thousands of 
Americans were killed or injured through terrorist attacks at the World 
Trade Center and the Pentagon and in the crash that occurred in 
Pennsylvania. We mourn their deaths and extend our deepest sympathies 
to their loved ones. While the human toll of last week's events was 
tragic and significant, there were economic implications as well. The 
jobs of many employees and the retirement funds of others are 
threatened in the aftermath of these attacks. In addition, aviation and 
related industries have suffered significant additional financial 
losses which are projected to continue, perhaps threatening the 
viability not just of individual firms, but of the entire industry. 
Estimates of the total expected loss for major U.S. commercial 
passenger airlines for this year range from over $4 billion by many 
industry analysts to over $20 billion by certain airline officials. The 
continuation of a strong, vibrant, and competitive commercial air 
transportation system is in the national interest. A financially strong 
air transport system is critical not only for the basic movement of 
people and goods, but also because of the broader effects this sector 
exerts throughout the economy. As a result, the Federal Government may 
need and want to provide financial assistance to this industry. At the 
same time, care must be taken to assure that the interest of the 
Federal Government and the American taxpayers are safeguarded in 
connection with any such assistance program.
    The Congress has already appropriated $40 billion for emergency 
expenses to respond to the terrorist attacks on the United States. 
Among other purposes, these funds are available to provide increased 
transportation security. Now, the Congress is considering various 
proposals to provide other financial assistance specifically to the 
airline industry. In my statement today, I would like to discuss some 
broad principles or guidance that the Congress may wish to bear in mind 
when it considers providing financial assistance to the airlines. We 
base our observations on prior GAO work and lessons learned from 
previous federal financial assistance efforts, including those directed 
to individual large corporations (such as the Chrysler Corporation and 
Lockheed Aircraft Corporation) as well as public entities, such as New 
York City.\1\ These principles and guidelines can be grouped into three 
broad categories: clearly defining the problems that need to be 
addressed, tailoring the appropriate tools of government to address the 
identified problems, and protecting the interests of both the Federal 
Government and the American taxpayers.
---------------------------------------------------------------------------
    \1\ See, for example, Troubled Financial Institutions: Solutions to 
the Thrift Industry Problem (GAO/GGD-89-47, Feb. 21, 1989), Resolving 
the Savings and Loan Crisis (GAO/T-GGD-89-3, Jan. 26, 1989), Options 
For Dealing With Farm Credit System Problems (GAO/T-GGD-87-11), and 
Guidelines for Rescuing Large Failing Firms and Municipalities (GAO/
GGD-84-34, Mar. 29, 1984).
---------------------------------------------------------------------------
In summary:
   The government needs to clearly define the specific nature 
        of the problems confronting the industry--separating out short-
        term needs versus long term challenges and industry wants from 
        genuine needs. While all airlines are now facing major 
        financial challenges, government assistance cannot nullify the 
        serious but different financial positions that several carriers 
        faced prior to September 11. As a result, the Congress may wish 
        to consider what losses are being incurred that would not have 
        occurred ``but for'' the tragic events of September 11. 
        Moreover, the Congress may wish to further distinguish between 
        losses that are directly attributable to federal actions (such 
        as the closing of the entire national airspace or Reagan 
        National Airport) and those that are due to consumer shifts 
        that may occur in the overall demand for air travel.

   The government has a range of tools it can consider to 
        address the problems of the industry, from loans and guarantees 
        to grants and tax subsidies. The selection and design of the 
        tool is critical to targeting federal aid on the immediate 
        problems, ensuring the sharing of responsibility by all 
        industry stakeholders, and promoting accountability to the 
        Congress and the public. Federal aid should be viewed as 
        targeted and temporary, and it should be designed to restore 
        the industry to a self-sufficient financial position.

   Because these assistance programs pose an uncertain level of 
        risk to the Federal Government, it is important to include 
        appropriate mechanisms to protect the Federal Government and 
        the American taxpayers from excessive or unnecessary losses. 
        Specific mechanisms, structures, and protections should be 
        implemented to be prudent with taxpayer resources and manage 
        the government's risk consistent with a good faith attempt to 
        achieve congressional goals and objectives of any federal 
        financial assistance program.

Defining the Problems to Be Addressed
    Although U.S. commercial airlines have been subject to cyclical 
swings in profitability since deregulation, the industry has never 
before faced financial hardship of the magnitude currently being 
discussed. During the mid- to late 1990s, major airlines generated 
significant profits. Yet in the past year or so, as the economy slowed 
and fuel prices rose, the industry's profits turned to losses. Until 
last Monday, industry analysts had projected that the U.S. commercial 
airline industry would lose over $2 billion in 2001. Of course, not all 
carriers faced the same financial challenges prior to the tragic events 
of last week. Southwest Airlines and Continental Airlines, for example, 
were still able to report net operating profits during the first two 
quarters of the year. United Airlines, on the other hand, reported net 
operating losses exceeding $600 million. Following last Tuesday's 
tragedy, some industry analysts estimated losses for the major airlines 
will now exceed $4 billion for the year. Even airlines that had 
reported second quarter operating profits are now experiencing 
significant financial difficulties. According to reports from industry 
analysts, these losses are of an unprecedented magnitude.
    During the first few days of trading this week, airline stock 
values have been very volatile--most dropped by roughly 40 percent on 
Monday, although they rebounded somewhat in trading on Tuesday. A 
variety of factors may be behind this decline, including uncertainty 
about the airlines' future and public statements by airline executives 
that they many need to file for bankruptcy protection if the Federal 
Government does not offer significant financial assistance to the 
industry.
    The airlines appear to face both short- and long-term financial 
needs. The most immediate threat to many carriers is reported to be 
inadequate cash reserves and negative projected cash flows combined 
with a tightening or denial of credit by commercial lending 
institutions. This liquidity problem is likely due to the interruption 
in operations following last week's tragedy. The Department of 
Transportation closed U.S. airspace for several days, basing its 
decision on what it felt was in the overall interest of the nation, 
given the facts and circumstances existing at the time. Some analysts 
have estimated that U.S. airlines lost tens of millions of dollars 
every day they could not operate. In addition, the Federal Government 
has not yet decided when and under what conditions it may allow Reagan 
Washington National Airport to reopen. This situation has clear 
financial implications for the airlines and other businesses with 
significant operations at that facility. Additionally, commercial 
lenders may be less willing to extend credit to the carriers because of 
uncertainty about the industry's economic viability.
    The industry also faces potential longer-term financial needs. Some 
analysts are further concerned that last week's tragic events may have 
a profound and lasting effect on the demand for air travel. Although it 
is too early to tell how passenger demand will be affected in the long 
term by last week's events, it is clear that the airline industry now 
has significant excess capacity, given the current and near-term 
expected demand. In addition, several carriers had excess capacity 
prior to the events of September 11.
    The long-term viability of American Airlines and United Airlines as 
individual corporate entities could be heavily impacted by the extent 
to which they are found to be legally liable for claims stemming from 
the events of September 11, 2001. If these airlines are found to be 
liable for claims stemming from the loss of life, personal injury, and 
property damage that occurred, their potential liability is likely to 
be unprecedented. While these carriers presumably have liability 
insurance, insurance coverage typically has limits beyond which the 
insurers had no legal liability. Also, although airlines are 
responsible for the safety and security of their own flights, if 
American and United had arrangements or contracts with other carriers 
or security firms to provide security, those firms may also share 
liability with American and United.\2\
---------------------------------------------------------------------------
    \2\ Additionally, because insurers recognize additional risks and 
because they face the high cost of paying potential claims, liability 
insurance premiums for the entire industry could rise considerably in 
the future.
---------------------------------------------------------------------------
    Furthermore, lenders and insurers will undoubtedly be concerned 
about losses from possible future terrorist events. As a result, the 
issue of potential limitations on liability for losses relating to such 
events needs to be resolved in order to provide stability to related 
market activity.

Tailoring the Authority and Tools to Address Defined Problems
    After the problems confronting the industry are better defined, the 
Congress can then better determine which policy tools may be most 
relevant to addressing the particular goals of the assistance program. 
The Federal Government has a range of policy tools that might be 
considered to help the industry--grants, loans, loan guarantees, 
regulatory relief, and tax subsidies are leading examples. Different 
tools may be more appropriate for addressing different needs. Each tool 
has different implications for the Federal Government and for the 
industry. These implications need to be carefully weighed and balanced.
    Our previous work on federal programs in general suggests that the 
choice and design of policy tools have important consequences for 
performance and accountability. Regardless of the tool selected, the 
Federal Government should take steps to design and manage the 
assistance with the following considerations in mind. First, immediate 
assistance should be targeted to address the short-term problems 
associated with the attack last week, not to resolve the longer-term 
structural problems affecting particular carriers in the industry. 
Second, the federal assistance should be designed and managed to 
promote shared responsibility by all interested parties in the 
industry's recovery from last week's tragedy. Additionally, incentives 
can be provided to help strengthen the longer-term competitive position 
of the industry in the market. Finally, accountability should be built 
in so that the Congress and the public can have confidence that the 
assistance provided was prudent and consistent with the accomplishment 
of stated public objectives.
    Historically, the Federal Government has used loan guarantees in 
its financial assistance to specific companies. Such guarantees assume 
that the federal role is to help the industry overcome a cyclical or 
event-specific crisis by gaining access to cash in the short term that 
it otherwise cannot obtain through markets. Loan guarantees and loans 
alike assume that the aided firms will eventually return to financial 
health and have the capacity to pay back the loans. Credit assistance 
is often premised on the provision of various forms of collateral and 
equity to protect the federal interest, as well as various concessions 
by interested parties to share the risk and promote a stronger outlook 
for the firm in the future.
    Other tools are under consideration as well. For instance, grants 
may be appropriate for reimbursing airlines for losses attributable to 
direct actions mandated by the Federal Government, such as closing the 
national airspace and particular airports. This decision, while prudent 
and understandable, had a direct and negative impact on the airline 
industry--carriers would not have incurred certain losses ``but for'' 
the acts of the government. Grants can provide an infusion of cash in 
the short term and can be part of the recovery process. Grants can be 
designed with eligibility criteria to target them to those most in need 
as well as to ensure a federal agency role in approving plans and 
applications up front from prospective grantees. As with credit, grants 
can be conditioned on various concessions by interested parties.
    Tax subsidies have also been proposed. For example, the carriers 
are reported to have proposed being able to retain all ticket and cargo 
waybill taxes and for relief from the federal tax on jet fuel. Unlike 
grants and loans, tax subsidies are a more automatic tool of government 
and do not generally permit the degree of federal oversight and 
targeting that these other tools do. Generally, tax subsidies are 
designed to be available by formula to all firms that satisfy 
congressionally-established criteria. Federal oversight of tax 
subsidies generally comes after the fact through audits of firms by the 
Internal Revenue Service. While federal oversight is less direct, many 
argue that tax subsidies have certain inherent advantages as well. For 
example, they can quickly become available for firms and are generally 
less costly to administer.
    Federal direct spending might also help to relieve the industry of 
certain costs. For instance, it has been suggested that the screening 
function at airports be taken over by the Federal Government, thereby 
freeing up resources in the industry.
    Although the Congress may well decide there is a compelling 
national interest in providing financial assistance to ensure the 
viability of the commercial airline industry, no one envisions that 
this industry should remain under federal protection indefinitely. 
Having an exit strategy at the beginning will provide congressional 
guidance to the airlines and the program administrators on how the 
industry should emerge from the assistance program.

Protecting the Interests of the Federal Government and American 
        Taxpayers
    Various mechanisms can be built into the design of an assistance 
program and its oversight to protect the interests of the Federal 
Government and American taxpayers. The Congress may want to create an 
oversight board whose membership reflects the diverse elements that 
contribute to the assistance program. For example, to administer the 
loan guarantee program created to assist Lockheed, the government 
established a three-person board consisting of the Secretary of the 
Treasury, the Chairman of the Board of Governors of the Federal Reserve 
System, and the Chairman of the Securities and Exchange Commission. 
Staff could also be detailed from federal agencies represented on the 
board to support the board's review and oversight function. It would 
also be prudent to provide the board with access to the financial 
records of any recipients of assistance under the program. Furthermore, 
prior federal assistance programs for failing firms and municipalities 
gave us the authority to audit the accounts of the recipients; this 
authority enabled us to support congressional oversight of the 
program's administration.
    If a board is established to oversee federal financial assistance 
for the airline industry, the board could be tasked with implementing 
specific procedures and controls over the financial assistance program 
to protect the government's interests. The board could also be required 
to report periodically to the Congress on the assistance program's 
operations and results and the board's stewardship of the program. The 
board would likely be the logical entity to establish clearly defined 
eligibility criteria for borrowers, consistent with statutory direction 
provided by the Congress, and establish specific safeguards to help 
protect the government's interests. The specific safeguards could vary, 
depending on the nature of the financial assistance tools used. 
Examples of safeguards over loans and loan guarantees include the 
following.

   Potential borrowers should demonstrate that they meet 
        specific eligibility criteria, while at the same time 
        demonstrating that their prospective earning power, together 
        with the character and value of any security pledged, provides 
        reasonable assurance of repayment of the loan in accordance 
        with its terms.

   Potential borrowers should clearly state the purpose of the 
        loans so that the board can make appropriate decisions about 
        terms and conditions, as well as collateral.

   Fees can be charged by the government to help offset the 
        risks it assumes in providing such assistance.

   The government's loss exposure can be reduced by a 
        requirement for pledged security or liens as collateral.

   For loan guarantees, the level of guarantee can be limited 
        to a given percentage of the total amount of the loan 
        outstanding.

    The oversight board would be in a position to monitor the status of 
loans and guarantees on a regular basis and to require regular 
reporting on the part of the borrowers regarding their cash flow, the 
results of their operations, and their financial position, including 
independent audits of their records, as appropriate.
    In evaluating applications for direct loans or loan guarantees, the 
oversight board would be charged with acting on applications as quickly 
as possible to meet the objectives of the assistance, while thoroughly 
analyzing the risks to the government of providing the loans or 
guarantees. Examples of external risk factors involve the pricing and 
demand risks that are currently impacting the airline industry. 
Internal borrower risks, however, result from a borrower's own 
disadvantages or limitations, which may have been present before the 
recent, tragic events, but are now being magnified by those events. 
Potential borrowers would need to clearly state the purpose of the 
financial assistance and provide operating and financial plans that 
integrate their internal and external risk factors so that appropriate 
decisions can be made about the nature and amount of assistance to be 
provided by the government.
    Another potential tool for providing financial assistance would be 
grants for specific purposes, as noted previously. Examples of 
safeguards over grants include the following:

   Applicants should demonstrate that they meet specific 
        eligibility criteria and clearly specify how they will use the 
        assistance they receive.

   The oversight board should have clearly defined procedures 
        and criteria for approving grants.

   The oversight board should monitor the use of grant funds on 
        a regular basis, and require regular reporting on the part of 
        the recipients regarding the use of funds and results, 
        including independent audits of grantees' records.

    Additional protections to the government's interest could be 
achieved by tying financial assistance to certain concessions from the 
recipients of the assistance or others who have a stake in the outcome. 
For instance, recipients could be required to provide the government 
with an equity interest in exchange for the assistance, or with 
priority claims guaranteeing that government loans or government-
guaranteed loans be paid first, thus subordinating other lenders' 
interests.

Conclusions
    Clearly the tragic events of September 11, 2001 have had a dramatic 
impact on not only many individual Americans, but also our nation as a 
whole. Obviously, those who lost their lives and their family members 
and friends have been affected the most. However, as we have discussed 
today, there are significant implications for the U.S. economy--and the 
airline industry has been affected in a dramatic and fundamental way. 
Given the clear national interest in a sound aviation system, it is 
appropriate that the Federal Government consider measures to assist 
this critical industry in recovering from the tragic events of last 
week. At the same time, any such assistance needs to be properly 
targeted, managed, and overseen in order to protect the Federal 
Government and American taxpayers.
    My remarks today have focused on principles the Congress may wish 
to consider as you contemplate possible financial assistance for the 
airline industry. These lessons are drawn directly from GAO's support 
of Congressional efforts over several decades to assist segments of 
industries, firms, the savings and loan industry, and even New York 
City. Our counsel hinges on three basic elements:

    (1)  the need to clearly understand distinct dimensions of the 
problems confronting the industry, including short- and long-term 
concerns as appropriate;
    (2)  the need to carefully tailor appropriate tools to address 
well-defined problems; and finally
    (3)  the importance of crafting effective mechanisms, controls, and 
oversight to protect the interests of the Federal Government and 
American taxpayers.

    The application of clear principles to the consideration of federal 
assistance is especially important, since actions to assist the 
commercial aviation sector are likely to set precedents for additional 
parties already coming forward and seeking relief. In addition, we must 
be prudent about the decisions we make for this industry because we 
still have long-range fiscal challenges in other areas of the federal 
budget and our economy.
    It is important to remain mindful that in a market economy the 
federal role in aiding industrial sectors should generally be of 
limited duration and purpose. The assistance should be structured to 
ensure that it prompts the industry to recover and become self-
sustaining in the future. It may be appropriate to distinguish between 
losses that are directly attributable to federal action (such as 
closing the nation's airspace) and those that are due to either 
individual circumstances of carriers or broad shifts that may occur in 
the market demand for air travel. While this is a difficult and 
tumultuous time, the Congress would be prudent to be clear about 
precise objectives of assistance to the industry and assure a clear 
path for how the industry can be expected to emerge from the assistance 
program--hopefully as a vibrant, stable and efficient force in the 
American economy.
    GAO stands ready to assist the Congress in examining this issue--as 
well as the many interrelated issues brought to the fore by these 
tragic events--including measures to improve airport security, provide 
air marshals, and examine the future of Reagan Washington National 
Airport.
    This concludes my prepared remarks. We hope that our testimony 
today has been of assistance to you.

    The Chairman. Thank you, Mr. Walker. I understand you to 
say there is short-term and then long-term financial 
assistance. I have a feeling that the Administration is on 
target with respect to the short-term. The news carried the 5 
billion to keep them whole and going, particularly some of the 
small airlines, and another 3 billion to take care of the 
safety needs and otherwise, about 8 billion.
    The reason I say that is you can imagine how it got totally 
out of hand in the sense of up, up and away. This thing 
occurred on Tuesday. I was handling the counterterrorism bill 
amongst other things on the floor Wednesday; I was told of a 
2.5 billion relief bill. By Thursday, the Senator from Missouri 
had 5 billion. On the House side by Friday, it was up to 15 
billion. By the Sunday shows it was to 20 and by the first of 
the week it was 24 to 30.
    Coming back down into reality with the 5 and the 3, that 
sounded like sense to me, and yet on the other hand it seems to 
me that there's going to have to be some kind of long-range 
assistance. Does it see to you that way also?
    Mr. Walker. I think so, Mr. Chairman. I think clearly you 
have a situation where there are significant losses that are 
being incurred that probably satisfy that but-for test, that 
there are certain actions that have been taken by the Federal 
Government that caused----
    The Chairman. That would be in the nature of loan 
guarantees perhaps?
    Mr. Walker. Well, the Congress might want to consider 
different options. For example, you could decide that if there 
were certain losses that were incurred, that were only incurred 
because of actions by the Federal Government that relate to the 
events of September 11, you might decide you want to provide 
grants for that amount of money, and give immediate cash 
infusions and give immediate assistance for that amount of 
money because it directly related to the events and it was 
caused by actions of the Federal Government, for example, the 
closing of the air space or Reagan National Airport, which 
continues to be closed. That is for your consideration.
    But longer term, to the extent that there are significant 
changes in consumer demand, that's something that's going to 
have to be worked out. There is going to have to----
    The Chairman. How is that worked out? You are the Senator, 
what are you going to have to vote for? The reason I am asking 
the question is it seems to me like a loan guarantee, but then 
I heard the Secretary of Treasury saying before the Banking and 
Housing Committee, that there was not going to be any such 
thing as loan guarantees, and of course the airline stocks went 
right to the bottom immediately with that comment made by the 
Secretary of the Treasury.
    I am trying to correct the comment if I possibly can, so 
that we will calmly go into this in a deliberate fashion, and 
not panic the market or otherwise.
    Mr. Walker. My understanding, Mr. Chairman, and I obviously 
can't speak for the Administration because I work for the 
Congress, but my understanding is what the Administration is 
talking about is some type of direct immediate financial 
assistance, some type of liability limitation, and in addition 
to that, is not talking about loan guarantees at the present 
point in time but has not taken that off the table, recognizes 
that there may be some need for loan guarantees, but my 
understanding is they are trying to move an immediate package 
for assistance now and then to consider what if anything else 
might be necessary, but you would have to ask the 
administration about that.
    The Chairman. Well, I think the immediate package will 
move. Incidentally, that is more in the jurisdiction of the 
Banking and Housing, Senator Sarbanes and others, they have the 
expertise with respect to this.
    And incidentally, since I handled the Chrysler loan which 
was put on to the State, Justice, Commerce Appropriations Bill, 
Lee Iacocca restricted himself to a dollar a year. I want to 
see how many volunteer for that.
    On the matter of limiting liability, they obviously have 
the coverage for the individual loss in flight. Now the 
collateral damage, I can see these insurance companies being 
subrogated to the insurance companies being subrogated to the 
insurance company. We need Senator Nelson on this one. They 
would be ad infinitum. Is there some kind of cutoff to that? 
Otherwise, we can't build enough courthouses for the hearings.
    Mr. Walker. Well, Mr. Chairman, clearly the liability issue 
is not only a liability issue with regard to the events that 
occurred on September 11. It also places a cloud over the 
ability of airlines to be able to continue to purchase 
liability insurance on a reasonable basis going forward. I'm 
sure Senator Nelson can tell us about that.
    There are precedents for this. For example, there is 
something called the Price-Anderson Act, which deals with 
nuclear power plants, that there was a recognition back many 
years ago of the possibility of a cataclysmic event occurring 
in conjunction with nuclear power plants, either due to a 
terrorist act or otherwise, and there was a provision provided 
for whereby certain liabilities in excess of certain amounts, 
would be assumed by a central party. And so that is something 
you may want to look at.
    The Chairman. Can we do that in your opinion ex post facto?
    Mr. Walker. Well, I'm not a lawyer, Mr. Chairman, so your--
--
    The Chairman. You sound like one.
    [Laughter.]
    Mr. Walker. I don't know if I should say thank you or not.
    The Chairman. Thank you very much, Mr. Walker. Senator 
McCain.
    Senator McCain. Thank you, Mr. Walker. We are all happy 
that your wife is well and safe. Let us run through what we are 
dealing with here. $5 billion in immediate grants, that is 
fine, in your view?
    Mr. Walker. Well, the Congress has to make that choice. I 
think clearly there is short-term bleeding that has to be 
stopped and something needs to be done quickly.
    Senator McCain. $3 billion for safety and security.
    Mr. Walker. There is absolutely no question as GAO reports 
have shown, that we need to take dramatic steps in the security 
and safety area.
    Senator McCain. We need an oversight board such as we had 
for other areas where money was obligated for specific purposes 
such as this.
    Mr. Walker. I believe that would be prudent and is 
consistent with what the government has done in the past.
    Senator McCain. I have a letter from Morgan Stanley 
addressed to Secretary O'Neill. ``Today there are virtually no 
markets open to these carriers. The U.S. airline industry has 
been an industry with enormous need for capital. Today, 
however, the risks go beyond those which can be analyzed and 
priced. Unresolved and unquantifiable liability claims will 
effectively bar the airlines involved in the tragic events of 
September 11 from access to capital markets. There will be no 
functioning capital markets for the U.S. airline industry until 
the uncertainty with respect to both liquidity and liability 
are eliminated. Even then, access is likely to be severely 
limited, et cetera.'' Do you share the view of Morgan Stanley?
    Mr. Walker. I think clearly, in order for there to be any 
stability to come back to the market here, that you have to 
deal not only with the short-term financial problem but also 
the liability issue.
    Senator McCain. You have to deal with the liability issue.
    Mr. Walker. You have to deal with the liability issue. And 
I also believe that it's clear that there is a significant 
supply and demand imbalance with regard to capacity. Some of 
that existed, frankly, prior to September 11, and there is 
going to have to be a rationalization at some point in time of 
that excess capacity.
    Senator McCain. So it is a matter of how we deal with the 
liability. The Price-Anderson provision which, I believe can be 
made retroactive, being familiar with it to some degree.
    How do you differentiate between the problems as you 
mention in your written statement that the airlines already 
had, they were already losing, some airlines were losing 
billions cumulatively, between what they were already losing 
and what they have lost as a direct result of this act of 
terrorism?
    Mr. Walker. Well first, obviously there were projections of 
what each carrier was expected to do for the year before this 
tragic event occurred, and as I said, obviously those losses 
have escalated dramatically for every carrier that was going to 
have losses, and for those that were expecting to have net 
income for the year, of which there were not many, they are 
obviously being adversely affected as well. I think you have to 
look at what was likely to happen prior to this event, and I 
would recommend that you consider the but-for test, but for 
this event, as well as what role did the government have. In 
other words, you know, what role did the government have that 
could have had some impact on these losses?
    To the extent that it had a more direct role, you may want 
to lean more toward grants or toward other forms of assistance. 
To the extent that it didn't have a more direct role, then you 
may want to consider loan guarantees or other types of 
assistance, but if you do that I think one of the things that's 
going to have to be carefully considered is now to 
differentiate between who should get them on what terms and how 
long, because not all carriers are equal with regard to their 
economic viability, not all carriers are equal with regard to 
their capacity imbalances, et cetera.
    Senator McCain. So the but-for clause is very important in 
our addressing these problems.
    Do you hear the same information that I do that one or more 
major airlines will shut down within days if we do not act?
    Mr. Walker. I have heard, as has been publicly reported, 
that a number may declare bankruptcy. That's not necessarily 
shutting down. As you know you can file for Chapter 11 and not 
shut down operations.
    Senator McCain. Have you heard shutting down?
    Mr. Walker. Pardon me?
    Senator McCain. Have you heard shutting down?
    Mr. Walker. I haven't personally.
    Senator McCain. Are there any lessons to be learned from 
the Persian Gulf War experience, which was the last time that 
the airlines, because of an act not of their making, have 
suffered significant financial difficulties?
    Mr. Walker. I'm sure there are. I wouldn't want to reflect 
right now. I think it is important to note, however, that as 
you know Senator, the airlines also have a role to play in time 
of war with regard to additional lift capacity to the extent 
that lift capacity is necessary for military purposes.
    Senator McCain. So you do not see any particular parallels?
    Mr. Walker. I really have not thought about it, Senator. I 
would have to think about it.
    Senator McCain. Well, we thank you, Mr. Walker, as always. 
We need your objective assessment of the situation and I think 
it will be very helpful to us as we move forward with this 
package. I thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Inouye.
    Senator Inouye. Mr. Chairman, I just have one question. In 
all the statements made by my colleagues, words such as act 
swiftly, act expeditiously, act now, we can't waste time, time 
is of the essence. More specifically, how much time do we have?
    Mr. Walker. I think that Mr. Mullin, who is going to 
testify on behalf of the industry, might be able to give you a 
better feel for that. Clearly there is a need to do something 
now with regard to the hemorrhaging with regard to cash-flow, 
and I think that's what the Administration is proposing to do, 
is some type of an immediate infusion as well as some type of 
liability relief.
    I think to the extent that you talk about loan guarantees, 
there could be significantly higher sums for extended periods 
of time where more judgment would have to be used as to whether 
and under what circumstances and conditions, terms and 
conditions those would be granted. That's a different matter.
    You may want to move expeditiously to address things that 
need to be done expeditiously and then set up a mechanism such 
as Senator McCain suggested, and others, of some type of a 
control board or whatever to determine whether or not there is 
going to be something else done and if so, what those terms and 
conditions would be.
    Senator Inouye. By acting now, you are talking about by 
tomorrow or Monday?
    Mr. Walker. That's up to you, Senator. Soon, obviously 
soon.
    Let me also add that I am scheduled to fly to Hawaii and 
Asia in October, and I am planning on going, but I can't make 
up for all the spending that otherwise would have occurred.
    Senator Inouye. Thank you, sir.
    The Chairman. Thank you. Senator Burns.
    Senator Burns. I have not so much a question of your 
testimony, Mr. Walker, but in a statement, the formula on the 
infusion of cash into the lines is going to have to be a little 
bit different than has been put forth by the Administration 
right now because of essential air service, and my state relies 
on essential air service and those funds in order to provide 
service to underserved areas. They are experiencing the same 
thing as the majors are.
    And also, I think there is, some case could be played for 
general aviation just a little bit in this whole thing because 
of the time they were down. Of course, the majors were back in 
the air before general aviation was.
    So, do you have any thoughts about those airlines that fall 
in that classification of essential air service?
    Mr. Walker. Well, I think clearly that's an issue that the 
Congress is going to want to look at. It's very similar, quite 
frankly, to the Postal Service. I mean, you have certain parts 
of America, rural America, whether it be Alaska, whether it be 
Montana, whether it be, you know, other parts of the country 
that no matter what the cost is, there is a national public 
commitment and an interest to make sure service is provided 
there. So that's something I expect the Congress would be 
concerned with, as well as these other aspects of air travel 
that have not gotten back in the air yet.
    Senator Burns. I just wanted to make a statement. When we 
go to debating all this, that I see no structure, to where it 
all goes into the big carriers, and I think probably the 
chairman of the subcommittee understands that, and I thank the 
chairman.
    The Chairman. Good. Senator Hutchison.
    Senator Hutchison. I pass, Mr. Chairman.
    The Chairman. Thank you. Senator Rockefeller.
    Senator Rockefeller. To followup exactly on what Senator 
Burns was referring to, this is a discrete and specific 
question. If the airlines all operate individually, major and 
minor, or their subsidiaries, then that means that decisions 
that affect small rural airports will be made individually by 
airlines, and there will be no guarantee or even hope perhaps, 
that individual small airports have service.
    So I put this to you and ask for your reaction. And I do 
not ask for comment on matters of antitrust, et cetera. What 
would happen if the airlines and those subsidiaries, regional 
jets and otherwise, one of which, ACA, that will testify today, 
were to under a carefully calibrated system, under the 
supervision of the Department of Transportation working not 
apart from them but with them at the table, or the Department 
of Justice, were to sit around and say look, we have a hub and 
a spoke system, we cannot cutoff the spokes. Americans are not 
placed equally geographically but they have similar potential 
rights geographically.
    That if they were to not, and I do not want to use the word 
collude, because that implies they are doing it by themselves, 
but under the monitoring in the room of the Department of 
Transportation or Justice, that they were to be able to say all 
right, we have not done these couple of airports and we do not 
do them now, but we understand they have to be served, so we 
will do these two, with the DOT, DOJ walking, listening, you do 
those three or whatever. So that each rural airport to the 
extent possible is guaranteed at least service if not as much, 
at least service, so they are not cutoff and condemned.
    Mr. Walker. Well, obviously there are pros and cons to that 
approach, and it does have economic implications. As you 
properly point out, to the extent that it would be under 
government supervision, then again, I'm not a lawyer, but 
obviously you wouldn't have collusion among the parties solely, 
there would be some supervision.
    It would theoretically be possible to have issues like this 
considered by the control board as a condition of financial 
assistance. And so, you know, these are some of the issues that 
the Congress may want to consider and you know, unlike past 
financial assistance, where typically you have dealt with a 
Chrysler, which is a single corporation, or Lockheed, which is 
a single corporation, or New York City, which is a single city, 
we're talking about multiple enterprises here and multiple 
objectives that have to try to be achieved, all the more reason 
why I think you are going to need some type of control board to 
oversee.
    The Secretary of Transportation potentially could be on the 
control board. Historical models are typically contained in 
past GAO reports. I've got a copy of one here that we did a 
number of years ago that is still relevant for this discussion. 
So those are the kind of issues that might be discussed and 
debated either outside the control board or within the control 
board.
    Senator Rockefeller. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Cleland.
    Senator Cleland. Mr. Walker, thank you very much and again, 
thank you for your service to our country and thank you for 
your wife's service to Delta and this country.
    May I say, if you could step back just for a moment and 
help me here. I am trying to think this thing through. What 
kind of problem do we really have? Is it a financial problem, 
is it an access to capital problem, is it an expansion of the 
runway problem, is it too little competition or too much 
competition problem? I am beginning to believe that we have a 
fear problem. I said that today in the security hearing that if 
we do not handle the fear problem that American people have 
about fearing to fly, that we can pump a lot of money, we can 
do a lot of things, we can do a whole lot of things with the 
airlines, but if we do not go after the fear problem and put 
together some elements of action that are confidence building 
in nature, we will not be able to build that market back up to 
60 or 65 percent where the airlines break even, and even beyond 
that where they begin to make some money.
    I just want to get your take on that. What is our root 
problem? Is it fear of flying now? I mean, what is the 
difference between now after September 11 and the situation on 
September 10? I think we had some challenges, I think we had 
some problems, but we had 650 million people flying, and were 
talking about a billion people flying in about 5 years from 
now, and we were worried about capacity and building new 
runways and you know, we were pushing the envelope and we were 
rocking and rolling, OK?
    We are post-September 11 now. What do we have now that is 
different than say September 10? Is it not at the root of the 
problem the fact that people will not get on an airplane and 
fly?
    Mr. Walker. Short-term, I think we have two problems. We've 
got a severe cash-flow problem and obviously cash is what's key 
in order to survive and continue to operate, and more companies 
go into bankruptcy because of inadequate cash-flow, even if 
they're making money. But in this case airlines both have 
negative cash-flow as well as not making money.
    Second, a liability issue, that's clearly an issue that's a 
short-term and a long-term issue. In addition to that, I think 
you put your finger on something. I don't know if I would use 
the word fear, but there clearly is significant apprehension on 
behalf of the American public at large with regard to whether 
or not they should fly now unless they really need to fly. So 
in other words, I think what's happening is that people are 
making a judgment, is this a want or a need, can I put this off 
for a period of time when things cool down and I have a little 
bit more confidence with regard to security and I have a little 
bit more confidence that would cause me to go ahead and get 
back on the plane.
    So I think part of it is a timing difference, a large part 
of it is a timing difference. It's hard to measure. Some may 
well be a permanent difference, some may well be individuals, 
especially in certain parts of the country, like the northeast 
corridor, may decide that a higher percentage of people are now 
going to take Amtrak, which has financial problems that could 
be helped by this, than otherwise would be the case, because 
they have that alternative, versus the shuttle.
    But when you're talking about longer distances, the train 
obviously is not as viable an option because time is money.
    Senator Cleland. May I just followup on that?
    Mr. Walker. Yes, Senator.
    Senator Cleland. Then would you accept the proposition 
maybe that we are dealing with a twin headed monster, maybe not 
a single headed monster. It is not just maybe that the root 
cause is fear, that we do need to take other actions that are 
themselves confidence building measures, certainly for the 
airlines themselves in order for them to stay on their feet, 
the financial piece, the infusion of money piece, the loan 
guarantee piece.
    I will say to you that I think we are entering a new era 
here. We generally talk about government and the private sector 
working in partnership to accomplish a goal, but I think this 
is a unique partnership. We are not seeking to nationalize or 
buy the airlines, but we are in effect investing some 
taxpayers' money in them and serving as a banker of last resort 
and so forth.
    I think it is going to take, shall we say some maybe unique 
supervision of this, I am not sure what, but you pointed out 
some oversight committee, do you not?
    Mr. Walker. Control board, oversight board, call it what 
you want. I do agree wholeheartedly, Senator Cleland, that the 
government must take steps now in cooperation with the airline 
industry to deal with the security issue. It's not just a 
matter of the screeners. It's also better control over 
credentialing of airline employees, credentialing of law 
enforcement officials and a variety of other things. It's the 
air marshal issue. I mean, there are a number of issues that 
absolutely positively have to be addressed, because that will 
help to regain public confidence, reduce apprehension and 
obviously to help the industry as well as our economy.
    Senator Cleland. Thank you very much and we appreciate your 
willingness to help this Committee structure such a proposal. 
Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. When Chairman 
Hollings announced this hearing and people around the country 
knew we were going to meet on this topic, the phones basically 
started ringing off the hook and people would say look, I know 
the airline industry has taken some tremendous hits, but so is 
my company, so are my workers. And my question to you, Mr. 
Walker is, given the interest in this Committee in making a 
principled decision, and trying to be fair to all of the 
affected industries, does GAO have anything resembling, if not 
a road map, at least some principles that we might, you know, 
look at in terms of trying to decide how and when and how much, 
so that we can stand up in a town hall meeting and say we are 
being fair to these various interests?
    Mr. Walker. We do, Senator Wyden. I will provide to the 
Committee a copy of a report that we actually issued a number 
of years ago, but is still relevant today. It's a report that's 
entitled Guidelines for Rescuing Large Failing Firms and 
Municipalities. In this particular case we're dealing with an 
industry, which makes it more complex. You're also dealing with 
a lot more money, but I would be happy to make that available 
to the Committee.
    Senator Wyden. The other question I wanted to ask is how 
much of what is being projected is based on really ill defined 
notions of when passengers are going to return? I am looking at 
the airline projections, and the airline industry says that 
things would be down obviously 60 percent in September and the 
fourth quarter, 40 percent, and then into 2002, the first 
quarter, 25 percent. Are you comfortable with how they are 
making those calculations about when passengers are going to 
return and how many are going to stay out?
    Mr. Walker. Senator, we have not been asked nor have we 
looked at any of the projections that the airline industry may 
have made or even what the Administration is doing. I only am 
aware----
    Senator Wyden. Isn't that a key factor?
    Mr. Walker. Absolutely. It's a key factor in projecting 
revenues and therefore, resulting cash-flows. And it deals 
directly with what Senator Cleland talked about. How quickly 
will public confidence be restored such that revenue passenger 
miles and load factors will end up increasing, hopefully to the 
point of getting past the break-even point.
    Senator Wyden. But it strikes me as being important to have 
somebody independent making an assessment about that, either 
the General Accounting Office or somebody else.
    Those were the only questions I wanted to explore. Thank 
you, Mr. Chairman.
    Mr. Walker. Senator, I think that's particularly more 
important to the extent that you are talking about longer term 
assistance. If you are talking about the short-term need that 
exists, the infusion, especially if it relates to government 
actions, you may not need it. But for long-term assistance like 
loan guarantees or whatever, clearly that's something.
    The Chairman. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. Senator Wyden 
actually asked exactly the question I was wanting to pursue and 
dealing with where do we stop. I mean, it is a political 
problem for us, because I have the hotels, motels, 
entertainment industry, the tourism industry which is big in 
New Orleans, and Louisiana, already talking about, you know, we 
have suffered economically and we need to be a part of any kind 
of assistance program.
    And I guess what you have done in that paper is to sort of 
give us an economic reason--we have to handle the politics of 
it, which is our job, but I mean, we have to have some basis 
for making those decisions and I think it would be helpful if 
you could get me a copy of that report, and certainly to all of 
us on the Committee. I think it would be helpful, thank you.
    Mr. Walker. A lot of it, Senator, has to do with national 
security. A lot of it has to do with issues like to what extent 
does the government have direct control. Obviously, you know, 
the government runs the FAA, the government controls the air 
space. Obviously the airlines have an impact on national 
security, the airlines have an impact on fuel and the economy. 
But we have various factors that this Committee and the 
Congress may want to consider, as well as others.
    Senator Breaux. Thank you.
    The Chairman. Very good. Senator Allen.
    Senator Allen. Thank you, Mr. Chairman. Mr. Walker, just as 
Senator McCain brought up in the beginning, your standard of 
the ``but-for'' test is one that is very much similar to the 
way I look at this matter. The airlines received $5 billion in 
compensation from the Federal Government after the FAA shut 
down the nation's airports. In addition, the FAA has created 
stricter safety standards and there is certainly a cost 
associated with these new standards compensating the airlines 
and creating new safety standards makes a great deal of sense.
    Now when you get to the loan guarantee piece of this I was 
struck by how it seemed like a similar sort of thing is done 
when you're trying to get a new investment in a state and 
create new jobs. We are talking about loan guarantees which 
have some sort of value, whatever amount it may be. But what if 
we came up with an approach to financial assistance or loan 
guarantees based on a performance grant approach.
    I do not know what the criteria would be. Normally in 
economic development it is an amount of investment and number 
of new jobs created. That is not necessarily the way this would 
work, but you would have a criteria where you measured certain 
positive activity, jobs saved as opposed to created, and 
service levels to various cities.
    Have you thought of any sort of positive incentive approach 
to these loan guarantees?
    Mr. Walker. There may be ways to work something in with 
regard to the terms and conditions, but I think you have to 
keep in mind, Senator, that presumably the reason that they 
would be coming to the Federal Government is because they are 
in financial distress, and so therefore, the ones that are 
hurting the most are going to be the ones that are coming. 
Ultimately what has to happen is there has to be a tradeoff, 
because if you're making the loan on behalf of the taxpayers, 
presumably you want to have, you want to believe that you're 
going to get repaid within a reasonable period of time.
    Now there is a lot you can do on interest rates and terms 
and things of that nature if you will, but you know, and 
obviously to the extent that there is less of an adverse impact 
on job loss or whatever, as long as they can still repay the 
loan, you may want to somehow, you know, reflect that in what 
the terms are, or adjust the interest rate or something of that 
nature, if you will.
    But I think it requires a lot more thought. The bottom line 
is, if you're going to provide loan guarantees to deal with a 
longer term issue, the longer term transition issue because of 
the uncertainty about when people, when consumer confidence is 
going to be increased, it's going to be a lot more difficult.
    Senator Allen. Let me ask you this final thing as time is 
running out. Where is the claw-back provisions? In Virginia, 
whenever we would put some of these incentives in to bring 
businesses to the state there would always be a claw-back. If 
the airlines don't perform, for example one of these airlines 
does go bankrupt, where are the taxpayers in the line of 
creditors?
    Mr. Walker. Clearly what happened in the past, and I 
believe what was in the case of Chrysler although I will double 
check it, is the government got a priority in the event of 
bankruptcy, it got a priority claim.
    In addition to that, the government got an equity kicker. 
To the extent that it worked, the government received certain 
warrants, and in fact that turned out in hindsight to be a good 
deal for the government.
    Senator Allen. Finally, Mr. Chairman, on the liability 
issue, how can the government pass a law changing a cause of 
action retroactively or an ex post facto approach? Has that 
been done before?
    Senator Fitzgerald. Yes.
    Senator Allen. I am always amazed at what the Federal 
Government does.
    The Chairman. Senator Nelson.
    Senator Nelson. Mr. Chairman, I just had two issues.
    We have this estimate report, estimating that passenger 
loads were going to be off by 40 percent in the future. Now if 
a major financial house is sending out that kind of news to the 
marketplace, is it any wonder that we see the kind of 
precipitous drop in airline stocks? And I think Senator Cleland 
is on to the major issue there, that to restore that confidence 
and turn this around, getting the airlines flying with loads is 
one of the most important things that we could do.
    The second thing that I would urge for the Committee's 
consideration is the question of the liability question and the 
insurance question. That is perhaps one of the items that could 
take down major airlines so quickly, particularly if liability 
and property damage coverage were to be canceled in the near 
future.
    And I notice that Mr. Walker, who has a very good insight 
into this, made the statement that that is one of the critical 
factors. Would you expound on that?
    Mr. Walker. I think the liability issue, not only with 
regard to the events of September 11, but also the overlapping 
of the liability issue with regard to the industry as a whole, 
is clearly an issue that needs to get resolved. We talked about 
one model, which is the Price-Anderson model. My understanding, 
the Administration is talking about some type of stop loss, 
where the government might end up assuming losses in excess of 
a certain amount, but I don't really know, I've just gotten 
bits and piece of it.
    But I think there is general recognition that the liability 
issue is something that needs to be addressed quickly.
    The Chairman. Senator Edwards.
    Senator Edwards. Mr. Walker, tell me what this money we are 
talking about appropriating today or tomorrow, sometime very 
soon, tell me what impact you think that is going to have on 
all these people who are going to lose their jobs.
    Mr. Walker. It's not necessarily going to guarantee that 
people aren't going to lose their jobs, and the reason being is 
there clearly is a significant supply and demand imbalance. 
There was some excess capacity, especially on behalf of certain 
carriers, before the events of September 11 occurred, now there 
is a broad-based excess capacity within the industry.
    And keep in mind, that in the Chrysler situation and in 
other situations, there were significant reductions in levels 
of employment in order to be able to save jobs long term rather 
than to save jobs short term, so there are some tough decisions 
that are going to have to be made. In providing this 
assistance, although ask Leo Mullin, who can speak on behalf of 
the industry, it is no guarantee you are not going to have job 
losses.
    Senator Edwards. Can you address that issue? As many of my 
colleagues, I am concerned about those people. In my state, I 
think I mentioned, we have over 11,000 people who work for U.S. 
Air, and some of my colleagues have lots of airline industry 
workers in their state, and I think we need to put some 
attention on that issue. We have an awful lot of folks who 
could lose their jobs, totally innocent victims of what 
happened last Tuesday.
    Mr. Walker. Part of the question you may want to ask, 
Senator, is but for the financial assistance, what would 
happen? To what extent might the carrier file for Chapter 11. 
To the extent the carrier files for Chapter 11, that's 
reorganization. They are going to have to end up restructuring 
their debts, the shareholders are going to take a hit, and they 
are going to have to end up somehow trying to get their 
revenues and costs in line, and there are going to be job 
losses associated with a Chapter 11 restructuring. Obviously if 
the carrier can't do a Chapter 11----
    Senator Edwards. But there are going to be people who lose 
their jobs----
    Mr. Walker. Absolutely.
    Senator Edwards.--in this country as a direct result of 
what happened last Tuesday, are there not, in the airline 
industries?
    Mr. Walker. Yes. I think there were going to be people who 
were going to lose their jobs in the airline industry before 
the events of September 11, and there are going to be more 
people that are likely to lose their jobs because of the events 
of September 11, even if you provide assistance.
    Senator Edwards. Second question. Is there some way going 
forward, not talking about what we are going to do immediately, 
that we could provide financial incentives to passengers to get 
them on airplanes? You know, whether it's a tax deduction, tax 
credit, something to cause them to want to fly? I mean, the 
issue of fear of flying is obviously an issue that we are 
addressing on the security front, but is there something we 
could do to provide some financial incentive to get people on 
airplanes? Because that also impacts not just the airline 
industry, but all the attendant industries that many of my 
colleagues have been talking about, the hotel industry and many 
others.
    Mr. Walker. Obviously Congress can do a lot of things 
through the tax code and through the appropriations process. 
The difficulty is trying to understand what the nature and 
amount of that incentive would have to be in order to be able 
to deal with the apprehension. My personal view is that the 
thing that the government needs to do the most is to deal with 
the security issue. I mean, to deal with the security issue and 
to take definitive steps.
    And I think the security issue, quite frankly, is not just 
a government issue, it is also an airline issue. The crews have 
not been trained for the new threat. The crews were trained to 
deal with a hijacking by being submissive, do what they say, 
allow them--you know, because the assumption was that you were 
going to be flying to Cuba or someplace else you didn't want to 
go, but you were going to be coming back. We are clearly in a 
different ball game.
    In addition, the cockpit, access to the cockpit, obviously 
that has to be reinforced. There are a number of things the 
airlines need to do. So as has been mentioned by several 
members here, there needs to be a partnership approach. The 
government has to do certain things, the airlines have to do 
certain things and frankly, the citizens have to do certain 
things.
    Senator Edwards. Thank you.
    The Chairman. Senator Brownback.
    Senator Brownback. Thank you, Mr. Chairman. Mr. Walker, 
just a short question about the associated industries. You 
mentioned in your study you look at the broad-based industries. 
A company that announced similar layoffs the same day, 
virtually, that the airlines did was Boeing Corporation; they 
announced 20 to 30 percent layoffs in manufacturing. I do not 
know that they moved a plane last week, and I think they are 
looking some time into the future. What do you think about 
working with Boeing, or would there be a way for us to press 
Airbus, their major competitor, to reducing its either subsidy 
level that goes to them or getting the two in a better 
competitive situation, as Boeing takes this huge hit here in 
this country from sales of domestic airliners here?
    Mr. Walker. Well presumably, the reason that Boeing is 
contemplating significant layoffs is because, A, they may be 
concerned that existing orders are going to be canceled, 
especially if airlines go into bankruptcy. And second, they are 
concerned that the future projection of demand for air travel 
may have been significantly modified in some way and therefore, 
people aren't going to need as many airplanes.
    These issues, by the way, exist in Europe as well. I mean, 
while Europe wasn't directly affected by the events of 
September 11, they are not immune from events such as occurred 
on September 11. And so, you know, we have some preliminary 
indication, although Leo Mullin may be able to talk more about 
behavioral impacts of air transportation in other parts of the 
world as well.
    Senator Brownback. That is all I have.
    The Chairman. Very good. Senator Kerry.
    Senator Kerry. Mr. Chairman, thank you very much. Once 
again, I do not want to make it sound simplistic, but I do 
think that we are more worried about the post-September 11 than 
we have to be, and the larger problem in the airlines is pre-
September 11 with respect to this Committee.
    If we do three or four things, I think you can get people 
flying again pretty soon. The first and most important you just 
mentioned is the security issue. If we guarantee Americans that 
there is a federal system in place that is strong and capable 
for screening passengers, and if we guarantee Americans that 
nobody can get into that cockpit again, and then you market the 
new safety in a significant way and combine it with 
extraordinary low fares. And I think part of our bailout ought 
to be that those steps are coming in one, two, three, very 
fast.
    And then we are going to sustain the notion of a major 
marketing campaign in the country with public officials and 
others flying, with the media joining in the effort to prove 
how safe it is, and with the fares, and you will fill those 
planes up again just the way they were before, I think very 
rapidly, I am convinced of that.
    If we federalize the security, we are going to be saving 
the airlines a billion dollars a year right there. Now should 
we not factor that in to whatever this bailout is, that if all 
of a sudden there is a transfer of that payment, that's a 
component of what we are now doing, correct?
    Mr. Walker. Absolutely. One way you could help is to assume 
responsibility for something that otherwise the airlines are 
responsible for, such as screening.
    Senator Kerry. So there is one component of saving cost 
there.
    The second thing is, I would like you to come back for a 
moment to the worker issue. 10 percent of the work force, 
almost, is being laid off. I think about 1.2 million employees, 
100,000 plus, and there may be more. These workers, how many of 
them do you think fit the but-for, how many are directly as a 
consequence of what happened in this immediate downturn of 
September 11?
    Mr. Walker. I wouldn't want to hazard a guess there, 
Senator Kerry.
    Senator Kerry. Do you not think we should try to figure 
that out? I mean, it seems to me we have some obligation here 
to try to help those people in some way. I mean, they are 
directly impacted, their lives are impacted, and that also 
helps the economy. If they have a capacity to transition into 
something or to be sustained, it seems to me we are going to 
help them in terms of their consumer capacity.
    Mr. Walker. That would be difficult but not impossible to 
do, but it is something I think you would have to have another 
body such as a control board or something to be able to take a 
look at that if you are going to do it.
    Senator Kerry. Well, would you not agree with me that if 
you do have these safety measures addressed rapidly, right up 
front, America knows the screening is unprecedented, America 
knows no pilot, you just do not have access, no terrorist can 
get into the cabin, you cannot turn your airplane into a 
missile, and you have a marshal conceivably, do you not think 
you are going to appeal to Americans in a remarkable campaign 
that would bring them back, particularly with extraordinarily 
low fares which we as part of the bailout ought to sustain as a 
matter of bringing people back?
    Mr. Walker. That's one form of assistance you could 
provide, to subsidize for a period of time. I believe it is 
absolutely essential that steps be taken with regard to the 
security issue immediately. You can't guarantee, nobody can 
guarantee that events will never happen again, but there's a 
lot that you can do to significantly reduce the risk.
    And in fact GAO, as you know, Senator, has done a lot of 
work on this area, including what do other countries do with 
regard to screening and other procedures, that I think can help 
inform the Congress.
    Senator Kerry. Well, it is interesting, though, to note 
that none of these hijackings took place with a gun and none of 
them walked in with a big box. I mean, security did work to 
that extent. This was low tech, it was smart, but low tech. It 
was remarkably thoughtful in thinking out the reaction to the 
terror threat in the plane, and ostensibly the reaction to the 
threat was that the pilot opened up the cabin, came back to do 
something about it, and that gave people access, or the terror 
to the flight attendant gave people access, or the door itself 
was so weak it gave people access.
    But it seems to me that that is something that everyone 
knows we could deal with, so if you are reducing a terrorist to 
the choice, God knows how, if the screening improves over what 
we had, that did not allow them to have a gun, it did not allow 
them to have a bomb, it is already pretty good, and if it gets 
better, then the likelihood of anybody being able to bring down 
a plane, I tell you, the comfort level is extraordinarily high.
    Mr. Walker. I think there are some things that can be done 
that can increase confidence if the public is made aware.
    Senator Kerry. Let me ask you a critical question. Go back 
to September 10. Were there on September 10 some airlines that 
were not going to make it or should not make it that we should 
not be bailing out?
    Mr. Walker. There were some airlines without mentioning 
names on September 10, that in my opinion, there were serious 
questions as to whether or not they were going to be able to 
survive without going through Chapter 11.
    Senator Kerry. And what then is our responsibility with 
respect to that but-for application and looking at September 10 
and making a judgment about what agony we may be prolonging by 
this open-ended bailout, or should it be more surgical in terms 
of our own actions?
    Mr. Walker. I think it clearly needs to be more surgical 
with regard to the extent that you're talking about providing 
assistance for anything other than but-for events for which the 
government had direct responsibility, for example, but for the 
event of the government closing down the airspace. If you want 
to do something that goes beyond that because of the decline in 
consumer demand, such as loan guarantees or whatever, you are 
going to have to differentiate.
    Senator Kerry. Mr. Chairman, thank you. I would just say to 
you, Mr. Chairman, the best bailout for all these other 
businesses that Senator Wyden and others are hearing from, 
whether it is car rentals or restaurants or hotels, is getting 
people back in these planes.
    The Chairman. Yes, sir.
    Mr. Walker. And Senator, one of the things that has to 
happen and I think it has already, is to change what you can 
carry on to the plane. I mean, there is too much carry on in 
the planes right now. And second, my wife herself disarmed a 
passenger 3 months ago of a four-inch knife that was allowed. 
That's not acceptable.
    The Chairman. Senator Fitzgerald.
    Senator Fitzgerald. Mr. Walker, I thank you for your help 
in talking about the safeguards we can have. The reason I have 
been concerned and said before, and Senator Boxer picked up on 
this and was disputing my suggestion that this is a question of 
whether the risk is borne by airline shareholders or by the 
taxpayers, the reason I say that that is the simple choice here 
is because unlike other bailouts, in this case what is being 
proposed is that we just get out the ladle and give taxpayer 
money and get nothing in return.
    Now if you look to say the Continental Bank bailout, the 
government got 80 percent of the stock of Continental Bank. We 
didn't enrich the shareholders of Continental Bank, we took an 
equity position. And to the extent that we are called upon to 
contribute equity to the airlines, is it not wrong to not get 
equity in return, get preferred stock or common stock?
    Even in the Chrysler bailout, the government was given I 
think 14 million warrants which we later sold at a profit. Once 
the Continental Bank got itself back on its feet, the 
government did an IPO of the stock, and I think it is just 
wrong to not get something in return for our investments.
    Mr. Walker. Senator, you make a good point. My view is that 
the Congress may want to consider that if the Congress, if the 
U.S. Government took certain steps that caused certain losses, 
e.g., closing the airspace for a period of time, that you might 
want to view that differently than if, in the case of Chrysler, 
where there were loan guarantees, which might be necessary and 
the Congress may or may not want to do, and as part of the 
terms for loan guarantee, you may well want an equity stake as 
well as a priority in bankruptcy and several other things, 
which is what happened in Chrysler and what has happened in 
other deals.
    So I think it depends on what is the nature and amount 
involved.
    Senator Fitzgerald. Well clearly, there may be a claim for 
those 3 days that there was a shutdown on the government edict, 
but they are asking far beyond their possible damages for that, 
figures as high as $24 billion.
    Mr. Walker. It obviously doesn't pass the straight face 
test.
    Senator Fitzgerald. Now if we make loans, can we not take 
collateral? I mean, what is wrong with us taking their 
unencumbered jets as collateral? And what is wrong with us 
having a collateralized loan? Why does it have to be just 
gifted?
    Senator Kerry. Would you yield just for a minute on that?
    The Chairman. Wait a minute. It is his time. We have two 
more panels and several witnesses.
    Senator Kerry. Aren't most of those planes on lease anyway? 
I understand insurance companies own the better part of the 
planes and they just lease them.
    Mr. Walker. A lot of the planes are leased. I don't have 
the numbers in front of me but a lot are leased.
    Senator Fitzgerald. I think that was in the testimony of 
Morgan Stanley.
    The Chairman. Right. Senator Boxer.
    Senator Boxer. Thank you very much. Mr. Walker, you are a 
very clear thinker and I appreciate that very much. I also 
appreciate that you have not said the word paradigm at all, 
neither in your oral statement or in your written statement and 
I am grateful. For some reason that word just makes me think 
bureaucrat, and you have not done that, so my apologies to 
anyone here who has used it.
    We are talking here about a bailout package or a rescue 
package, however one wants to term it, and a financial 
assistance package, we can call it whatever we feel comfortable 
calling it, and I really do think the vast majority of members 
here will support it. But I want to pick up on Senator Kerry's 
point, which you also talked about, and Senator Breaux's point, 
that we are looking at pre-September 11 in terms of this 
package, and post, and we do not want to throw, if you will, 
the very overused expression, good money after bad by investing 
taxpayer funds, if you will, or granting them or lending them, 
to companies that were going to go under anyway in any case.
    Now that puts us in a position, Mr. Chairman, of picking 
winners and losers, a very hard thing for us, a very difficult 
thing. I am wondering if you have given any thought of how we 
can feel comfortable that we are setting aside all political 
considerations and we are really making a decision based on the 
merits. Have you given a thought to some type of a process?
    You talked about a control board, but I assume that was 
after the package. So is there any independent entity we can 
look toward before we do the package that you think would be 
comfortable, how about GAO as an example?
    Mr. Walker. Well, Senator, obviously we are happy to 
provide assistance to the Congress, but I really think it 
depends upon what is the nature of the package. For example, if 
the Congress decided that it wanted to move immediately to 
provide grants to deal for the losses that were incurred due to 
direct events that were within the control of the government, 
if the government decided it wanted to do something on the 
liability side for the industry as a whole, if the government 
decided it wanted to do something on the security side, which 
is something that is necessary for the overall government, and 
if the government stopped short of saying it wants to end up 
making a lot of loan guarantees, all right.
    Then you may not have as much of a need, you know, for 
picking winners and losers. On the other hand, once you get 
into the situation of trying to extend credit or guarantee 
loans, or do something which is something that the government 
did not have a direct causal effect for, it did not cause in 
any way, then I think you're going to have to have a control 
board or something, because the Congress as an entity 
realistically can't deal with those issues. I mean, those are 
details and that's why I say you need some type of entity, 
which has been the case for every prior federal assistance 
ever.
    Senator Boxer. Right. But as you point out, this is a 
little different because we are talking about an industry, so 
it is a tougher call. You are going to have colleagues in this 
body and the other body who have those companies in there, and 
I am just saying how difficult it will be for us.
    The last point, I just want to underscore what Senator 
Cleland has talked about I guess this morning, and has been 
echoed by many others on both sides here, the issue of safety. 
Because frankly, from where I sit here thinking about it, 
someone who has traveled more than a million miles and intend 
to continue, if people do not feel good about it, if they do 
not get back in those planes, it does not matter what we give, 
it is over, because it is not an endless situation.
    So I would just like to say to you, Mr. Chairman, and to my 
friend Senator McCain, as you two take the leadership along 
with Senator Hutchison and others, Senator Rockefeller, I hope 
that you will put this front and center. I believe that I could 
get as optimistic as John Kerry, maybe not today but maybe in a 
little while when it is a few more days away from this tragedy, 
but it will take a tremendous amount of action.
    I love Norm Mineta but, I did not get as much as I wanted. 
I got so much more from the panel that a lot of folks did not 
hear, they were so clear in what they said. The pilot said I 
want to be in a fortress when I fly, that is what I need, then 
I know everything will be OK. I mean, he was clear.
    The airlines said we need you to take security off our 
hands, we really cannot do it, it is not our thing. We need to 
do that. And we need air marshals in every plane. It is pretty 
clear what we do.
    You know, I am going to support helping this industry, but 
if we fail to do what we need to do on the safety side, it is a 
complete waste. I have been in a lot of hearings, Mr. Chairman, 
and I am so honored to be on this Committee, but this has been 
today so far, and I will stay for the last minute, an 
extraordinary experience, and I think that I have a better 
handle because of the wisdom of my colleagues and of the 
witnesses, so thank you.
    The Chairman. Thank you very much, Mr. Walker. We are 
indebted to you.
    We have now the Panel II, Mr. Leo Mullin, the president of 
Delta Airlines, and Mr. Kerry B. Skeen, the chairman and CEO of 
Atlantic Coast Airlines.
    Mr. Mullin, we are going to lead off with you, and we 
appreciate very very much your appearance, and your statement 
in its entirety will be included in the record. You can 
highlight it or deliver it in full, as you wish.

                   STATEMENT OF LEO MULLIN, 
                   PRESIDENT, DELTA AIR LINES

    Mr. Mullin. Thank you very much, Mr. Chairman. I will go 
through most of it but highlight a few points.
    First of all, thank you for providing the opportunity to 
testify here today on behalf of the Air transport Association 
and its members. We are extremely grateful to you, Senator 
Hollings, Senator McCain, and Members of the Committee for 
convening this hearing so quickly.
    We also commend you for the hearing you held today on 
important aviation safety and security issues, and for the 
swift capable leadership you are providing as our nation 
stabilizes and recovers from the heinous attack of September 
11.
    Airline safety has been our consuming activity and we are 
pleased and grateful for the Federal Government's efforts made 
in this critical area. We are now running today with safer and 
more secure processes than we have ever had, and we are working 
to restore our reputation as by far the nation's safest mode of 
transportation.
    While the safety goals are being met and flight operations 
have returned to 70 to 80 percent of pre-September 11 
schedules, the financial damage to our industry is devastating 
and it poses yet another threat to air transportation. Air 
transportation, as has been mentioned many time, is the engine 
that drives our nation's economy. A vital industry at all 
times, it is especially important now as our nation works for a 
return to normalcy.
    But this industry has been destabilized by a near total 4-
day shutdown, steep declines in passenger demand, sharp 
increases in insurance premiums, and rising costs for essential 
heightened security measures. Mr. Chairman and Members of this 
Committee, under current circumstances and without immediate 
financial support from the government, the future of aviation 
is threatened.
    Today there are virtually no private sources of capital 
open to airlines, which are by their nature capital intensive. 
Financial liquidity in the industry is poor. Even with the self 
help that all airlines are taking, almost no airline is strong 
enough to survive for long facing the upcoming challenges.
    Therefore, Mr. Chairman, on behalf of the industry, I am 
here to ask your help in the development and approval of a 
package of transition aid so that as Secretary of 
Transportation Norman Mineta said recently, ``We do not allow 
the enemy to win this war by restricting our freedom of 
mobility.''
    As airline operations began to return on Friday of last 
week, the CEOs of the industry under the aegis of the ATA, 
turned their attention to this looming crisis and developed a 
three-prong request for assistance.
    The first addresses the financial underpinning required to 
maintain the industry's capacity to serve. The second relates 
to the liability issues arising out of the tragic role case on 
aviation in this attack on America. And the third deals with 
the need to provide resources for our enhanced aviation 
security programs.
    Let me begin with the financial, the first component, which 
is the need for direct financial aid. In effect, we as an 
industry experienced roughly 4 days of near zero revenue while 
we continued to accumulate almost all expenses. Since the 
airline industry spends about $340 million a day, their direct 
costs of the 4-day halt in operations was approximately 1.36 
billion.
    Looking beyond those 4 days, we have used our actual 
numbers so far, as well as projections based on the disasters 
of PanAm 103, and the implications of the Gulf War to estimate 
that revenues from September 15 to September 30 will likely 
reach only 40 percent of what we had expected prior to 
September 11. Based on that, estimated daily losses for the 4-
day shutdown total 3.36 billion.
    Added together, those two numbers bring the September 
losses to $4.7 billion. Adding 300 million for losses by cargo 
and other carriers not part of the ATA to the 4.7 billion 
number, we arrive at a cash infusion amount of $5 billion for 
immediate term damage associated with September alone.
    Next we work to determine the effect of reduced revenue 
during the upcoming months on each company's cash position, the 
method which best reflects our needs for funds. As Senator 
Wyden has mentioned, we assumed the traffic for fourth quarter 
would grow to 60 percent of the previous expectations, to 75 
percent of expectations by the end of the first quarter of 
2002, and to 85 percent of expectations by the end of the 
second quarter of 2002, a pattern by the way, that would follow 
the response after those previous disasters.
    Prior to the events of September 11, the industry had 
forecast an aggregate cash balance on June 30, 2002 of positive 
8.5 billion. With these revenue assumptions, our new estimates 
now indicate instead a negative $15.5 billion cash balance. 
Thus, the events of September 11 are forecast to have a 
negative $24 billion impact on the industry's cash position.
    Mr. Chairman, it's the arithmetic. It follows very clearly.
    Now none of us knows precisely in the upcoming period. 
These estimates pertain to a situation that has never occurred. 
Hence, we also ran these same numbers in an optimistic and 
pessimistic mode. Optimistically, the swing in case balance 
could run just under 18 billion as opposed to the 24, or 
pessimistically as high as 33 billion.
    To minimize our requests for aid, we would recommend that 
the industry and government use the optimistic projection of 
just under 18 billion rather than the best estimate of 24. This 
implies some risk, but it is our job to do the very best to 
absorb that risk as part of our collaboration with the 
government.
    Now given our request for $5 billion to address the 
immediate impact in September, we would then as a second part 
of the financial portion of this package, ask the government to 
provide access to 12.5 billion in loan guarantees to assist 
with the potential shortfall through June 30, 2002. Our total 
request including the 5 billion in grant and the 12.5 billion 
in guaranteed loans is for 17.5 billion in financial 
assistance.
    Mr. Chairman, our industry's need is urgent and immediate. 
We understand that these are large numbers but we must also 
emphasize that we face an enormous problem with potentially 
devastating repercussions for our nation's full recovery.
    The second topic relates to the liability issues arising 
out of the tragic role that was cast on aviation in this attack 
on America. The events of September 11 are unique, with 
terrorists for the first time in history using a commercial 
aircraft as an instrument of destruction.
    We believe that the resolution of claims arising from this 
act of war should be resolved by Congress enacting appropriate 
federal law rather than be resorting to widely divergent 
principles of state common law. If that is not the case, then 
while American, United and any other airlines named as 
defendants will necessarily defend themselves in litigation, 
the massive response and uncertainty as to the outcome of 
litigation will almost certainly frustrate an airline's ability 
to raise needed capital in the short term.
    Therefore, we would propose as the second part of our 
program that legislation be passed by Congress that first 
reaffirms the right to bring claims against the airlines for 
the experiences and deaths of the airlines' passengers, as it 
does now. However, such legislation should also stipulate based 
on the fact that this was an act of war, that the airlines 
would not be liable for the damage to persons and property on 
the ground.
    This seems the fairest way to insure that appropriate 
parties have the right to pursue their legal rights, that 
airlines are not further victimized by these terrorists, and 
that airlines can instead continue the work of rebuilding our 
nation's aviation system.
    A related problem is the concern for huge increases in 
insurance premiums. The carriers are experiencing drastic 
increases in premiums, totaling as much as a $1 billion 
increase for the industry. And insurers are also severely 
reducing coverage limits.
    We simply do not have the resources to pay for such 
increases, which are a prerequisite for airline operation, we 
cannot fly without that insurance. Mr. Chairman, it is 
absolutely critical that this issue be addressed in your 
legislation, as it is a critical element of the overall 
financial impact of this tragedy on our industry.
    The third and final component of our program deals with the 
need to provide resources for the enhanced aviation security 
programs which our nation is undertaking. The events of 
September 11 marked a sea change in the way we as a nation need 
to think about air security. It's time for a unified federal 
security system, calling forth the government's extensive 
resources and expertise, including its intelligence gathering 
capability and its relationships with foreign governments.
    Our proposal, Mr. Chairman, is that the Federal Government 
should provide financial support for all future mandated safety 
requirements, including the reinforcement of cockpit doors and 
enhancement of screening devices, strengthen the intelligence 
gathering analysis and distribution processes, take over all 
security screening functions, and provide sky marshals on 
domestic flights. The government--by the way, they are on 
international flights already.
    The government's assumption of a stronger role in aviation 
security by assuming these responsibilities will be an 
important step that will go far in addressing the issues which 
are at the heart of public concern over the events of September 
11.
    In closing, Mr. Chairman and Members of this Committee, our 
proposal is only intended to stabilize the financial condition 
of the industry. It is not a bailout, but rather a package 
designed solely to recover the damages associated with the 
heinous acts of September 11, nothing that went before. And it 
gives the airlines a chance to continue to serve as the 
economic engine and offer the public service it is our duty to 
provide.
    The current industry situation is urgent. While the 
financial components of this recommendation I have presented 
today are most directly related to airline viability, the 
issues of liability and security are also important factors in 
our industry's crisis.
    Because of variation in financing cycle and other 
differences between carriers, several airlines are facing 
decisions in just the next few days that will dramatically 
influence their future course and indeed, public perception of 
the industry.
    Under ordinary circumstances in ordinary times, Congress 
should not and would not make decisions of this magnitude 
without length debate. These are not ordinary times or ordinary 
circumstances. And as a result, the airline industry is 
requesting that you move decisively now.
    Thank you, and my panel colleague and I will be glad to 
answer questions.
    [The prepared statement of Mr. Mullin follows:]

      Prepared Statement of Leo Mullin, President, Delta Air Lines

    Mr. Chairman and Members of the Committee:
    Thank you for providing the opportunity to testify here today on 
behalf of the Air Transport Association and its member airlines.
    We are extremely grateful to you, Chairman Hollings, Senator 
McCain, and Members of the Committee for convening this hearing so 
quickly.
    We also commend you for the hearing you held earlier today on 
important aviation safety and security issues and for the swift, 
capable leadership you are providing as our nation stabilizes and 
recovers from the heinous attack of September 11.
    For airlines, safety has been our consuming activity--and we are 
pleased and grateful to the Federal Government for the efforts made in 
this critical area.
    We are now running with safer and more secure processes than we 
have ever had and we are working to restore our reputation as by far 
the nation's safest mode of transportation.
    But while the safety goals are being met and flight operations have 
returned to 70 to 80 percent of pre-September 11 schedules, the 
financial damage for our industry is devastating--and it poses yet 
another threat to air transportation.
    Air transportation is the engine that drives our nation's economy.
    A vital industry at all times, it is especially important now as 
our nation works for a return to normalcy.
    But this industry has been destabilized by:

   A near-total four-day shutdown

   Steep declines in passenger demand

   Sharp increases in insurance premiums

   And rising costs for essential heightened security measures.

    Mr. Chairman and Members of the Committee, under current 
circumstances and without immediate financial support from the 
government, the future of aviation is threatened.
    Today, there are virtually no private sources of capital open to 
airlines, which are by their nature capital intensive.
    Financial liquidity in the industry is poor.
    Even with the self help that all airlines are taking, almost no 
airline is strong enough to survive for long facing the upcoming 
challenges.
    Therefore, Mr. Chairman, on behalf of the industry I am here to ask 
your help in the development and approval of a package of transition 
aid so that, as Transportation Secretary Norman Mineta said recently, 
``We do not allow the enemy to win this war by restricting our freedom 
of mobility.''
    As airline operations began to return on Friday of last week, the 
CEOs of the industry, under the aegis of the ATA, turned their 
attention to this looming crisis, and developed a three-prong request 
for assistance.

   The first addresses the financial underpinning required to 
        maintain this industry's capacity to serve.

   The second relates to the liability issues arising out of 
        the tragic role cast on aviation in this attack on America.

   The third deals with the need to provide resources for our 
        enhanced aviation security programs.

Financial
    Let me begin with the first component, which is the need for direct 
financial aid.
    In effect, we as an industry experienced roughly four days of near- 
zero revenue while we continued to accumulate almost all expenses.
    Since the airline industry spends around $340 million a day, the 
direct cost of the four-day halt in operations was approximately $1.36 
billion.
    Looking beyond those four days, we have used our actual numbers so 
far as well as projections based on Pan Am 103 and the Gulf War to 
estimate that revenues from September 15 to September 30 will likely 
reach only 40 percent of what we had expected prior to September 11.
    Based on that, estimated daily losses for the four-day shutdown 
total $3.36 billion.
    Added together, this brings September losses to $4.7 billion.
    Adding $300 million for losses by cargo and other carriers not part 
of ATA to the $4.7 billion number, we arrive at a cash infusion amount 
of $5 billion for immediate term damage associated with September 
alone.
    Next, we worked to determine the effect of reduced revenue during 
the upcoming months on each company's cash position, the measure which 
best reflects our need for funds.
    We assumed that traffic for the 4th quarter would grow to 60 
percent of previous expectations, to 75 percent of expectations by the 
end of 1st quarter 2002; and to 85 percent of expectations by the end 
of the 2nd quarter of 2002.
    Prior to the events of September 11, the industry had forecast an 
aggregate cash balance at June 30, 2002 of $8.5 billion; with these 
revenue assumptions, our new estimates now indicate instead a negative 
$15.5 billion cash balance.
    Thus, the events of September 11 are forecast to have a negative 
$24 billion impact on the industry's cash position.
    Now, none of us knows precisely what will happen in the upcoming 
period--these estimates pertain to a situation that has never before 
occurred.
    Hence, we also ran these same number in an optimistic and 
pessimistic mode.
    Optimistically, the swing in cash balance could run just under $18 
billion or pessimistically, as high as $33 billion.
    To minimize our request for aid, we would recommend that the 
industry and government use the optimistic projection of just under $18 
billion rather than the best estimate of $24 billion.
    This implies some risk, but it is our job to do our very best to 
absorb that risk as part of our collaboration with the government.
    Given our request for $5 billion to address the immediate impact on 
September, we would then, as a second part of the financial portion of 
this package, ask the government to provide access to $12.5 billion in 
loan guarantees to assist with the potential shortfall through June 
30,2002.
    Our total request--including $5 billion plus $12.5 billion--is for 
$17.5 billion in financial assistance.
    Mr. Chairman, our industry's need is urgent and immediate.
    We understand that these are large numbers, but we must also 
emphasize that we face an enormous problem with potentially devastating 
repercussions for our nation's full recovery.
Liabilities
    The second topic relates to the liability issues arising out of the 
tragic role cast on aviation in this attack on America.
    The events of September 11 are unique, with terrorists for the 
first time in history using a commercial aircraft as an instrument of 
destruction.
    We believe that the resolution of claims arising from this act of 
war should be resolved by Congress enacting appropriate federal laws 
rather than by resorting to widely divergent principles of state common 
law.
    If that is not the case, then while American, United, and any other 
airlines named as defendants will necessarily defend themselves in 
litigation, the massive response and uncertainty as to the outcome of 
litigation will almost certainly frustrate airlines' ability to raise 
needed capital in the short term
    Therefore, we would propose as the second part of our program that 
legislation be passed by Congress that first reaffirms the right to 
bring claims against the airlines for the experiences and deaths of the 
airlines' passengers.
    However, such legislation should also stipulate, based on the fact 
that this was an act of war, that the airlines would be not be liable 
for the damage to persons and property on the ground.
    This seems the fairest way to ensure that appropriate parties have 
the right to pursues their legal rights, that airlines are not further 
victimized by these terrorists, and that airlines can instead continue 
the work of rebuilding our nation's aviation system.
    A related problem is the concern for huge increases in insurance 
premiums.
    In addition, carriers are experiencing drastic increases in 
premiums totaling as much as $1 billion for the industry--and insurers 
are severely reducing coverage limits.
    We simply do not have the resources to pay for such increases which 
are a prerequisite to airline operation.
    Mr. Chairman, it is absolutely critical that this issue be 
addressed in your legislation as it is a critical element of the 
overall financial impact of this tragedy on our industry.
Security
    The third and final component of our program deals with the need to 
provide resources for the enhanced aviation security programs which our 
nation is undertaking.
    The events of September 11 marked a sea change in the way we as a 
nation need to think about security.
    It is time for a unified federal security system, calling forth the 
government's extensive resources and expertise, including its 
intelligence gathering capability and relationships with foreign 
governments.
    Our proposal, Mr. Chairman, is that the Federal Government should:

   Provide financial support for all future mandated safety 
        requirements, including reinforcement of cockpit doors and 
        enhancement of screening devices.

   Strengthen intelligence gathering, analysis, and 
        distribution processes.

   Take over all security screening functions.

   Provide sky marshals on domestic flights.

    The government's assumption of a stronger role in aviation security 
by assuming these responsibilities will be an important step that will 
go far in addressing the issues which are at the heart of public 
concern over the events of September 11.
    In closing, Mr. Chairman and Members of the Committee, our proposal 
is only intended to stabilize the financial condition of this industry 
. . .
    It is not a bailout, but rather a package designed solely to 
recover the damages associated with the heinous acts of September 11.
    And it gives the airlines a chance to continue to serve as the 
economic engine and offer the public service it is our duty to provide.
    The current industry situation is urgent.
    While the financial components of this recommendation I have 
presented today are most directly related to airline viability, the 
issues of liability and security are also important factors in our 
industry's crisis.
    Because of variation in financing cycles and other differences 
between carriers, several airlines are facing decisions in just the 
next few days that will dramatically influence their future course and, 
indeed, public perception of the industry.
    Under ordinary circumstances, in ordinary times, Congress should 
not and would not make decision of this magnitude without lengthy 
debate.
    These are not ordinary times, nor ordinary circumstances--and as a 
result, the airline industry is requesting that you to move decisively 
now.
    Thank you, and my panel colleagues and I will be glad to answer any 
questions.

    The Chairman. Thank you very much. Mr. Skeen, similarly, we 
are delighted to have you, sir, and your statement in its 
entirety will be included, and you can give it in full or 
highlight it as you wish.

        STATEMENT OF KERRY B. SKEEN, CHAIRMAN AND CEO, 
                    ATLANTIC COAST AIRLINES

    Mr. Skeen. No, the Regional Airline Association as well as 
Atlantic Coast Airlines, which I am the chairman of, we support 
ATA's position 100 percent.
    I do have just a few anecdotes to add to what Leo just 
said. Again, thank you very much for having me here today. I 
appreciate the opportunity to address you.
    My company, Atlantic Coast Airlines, I think is a good case 
study to look at in terms of the regional airline industry. We 
have an excellent partner, sitting to my left, is Delta 
Airlines. We fly as Delta Connection in the Boston and 
Laguardia areas, and then our other partner, United Airlines, 
we fly as United Express, predominantly out of Washington 
Dulles, and our headquarters is out a few miles from here in 
Dulles, Virginia.
    So, you don't know it's Atlantic Coast Airlines but you do 
know us, and I look around the room and many of you, we fly 
into your states quite frequently and serve a lot of markets 
that quite frankly would not be served if it wasn't for the 
type of service that regional airlines bring to this country.
    So with that, I think the points are just two. And one is, 
we're so intertwined with the majors that we definitely, our 
first and foremost concern is that obviously they are vibrant, 
they survive, because we have no future because we are so 
dependent on our connectivity in terms of the network.
    The second point is that we are separate companies, we are 
a publicly traded company, and there is no equity position in 
our company like many of our membership's, and so it is 
important that we also participate because our industry, the 
regional industry's losses have been real, on a relative term, 
much smaller than the majors but still very real to our 
employees and to our shareholders.
    The regional jets, I think all of you know the regional jet 
story well. It has transformed this industry in the last few 
years. My company is in a rapid process of phasing out 
turboprops. We had 60 turboprops in our fleet a year ago. By 
the end of 2003, we will have no turboprops, that is the plan, 
because we have 81 regional jets on order to complement the 77 
we already have.
    What has transpired in the crisis that we are in today 
truly jeopardizes our ability to execute that plan. Just this 
week, since September 11, we had three of our aircraft 
financings back out, so it is truly a problem if we are going 
to continue to upgrade the level of service to the communities 
that we serve and that are so important to your various 
districts.
    Security I won't touch on, because obviously I think it has 
been well said here today and we fully support the 
federalization of the security program.
    And insurance, just to give you a relative benchmark for a 
small company but very big numbers on us, we were notified of 
an increase in our passenger liability insurance which we have 
to do by Monday. This year our insurance bill will run on 
liability about $2 million dollars; next year under the new 
charges, new surcharge that has been invoked on us, that will 
be $8 million, so an increase of $6 million, and you can 
imagine what it is for the larger carriers.
    So again, I appreciate your time and because of the 
lateness in time, I will turn it over to questions. Thank you 
very much.
    [The prepared statement of Mr. Skeen follows:]

        Prepared Statement of Kerry B. Skeen, Chairman and CEO, 
                        Atlantic Coast Airlines

    Senator Hollings, Senator McCain, and distinguished Members of the 
Committee, thank you for inviting me to appear before this panel.
    I testify before you here today as Chairman and Chief Executive 
Officer of Atlantic Coast Airlines Holdings, Inc., based in Dulles, 
Virginia and as a Board Member of the Regional Airline Association 
(RAA). ACA, which is headquartered in Dulles, Virginia, operates a 
fleet of 118 aircraft and provides service to 66 cities in the U.S. and 
Canada, and employs over 4,000 professionals.
    Before beginning my testimony and on behalf of the 4000 aviation 
employees of Atlantic Coast Airlines, I would like to extend our most 
sincere thoughts to the victims and families and rescue workers and all 
those whose lives have been forever changed by the acts of war carded 
out against all Americans last Tuesday. Our employees live and work and 
serve in the cities of Washington, DC and New York, and none of us will 
ever forget this tragedy.
    We are heartened by the rapid action of the United States Congress 
in passing the 2001 Emergency Supplemental Appropriations Act, to 
provide funding for the victims of these tragic acts of terrorism and 
to help prevent such a horror from recurring. As the people of Atlantic 
Coast Airlines pause to grieve and reflect on these horrific acts, we 
must also focus our attention toward the commitment we have made to our 
customers and employees to keep air travel safe and reliable.
    Regional airlines, like major airlines, depend and rely on a 
consistent source of revenue to keep their fleets in operation. The 
three-day grounding of commercial airlines during the aftermath of 
these terrorist acts inflicted staggering losses across the regional 
airline industry. At a minimum, the financial losses resulting from the 
nationwide groundstop and subsequent reduction in passenger traffic 
will put a tremendous burden on regional carriers' ability to continue 
current and future operations. Without immediate and sufficient 
emergency assistance, many regional carriers will be forced to cease 
operations, leaving passengers in small and medium sized rural 
communities in nearly every state of the nation without access to the 
nation's air transportation network.
    Furthermore, while the main headline for the regional airline 
industry over the last five years has been the rapid replacement of 
turboprops with regional jets, the ability of regional carriers to 
continue the transition from old technology to new technology, and to 
dramatically improve the quality and reliability of service to hundreds 
of communities, is likely to come to a grinding halt without some help. 
Atlantic Coast Airlines, for example, operated with 60 turboprops in 
its fleet last year. We were on track to retire all of those turboprops 
and to replace them with state-of-the-art regional jets by year-end 
2003. To meet this commitment to providing better service to 
communities with faster and more comfortable aircraft, ACA has 81 
regional jets on firm order in addition to the 77 regional jets already 
in our fleet. Without some form of government support, it will be 
extremely difficult, if not impossible, for us to continue financing 
and obtaining insurance for regional jets in today's environment.

Background
    Before moving on, I would like to provide some background so that 
you may better understand the regional airline industry and its 
contribution today. Last year, the regional airline industry accounted 
for 1 out of every 8 domestic passengers who flew in the United States. 
Of all the airports in the United States, nearly 70 percent have no 
mainline service at all but are instead served exclusively by regional 
carriers. Regional airlines provide the only link to the national 
transportation network for 271 airports in the lower 48 states. Their 
importance is even more pronounced in Alaska and Hawaii, where regional 
carriers provide the only scheduled airline service at 198 of these 
states' 222 airports.
    For the last few years, regional airlines have been the fastest 
growing segment of commercial aviation. In the year 2000, regional 
airlines carded 85 million passengers, or 12 percent of all domestic 
passengers traveled on a regional carrier. Regional airlines accounted 
for 42 billion available seat miles and 25 billion revenue passenger 
miles in 2000.

FIGURE A

             Regional Airline Transport Statistics in 2000:

 Passenger Enplanements (Millions)    Revenue Passenger Miles (Billions)

                           85                                   25

    Many regional airlines work in close cooperation with the major 
airlines through code sharing agreements. Of the 95 regional airlines 
in the United States today, 14 of them are wholly owned by major air 
carriers. Three of the regional airlines are partially owned. Still, 
other airlines like Atlantic Coast Airlines are independent, publicly 
traded companies that operate under codeshare or marketing agreements 
with one or more major carriers. Atlantic Coast Airlines has codeshare 
agreements with both United Airlines and Delta Air Lines. As such, 
Atlantic Coast Airlines relies heavily upon the survival of United and 
Delta for our own continued viability. The significant capacity 
reductions recently announced by many major airlines are already having 
a serious impact on regional carriers and if continued, are likely to 
lead to staggering losses for many of the carriers.
    Despite these close working relationships with major carriers, 
regional airlines operate as separate financial entities and have been 
impacted by the. aftermath of last Tuesday's terrorism in many ways 
that are unique to our particular segment of the airline industry. 
Whether or not a major airline has an equity position (ownership or 
part ownership) with a given regional, that regional carder cannot 
support and maintain employees, cannot finance the acquisition of new 
aircraft, and ultimately, cannot continue to provide service to small 
and medium sized communities across the nation if it does not generate 
sufficient passenger traffic. In light of this, we recommend that all 
financial assistance be distributed in a way that allows regionals to 
receive direct financial assistance as separate entities rather than 
through a method which is reliant upon major airlines to mitigate 
regional airline losses.
    The major airlines have identified several areas where airlines are 
in critical need of government assistance and are asking for $24 
billion in aid. Estimates of the support necessary for the regional 
airlines are proportionate to those loses estimated by the majors based 
on the regional airline industry available seat miles for last year. 
The regional airline industry last year accounted for just under 5 
percent of the available seat miles produced by the major carriers.
    The Regional Airline Association estimates total industry short-
term losses will equal roughly $1.3 billion. While our specific funding 
needs differ slightly from those of the major airlines, our request is 
line with the request of the major airlines considering our 
proportionate available seat miles.
    There are other factors, besides the immediate losses related to 
the groundstop imposed last week, that are likely to have a material 
impact on regional carriers. These include the inability of airlines to 
obtain reasonable insurance rates, the inability to obtain reasonably 
priced capital or in some cases credit at all, higher costs associated 
with additional security measures, reductions in equipment utilization 
resulting from the increased passenger processing times, higher oil 
prices, lower share prices, and reduced consumer confidence.
    We therefore urge Congress to include additional support for 
regional carriers in any relief package to be provided to the major 
airlines, and urge that the support be provided directly to the 
regional carriers. That support could take the following form:

        1.  An immediate cash infusion in direct grants earmarked for 
        regional airline industry to help mitigate losses associated 
        with last week's groundstop.
        2.  Federalization and government financial sponsorship of 
        security screening. In instances where regional airlines are 
        uniquely impacted by additional security measures--a particular 
        concern for regional airlines who exclusively serve cities and 
        who operate small aircraft we urge federal assistance for 
        implementation of any security directives. Since the government 
        holds the intelligence information, and currently must filter 
        it through FAA, to airlines, a more effective system would be 
        to place security in hands of government so they could take 
        immediate and appropriate countermeasures without the delay and 
        added confusion of human factors.
        3.  Financial assistance in the form of low interest loans to 
        provide working capital until passenger confidence levels 
        improve and airline load factors return to sufficient levels to 
        sustain carrier operations. The regional airline industry by 
        nature is capital intensive and therefore highly leveraged and 
        as a result needs access to capital at reasonable rates. 
        Airlines expect difficulty financing aircraft acquisition; some 
        carriers have even experienced difficulty obtaining replacement 
        parts and spare parts because of supplier concerns over short-
        term airline fiscal health and commensurate ability to pay.
        4.  Assistance dealing with rapidly escalating insurance costs. 
        All carriers face enormous rate hikes, and many with near-term 
        policy extensions worry that insurance may not be available at 
        all. Additionally, aviation underwriters have begun to impose 
        significant surcharges on existing coverages starting next 
        week. Significant could mean a 10 to 50 percent increase in 
        existing liability premiums, surcharges of $1.25 per passenger 
        per segment, and 700 to 1000 percent increases in airline hull 
        insurance. Some form of assistance in this area, either through 
        government guarantees, government underwriting, or the 
        establishment of a war-risk insurance program, are absolutely 
        critical to the recovery of our industry.
        5.  Additional funds for the Essential Air Service program to 
        provide DOT latitude for real-time rate adjustments to offset 
        carriers losses and prevent service terminations associated 
        with the drastic reduction in traffic. Additionally, such cash 
        is necessary to continue subsidizing service at current and 
        soon-to-be designated EAS markets. This is especially critical 
        considering the announced capacity reductions; many markets not 
        currently receiving subsidy may qualify and put an enormous 
        cost burden on the program. Additionally, DOT must immediately 
        consider incremental subsidy rate increases to cover cost 
        increases and revenue reductions associated with the drastic 
        reduction in traffic.

    The Regional Airline Association arrived at these numbers after 
discussions with member airlines on the financial impact of Tuesday's 
events and the new security mandates that are now in place. Based on 
these responses, RAA anticipates revenue losses per airline will range 
from $130 thousand to $3.7 million per day (depending on the size of 
the operation) due to the federally issued nationwide groundstop. 
Beyond these losses, revenue loss forecasts for the next four months 
are anticipated to be between from $8 million to $20 million per 
airline and total long-term revenue losses for some of the larger 
regional airlines could approach $100 million, based on conservative 
estimates of reduced capacity and traffic, but not including costs 
associated with higher insurance premiums and aircraft financing.
    Most regional airlines responding to this question said that, 
without some form of financial relief, airlines will undergo drastic 
downsizing, reduce service to communities, and in some cases completely 
cease operations. Regional airlines form the transportation backbone 
that supports the economies of many smaller and medium-size 
communities, and the ripple effect of dramatic service cutbacks or 
termination of service to those communities will have staggering impact 
on the economy of the United States at large.

Conclusion
    We at Atlantic Coast Airlines take our commitment to our passengers 
traveling to and from smaller and mid-sized communities seriously. 
Government assistance in the forms described above will provide the 
necessary life support our industry needs for the short term so that we 
can recover as an industry and be here to serve our communities for the 
longer term. As we continue to strive to keep air travel safe and 
reliable for our passengers, and for our employees, we respectfully 
request that Congress step up now and help us ensure that the regional 
airline industry along with service to almost 669 communities 
throughout the United States does not become the next casualty from the 
acts committed against the United States on September 11.
    This concludes my prepared statement before the Committee. I thank 
you and all the Members of this Committee for your timely response and 
immediate efforts to secure assistance for airlines struggling under 
the weight of this national tragedy. Atlantic Coast stands ready to 
assist you in any way we can as you continue those efforts. Because the 
very viability of our industry depends upon the timeliness of this 
hearing and government assistance, we thank you sincerely for your 
efforts.

    The Chairman. Mr. Mullin, I am glad you are the witness, 
because you and I have had discussions before with respect to 
the airlines operation. I have the greatest respect for you and 
know you to be a heck of a good operator. And yet, 
categorically, you say it cannot be a bailout; wait a minute, 
it could be. We had an airline CEO tell us last year, you 
either approve my merger plan or I am going bankrupt. His plan 
has been turned down.
    And otherwise, just looking at the airlines involved in 
this up in New York and here, you can see that those airlines 
and the airlines were responsible, were just recently fined 
because they did not have security, and it was very lax and 
otherwise in that regard.
    A lot of those things go through a senator's mind that--do 
not worry about me, I am going to vote, because I do not think 
we can afford to dilly around, I think we are going to have to 
give the short-term assistance, period, so that we can look 
objectively as to the security measures and everything else for 
getting this thing back going again.
    But in the long-term, the airlines, you would not call them 
well run operations in the United States. I have been here 35 
years watching it. When we had the old Civil Aeronautics Board, 
the old CAB used to watch you, and the whole airline was all 
developed to service on the public convenience and necessity. 
The community got together, built the field, the tower, went to 
the CEO like yourself and said, look, can you bring us service, 
now we have the runways and everything. And they would come to 
Washington, and I participated in those hearings, but the 
community itself then had control.
    Now with this hub situation, you control Atlanta, the phone 
rang. Good God, you ought to hear the telephone calls I have 
gotten around here. You cannot go to the bathroom that you do 
not get another call. But in any event, you folks have been 
calling around, you have your K Street lawyers, they have put 
on the full court press, and you all got a monopolistic 
situation that we cannot even get any competition.
    When we got some down in Texas, we knew it was predatory 
pricing, but then you have the antitrust technicalities and so 
forth, and the court on an antitrust law technicality could not 
call it predatory.
    So in going forward with these billions, let us make sure 
we do not have predatory pricing, that we do have some 
competition, that we really are not helping those who are 
bailing out, because that would be a bailout, those who are 
about to say ta ta and good-bye, those who have been paying 
inordinate executive salaries.
    I know the people in the airports, and they are the best. I 
talk to them, they look out for me and they work hard, and 
there is no waste there, but the system is way out of kilter, 
way out of kilter. They are constantly full, I do not know 
whether it is 85 percent or 65 percent, but I am traveling with 
100 percent. And they are constantly saying we will give you 
some free tickets anywhere in the continent if we can get two 
more leaving, two more leaving, so they have a sytem of 
overselling, and otherwise.
    We have got to get better operation in the airlines 
themselves, that is what is bothering a lot of the senators. 
You can tell from their questions that we are having a very 
difficult time trying to get competition in the industry 
itself, and when it costs $917 for a round trip ticket from 
Washington to Charleston and back for coach class, that is way 
out of kilter, and do not tell me about the senior citizen and 
the aged citizen, and buying 3 weeks ahead of time and all 
that. That is not airline service that we are going to put 
billions out for.
    You all got to get back to where people ought to be able to 
go within a week and buy a ticket and get a reasonable price. I 
mean, I can fly to Frankfurt, Germany and back for $279, but I 
cannot go to my own home town other than government rate, for 
900 and some odd dollars.
    That is the kind of thing that--I am going to vote 
billions, but I do not want to vote billions for that. You can 
comment as you wish.
    Mr. Mullin. Well, Senator----
    The Chairman. I could not get you into direct service. I am 
going back, do not tell me about, oh, look how many more 
passengers we have got. I had three direct flights up, but not 
only with National, but I had Delta serving Charleston. You all 
gave it up, you took your sweetheart deal at Atlanta and they 
took their sweetheart deal at Charlotte, so do not talk to me 
about your bailout.
    Yeah, I see how you look. I wish I could see you on TV. I 
hope they run this thing again.
    [Laughter.]
    The Chairman. And that is the way it is at Detroit and that 
is the way it is at Pittsburgh, and that is the way it is in 
Chicago, and we do not want to finance those sweetheart deals. 
We are trying to get competition and real service, and there 
are bills galore. We have three bills on the floor right now.
    The distinguished ranking member, let me yield to yield to 
him. I take it you do not want to comment, do you?
    Mr. Mullin. I would like to make one comment, Senator.
    The Chairman. Yes, sir.
    Mr. Mullin. Just one. I have appreciated our dialog on a 
number of those issues in the past. There are two things I 
think I want to say about it.
    One is that we have attempted to in a very clinical way 
associate particularly our financial requests with this 
tragedy. All of this is intended to be just associated with 
that, there are no other public policies that we have 
introduced, many of which are on the agenda that you have just 
outlined here. So from that standpoint it is a clean one, 
intended to allow for the urgency that the situation provides 
for, because if we get into those right now we will have a lot 
of discussion, and the financial need is so urgent.
    The second is, I would like to make a comment on safety. 
This whole issue is about safety. Many of you, Senator boxer, 
others, have all commented on the crucial ingredient of safety. 
We were asked yesterday in the House hearing about whether we 
could employ marketing programs to get the passengers back on 
the airplane, and several of you have noted the absolute truth. 
The most important thing we have to convey to the American 
traveling public is that this is safe.
    And I think that the deepest regret that everybody in 
aviation has is that we operate by far the safest mode of 
transportation and we have lost, hopefully temporarily, our 
reputation. In the years 1998 to 1999, we had 650 million 
passengers a year travel on our airplanes without a single 
fatality. When you look at that versus any mode of 
transportation, this is a wonderfully safe mode of 
transportation. It will be terrifically safe going forward 
because of the efforts that have been made by the Federal 
Government and the industry together to really deal with this 
incredibly horrible situation. Thank you, Senator.
    The Chairman. Thank you. Senator McCain.
    Senator McCain. Thank you, Mr. Chairman. I would like to 
followup. Mr. Mullin, maybe they are safe, but not secure, and 
there were report after report, study after study, from the 
Inspector General of the Department of Transportation, GAO and 
others, that security was not anywhere near the standards that 
we wanted it be to be at airports. So I think it is important 
to put that into perspective and that is why we are going to 
appropriate $3 billion to upgrade security and safety, and 
perhaps take it to a large degree out of the hands of the 
airlines. The airlines have not done a proper job in taking 
care of security at airports, and I think that is not just 
because of this tragedy but because of various reports and 
studies we have had in the past.
    My problem here, and we are going to obviously give you the 
money and I hope be able to come up with liability provisions 
that are acceptable and try to get this situation under 
control. My problem is, not every airline is the same, and I am 
impressed by that chart. But what if that was just Southwest 
Airlines on that chart, Mr. Mullin, it would be a little 
different, would it not?
    What if it was just one of the airlines that is in more 
serious trouble? It would be a little different. Your problem 
and American's is that you need liability protection. You can 
still get some access to capital markets. Other airlines, their 
problem is they need an infusion of cash right away, because 
they do not have any cash reserves.
    So what we are doing here, and it is the only way we can do 
it, I am lamenting rather than objecting, and that is that. We 
are coming up with a one size fits all bailout, and there are 
different challenges that different airlines face. That is why 
I think it is important what the previous witness, Mr. Walker 
was talking about, the but-for.
    In other words, there were airlines that were in trouble 
before this tragedy occurred, right?
    Mr. Mullin. Yes.
    Senator McCain. And there were airlines that were doing 
pretty well before this tragedy occurred.
    Mr. Mullin. Yes, that is correct.
    Senator McCain. So it is really important that whatever we 
do, it does not cure all the ailments that an airline is 
experiencing.
    Now, can we expect some concessions, or maybe you might 
even call them sacrifices in the area of executive compensation 
and also labor agreements, including those that were recently 
concluded that gave as much as 40 percent pay increases for 
executives that might have been eligible over a 5-year period 
to a $123 million compensation package? This is one of the 
reasons why I am sorry we have to rush into this. Can we expect 
something in that area as well, Mr. Mullin, Mr. Skeen?
    Mr. Mullin. We are going to be taking the executive 
compensation, absolutely, I think that as you would know, 
Senator McCain, most executives in this country have a 
compensation program that is comprised of a salary, an 
incentive compensation commonly called a bonus, and then long-
term program associated with stock options or stock.
    Those stock option and stock programs by virtue of what has 
happened are virtually worthless and I think very few of us 
will get any incentive compensation. I think you could see an 
expectation that incentive compensation, excuse me, executive 
compensation in this industry----
    Senator McCain. Are you going to go back to labor and ask 
to look at some of this?
    Mr. Mullin. Yes, we are.
    Senator McCain. And have you gotten any indications from 
labor?
    Mr. Mullin. I don't have them from Delta's perspective at 
this moment, but you have heard the announcements on the labor 
cutbacks that have been taken and many of those have to be done 
in respect also of the labor agreements that have been forged.
    Senator McCain. You are happy with $5 billion cash 
injection to start with. Mr. Skeen?
    Mr. Skeen. Yes. And I would also like to add to the answer 
on the executive compensation. Our board met on Tuesday of this 
week and the top five executives of the company did accept a 
pay reduction in basic compensation, as well as suspend all the 
bonus compensation which Leo touched on, which is a major 
component of our at risk compensation. So it's definitely at 
risk now, meaning it's not going to happen.
    And when you look at individuals such as myself, who is one 
of the original founders of this company, so there is pain here 
in terms of the equity side too.
    Senator McCain. I do not want to waste too much time on it, 
but 5 billion is good. $3 billion for safety and security; is 
that good?
    Mr. Mullin. Yes.
    Mr. Skeen. Yes.
    Senator McCain. Consolidating all suits in one United 
States District Court, is that important to you?
    Mr. Skeen. Yes.
    Mr. Mullin. Yes. Anything that moves the liability. I am 
not a lawyer but yes, as I understand it, that's a very good 
move.
    Senator McCain. Certain assumption of obligation by the 
Federal Government after the claims or the insurance money has 
been exhausted that the airlines have.
    Mr. Mullin. Yes, that's very important. It's important both 
with respect to the incident itself, mostly involving American 
and United, it might involve some others, who knows, and 
certainly going forward, is to protect all airlines from that 
threat. Else, the financial markets would view us as having a 
contingent liability, which would just prohibit us from 
accessing capital markets.
    Senator McCain. And certain limitations to the airlines for 
what happened on the ground as opposed to the air.
    Mr. Mullin. Right. The passengers on the plane are 
currently covered under current law, and we do not advocate a 
change in that. It is the issue of the passengers on the 
ground, or the people on the ground that's at issue.
    Senator McCain. My time has expired. Mr. Skeen, did you 
want to comment?
    Mr. Skeen. I agree entirely with what Leo said.
    Senator McCain. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Inouye?
    Senator Inouye. In order to avoid redundancy, may I simply 
say that the chairman and Senator McCain have very well 
articulated some of our concerns.
    Having said that, I like all of my colleagues, I too have 
received telephone calls. I would like to bring up two groups 
of calls and ask for your comment. I have had calls from labor 
leaders suggesting that the airlines would use this occasion, 
this crisis, to fire people, that they would be unjustifiably 
firing people.
    Second, I got calls from travel agents telling me that the 
airlines will use this crisis to eliminate commissions.
    Your comment, sir.
    Mr. Mullin. On the first, I guess I could only comment from 
the standpoint of Delta, and we will absolutely not be doing 
that. We are going to have to have a force reduction at Delta. 
We have no choice. We are operating right now with about a 30 
percent or so load factor, we have 80 percent of our planes 
back in the sky, and there is no way we could continue to 
operate with the kinds of losses that that would imply without 
changing staff.
    But the people at Delta are Delta, and this is the most 
heartbreaking activity I am ever going to be involved in at 
Delta Airlines is to have to do this. And so from our 
standpoint, we have every intention of treating our employees 
the very best we can under the circumstance, and we have the 
hope that we can get them back just as fast as we can, 
hopefully when the market turns up and the passengers return.
    On the issue of the travel agents, the travel agents are 
our partners, over 50 percent of our revenues are generated by 
travel agents. We recognize their need for appropriate 
compensation. There has been a wide range of difference of 
opinion on that and we are going to have to work that out with 
the travel agent community over time as it goes, Senator 
Inouye.
    Senator Inouye. As you have heard, all of us have used the 
words, we have to act now, swiftly, expeditiously. What is your 
timetable?
    Mr. Mullin. Well, the timetable is extremely urgent. There 
are three of the top ten airlines that are facing imminent 
crises of bankruptcy. There is one of them who officially 
recorded that yesterday at the House hearing, which was America 
West, which describe its immediate term plight.
    And I would say, I can't speak for the others. I will say 
that Continental Airlines did in fact default on 70 million of 
equipment trust certificates on Monday, which is in, the EETC 
market is absolutely vital to all of us going forward, it's our 
key mode of equipment financing. So there are things happening 
in this which indicate some airlines may be lining up for that 
option and the decision is imminent, I think within days.
    Senator Inouye. So you would prefer something happening 
tomorrow or Monday?
    Mr. Mullin. Yes, sir, I would.
    Senator Inouye. Thank you, sir.
    The Chairman. Thank you. Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman. Mr. Chairman, I 
think that many of the questions being raised here are quite 
legitimate and I think you would agree that it is our 
responsibility to do this in a way that has accountability 
attached to it.
    Mr. Mullin. I do agree with that, Senator.
    Senator Hutchison. One of the issues that has been raised 
in other contexts is the small community issue. We now have 
several communities, San Angelo, Abilene, and Waco that I know 
for sure are losing Continental's service completely, and I am 
very worried, and I understand that the economics of this are 
not critical at all, but can you make any suggestions because 
Delta has a regional airline component as well. Can you make 
any suggestions to us about a responsible way to approach 
support for our smaller communities, and would an antitrust 
exemption be helpful in this regard on a very temporary basis 
until we get back to say 80 percent of normal? What is the best 
way to assure that our smaller communities all over this 
country are not axed, left to never get service again?
    Mr. Mullin. I think that is a very serious issue, Senator 
Hutchison. I think one good element is that there is, as you 
know and as you just mentioned, an increase in regional jets 
which are uniquely tailored to serve those smaller communities. 
And from Delta's perspective, as the operator of the largest 
regional jet operation in the country, we intend to continue 
that inflow to us which would provide a mechanism for say down 
gauging a main line jet and putting on a regional just, and 
still having that service during that, possibly during that 
time when the traffic grows back up to the point where a larger 
jet might be put pack.
    I think in the issues where there is more than one carrier 
on a route, that yes, I would support your suggestion under 
extremely tight rules and oversight, that those conversations 
go on, say, between two carriers where one of them stays in the 
market. I think the government would have to define exactly 
what those guidelines are because I do not advocate the 
abdication of the antitrust rules just generally, and I think 
in the time during this crisis that that's a very good idea 
that should be pursued.
    Kerry, did you want to respond?
    Mr. Skeen. I would agree entirely, that it's the regional 
jets really that are the answer that will prevent or minimize, 
I don't think you can sit here and say prevent 100 percent, but 
minimize the impact of the small communities. Delta has been 
very active in matching really the size of aircraft to the 
potential demand, and I think they have, as Leo said, more 
regional jets coming, and I'm very heartened to here him say 
that's going to continue, that philosophy, because obviously it 
affects my company.
    Senator Hutchison. We should at least assure that a 
community wouldn't lose all air service, because then you have 
an airport and all the costs of an airport, and not to mention 
that people would have a hard time accessing other major 
airports from which they could embark all over the world. I 
think this is a major problem for rural areas all over our 
country. I think we need to make it part of how we deal with 
this package without trying to get in and make business 
decisions for people and then say well, but we required you to 
do this why did you fail.
    We don't want to do that. But on the other hand, if we are 
going to be involved in getting over the hump for our aviation 
industry, I do not want millions of people all over the country 
to be left stranded.
    The other question I would like to ask you is the one that 
we have heard recurring in our offices and in all of the 
questions that we are getting on talk shows how would you 
answer the question about other industries that are also 
suffering because of the aviation crisis, and even if they are 
not affected by aviation, just by the crisis itself? How would 
you differentiate what we would do for the airline industry 
with those other companies and businesses that are having 
problems?
    Mr. Mullin. Well first of all, I am generally supportive 
of, this is a time I think for helping everybody, so I would 
not argue for the airlines at the expense of anybody. I would 
only argue the airline case.
    I think the airline case really derives from two points. 
One is that we were uniquely used as the weapon of destruction 
in this just terrible event of September 11. Never before in 
the history of aviation has a commercial airliner been 
essentially converted to a missile, targeted on a building in 
the center of New York. It was just an awful thing to 
contemplate, that nobody had ever dreamed of, so our industry 
has this unique feature of having been uniquely involved in 
this tragedy.
    I think the other aspect is what all of you have said 
around this table pertaining to the fundamental role that the 
airline industry provides in supporting the economy. There are 
studies that say that the airline directly in some effect, with 
a multiplier effect, accounts for 10 percent of the gross 
national product of this country. And we have heard many 
instances when you hear about tourism and the restaurants and 
the hotels and so forth, where the comment was made by one 
senator that by far the best thing that could possibly happen 
to them is to get the airlines flying and get the customers 
back on the planes, and I think that that's the key reason.
    This industry has a unique role to play in our economy and 
none of those other elements of our economy are going to grow 
and prosper if we don't get the airlines back and get the 
passengers on the plane.
    Senator Hutchison. Well, getting the security package is 
what will bring the flying public back and that will be the 
best way to shore up the airline industry.
    Mr. Mullin. Yes.
    Senator Hutchison. Thank you.
    The Chairman. Senator Rockefeller.
    Senator Rockefeller. Thank you Mr. Chairman. I want to 
start off by saying to both of you what I am sure you already 
know, and that is, had I been in the Congress at the time I 
never would have voted for deregulation, because I saw what 
happened to jet service from United, Eastern and American in 
West Virginia. So that, let that stand.
    Second, I want to take a little bit of a different tack 
here. There is an instinct, I think, when you all have made 
very very clear in the conversations which we had with Senator 
Hutchison on the telephone, and other conversations, that this 
is only something based upon September 11.
    Mr. Mullin. That's absolutely right.
    Senator Rockefeller. There is a tendency I think on the 
part of some of us and perhaps the American public as we get 
into a subject like this, to recall slippages in the past or 
things that were not done in the past which might have been 
done, and thus to water down in effect the urgency of the 
situation that we face now, which is to my mind, No. 1, the 
survival of an aviation industry on a national level, and 
second, the survival of the state that I happen to care about 
called West Virginia, which is in danger of losing, at the end 
of the food chain, a whole lot of service, providing us with no 
future. So I want to bring that perspective.
    Second, it has been raised here that if people were not 
doing well before, or as well as they might have been doing, 
that maybe we should not make them whole. My answer to that is 
that in the state that I come from and a lot of other states I 
know, there are certain of those airlines that are referred to 
which under the worst of circumstances may have two, three, 
four, 5 years of life ahead of them, given our support, and 
will therefore provide the only service available to almost 2 
million people who I represent and care about very strongly.
    So that the concept of, if you are sort of weak and have 
not been making it, then let us kind of write you off and start 
from the beginning, again, that takes us back to pre-September 
11. That is not where we are on this. That is not what this is 
about.
    My third point would be that it is not my impression--well, 
let me say it this way. I would have gone further on loan 
guarantees, and I do not have to really make a big I point of 
that because I think the President has been very clear in 
saying that is not off the table. But there has to be 
perception, not only on the part of travelers, who feel safety 
and therefore get back on your airplanes and provide part of 
the financial viability that we are talking about, as well as 
receive the safety, but there also has to be a sense of 
viability on the part of financial markets, which do not just 
look on the next week or 2 weeks but which look to the future. 
In our conversation, people were talking about projections 2 
years out, which were not very happy.
    So my final point is the following, that it is not my 
impression having watched the steel industry in West Virginia, 
and many others, that airlines can afford to wait until they 
have absolutely no cash left whatsoever to file for a Chapter 
11.
    Mr. Mullin. That's correct.
    Senator Rockefeller. They have to have the assets in order 
to restructure, which means they have to make earlier decisions 
than we may be aware of, and not being fully aware of all the 
financial conditions of the airlines, although I think the 
Department of Transportation now is, this is a very large 
factor in terms of what happens in aviation financial viability 
and therefore, success in this.
    With that I will end, Mr. Chairman, and ask for a comment 
from either on this point. And you made that, Leo Mullin, and 
that is that you know, the steel industry is huge in West 
Virginia and it is in 16 other states, 15 other states. The 
airline industry is absolutely and totally fundamental to the 
future of this country. I think it has surpassed the highway 
system in terms of its economic importance to the country, that 
is my view of the place I represent, and I suspect it may reach 
further than that. So I am interested in your comments, either 
of you.
    Mr. Mullin. I absolutely agree with everything you said, 
and to pick up particularly on the last point, it's one of the 
most crucial elements of why it is so urgent to do this. You 
have pointed out that an organization that has contemplated 
bankruptcy, and with the kind of revenue streams that I have 
outlined here, 30 percent load factors, so forth, with the 
heavy fixed costs that we have in the industry, we just bleed 
red ink very very quickly.
    And so if an organization looks even 20, 30 days ahead, and 
says that without some kind of resource behind it that allows 
us to contemplate an existence beyond that, it makes its 
decisions now to husband cash, so that when in fact that 
decision to head into bankruptcy does occur, it goes into 
bankruptcy with cash to enable it to continue to function.
    So you were absolutely correct, that is the decisionmaking 
process that I believe, Delta is not in this circumstance, but 
I believe the other airlines that are facing this, that that's 
the decision process that they are going through right now, and 
hence, the urgent need for this financial package.
    I would add also that in terms of this situation, this 
financial aid that has been put forward here, all of us, even 
those that are the best capitalized airlines, including Delta 
which is near the top, are going to face the tidal wave of 
problems that are associated with the kinds of forecasts I have 
outlined here. We may be a month, we may be 2 months, we may be 
3 months, that's about the extent of it. American, United, any 
of the larger most successful airlines in the world, would be 
in that state.
    But by virtue of the way, and in other circumstances we 
talked about apportioning this on the basis of the percentage 
of available seat miles that an airline has in this country. So 
in Delta's case, it's about 16 percent, so about 16 percent of 
this money would go to Delta. And in all of these other cases 
where some of these airlines are weak, they would only get a 
percentage based on their seat miles. Therefore, that does not 
allow an excess of funds to go to propping up the airlines that 
were weak prior to September 11.
    Once we get set on a sound financial footing, everybody is 
kind of fighting it out like they were before. I think that's 
the best way to do it. You have captured exactly the right 
point with respect to the urgency of it from a financial 
perspective. We need it now.
    Mr. Skeen. And I will just add that the confidence just has 
to be restored to the capital markets. I mean, it is for us. We 
on a relative basis in the regional industry, financially we 
are at the very top of that list in terms of successful 
profitable carriers and here this we find that we lose 
financings on three aircraft where you know, 6 months ago we 
may have over capacity on certain credit issues. And trying to 
finance aircraft today, we are extremely nervous that you know, 
that this pipeline is drying up immediately and we have growth 
coming, we have aircraft coming that we are concerned we won't 
be able to finance.
    Senator Rockefeller. Thank you, Mr. Chairman.
    The Chairman. Very good. Senator Cleland.
    Senator Cleland. Thank you very much. Mr. Chairman, I was 
just sitting here thinking of a line from Ernest Hemingway, his 
definition of courage was grace under pressure, and Mr. Mullin, 
Mr. Skeen, we are very proud of you and your industry for 
showing incredible grace under pressure since September 11. You 
are under tremendous stress and pressure, as are all of your 
employees. We are very proud of you for hanging in there.
    Mr. Mullin, let me just say that I just want to go over the 
three key points that we are down to. At the end of the day 
here, it does seem like you summarized it, and I think these 
two hearings say it loud and clear, three key elements of 
restoring, shall we say, confidence in the American public for 
flying again, and confidence in the financial markets, Mr. 
Skeen, that you mentioned.
    Two, confidence building challenges. And again, I think so 
much of this has to do with psychological impact of what 
happened. Of course that is exactly what a terrorist is, 
spreading terror, spreading fear, creating chaos. So the extent 
to which we can then rebound and gain confidence, whether in 
the financial markets, among our passengers and in our country 
itself is the extent that we are healing up and pulling this 
back together.
    But the three elements I gather in restoring confidence in 
the aviation industry are one, security. I put that first.
    Mr. Mullin. I agree.
    Senator Cleland. And Mr. Mullin and Mr. Skeen, I am 
delighted to hear, and I think I heard you right, that you do 
favor what I would call the federalization of the security 
checkpoints. When I was at Hartsfield, which is the busiest 
airport in the world, Delta's headquarters this past weekend, 
it was obvious that the security personnel there were unanimous 
in wanting to upgrade those checkpoints, make them federal 
officers, a domestic version of say the Customs Service, 
trained professional skill and career path and so forth, so we 
get out of this minimum wage, part-time worker, 300, 400 
percent turnover a year kind of culture.
    Mr. Mullin. We agree with that.
    Senator Cleland. Yes, sir, thank you.
    Second, liability, I certainly understand that and you have 
distinguished it, responsibility for those in the air, 
liability help for those on the ground. But I would like, Mr. 
Mullin, to get you to talking a little about liquidity. You 
have been on the other side of the financial marketplace. 
Before you came to Delta you had a long history in the 
financial services industry, banking and so forth.
    Can you step back one step and look at it as if you were in 
the financial services world now? What would turn you on to 
support the airlines again? I gather it is a lot of the 
recommendations you made, but give us your--put that hat on and 
look at it from that perspective and talk to me a little bit 
about that. I was concerned that Senator Rockefeller pointed 
out that a bankruptcy decision has to be made early in order to 
maintain the cash so you can reorganize. Can you tell us a 
little about seeing this problem from that point of view of the 
financial services world?
    Mr. Mullin. I believe you, Senator Cleland, did read that 
Morgan Stanley letter. Did I recall that correctly?
    Senator Cleland. Yes, sir.
    Mr. Mullin. I could have written that letter as a banker, 
and so I would associate myself completely with the 
presumptions that were in there. That was a hard hitting 
letter. It essentially said that under the current 
circumstances, there is no financing available to this industry 
right now. And were I on the other side, through 15 years of 
banking as you stated, with First Chicago, I would have 
associated myself with those thoughts.
    Senator Cleland. And yet I find it hard to believe as I 
read in the paper today that in effect, the value of stocks and 
bonds of aviation companies in this country are the equivalent 
of junk bonds. I find that hard to believe, quite frankly.
    Mr. Mullin. If I may point out just one thing, just by way 
of how far that this has fallen. America West now has a capital 
market evaluation of $100 million. That's about the price of 
one 777.
    Senator Cleland. And yet on the 10 of September, the market 
out there was 650 million passengers a year, growing so that 
the last time you testified before us, I remember you were 
sitting right there and pressuring for added capacity, a fifth 
runway at Hartsfield and so forth.
    Mr. Mullin. I am going to be back requesting that on a 
happier day.
    Senator Cleland. Yes, sir. But that tells me that basically 
what we are facing is a temporary crisis. I think there are 
long-term challenges for the aviation world but I think what we 
need to do is do those things to get us through this temporary 
crisis, a series of confidence building measures, to restore 
confidence by the financial markets and American people in the 
aviation world.
    I do want to get that insight on the liquidity part, and is 
it your understanding that what you have asked for here, if we 
give it to you, if we respond quickly and appropriately here, 
that that will trigger or act as confidence building measure or 
measures to the financial world that is now looking at you?
    Mr. Mullin. We do believe that. And I think it's important 
to emphasize how crucial it is to have all of the components. 
The 5 billion again, which sounds like a very very large number 
and it is, but the 5 billion is derived arithmetically as just 
the losses associated with September. By the end of September, 
in effect that money is used. The $12.5 billion loan program or 
whatever equivalent program is developed that somehow provides 
that amount of cash eventually to the industry is an essential 
element as well, to give the financial markets and creditors 
longer term confidence in the industry so that they will 
invest.
    The added $3 billion in security is great. That helps us 
with respect to adding the sky marshals and the like, it gives 
great confidence in safety and security to the traveling 
public.
    We really need all of the elements, and the liability I 
might add, very very swiftly. I mean, representations are 
having to be made by our companies right away in terms of what 
kind of contingent liabilities we have. This is such an obvious 
one of any of us who had the kind of contingent liability that 
United and American have spoken of as associated with it, none 
of us could take that and then do any kind of financing.
    Senator Cleland. Both of you have been very articulate 
today. Mr. Mullin, you have been an articulate spokesman for 
the aviation industry in America. I support your plan and we 
thank you for coming.
    Mr. Mullin. Thank you very much, Senator Cleland.
    The Chairman. Thank you. Senator Wyden.
    Senator Wyden. Thank you very much. Mr. Mullin, like my 
colleagues, I am going to support an emergency package. I do 
have some questions though about some circumstances in this 
debate that clearly do have ripples to aviation policy as a 
whole and that is what I want to ask you about.
    For example, the document that was sent out originally, 
proposed initiatives to stabilize the airline industry as a 
result of the terrorist attacks in the United States of America 
calls for Congress to pass antitrust immunity for the airlines 
so that they can talk about reductions in the aircraft they 
will fly, routes to be served, and frequency of service on 
specific routes.
    It is not clear to me where you all stand on the antitrust 
immunity issue today, so I think it would be helpful if you 
would just clarify that so we sort of know once and for all 
where you all are on the issue.
    Mr. Mullin. Philosophically, we are not for the abandonment 
of the antitrust rules but in response to Senator Hutchison's 
point, and I thin Senator Rockefeller, I believe you would 
associate yourself with the views of Senator Hutchison that in 
the smaller size communities, it's crucial to take whatever 
steps we can to maintain service during a period of economic 
crisis.
    And to the extent that you have more than one airline 
serving an area and if we are splitting traffic which is 
reduced to a considerable degree, both of us may make the 
decision to leave, therefore leaving no service. And if in fact 
by a discussion we could determine that one airline would stay, 
and you would have to have that discussion in order to 
determine that, then I would think in that narrow sense that 
that would be an appropriate discussion to have.
    Senator Wyden. All right. Well, this document I have was 
prepared by your group, and so when you say philosophically we 
are not for antitrust immunity, and I will make this document 
available to you but it came from you, it says Congress should 
pass a bill granting antitrust immunity.
    Mr. Mullin. I am familiar with that document.
    Senator Wyden. That does not reflect the industry's 
position anymore?
    Mr. Mullin. No, I think what I just said is closer to it.
    Senator Wyden. Good. On the question of trying to arrive at 
an appropriate sum of money, and in stages, have you all opened 
your books to someone independent for purposes of taking a look 
at this issue? In other words, we are going to have to stand up 
at town hall meetings and say to the various groups that are 
also hurt, that we have been fair to all concerned. One of the 
ways that it will be easiest at least for me is to say, you 
know, the General Accounting Office took a look at this.
    Mr. Mullin. We are all prepared to do that, Senator.
    Senator Wyden. That has not been done yet.
    Mr. Mullin. It has not been done yet, no, in light of the 
crisis that we face. But from the standpoint of, there have 
been comments about some kind of a review board, an oversight 
process.
    Senator Wyden. That is fair.
    Mr. Mullin. We are OK with that.
    Senator Wyden. So you are saying that as Senator 
Rockefeller and Senator Hollings take out a sharp pencil and 
get down to these numbers, you all are willing to work with the 
Committee and the GAO to open the books in a way that protects 
people's proprietary interests, so that we can see where these 
dollars are going?
    Mr. Mullin. Yeah. We are prepared to establish whatever 
procedures are appropriate.
    Senator Wyden. The last question I wanted to ask, on the 
projections point, how much is due to projections with respect 
to lost passengers and how much would be due, say, to your 
sense that it will take more time to process passengers 
individually in terms of security? Can you break that down?
    Mr. Mullin. The projections that we have put forward here 
are almost solely associated with the lost passenger aspect. 
You read off the assumptions and those assumptions are the 
assumptions that we used, and the assumptions that led to the 
$24 billion estimate, which is the ones that you read. As we 
have stated, we are basing ours on even more optimistic 
assumptions, therefore lessening the need from 24 to 18. But 
there are--it is not frankly a sophisticated analysis, it is 
very straightforward.
    Senator Wyden. Last question. On this idea of structuring a 
process so that it goes in two tiers, with the idea of Congress 
giving some emergency assistance so as to sort of staunch the 
bleeding right now, and then setting up a process so that we 
can come back and look at what if any additional help is 
necessary, what are your thoughts on that?
    Mr. Mullin. Well, I'm afraid I have to be against that 
right now, for the reasons that when we are looking at the 
future viability of the industry, given the fact that all of us 
are buying airplanes all the time, making capital investments, 
several references to Boeing, regional jets and so forth, all 
of us do equipment financing on that. We have to have the 
confidence of the financial markets in order to be able to do 
that going forward.
    The $5 billion for example, it just staunches the bleeding 
for September, so that the $12.5 billion program and the 
liability issues are just crucial to be integrated into a 
package to give the confidence for a longer-term look. It isn't 
just from the standpoint of providing the financing. If it were 
just that, then we could do it the way that you were talking. 
But that money needs to be available for the financial 
community to have confidence in our existence.
    Senator Wyden. Would you feel exactly the same way if the 
General Accounting Office said that is the way we ought to do 
it? Because that is the point of my having somebody independent 
review this, I want to do this in a way that is based on the 
best and most objective kind of data, and if the General 
Accounting Office comes back and says to this Committee, you 
know, they do need 5, 6 billion, whatever the sum is 
immediately now, but you ought to hold off, are you going to 
question that on the basis of what you just said?
    Mr. Mullin. No, all of us are prepared--we recognize when 
we come to the government for help on this that we have to 
account appropriately for what has happened here, and we regret 
deeply being here by virtue of this war act. I mean, this is a 
terrible circumstance to have to come here. You know, on 
September 10, not in my wildest imagination did I ever conceive 
that I would be here before a committee like this talking like 
this. Delta Airlines is just absolutely not in that 
circumstance.
    And as I said earlier, I think we are clearly one of the 
best in terms of our financial strength as an organization, but 
I am here representing the industry and Delta is in the same 
boat, by virtue of this immense tragedy which has struck our 
country. And when we talk to the government and we ask for 
government funds, with that comes responsibility.
    Now the one caveat that I would make about that, I think it 
should be clearly associated with the money issues that we are 
spending it properly, that we have justified it properly and so 
forth. I have made the point earlier that we have attempted to 
tailor our recommendations not to get into the other policy 
issues that are associated with it. Whether we are talking 
about how we develop in a merger and acquisition way going down 
the road, or the labor issues that we face, or the kind of 
passenger issues that you and I have discussed on several 
occasions, those we have held right to the side. This is a 
monetary issue to deal with the financial stability of this 
industry.
    Senator Wyden. My time is up. I want you to know that I 
will be willing to put more money in that first phase and I 
recognize that you oppose the idea of a two-tier process, as 
long as we have an independent way to verify those numbers. You 
said you supported that and I appreciate that. Thank you, sir.
    The Chairman. Thank you. Senator Allen.
    Senator Allen. Thank you, Mr. Chairman, and thanks to both 
these gentlemen for their testimony. Mr. Mullin, for not being 
a lawyer, I thank you for better explaining the liability 
aspects. I do want to say to Mr. Skeen of Atlantic Coast 
Airlines, I have a very special affinity for you all because 
while I was Governor we were able to convince you to locate in 
Virginia.
    More importantly, Mr. Chairman and Members of the 
Committee, the way I see these regional airlines is that they 
probably have the greatest opportunity for prosperity. They do 
not have the legacy costs that some of the older airlines have, 
but most importantly, they are the ones who are providing the 
service and access to the smaller and medium size markets. 
Atlantic Coast Airlines was doing relatively well in acquiring 
regional jets prior to this tragedy that befell our country on 
September 11. Access to regional jets certainly increases the 
attractives of a city to businesses wishing to relocate or 
expand.
    When one is recruiting a business, and I know former 
Governor Rockefeller knows this, if you can say you have 
regional or jet service a city becomes much more attractive. It 
may be one of the Bombardiers which have about 50 seats and so 
forth, which is so crucial in areas like Roanoke, or Lynchburg, 
or the Charlottesville area or Newport News. And so, I look at 
you as a vital resource to the rest of the country and the rest 
of the world. I am very glad to hear your views.
    Senator Hutchison asked a question about continued service, 
because one of the worries is that smaller markets will be the 
first ones that are going to get cut out in the rationalization 
or the assessment of the business models here under this new 
world. So I think one of the best things I heard out of this 
entire day is how the smaller-to-medium size markets will still 
be served.
    And you also clarified how this allocation is going to be 
made. I would ask you first, Mr. Skeen. As I understand it, 
both the direct grants, the $5 billion and $3 billion for the 
immediate losses as well as the security upgrades and these 
loan guarantees which are part of this emergency recovery 
package, would be given directly to Atlantic Coast Airlines as 
opposed to a derivative approach via United or Delta Airlines. 
Is that correct?
    Mr. Skeen. That is correct. The formula is designed to 
where we get our proportional share of what we make up in terms 
of the 5 billion, the proportionate share of what we make up in 
terms of our capacity versus the whole, so obviously much 
smaller numbers, but that's a fair way to distribute it, 
because what I said earlier is yeah, we think we deserve a cut, 
but we're not going anywhere if the carriers like Delta and the 
other airlines that need the support have the proportionate 
share that they deserve, because we have no route system 
without their assistance.
    Senator Allen. Thank you. Mr. Mullin, you agree with this 
approach?
    Mr. Mullin. I do.
    Senator Allen. The way that the shares are derived?
    Mr. Mullin. I do. And the in the case of the Air Transport 
Association, it was unanimously agreed to.
    Senator Allen. Good. Mr. Mullin, I am going to ask you 
another question on a matter as far as your viability. I know 
that you and U.S. Airways have as one of your this metropolitan 
Washington, D.C. area.
    Mr. Mullin. Right.
    Senator Allen. You and U.S. Airways have a large presence 
at Reagan National Airport. To the extent that we are worrying 
about the future of your viability as an airline what impact 
does the current closure of Reagan National Airport have on 
your projected revenues and ability to get back to normal?
    Mr. Mullin. Washington Reagan National is one of our most 
important service areas. It is extremely important to Delta not 
only in terms of the direct service that we provide to 
Washington from our hubs, but as we are also associated with 
the Delta shuttle as has been mentioned, and so it is 
absolutely crucial that it come back.
    Senator Allen. Have you been sharing that with FAA and 
others?
    Mr. Mullin. We have. And I think the issues of security are 
obviously beyond my own ken, and they need to be very 
critically evaluated. I heard Vice President Cheney's comments 
on Sunday on the talk shows on that, and I do understand them, 
but from the standpoint of customer service and from a 
standpoint of it being an attractive market for airline 
service, it is phenomenal, and we really support its opening.
    But I do think it has to be weighed relative to the 
security aspects, but I hope it is decided in favor of 
restoring it.
    Senator Allen. Earlier in the day, the chairman and myself, 
and also Senator Kerry were bringing this up. How would you 
envision, say a staged reopening of Reagan National Airport? 
Would it be acceptable to you if you were required in addition 
to all the security that we are talking about here, including a 
more secure cockpit to have an air marshal required to be on 
every flight coming in and every flight going out of Reagan 
National?
    Mr. Mullin. Yes, it would be. In fact, certainly with 
respect to all those measures that you just mentioned, they are 
part of the program that we have agreed with in general with 
the Federal Government, and would certainly favor the most with 
respect to Reagan National.
    Senator Allen. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. As I understand 
your testimony, to restore the confidence of the financial 
markets is one of the most important things for you all to 
survive as an industry.
    Mr. Mullin. Yes, sir.
    Mr. Skeen. Yes, sir, that's correct.
    Senator Nelson. As I have understood the testimony here 
thus far, two things that would restore the confidence of the 
financial markets, No. 1, the passengers return and fill up the 
planes.
    Mr. Mullin. Absolutely.
    Senator Nelson. And No. 2, you having affordable and 
available insurance.
    Mr. Mullin. Yes, sir.
    Senator Nelson. All right. Then in order to do that, why do 
we not have a major campaign by you all trying to get 
passengers back? I mean, I flew Monday night to Orlando, and my 
press announcement at the Orlando airport was I personally 
think it is safe to fly and if you need to fly, now is the time 
to fly because there are not any lines. And then I went to 
Tampa and I did all the security stuff there and I said the 
same thing. Why would that not be a major theme for you right 
now?
    Mr. Mullin. We are, I think that every airline is 
marshaling exactly the kind of marketing campaign that you are 
talking about. I think that you are going to see some price 
deals in the next period of time that are going to just be mind 
boggling in terms of attractiveness.
    But to go to a point that was made repeatedly, the crucial 
ingredient goes back to the safety and security aspects, and I 
think just a little bit of time will work in our favor 
certainly. The fact that you all, even when they see a hearing 
like this, you they know you're from Florida, you've flown to 
get here. That's very reassuring to people to see public 
officials. When I flew up here myself, I know it was reassuring 
to the Delta people.
    Senator Nelson. Let us talk about insurance.
    Mr. Mullin. Yes, sir.
    Senator Nelson. All of the horrors that you have presented 
here about insurance, the possibility of cancellation, you just 
gave the cite on your particular company, it is being increased 
four-fold. Listen, I have babbled for 6 years, rising insurance 
rates. So let us inject into this another kind of idea of how 
you go about controlling it.
    Back in the 2060's when we had riots in Los Angeles, in 
order to get insurance into the inner city, there was something 
like a government kind of backing for that insurance. What do 
you propose with regard to that?
    Mr. Mullin. I think that's a very good idea. There is the 
work associated with--the Civil Reserve Air Fleet, CRAF offers 
a model for that. CRAF offers losses in liabilities to carriers 
operating on its behalf, and this is an entity that could 
supply the kind of insurance that we would need in the kind of 
war and terrorism aspect.
    There are two parts of the insurance issue here. There is 
the basic hull insurance that pertains to what happens to an 
airplane in an airplane accident, and then there is this war 
and terrorism insurance, that we have also had to have.
    That number is cost, it's usually put on as a rider and has 
a fairly modest cost associated with it in our entire insurance 
program. That has gone through the absolute roof with respect 
to it, and the coverage levels have been just absolutely 
slashed.
    Senator Nelson. Mr. Chairman, in light of the fact of this 
new kind of tragedy and the new use of an airplane as a 
projectile loaded with explosives, that might be something, if 
the objective here is to get the restoration of the confidence 
of the capital markets, it may be something that we want to 
look at for this so-called war and terrorism kind of insurance 
coverage, and what is the role of the government there?
    Now, that brings me then to if you got the passengers and 
you got the available and affordable insurance, then why do we 
need the bailout of $5 billion, particularly when some of those 
airlines that we are going to bail out were sick to begin with?
    Mr. Mullin. This money would have, in my judgment, will not 
prop those airlines up. I think that we have experience in 
looking at past tragedies that involve airliners as to what the 
pattern follows with respect to the recovery of passenger 
confidence. I mean, in the case of the Gulf War for example, it 
didn't come back or reach former prior to Gulf War levels until 
a year after. We're essentially projecting that that 
confidence, by virtue of going to I think the 85 percent number 
in the second quarter of next year, that it will be about where 
we were supposed to be in the third quarter of next year, which 
is of course less than a year.
    I actually think that's rather optimistic and yet, those 
assumptions generate arithmetically these kinds of losses, and 
it's very very easy to do just taking the financial statements 
of the airline, to just project this kind of situation, make 
some assumptions on variable cost reductions because we are not 
carrying so many passengers.
    Senator Nelson. Is the $5 billion, and I would like to see 
the breakdown.
    Mr. Mullin. Sure.
    Senator Nelson. And as Senator Wyden said, that there 
should be an independent verification of this breakdown. Is the 
$5 billion solely related to the loss of revenue as a result of 
the terrorist act, not just loss of revenue in the month of 
September since September 11?
    Mr. Mullin. The way we did that, all of us have forecasts 
for September, every company. I mean, we review these routinely 
with our boards of directors. And the way that we did this was 
just to take our most recent forecast reviewed with our boards 
of directors for September, and that information is about as 
good as it gets, because we are pretty good three or 4 weeks 
out in advance looking at bookings in terms of estimating what 
that revenue number is. And then you take the total loss of 
revenue for really the 4-days after the terrible incident, and 
then you make just the projection that we will have 40 percent 
of the revenue for the rest of September. Delta so far, it's 30 
percent in the first three or 4 days into this period.
    And that's how you come to that number. It might be 
different from that, but it's around $5 billion no matter how 
you cut it. It might be 4.7, might be 5.2.
    Senator Nelson. What is the logical conclusion of doing 
that in a federal bailout if you did not have a federal bailout 
back at the time of the Gulf War, assuming that the major thing 
that you need is the restoration of capital markets?
    Mr. Mullin. The key reason is because first of all, our 
industry was used as the weapon in this particular incident, 
and nothing like that has ever happened before. The whole idea 
of commercial airplanes being flown into these buildings is so 
unprecedented as to be beyond belief.
    Senator Nelson. But the importance is getting you back in 
business, and clearly somebody from Florida understands that 
with the multiplicity of interests that are conditioned upon 
you being able to fly people. So what I want to do is to 
support a financial package to get you back in business, and it 
seems like No. 1 is to get passengers up, and No. 2 is to make 
sure you have got affordable and available insurance. And Mr. 
Chairman, I just want to scrub this $5 billion, I want to scrub 
it five times to make sure we have the right figures and then I 
want to compare it to 8 years ago in the Gulf War, 10 years 
ago, and see what was the drop there, and how does now compare 
to then, just in diminution by virtue of an act of the revenues 
of the airline industry.
    The Chairman. Very good. I want to be scrubbing it with you 
but I do not know that you and I are going to get a full 
opportunity because the White House is working directly with 
the leadership and it might pass before we can get a good 
scrubbing. Senator Fitzgerald.
    Senator Fitzgerald. Thank you very much, Mr. Chairman, and 
I thought Senator Nelson did a good job in recognizing the 
Continental situation, and those were difficult times for banks 
too.
    Mr. Mullin. They were.
    Senator Fitzgerald. But Mr. Mullin, thank you for being 
here. You are a very articulate spokesman for the airline 
industry. And I have to compliment Delta on what appears to be 
the among the strongest balance sheets in the industry. And it 
looks to me from what I have available, and I am looking at the 
Morgan Stanley research paper dated September 17, and they said 
that Delta had $3 billion in immediate liquidity, and making 
calculations with your unencumbered aircraft, even discounting 
them for after the World Trade Center, they thought that you 
could borrow about 2.7 billion on your unencumbered aircraft 
which have a book value or original, 100 percent value would be 
$7 billion, your unencumbered aircraft.
    They estimate that you have total liquidity of $5.7 
billion. It seems to me that it may be that some of the other 
airlines might not survive if there were no government aid, but 
Delta almost certainly would survive. Is that not correct?
    Mr. Mullin. Well, we would really have I think a decent 
chance at it, although I will just say to you that I have now 
become far more familiar with these projections than I would 
care to explain and with the kind of margins that this industry 
has and its heavy fixed costs, particularly associated with 
equipment financing, our investment in terminals and so forth, 
even when we make cost reductions in a variable way, fixed 
costs don't move and so as a result, minor reductions in 
revenue create major reductions in the bottom line under 
ordinary times.
    That's why we are having the losses in the period prior to 
September 11. You take something where you're losing 60 percent 
of your revenue for an extended period of time, which is 
likely, no airline could survive through that period.
    Senator Fitzgerald. How much does Delta figure it lost per 
day for those 3 days that there was that ground stop order?
    Mr. Mullin. About 70 million a day.
    Senator Fitzgerald. 70 million a day, so about $210 million 
is what you lost?
    Mr. Mullin. Yes.
    Senator Fitzgerald. That is a lot of money that you lost in 
3 days.
    Mr. Mullin. Yes, sir?
    Senator Fitzgerald. But earlier you said that Delta would 
get 16 percent of the $5 billion.
    Mr. Mullin. That's correct.
    Senator Fitzgerald. And that would be what, about $800 
million?
    Mr. Mullin. That's correct.
    Senator Fitzgerald. So you would get four times what your 
direct losses were by that immediate cash assistance alone.
    Mr. Mullin. In those 4 days.
    Senator Fitzgerald. Yes.
    Mr. Mullin. But you will recall that the $5 billion 
estimate had two components to it. One was the estimate for the 
immediate 4 days, and then the other was the estimate for the 
remainder of September, in which we determined or figured that 
revenues would be running at 40 percent of what they would have 
been had the tragedy not occurred. And that's a good number, 
because we all had----
    Senator Fitzgerald. Let me stop you there, though. If we go 
beyond compensating the airlines for those 3 days where there 
was a government edict that shut you down, what then is the 
limit in principle for what we will compensate you for, and do 
we not run into the question of why not compensate hotels or 
other industries that have been affected?
    Mr. Mullin. I think as I mentioned earlier, the bridge you 
have to cross in terms of thinking about this has to do with 
the essentiality of airline service to the recovery of this 
economy, the reality being that if we're sitting here as 
believers in free market principles, which we all are, none of 
us----
    Senator Fitzgerald. If we were--this is not--I mean, a pure 
free market, we would not be talking about a government bailout 
of a private industry.
    Mr. Mullin. That's why I'm talking about it. And I wouldn't 
be here arguing it either. It has to do with that sense of 
essentiality to the economy. And second, the fact that in this 
particular instance, our industry was used as the weapon of 
war. Our industry. It wasn't anybody else who----
    Senator Fitzgerald. So, would you oppose aid for any other 
industry?
    Mr. Mullin. No, I don't.
    Senator Fitzgerald. Would you support it?
    Mr. Mullin. I would certainly support looking at it. I 
think these circumstances are extraordinarily unique, wherein 
we ought to be looking for all kinds of support mechanisms for 
the employees and families of this country during this terrible 
time.
    And so when I argue here on the part of aviation, it is not 
to exclude the use of any of those arguments for anybody else. 
But it is my obligation to come here and talk about aviation, 
given the essentiality of aviation to our economy and given the 
fact that we were uniquely used and targeted to be used as the 
weapon of war.
    Senator Fitzgerald. One final question. You were probably 
at First Chicago Bank when they bailed out Continental Bank.
    Mr. Mullin. I was indeed. I remember it very very well. I 
was there 15 years.
    Senator Fitzgerald. 15 years. Everybody who was in banking 
certainly remembers that, and the government put several 
billion dollars, a billion dollars in cash into Continental, 
and I think assumed 3 or so billion dollars worth of debts of 
the bank. But in return, they got an equity position.
    Mr. Mullin. I'm glad you brought that up, and I was hoping 
you would actually ask me that question. I also spent 5 years 
working at Conrail, which was the residual of the Penn Central 
and the bankrupt railroads in the northeast, it's where I spent 
1976 to 1981 there as senior vice president for strategy.
    In both of those instances, both Conrail and in the case of 
Continental Bank as well as the Chrysler situation and the 
Lockheed, all of those problems came about because of the 
economic failings of the company themselves. Arguably, they 
were the failures of management.
    We are not here because of the failures of management. We 
are here because an act of war that took place on September 11 
puts us here. I do not like being here to have to talk to you 
about these subjects or asking for money, particularly when my 
company was in such great shape back on September 10.
    Senator Fitzgerald. But you are asking for more money than 
you incurred in losses as a direct result of the government 
edict shutting the airlines down.
    Mr. Mullin. These results that we have put forward, these 
projections, it is our belief, and we're willing to talk about 
them over time, that--and even adjust them over time if 
something else prevails. Our guess as to the implications that 
are associated with us through the next year, those are just 
the consequences of this, Senator.
    Senator Fitzgerald. Now I have a question. Even if we do 
all this, United and American, because of their potential 
liability, and you as a former banker, do you not think some 
banks will still be worried unless there is a limitation on 
their liability?
    Mr. Mullin. Yes.
    Senator Fitzgerald. Banks will still be reluctant to lend 
to United and American, and even if we give all the government 
aid, if there is not a limitation on liability, United and 
American still might have to go bankrupt if they are ever held 
liable.
    Mr. Mullin. We have to take care of that, yes. This is, 
part of this recommendation is that retroactively, that that 
situation be included. Else, both of those organizations would 
never be able to borrow as we move forward, or any other 
airline that might get drawn in on it.
    Senator Fitzgerald. Well, Mr. Mullin, thank you very much, 
and Mr. Skeen, thank you.
    Mr. Mullin. Thank you, Senator.
    Mr. Skeen. Thank you.
    The Chairman. Mr. Mullin, two of the top airlines, the CEOs 
get paid six times more than you do.
    Mr. Mullin. My goodness.
    The Chairman. Just to put it in the record, those are not 
dumb CEOs. They sent up the right witness.
    [Laughter.]
    The Chairman. They probably ought to be paid six times 
more, but they were in trouble. You are not, but they were, 
without getting into that. But that is what we are going to 
have to be looking at, Senator Fitzgerald, there is no question 
about it.
    You had no idea of coming up here, but we were looking at 
those two airlines, because they put us on notice that they 
were in trouble and when we have bills to try to improve the 
service, try to bring in competition, try to get another dollar 
fee or whatever it is, to get more runways, we have Senator 
Hutchison's bill, we would go broke, we just cannot stand one 
dollar. So you have to understand the background, and I am 
convinced you do.
    I cannot thank you enough, and Mr. Skeen both, the 
Committee is indebted to both of you for your appearance here 
this afternoon. The record will stay open for any further 
questions.
    Now I want to try to move on to the third panel.
    Mr. Mullin. Thank you very much.
    The Chairman. Thank you both very very much.
    Mr. Robert Roach, the Vice President of the International 
Association of Machinists and Aerospace Workers; Dr. Mark 
Cooper, Director of Research for the Consumer Federation of 
America; Mr. Harry Pinson, the Manager of Direct Investments, 
Credit Suisse; and Ray Neidl, Research Director and Airline 
Analyst at ABN Incorporated.
    Years ago, we used to campaign in South Carolina at stump 
meetings, and every candidate for every particular position 
whether it was Governor, lieutenant Governor, attorney general, 
even the adjutant general ran for office, and we would go right 
on down the list. At one of the meetings in Saluda, I was what 
I thought the last speaker, so I made my talk, went over and 
thanked him. I said you were nice to stay to listen to me, and 
he said do not thank me, I am the last speaker. So I was going 
to thank Senator Fitzgerald, you are the last listener.
    Now we welcome you all. We apologize for the lateness of 
the hour, but it goes with the Committee, it has done its best 
planning, and we wanted to hear from each of you, and we want 
to enter your statements in full in the record.
    And then let me start with Mr. Neidl over here, and you can 
summarize it or say what you will. The hour is late and we are 
going to have to move along, but you folks have really favored 
the Committee and we want to hear what you think is absolutely 
necessary to be emphasized. Mr. Neidl.

          STATEMENT OF RAY NEIDL, RESEARCH DIRECTOR, 
            AIRLINE ANALYST, ABN AMRO, INCORPORATED

    Mr. Neidl. Thank you, Senator Hollings. It's Ray Neidl. I 
am an airline analyst with ABN Amro and I have been involved 
with this industry one way or another for about 20 years, ever 
since school. I used to work for American Airlines. I used to 
be the airline analyst, credit analyst at Standard and Poor's, 
and I was involved with high yield bonds for the airline 
industry for secured bonds for many years.
    And I am historically a free market person. I don't believe 
that the government should be interfering with the business, 
the failings. At the time I wasn't really in favor of the 
Chrysler bailout or the Lockheed bailout, or even New York 
City. The executives got themselves into trouble and if 
companies mismanage or let their costs get too high for 
whatever reason, or if the union demands price themselves out 
of the market with too high or expensive labor agreements, I 
feel that the company should pay the price and the stockholder 
should pay the price, and let the market function.
    However, in this case, this is an exceptional circumstance. 
The airlines had nothing to do with the events that happened. 
They were used as the instrument of terror and destruction, and 
it's a vital industry to the nation. There will be many other 
failing if this industry goes into Chapter 11, and I don't 
think our economy nationally or the worldwide economy can 
afford to let that happen. Therefore, I think the industry is 
open to some relief.
    Basically, airline executives have done everything they had 
to do as business people to reform this industry since the 
early 1990's. They restructured their route system, they cut 
back where they weren't making money, they modernized their 
fleet, they got new procedures in place to look for the bottom 
line instead of going for market share, and they have been 
basically running a good system.
    I know there are a lot of complaints, people don't like 
their hub and spoke, and some smaller communities lost service, 
but nevertheless, for a mass transportation system, the system 
was working very well. And the industry was rewarded with good 
profitability in the 2090's. These margins, I want to 
emphasize, are still thin by most other business standards, but 
historically, airlines were producing consistent profitability, 
and it was my belief that they would be able to go into the 
next recession in stronger shape.
    Their balance sheets were stronger and their access to the 
market and the rates they were paying were stronger until last 
week, and that all went up in a vapor very quickly.
    I think it is an industry that is vital to our national 
interests and deserves special consideration. I don't mean to 
sound callous, but we can get along without as many 
restaurants, we can get alone without as many hotels, but the 
airline industry is vital before these other industries can 
come back and function and prosper.
    Basically, as far as security goes, the industry is not 
going to recover, I have heard that today, the industry is not 
going to recover until the traveling public has confidence in 
the system. And some of the questions that were brought up 
today about how quickly business came back after other 
tragedies, this is a different tragedy. This happened on our 
soil, more lives were lost, it was American airlines that were 
hijacked, and I think it is a much more serious consideration.
    In order to get the traveling public more confident in 
coming back and traveling again, definitely we need to have a 
new system as far as security goes. And I think as a function, 
that the airlines have not done as best as they could, they 
shouldn't have been responsible for those costs, I think it's a 
police function, and I think that's one of the few things that 
government really does have a prime responsibility for, 
insuring the citizens safety so that they can conduct business 
and carry on their lives in a peaceful manner.
    Just to sum it up, the airline industry is labor intensive, 
it is capital intensive, it has a lot of high fixed costs. And 
if you shut off their revenues, like what happened last 
Tuesday, and the revenues are slow in coming back, you have an 
industry that is going to disappear and become very ineffective 
very quickly.
    I think this is a temporary situation, I think one way or 
the other we will get over it. I don't know what the timeframe 
will be, but I think this industry does merit some special 
consideration during the recovery period.
    And I don't want to call this a bailout. It is not a 
bailout by any means. The airlines followed all safety 
procedures, they shut down at the request of the FAA as they 
should have, but the thing is, it was not the airlines that 
caused this. It was a decision made by the government and it 
was a decision that was more or less an act of God, an act of 
war, whatever you want to call it, and it was an extraordinary 
type of situation.
    We have to insure that this vital resource survives so it 
can prosper when things get back to more normal circumstances. 
Thank you.
    The Chairman. Thank you. Mr. Roach.

      STATEMENT OF ROBERT ROACH, GENERAL VICE PRESIDENT, 
          INTERNATIONAL ASSOCIATION OF MACHINISTS AND 
                       AEROSPACE WORKERS

    Mr. Roach. Thank you, Mr. Chairman. I will be brief because 
of the lateness of the day. My name is Robert Roach, Jr. I am 
the general vice president for the machinists union 
representing the transportation department. In addition, I am a 
member of the executive board of the AFL-CIO transportation 
trades department.
    I am here representing the 290,000 IM members who were in 
transportation, aerospace, as well as the other members of the 
AFL-CIO transportation trades department. The disastrous events 
of September 11 will be with us for the rest of our lives. The 
transportation industry as we know it must and will change 
dramatically.
    Transportation labor believes that we should be a full 
partner in fixing and remedying the problems that confront all 
of us. Cash infusion at this particular point is a must, it's 
necessary and immediate.
    There are a lot of other problems that go alone with fixing 
the transportation system and the matters that were discussed 
here today. First of all, we talked a lot about insurance, 
there were a lot of people talking about the insurance for 
American Airlines and United Airlines. I have no doubt that 
there is a need to fix that insurance problem. I am not 
familiar with all the details.
    However, there are 100,000 people who are scheduled to be 
laid off that will have no health insurance as a result of this 
incident. Those 100,000 people will not have any income to pay 
their mortgages, they will have no income to send their 
children to proper schools, whatever the circumstances are in 
the short term. There has been no relief provided to those 
people who have been adversely affected as a result of the 
events of September 11, 2001.
    We have indicated before the congressional committee 
yesterday that they should be looking at, in terms of bringing 
the customers back into air transportation, you have to build 
confidence in the consumer, in the passenger. The only way you 
can do that is to secure and stabilize the current employees of 
the air transportation system. If your employees are afraid, 
the passengers will not feel secure.
    Today, in air transportation, with passenger rage and air 
rage, and all the things we have been confronted with other the 
last few years, that we have been arguing about and discussing, 
our members, the airline employees do not feel comfortable 
confronting passengers concerning incidents that should raise a 
flag.
    For example, it was reported that somebody bought a ticket 
for cash, a one-way ticket with no luggage. This normally 
raises a flag. But because of an incident that happened at the 
Newark airport where an employee got his back broken by a 
passenger, that passenger was arrested and went to court and 
was acquitted, you find very few ticket counter agents who are 
prepared to confront passengers who come up with these type of 
events.
    Another problem that we have in security, security is a 
major problem, everybody has been talking about it, is the fact 
that there are thousands of workers working in catering who 
have no background checks, who have free access to the 
airports, free access, unsupervised access to aircraft. The 
major company that owns the catering outfits is a foreign 
company.
    Passenger screening. We fully support a federal takeover of 
security, we believe it's a long time coming. We believe 
however, because of the nature of people talking about the 
layoffs that they believe have to come, that those airline 
people currently subject to layoffs should be the first to be 
trained for those jobs. If you lay off 100,000 people, there is 
an effect that associated employees will be laid off; that has 
an effect on the economy.
    30,000 Boeing people to be laid off, G.E., Pratt & Whitney 
to follow. That will have an effect on the economy. And again, 
you will not be able to secure, make a passenger secure to come 
back, I don't care what you charge, you can give the seats away 
for free, if they are not confronted with an employee at the 
airport that feels secure about their system.
    Today, you have long lines at the airport, so prior to 
September 11 we had long lines at the airports, with a lot of 
machines, machines that allow people to get on the aircraft 
without ever confronting an individual until they get on board 
the aircraft. We were short staffed, forcing people to take the 
machines.
    I think it clearly needs to be looked at, that instead of 
laying off 100,000 people, those people should be utilized to 
fulfill those jobs that have been subcontracted out, that have 
been given to low paid, low trained individuals, so that we can 
really secure the system, so we can really make the people feel 
secure and want to come back to the transportation system.
    Again, we believe that we should be, transportation labor 
should be full partners in restoring the system to what it 
should be, and what it was prior to September 11 is not what it 
should be. Again, there are thousands of people who have access 
to the airports and no security clearance, nobody knows where 
they came from, they leave that job and go to another similar 
job in catering, passenger screening or whatever the case may 
be.
    We have proposed to the Department of Transportation, to 
the House of Representatives, and we propose it here, that 
there be a joint task force made of up of transportation labor, 
transportation management, overseen by the Department of 
Transportation, to insure that the things that have to be done 
to fix the system, to fix the problems that we are confronted 
with properly done.
    If we allow what has happened to continue to happen, you 
will not bring security, you will not bring any security back 
to the system and you will not bring the flying public back to 
the system.
    Again, we have well-trained people in air transportation 
and our transportation industry. Those people have made 
sacrifices over the years. I heard one senator say that the 
stockholders should take a hit. On United Airlines, they are 
the stockholders, so they are taking a hit as stockholders and 
they are taking a hit as employees losing their jobs with no 
health insurance.
    Senator Hollings spoke of someone who receives a large 
package, compensation package. Well, I'm here to report to you 
that that same individual is laying off employees today without 
regard to their seniority, no health insurance, and telling 
them that they will not get any severance because this is an 
act of war.
    The Department of Transportation, Secretary Mineta advised 
us that this was something that was discussed with all the CEOs 
and would not happen. This is what is happening to the 
employee. This is what is happening to the person that you are 
expecting, we all expect, the American people expect to bring 
the customer back to fly those airplanes.
    So I would surge that this body take some action, certainly 
to restore the financial strength of the airlines, it is dearly 
needed. I said yesterday that America is in shock. Thousands of 
people are missing. Two of our members are lost, a dear 
personal friend of mine is lost. Business as usual is just not 
an option anymore. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Roach follows:]

      Prepared Statement of Robert Roach, General Vice President, 
     International Association of Machinists and Aerospace Workers
    My name is Robert Roach, Jr. I am the General Vice President of 
Transportation for the International Association of Machinists and 
Aerospace Workers. International President R. Thomas Buffenbarger has 
requested that I testify before this Committee on behalf of the 290,000 
Transportation and Aerospace workers in the IAM.
    The disastrous events of September 11, 2001, will be with us as 
long as we live. The Transportation industry as we know it will and 
must be dramatically changed. For airlines, airline workers and the 
flying public, these changes call for more than a reflex response to 
this tragic incident. The casualty list from the terrorist hijackings 
is staggering. We cannot allow the nation, the industry, its workers 
and the flying public to remain victims of this catastrophic event.
    The complete shutdown of the aviation industry was unprecedented. 
Although the actions taken were necessary, we must work to guarantee 
such measures are never needed again.
    The initial response by airlines was to cut flight schedules, and 
ask the Federal Government for financial aid. These tactics do not go 
far enough to remedy the crisis that confronts us. Furloughing airline 
employees may be considered a short-term fix, but in the long term it 
will only exacerbate the real problems in the industry. To stabilize 
our air transportation system we must stabilize and secure the 
employees.
    It must be clearly stated that the solutions to our problems can 
only be obtained with a coordinated effort from the federal government, 
Transportation labor, and the management of the air carriers. We 
recognize that it is in the best interests of America and the American 
people to have a safe, viable air transportation system. It is in fact 
a matter of national security. The IAM leadership and their members are 
committed to working with all parties to that end.
    We fully support any assistance the government can provide. But any 
relief for the industry must also come with relief for the affected 
workers. We cannot forget this industry is made up of people. The 
Machinists Union represents 290,000 Transportation and Aerospace 
workers in North America. We represent workers at United Airlines, 
Northwest Airlines, US Airways, Continental Airlines, Southwest 
Airlines, TWA and dozens of smaller airlines and service companies. . . 
Our members also work at Boeing, Pratt and Whitney, GE and other 
aerospace companies. We are, therefore, the largest Transportation 
Union in North America and the outcome of the decisions that are made 
will certainly disproportionately affect our members. Our members 
cannot be expected to endorse a relief package that allows airlines to 
recover but does not remedy the inherent problems and lack of security 
that is prevalent within the Air Transportation industry today.
    Decisions cannot be made out of panic. We must take an orderly 
approach to the inevitable changes, and not allow ourselves to become 
victims of fear.
    It is imperative that the American public has confidence in the 
commercial aviation industry. Equally important, Transportation 
employees must work in a secure environment. If Transportation workers 
do not have faith in the system, then the public never will. This is 
why Transportation labor organizations must be involved in any 
discussions dealing with changes to our industry. It is the workers who 
confront the passengers, repair and maintain airplanes, make 
reservations, and ensure in-flight aircraft safety that will provide 
the true solutions. If the workers do not feel safe, there is no hope 
of restoring the public's confidence.
    In order to affect real change in the security of our airports, a 
complete retooling of how airports operate is needed. Airport security 
has long been a major concern of this Organization and our members. 
Prior to this incident, members have been injured because of the lack 
of security at airports. The amount of training airlines give in-flight 
crews and gate agents on how to deal with disruptive passengers is 
currently inadequate. The lack of prosecution of these passengers is 
frightening. To make this problem even worse, passengers can now 
receive boarding passes by machines, and may never encounter an 
employee until they are on board an aircraft.
    Federal authorities must be actively involved in the security of 
our airports. Allowing security contracts to be awarded to the lowest 
bidder is not an effective way to maximize security. These workers are 
typically low paid, with minimal or no training. The high turnover rate 
of these employees underscores the problem. The International 
Association of Machinists has long argued that the subcontracting of 
the security of thousands of passengers, and billions of dollars in 
assets, is a very dangerous way to save money.
    Armed Federal Marshals need to be on board flights. Well-trained 
and well-paid law enforcement officers must man security checkpoints. 
Well-trained and well-paid airline employees must be provided to assist 
these law enforcement officials. These airline employees are required 
to pass the background checks that all potential airline employees are 
subject to today. Subcontracted employees, however, are not screened by 
the airlines.
    A major security problem results every time carriers subcontract 
out work previously done by their own employees. An airline cannot 
ensure the security of an aircraft or its passengers when thousands of 
workers employed by other companies have unrestricted access to their 
aircraft.
    At many airports, the cleaning of aircraft, baggage handling and 
maintenance of aircraft is performed by outside contractors. The 
airlines have no control over whom those companies hire, and they do 
not perform background checks on potential employees. Yet they have 
full access to the aircraft parked at the gate. Airlines do not permit 
passengers to board a plane without airline personnel present, but they 
allow the aircraft security to be compromised by subcontracted 
employees. The industry did not, a decade ago, learn its lesson when 
120 illegal immigrants, working for a third party company, cleaning 
airplanes, were arrested at Newark Airport.
    The catering of aircraft is another problem. Well-paid airline 
employees once did these jobs. Those employees thought of working for 
an airline as a career, not just a job. Now, like airport security 
screeners, these jobs are performed by outside contractors. In fact, a 
foreign company owns the largest in-flight catering operation in the 
United States.
    Work being performed by third parties and machines has rendered our 
airports defenseless.
    The industry is in critical need of assistance. We totally agree 
with the airline management on this point. But airline employees, the 
real backbone of the industry, must be included in any discussions 
about industry relief. The transportation employees cannot be forgotten 
in this process.
    We therefore call for a Joint Task Force, comprised of labor, and 
management, working with the Department of Transportation to define the 
real problems, and make recommendations to the Congress of the United 
States.
    We have all been affected by this tragic and unnecessary act of 
violence. America is in a state of shock The IAM has lost at least two 
of its members. Thousands are missing. I have lost a dear and personal 
friend. Our prayers and thoughts are with the victims and their 
families. With all of this in mind, we have a responsibility to make 
certain that business as usual is not an option.
    I want to thank the Committee for inviting us to participate and 
listen to our concerns.
    I look forward to your questions.

    The Chairman. Thank you very much, Mr. Roach. Mr. Pinson.

STATEMENT OF HARRY PINSON, MANAGER, CREDIT SUISSE FIRST BOSTON 
        AND SOUTHWEST REGIONAL INVESTMENT BANKING GROUP

    Mr. Pinson. Good afternoon. I am responsible for our 
investment banking practice to the airlines in the United 
States, which again, is a very large and robust practice under 
normal circumstances, and I wanted to speak to you for a second 
about the future of the financibility of this industry.
    Obviously, the air transport system for all its faults here 
is the envy of the world. It's cheapness and ease of use means 
that more Americans fly more often than the citizens of any 
other major country. Whole industries are built around this 
unquestioned principle of mobility. Hotels, resorts, car rental 
agencies. It binds us together as a nation and connects us to 
the world.
    The events of last Tuesday and their ramifications are 
threatening that principle of mobility in a number of ways. 
First, the cash losses suffered while the industry was grounded 
and as it rebuilds this week are weakening an industry already 
made vulnerable by a weakening economy.
    Second, the reduction in demand caused by the loss of 
passenger confidence and the impact on travel times caused by 
the security guidelines necessary to restore that confidence, 
coupled with the increasing operating cost and lower fleet 
utilization that those same safety guidelines are likely to 
require means that the profit model for the industry is going 
to change, perhaps permanently.
    For the first time ever, an industry conditioned to growth 
will have to find a way to shrink to profitability. It will 
take a lot of Yankee ingenuity to find that path and many will 
not succeed.
    Third, the catastrophe last week and our government's 
response to it have served to raise the perceived potential 
liabilities of operating an airline, while simultaneously 
reducing the availability of insurance for that risk. This 
means that airline shareholders, creditors and potentially even 
employees and directors of these carriers are being asked to 
bear the risk of potentially catastrophic losses, an 
unprecedented and highly disruptive situation.
    Finance, the industry I participate in, has always played a 
big role in this industry because its persistent growth, 
capital intensity, fierce competition and low profit margins 
mean lots of external capital needs to be raised, for example, 
about $10 billion so far this year. Because the airplanes can 
be deployed anywhere in the world, have long useful lives and a 
long history of holding their value, the vast proportion of 
this capital is in the form of long-term debt secured by theses 
aircraft. This form of financing keeps annual ownership costs 
low and has generally been available in large amounts in 
virtually all operating environments, allowing airlines to 
fulfill purchasing equipments even when business is bad. It 
also means that the airlines have accumulated enormous debt 
service and lease payment obligations which will not diminish 
soon.
    We in our industry are eager to get back to the business of 
financing this one, as we are eager to get back to business 
generally. It's our livelihood. The rebuilding of this industry 
will generate terrific investment opportunities which will 
attract the capital necessary to fund the future of this 
industry and eventually supplant the aid you are considering.
    The fact that these investments will be risky does not 
necessarily diminish their appeal. The assessment of risk and 
speculation about an uncertain future are at the very core of 
the investing process. There are, however, some types of risks 
that financial markets find hard to deal with, which the 
current situation contains, and act as barriers to restarting 
that investment process.
    For example, the more stringent security procedures which 
are essential to attracting passengers back to the airlines 
will be costly ans disruptive, but we don't know how much 
because we don't understand them yet, nor do we know who will 
bear the costs. Clarity on the rules of this new game will be 
essential for the investment community to begin to assess 
rationally the future of the industry and its various 
participants. Until the rules are clear, investors will simply 
put their brains to work elsewhere.
    Since this issue also affects the likely size of the fleet 
you will see in the future, it makes the value of aircraft, the 
bedrock collateral for much of the industry's financing, also 
hard to determine.
    Second, investors are conditioned to assessing management 
turnaround plans and placing their bets, but liquidity concerns 
will again make this analysis difficult. Shrinking to 
profitability is a new concept in the airline industry. Given 
the rigidity of airline cost structures in both capital and 
labor, it will take a long time, years for our turnaround to 
take place.
    No airline has anything like the resources necessary to 
fund this turnaround and investors in the current poor general 
investment climate are not likely to bet on a company's ability 
to raise money in the future to fund its plan. Therefore, 
another necessary condition to getting private capital moving 
back into this industry is to give the airlines access to 
sufficient liquidity to fund a turnaround so that investors can 
focus on the business risks they do understand.
    It's in the nature of these support agreements that if the 
process goes as intended, much of this support won't be used, 
because it will act as a catalyst for the private capital flow 
back to the industry and to take back from the government the 
role of financing it.
    Third, new kinds of liability issues have arisen because of 
the catastrophe itself and the state of war resulting from it. 
The industry's insurance arrangements are not adequate to deal 
with this situation, and the war risk is effectively 
uninsurable at present. This has the potential to paralyze the 
industry, as you have heard from others, as investors and 
creditors are faced with the potential of catastrophic loss. 
This is an impossible situation for investors to grapple with.
    So, clarity as to the future, liquidity and liability 
management, address those issues and I think we are in 
business. Thank you.
    [The prepared statement of Mr. Pinson follows:]

Prepared Statement of Harry Pinson, Manager, Credit Suisse First Boston 
            and Southwest Regional Investment Banking Group

    Good afternoon Mr. Chairman. I want to thank you for holding these 
hearings today and allowing me to appear before the Committee.
    My name is Harry Pinson and I am a Managing Director of Credit 
Suisse First Boston (``CSFB''),\1\ and Head of the Southwest Regional 
Investment Banking Group, based in Houston. I joined CSFB in 1984, and 
moved to Houston in the summer of l995 from New York. I am responsible 
for coordinating the coverage of industrial accounts in the Southwest, 
including the airline industry. While in New York, I was Head of the 
Transportation Group in the Investment Banking Department from 1990 
through 1995.
---------------------------------------------------------------------------
    \1\ CSFB is a leading global investment and commercial banking firm 
serving institutional, corporate, government and individual clients. 
CSFB's businesses include securities underwriting, sales and trading, 
investment and merchant banking, financial advisory services, 
investment research, venture capital, correspondent brokerage services 
and online brokerage services. It operates in over 76 locations across 
more than 37 countries and 6 continents, and has some 28,000 staff 
worldwide (including over 16,000 in the United States). CSFB is a 
business unit of the Zurich based Credit Suisse Group (``CSG''), a 
leading global financial services company.
---------------------------------------------------------------------------
    I began my business career as an Associate in the public finance 
department of Merrill Lynch, where I specialized in the transportation 
industry, prior to joining CSFB. I have managed a variety of financing 
and strategic advisory assignments for major U.S. industrial companies 
including the acquisition of McDonnell Douglas by The Boeing Company, 
the strategic alliance between Continental Airlines and Northwest 
Airlines, the sale of United Airlines to its employees, advising the 
creditors of Continental Airlines in the reorganization of the Company 
the privatization of Qantas Airways and the acquisition of TWA by AMR.
    The U.S. air transportation system, for all its faults, is the envy 
of the world. Its  and ease of use means that more Americans 
fly more often than the citizens of any other major country. Whole 
industries are built around this unquestioned principal of mobility: 
hotels, resorts, car rental agencies. It binds us together as a nation, 
and connects us to the world.
    The events of last Tuesday and their ramifications are threatening 
that principal of mobility in a number of ways.
    First, the cash losses suffered while the industry was grounded and 
as it rebuilds this week are weakening an industry already made 
vulnerable by a weakening economy.
    Second, the reduction in demand caused by the loss of passenger 
confidence and the impact on travel times caused by the security 
guidelines necessary to restore that confidence, coupled with the 
increased operating costs and lower fleet utilization that those same 
safety guidelines are likely to require means that the profit model for 
the industry will change, perhaps permanently. For the first time ever, 
an industry conditioned to growth will have to find a way to shrink to 
profitability. It will take a lot of Yankee ingenuity to find that 
path, and many will not succeed.
    Third, the catastrophe last week and our government's response to 
it have served to raise the perceived potential liabilities of 
operating an airline while simultaneously reducing the availability of 
insurance for that risk. This means that airline shareholders, 
creditors, and potentially even the officers and directors of these 
carriers are being asked to hear the risk of potentially catastrophic 
losses: an unprecedented and highly disruptive situation.
    Finance, the industry I participate in, has always had a big role 
to play in this industry because its persistent growth, capital 
intensity, fierce competition and low profit margins mean lots of 
external capital needs to be raised: about $10 billion so far this 
year. Because the airplanes can be deployed anywhere in the world, have 
long useful lives and a long history of holding their value, the vast 
proportion of the capital raised is in the form of long-term debt 
secured by these aircraft. This form of financing keeps annual 
ownership costs low and has generally been available in large amounts 
in virtually all operating environments, allowing airlines to fulfill 
purchase commitments even when business is bad. It also means that the 
airlines have accumulated enormous debt service and lease payment 
burdens which will not diminish soon.
    We, in our industry, are eager to get hack to the business of 
financing this industry, as we are eager to get hack to business 
generally, It is our livelihood. The rebuilding of this industry will 
generate terrific investment opportunities which will attract the 
capital necessary to fund the future of this industry and eventually 
supplant the aid you are considering.
    The fact that these investments will he risky does not necessarily 
diminish their appeal. The assessment of risk and speculation about an 
uncertain future are at the core of the investing process. There are, 
however, some types of risks that financial markets find hard to deal 
with which the current situation contains, and act as harriers to 
restarting the investing process.
    For example, the more stringent security procedures which are 
essential to attracting passengers back to the airlines will be costly 
and disruptive, but we don't know how much because we don't understand 
them yet nor do we know who will bear the costs. Clarity on the ``rules 
of the game'' will he essential for the investment community to begin 
to assess rationally the future of the industry and its various 
participants. Until the rules are clear, investors will put their 
brains to work elsewhere. Since this issue also affects the likely size 
of the fleet for the foreseeable future, it makes the value of 
aircraft, the bedrock collateral for much of the industry's financing, 
also hard to determine.
    Second, investors are conditioned to assessing management 
turnaround plans and placing their bets, hut liquidity concerns will 
make analysis again difficult. ``Shrinking to profitability'' is a new 
concept in the airline industry. Given the rigidity of airline cost 
structures in both capital and labor, it will take a long time, years, 
for a turnaround to take place. No airline has anything like the 
resources necessary to fund this turnaround and investors in the 
current poor general investment climate are not likely to bet on a 
company's ability to raise money in the future to fund its plan. 
Therefore another, necessary condition to getting private capital 
moving back into this industry is to give the airlines access to 
sufficient liquidity to fund a turnaround, so that investors can focus 
on the business risks they understand.
    It is in the nature of these support arrangements that, if the 
process goes as intended, much of this support will not be used because 
it will act as a catalyst for private capital to flow to the industry 
and take hack from the government the role of financing the industry.
    Third, new kinds of liability issues have arisen because of the 
catastrophe itself and the state of war resulting from it. The 
industry's insurance arrangements are not adequate to deal with this 
situation, and the war risk is effectively uninsurable at present. This 
has the potential to paralyze the industry as investors and creditors 
are faced with the potential of catastrophic loss. This is an 
impossible situation for investors to grapple with.
    Clarity, liquidity, liability. Address these issues and we're in 
business.
    Thank you for the opportunity to appear here today and I would he 
happy to answer any questions.

    The Chairman. Thank you very much. Dr. Cooper.

        STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, 
  CONSUMER FEDERATION OF AMERICA, ACCOMPANIED BY ROBERT HUNTER

    Dr. Cooper. Thank you, Mr. Chairman, Members of the 
Committee. My name is Dr. Mark Cooper, I am director of 
research at the Consumer Federation of America. I am joined by 
Ron Hunter, who is our director of insurance.
    At the end of a long time day, let me start by suggesting 
that the debate we have heard today is a large part of what we 
are fighting for. Let no one mistake that the open democratic 
dialog, the give and take we have heard about how best to get 
the job done, detracts from our unity and sense of purpose. I 
greatly appreciate the opportunity to present a dissenting 
point of view, which is the heart of our democratic process.
    And in fact, I do represent the average Joes and Janes as 
Senator Fitzgerald mentioned. My Members are certainly average 
consumers around the country. And being typical Americans, I 
think we should seize this as an opportunity. The tragedy has 
occurred; in the American spirit, what can we accomplish going 
forward, which is exactly the spirit we have heard today.
    First of all, we take the opportunity to recognize that the 
airways are infrastructure. We had forgotten that, we had 
turned them into mere commercial operations, and yet you hear 
about essential services to small cities, about the centrality 
of the airways to defense and commerce, and we remember it is 
infrastructure, it is not just another industry.
    And because it is infrastructure, it certainly deserves 
some support by the public, it has a unique function. It was 
also uniquely impacted by the tragic events of last week. So 
therefore, there should be financial support.
    But while we are infusing cash, we also ought to take the 
opportunity to inject a good does of rationality into the 
industry. Recognizing that airspace is a limited resource, more 
precious now because of security concerns, we must not waste 
it. We must not let it be monopolized. Our goal should be to 
preserve the value and convenience of air travel as best as 
possible within the new confines of security concerns.
    This is an opportunity to improve competition within the 
industry. Every step that Congress takes to restore it to 
health should in fact be made with an eye toward preserving and 
promoting competition. I appeared before this Committee a while 
back, in which we heard small airlines begging for space, 
because they wanted to compete. Well, if there has been a 
reduction in traffic, let's make sure those new entrants get a 
shot at that space if it's available.
    This is an opportunity to create a better transportation 
network for the country. Congress should look very hard at high 
speed rail on high density routes. Our skies are filled with 
planes making short trips on very high density routes which 
aren't any faster than a good high speed rail would be, and 
that would give use a more diverse survivable transportation 
system.
    We should look on this as an opportunity to improve 
consumer protection. In addition to securing the safety of the 
traveling public, the rights of consumers need to be protected, 
and this is an important long-term consideration. If consumers 
do not believe they are being treated fairly, they will not 
sustain the commitment to fixing this system, to giving us a 
good survivable transportation network for the 21st century.
    And so, we need to worry about how the consumer will be 
treated. If the airlines want to pick and choose who is going 
to serve a route, what price will be charged, and how will that 
be decided? The airlines were having trouble delivering quality 
service to the public, which is why we had many hearings here. 
Now is an opportunity to figure out a way to balance consumer 
demands, competition and the financial demands of the industry.
    Now those are the opportunities. Let me suggest a couple of 
things we don't want to do. We obviously don't want to write a 
blank check. And we have heard a lot about the but-for 
analysis, and it's quite clear when you get a projection out 
for 6 months, the but-for has gotten very cloudy at the end, it 
looks more like a make whole analysis to me, this is how much 
we would have made, let's get it all back.
    And so, be very careful about how long the but-for is, but 
clearly, there were acts of government that impaired this 
industry and they deserve to be compensated.
    Second of all, with respect to the question of finance, in 
one sense the starting point should be simple, maybe we should 
commit to not letting airlines go bankrupt during this 
emergency. Some might have anyway, we don't know. But 
bankruptcy is a technical question that you can analyze by 
looking at their books. There are certain financial coverage 
ratios, minimum lease payments that have to be made in order to 
stay out of technical bankruptcy. And anything more than that 
in a tough economy when other people are facing bankruptcy is 
gravy that maybe they shouldn't be allowed to have.
    But perhaps we should commit to finding that number, and I 
don't think it's anywhere near 18 billion if you look at their 
finance charges and lease payment charges, but we should look 
at finding that number and that is a decent level of 
commitment.
    We should also not rapidly, hurriedly during crisis, change 
our fundamental laws. There will be time to think about 
antitrust, if we have to restructure the economic relationships 
in the industry. There will be time to look at insurance, 
questions of liability and a new threat. Those are legitimate 
questions, but the advice we always give to consumers, the 
average Joe and Jane, is don't make big decisions when you're 
under a lot of pressure or you've just suffered a tragic event.
    And that may be good advice to Congress when it comes to 
our insurance laws and antitrust laws. Yes, it's a legitimate 
issue, take your time and get it right. Thank you, Mr. 
Chairman.
    [The prepared statement of Dr. Cooper follows:]

       Prepared Statement of Mark Cooper, Director of Research, 
      Consumer Federation of America, Accompanied by Robert Hunter

    Mr. Chairman and Members of the Committee,
    My name is Mark Cooper and I am Director of Research for the 
Consumer Federation of America.\1\ I am accompanied today by the 
Consumer Federation's Director of Insurance, J. Robert Hunter, who will 
be available to answer any questions that may arise regarding the 
insurance implications of this issue.
---------------------------------------------------------------------------
    \1\ The Consumer Federation of America is a non-profit association 
of more than 280 organizations that, since 1968, has sought to advance 
the consumer interest through advocacy and education.
---------------------------------------------------------------------------
    Having testified before the Congress and other federal agencies 
about 150 times, I am well aware of the routine statements of 
appreciation that witnesses provide when they thank the Committee for 
the opportunity to testify. This is a very special hearing, in light of 
the tragic events of last week, so in thanking you for the opportunity 
to express the views of the Consumer Federation of America today, let 
me point out that it is proceedings such as this, in which the 
Committee will hear differing points of view, that are a significant 
part of the freedom we are fighting for. As a democratic society we are 
unified in our purpose to combat terrorism. We should be equally 
committed to allowing open dialogue as to how best to achieve that 
purpose, especially when it comes to using public funds to support 
commercial enterprises. This is, indeed, a rare opportunity that I 
truly appreciate.
    Although it is unlikely that Congress will consider propping up the 
many businesses that may go bankrupt in the months ahead as a result of 
the slowing economy and the tragic events of the past week, it is 
appropriate to consider some financial support for the airline 
industry. We should ensure that the industry does not collapse because 
of its unique role as a part of the essential infrastructure of the 
21st century economy and society and the severe impact that the attack 
has had on it.
    Airlines may need a limited infusion of cash to keep them afloat, 
but we should also inject rationality into the way this industry does 
business. In addition to ensuring a more secure air travel network, it 
is absolutely appropriate for Congress to require fairer competition, 
better service, and more effective consumer protection in exchange for 
assistance to commercial operators. The airline industry was falling 
seriously short in these crucial areas before the attack.
    Moreover, it would be a mistake to include hastily drafted industry 
proposals for legal indemnification and an antitrust exemption as part 
of this financial assistance package. There will be adequate time in 
the next few weeks to thoroughly discuss the implications of these 
longer-term proposals, parts of which may be ill-advised and harmful to 
consumers, and to prepare a legislative response if necessary.
    Recognizing that airspace is a limited resource, more precious now 
that security measures are likely to make it scarcer, we should not 
waste it, nor should we allow it to be monopolized by a few large 
carriers. Our goal should be to preserve the value and convenience of 
our transportation system as best as possible, within the confines of 
the new dictates of security. Once procedures to promote security are 
in place, we must find ways to ensure that competition fairly allocates 
resources within the industry, such as routes, landing slots and 
airport gate space. This will be a challenging task because of reduced 
capacity.

Keeping The Air Travel System Running In The Short Term
    In the short term, we are not opposed to limited financial 
assistance to the industry, as long is it based on a fair and careful 
accounting of the industry's short-term financial obligations, their 
losses and the extent of government responsibility for these losses. 
For example, it is reasonable to consider providing compensation for 
costs related to the shut- down of airline operations last week, as the 
FAA mandated this interruption because of national security concerns.
    The goal should be to keep airlines out of bankruptcy as long as a 
national emergency exists, but that does not mean writing them a blank 
check. Bond covenants have financial coverage ratio requirements and 
leasing arrangements identify minimum payments that must be met to 
avoid technical bankruptcy. That is the level of financial commitment 
that Congress should make. Airline management should not be excused 
from the obligation to efficiently adjust their operations to a new 
marketplace.
    Much of the cost of this adjustment is being shifted to the public 
through lay-offs, the brunt of which will be borne first by the 
affected employees and then by the treasury for unemployment and other 
benefits. To the extent that there is a permanent downsizing in the 
industry, funds should be made available to ease the transition for air 
industry workers as well.
Creating a Survivable Transportation Network in the Longer Term
    In the longer term, building a survivable transportation network 
requires redundancy and diversity of transportation options, as well as 
air travel decentralization. Here are some ideas that should be 
considered and debated.
    First, we should improve ground transportation, particularly high-
speed rail in highdensity air corridors. This could relieve a 
substantial part of the load in the most densely traveled routes 
without imposing significant indirect costs (increased travel time) on 
the public. It would also ease runway overcrowding at some airports. It 
would probably require the airlines to cut back on some of their most 
densely traveled and profitable routes for the sake of the public 
interest.
    Commercial operations that require plane changes by driving traffic 
through hub and spoke networks make economic sense for the air 
carriers, but they are heavy users of very scarce resources - take 
offs, landings and air traffic control. For consumers, however, the hub 
and spoke system has led to domination of routes in some regions by a 
single carrier, resulting in higher ticket prices. These networks also 
impose a transaction cost on the public that may increase substantially 
- boarding time. Concentrating traffic is profitable for the airlines 
and it may even be efficient, but it may not be in the public interest, 
given the new traveling reality.
    It may be necessary to separate different types of air traffic 
because they pose different security risks. Screening passengers is 
different from screening freight. General aviation, because it is not 
public transportation, can be required to have lower priority. We may 
have to allocate our scarcest resource - daylight hours at airports 
nearest to population centers - to moving people and relegate other 
types of traffic to off peak hours and more distant airports.
    We may also have to rethink expansions of airport capacity. Rather 
than adding runways at already overcrowded airports, it may be 
preferable to add airports handling different types of traffic.
Consumer Protection
    In addition to securing the safety of the traveling public, their 
rights as consumers should also be protected. If consumers are not 
treated fairly, they will obviously be less likely to fly, especially 
given the security concerns they may already have. It will also be 
harder to gain the long-term public support needed to build the 
transportation network we need.
    For many years now, airlines have been unable to deliver decent, 
on-time service to the public. A variety of causes have been cited - 
over-scheduling, inadequate airport capacity, antiquated air traffic 
control. This problem will get much worse since airline capacity will 
now be reduced by security concerns. We never want a plane to rush or 
to take off before it is secure and safe to do so, but the public 
deserves to be given honest and reasonable information about when 
planes will take off and land.
    The public should pay only once for ensuring the physical safety of 
passengers and the financial viability of the air travel system. 
Airport and air travel security are national security matters that 
should be the direct responsibility of government (federal and local) 
security forces, not private subcontractors of airlines and airports. 
Increasing governmental outlays for security can be offset by reduced 
private expenditures. Lay-offs shift costs to the public; airlines do 
not need to be compensated a second time.
    If billions are to be spent to directly support the airlines, then 
some agreement on ticket pricing must be reached. This is especially 
necessary in light of the fact that the already inadequate level of 
competition in the industry is likely to be diminished by the reduction 
in system capacity.
    Providing an antitrust exemption for allocating slots and routes, 
as has been suggested by some airlines, raises a host of serious 
concerns that must be considered at length. Larger airlines would 
likely attempt to use such an exemption to gain access to the most 
profitable routes and facilities. The survival of individual airlines 
will be determined by whether they have access to the most valuable air 
space and to airports near population centers during daylight hours. If 
we are going to preserve a competitive and convenient air travel 
industry, these finite public assets must be managed properly and 
shared among airlines, regardless of size.
    Having the government get involved in these issues may be a step 
back from the philosophy of ``let the marketplace decide,'' but asking 
the American taxpayer to pay billions to prop up airlines is the first 
step in that direction. In a general way, for the past several decades, 
we have neglected our infrastructure. The current crisis may refocus 
the nation's attention on this important issue. Making long-term 
decisions in a crisis mode does not always lead to the best choices. 
Having an open and thoughtful debate about the best policies in pursuit 
of new national goals, while spending the public's money, is the 
cornerstone of our democracy and likely to produce a much more 
effective long-term result.
    Thank you for the opportunity to offer these comments.

    The Chairman. Thank you, Dr. Cooper. That is at least a 
good ending for me, having spent the whole day here. I had a 
holdup on a bill here from my distinguished colleague from 
Texas on antitrust. Now I am glad that Mr. Mullin on behalf of 
all the airlines says no, they do not want to change the 
antitrust law.
    Second, with respect to competition, you are right. We have 
had it over the years, begging for gates and everything else 
like that, could not get any gates. Actually down in Texas, 
they got some temporarily and then they engaged in predatory 
pricing and put them out of business.
    These are the kinds of things we have to look at when you 
talk of the responsibility not to give a blank check. We have 
to look very carefully. It is a severe thing that has hit the 
airlines, but it has hit us all. My state, the largest industry 
is tourism, 14 billion. I can tell you, it is already cut in 
half for the next year. And I am going to be facing all the 
restaurants, all the hotels, all the rental cars and everything 
else like that, businesses directly affected. And that is why I 
say we have got to cover the airlines, get them saved harmless 
to a point, and then cutoff all the collateral claims, unless 
the government is going to take care of whatever it is, because 
the airlines will never, with the insurance companies going 
after each other on subrogation, never be able to end this 
series of claims as a result of 9/11.
    So, I really appreciate what you have had to say. Senator 
Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman. Mr. Chairman, I 
would just say that I had a little different view of what Mr. 
Mullin said about antitrust when we were talking about it. I 
thought he said that in some circumstances he thought the 
antitrust laws should be relaxed, and certainly to try to make 
sure that each small community has at least one air service. 
This might be one of the ways that you can waive antitrust for 
a good purpose.
    However, the purpose for which I was trying to originally 
have some way for antitrust exemptions to be made was to, in 
allow airlines to talk about over-scheduling during times of 
congestion. Unfortunately, I think probably that problem has 
subsided for a while so we probably would not need to address 
it.
    I would like to ask a technical question of Mr. Pinson, who 
is from my home state of Texas, and that is on the issue of 
what we do in the support package for airlines. If we do a line 
of credit or if we did a loan guarantee, which of those do you 
think is more productive but also more fair for taxpayers? 
Secondly, in a loan guarantee, do you think that there should 
be only a percentage of a loan guarantee to assure that there 
is still an effort made for all of the requirements of a good 
loan by the company that the Federal Government is going to 
guarantee?
    Mr. Pinson. Those are great questions. The first one, 
frankly I don't know about governmental financial arrangements 
to tell you that there is a material difference between one 
where in fact the government is simply extending the cash, 
being the banker, and the other is somebody else is extending 
the cash, but the government is providing the credit. I'm not 
sure there is really a difference from my point of view.
    On the second question, which I actually heard this morning 
in the finance committee, I think the dilemma is that right 
now, and it depends on the nature of the terms of the loan, but 
right now the industry is not financible, so the--I mean the 
premise here is that commercial finance isn't available, so 
setting commercial finance participation as a condition to an 
initial loan, as a condition sort of means you're out of luck 
at the get-go.
    Second, frequently, that--I mean, the purpose here I think 
is to in effect get off the dole as quickly as possible. This 
is an industry that is typically financible, good times or bad. 
I think it's perfectly fair somehow or other to in effect force 
companies to use the private markets when they become 
available, and create incentives to do so. And how exactly you 
do that, I don't know, but it's my fond hope that while this 
credit is extended, it in effect isn't used because the 
confidence instilled by extending the credit means you don't 
need it, because other people will step in and provide the 
necessary financing.
    Senator Hutchison. Let me just ask Mr. Roach a question on 
the security issues. Do you believe that there should be a 
security clearance for every person who has access to an 
aircraft, whether it is a food handler, baggage handler, or 
mechanic?
    Mr. Roach. Everyone should be cleared before they go on 
that aircraft. That would be security.
    Initially, the airlines had their own people, airline 
employees, who catered the planes and did all the work. For 
cost purposes they started subcontracting the work out to 
companies and to individuals who really have no loyalty to the 
airline, they make minimum wage and they have very little 
training. In addition, they have sent work overseas, foreign 
repair stations where work is being performed, and rather than 
work being performed in this country by trained mechanics that 
are overseen by trained foremen, the work is going overseas.
    Now with 100,000 people allegedly or supposedly getting 
laid off, all that work should be coming in house to people who 
have the security clearance, who have the qualifications to 
perform the duties, and that's the only way you are going to 
secure the airports. Just to do things cheap is rendering our 
airports defenseless.
    Senator Hutchison. One of the things that was brought up by 
an airline employee was piggy backing, which is going through a 
security door where you are supposed to go one person at a time 
with your security card, and in fact someone would allow a 
second person to go through on the same card. Do you think that 
the employee that allows another person to go through on their 
security card should have a sanction such as firing or a fine 
for doing that? Would that make a difference?
    Mr. Roach. I think everybody should follow the rules, 
especially security rules. If somebody violates the rules, they 
should be warned about it, and if they progressively continue 
to violate the rules, then they have to do something else, but 
I think everyone should follow the rules when it comes to 
security.
    Senator Hutchison. So you think a sanction of some kind 
would be appropriate for people who would violate those rules 
and put other people in jeopardy?
    Mr. Roach. Who consistently violate the safety rules, 
something should happen, yes.
    Senator Hutchison. Thank you, Mr. Chairman, I see that my 
time is up, and I thank all of you for waiting a long time, but 
I think it is important that we have the full range of the 
panels today. You have added something that is different from 
the earlier panels and we appreciate your patience. Thank you.
    The Chairman. Thank you. Senator Nelson.
    Senator Nelson. Dr. Cooper, you represent the Consumer 
Federation of America. What do you think consumers ought to get 
out of the fact that we are about to use taxpayer money, other 
than the reinstitution of an industry that is necessary to our 
national economy, what do you think the taxpayers, consumers 
ought to get in return in the way of improvements of airline 
service?
    Dr. Cooper. Well, it depends on the range of things you do 
beyond just money, but we have heard a great deal of talk about 
insuring essential service to a variety of communities, and 
that really does get us to the notion that this is 
infrastructure, it's not just a market, we are not willing to 
allow airlines to abandon these markets.
    And so if the airlines are going to decide this route needs 
to be served, by which airline and at what price? I get to ask 
those questions, because I know that competition is not going 
to protect me on that route and I know that the marketplace 
will not serve that route.
    At the larger airports, we believe that the ability of new 
entrants to get into those airports--let me give you an 
example. I am told that between Washington and New York, there 
are about 170 flights a day, a tremendous number of airplanes 
going back and forth, and we were told about the airplane that 
took off yesterday morning with only four passengers, and most 
of those 170 flights are not nearly booked. But that's a high 
visibility route that you want to serve to attract a certain 
kind of customer.
    There were new entrants dying to get some space so that 
they could fly from New York to Orlando. I sat here with Jet 
Blue, which said if I could get a fight from here to there, I 
could serve a much larger, or a different market that was 
underserved.
    And so, if we are going to put up $18 billion or some large 
sum of money, I think we ought to make sure that where we can, 
we get as many carriers into these airports to compete as 
possible.
    If we have to rebuild the industry, it may not be around 
the U.S. Air model, it may be around the Southwest Air model, 
or the Jet Blue model, which is a rather different model than 
the Southwest. There are competing business models out there. 
We need to make sure that that competitive aspect gets taken 
care of.
    The third thing is consumer rights. Let's be clear. Before 
last Tuesday, the airlines had a great deal of difficulty 
delivering people when they said, without getting them 
frustrated. They were not meeting their schedules. Consumers 
deserve honest and fair information about when the plane is 
going to take off and when it's going to land. They were not 
getting that.
    And if we are going to put up $18 billion or some number, 
we have to have some sort of an agreement, and I don't want to 
get back into managing schedules, and we never want a plane to 
take off before it's ready and safe.
    Senator Nelson. But they can at least tell us.
    Dr. Cooper. We also need an honest statement about when 
it's going to get there.
    Senator Nelson. By the way, you know, another reason that 
plane might have taken off with only four people on it is that 
all the TV news is saying you have a 3-hour wait. Who wants to 
go to New York by driving to Dulles, thinking they have to wait 
for 3 hours, then to fly to LaGuardia. Nobody would want to do 
that. The fact is, they do not have any wait.
    Dr. Cooper. I think a high speed rail might take a big bite 
out of that trip.
    Senator Nelson. Let me ask Mr. Pinson just a quick 
question. You heard my questioning of Mr. Mullin earlier about 
building the confidence of the financial markets. Increase the 
passengers, and affordable and available insurance. You are 
part of the capital markets. Would you add to that?
    Mr. Pinson. Well, I think he was spot on. Insurance is just 
a cost like any other cost, and you know, fuel, anything else, 
so to the extent we're trying to reform the industry to 
profitability and we can mitigate its costs that's a good 
thing, it is just helping in the restoration.
    The passenger recovery is obviously, that's the thing that 
everyone has agreed on, that we have to get passengers back in 
the planes. I think the hard notion is going to be, are 
passengers going to be, even after the safety concerns are 
allayed, coming in the same numbers? And if the security 
procedures that are allaying their fears are cumbersome and 
time consuming, as they are likely to be, that has to have a 
dampening effect on the desire to, say, take the shuttle, 
because it just adds to the trip time, compared to other ways 
of making the same trip or just deciding not to go at all.
    Senator Nelson. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Fitzgerald.
    Senator Fitzgerald. Mr. Roach, I wanted to ask you, are the 
airlines taking advantage now of that clause in the contracts 
with the unions that said if there is an event beyond their 
control, they can furlough workers?
    Mr. Roach. Yes, they are. U.S. Air, for example, is the 
worse offender, furloughing employees out of seniority, not 
giving them the guaranteed severance that's in those collective 
bargaining agreements, and telling them they are going to 
oppose any unemployment insurance that they may receive. And 
again, we were told by Secretary Mineta that would not be the 
case, that those provisions in the collective bargaining 
agreements would be adhered to.
    And yesterday, at another hearing, CEO Anderson echoed for 
the airlines that yes, all these things, all these provisions 
of the collective bargaining agreement would be adhered to and 
all the benefits, and that is not happening. They are taking 
advantage of a situation they said was an act of war.
    Senator Fitzgerald. Well, Mr. Roach, if the airlines are 
given the $5 billion direct aid that they are calling for, is 
there anything that you are aware of in their proposal that 
would prevent them from continuing to furlough the workers?
    Mr. Roach. There is nothing that prevents them from 
furloughing the workers.
    Senator Fitzgerald. So they could take the money and run, 
and give a kick in the gut to the employees anyway.
    Mr. Roach. Right. That's why I was saying there needs to be 
a real task force. Nobody gives anybody $5 billion without any 
restraint and without some rules and regulations.
    Senator Fitzgerald. It looks like they are getting ready to 
do it around here, as far as I can tell.
    Mr. Roach. Clearly people are being adversely affected, and 
again, 100,000 people as they have said are going to be laid 
off, which we don't believe should happen because of all the 
work that can be done at the airports, and securing the 
airports, are being laid off, they're not getting any health 
insurance, they're going to oppose them on getting unemployment 
insurance.
    There is no talk of retraining people for some of these 
security jobs, there is no talk of retraining people to do 
other work that they have subcontracted our, or bringing work 
in house. And it doesn't appear that there is anything that I 
have seen, and we have been talking about this since we got 
wind of it, that there has to be some restrictions on what they 
do to their employees, there has to be a task force made up of 
labor and management and the DOT, so we can sit down and 
resolve these issues as they come along, as well as rebuild the 
system.
    Senator Fitzgerald. Are you being included in any of the 
negotiations on the package?
    Mr. Roach. No.
    Senator Fitzgerald. I think you should be.
    And just, Mr. Neidl, in your research report that I have, 
you suggested a cash infusion of an estimated 2 to $3 billion 
to make up for the estimated losses the industry has incurred 
as a result of the shutdown after the terrorist attacks. You 
recommend 2 to $3 billion.
    Well, this package is going to give $5 billion. Do you not 
think it is too much? And please, Mr. Neidl and Mr. Pinson, if 
you could disclose--I mean, you are--the airlines are your 
customers. I mean, you are effectively, it is almost like you 
are in the industry yourself because your business will benefit 
them by getting the money, your livelihood. And I would 
imagine, Mr. Neidl, that ABN Amro, you know, does business with 
a lot of airlines too.
    Mr. Neidl. I wish we did.
    Senator Fitzgerald. But you are both supporters of the 
industry, you want them to get as much money as they can, 
right, from your personal interest?
    Mr. Neidl. I want the industry to survive, and it's not 
going to survive without the infusion of funds, and those are 
preliminary numbers that I did last week. I think there are 
more updated numbers now which I haven't updated. I went 
through, as Mr. Mullin went through his calculations, I did not 
have any disagreement with anything he was calculating, but 
nobody really knows right now how quickly people are going to 
start flying again over the next couple of weeks.
    But in my analysis, we have not been doing any business 
with airlines on a banking level and as far as my analysis 
goes, as an airline analyst, I have been strictly trying to 
help investors decide whether they should buy or not buy 
airline stocks, or what stocks to buy if they did want to go 
into the airlines.
    Senator Fitzgerald. Mr. Pinson, why would a bank not lend 
to Delta, which has $7 billion in unencumbered aircraft? I was 
in the banking industry before. If I was secured, I did not 
really care about what other issues were around because I knew 
I had the collateral, and we would go out and pick it up.
    Mr. Pinson. You're right in principle, and 99.9 months out 
of the last 100, you are exactly right.
    Senator Fitzgerald. Can you say with certainty there is no 
lender in the world who will lend to any of these airlines, and 
that they have actually gone out and asked for it, and every 
single request for lending has been denied?
    Mr. Pinson. Obviously I can't answer that question because 
I can't survey the world. I can tell you that many of the major 
airlines in the United States are clients of mine and believe 
me, I am trying to figure out a way to raise any cash for them 
I can. As I mentioned in my written remarks, and you said the 
magic word, collateral. The way the airlines have been able to 
attract so much debt which they have to service, is that the 
collateral value of aircraft has been so persistent and 
reliable over a long time, so the incomes of the airlines may 
fluctuate dramatically from year to year, but the value of the 
aircraft tends to remain relatively level.
    The problem as I am saying is that right now, for example 
there are more airplanes in surplus for same or lease now than 
there was at the height of the Gulf War, already, before the 
airplanes had put any planes on the ground, OK?
    Senator Fitzgerald. Whose fault is that? It is not the 
taxpayers' fault.
    Mr. Pinson. No, no, I'm trying to answer your question. It 
is just a fact, OK? So the reason why people are having trouble 
lending right now is because the prospective value of that 
collateral is uncertain because there are going to be so many 
more aircraft in surplus that if you have to foreclose on an 
airplane, who are you going to sell it to.
    Senator Fitzgerald. But that was the case before September 
11 too. I had heard there was a glut of aircraft because the 
manufacturers had been agreeing to buy the used, or take the 
used aircraft off their hands in return for them buying a new 
one, and now the manufacturers are trying to go all over the 
world unloading these.
    Mr. Pinson. That's the great American system, you bet.
    Senator Fitzgerald. So that is a pre-September 11 factor 
that is making it difficult.
    Mr. Pinson. That's right, and we were the week before this 
disaster as an industry, busily raising money for the airlines 
on very attractive terms notwithstanding their weak financial 
condition, secured by this very equipment. People said yeah, 
you know, there's 800 planes in the desert, that will work off, 
that's OK with us, the economy will come back, we'll use that 
equipment. But now we're not there, we are kind of down here, 
and that 800 is going to double or more as the industry has to 
shrink to manage this reduction in demand.
    So I think with the passage of time as I say, and it's not 
going to be much time, as the fate of the industry is more 
clear and how much equipment they can effectively use, people 
will grow more confident about the value of that collateral, as 
they will every other attribute of the airline industry, and so 
the pump will get primed to finance those that are financible. 
But right now, I think the answer is no.
    Senator Fitzgerald. Well, all of you, thank you very much. 
And to the chairman, thank you for putting up with this Senator 
from Illinois for keeping us all here.
    The Chairman. Let me ask just one final question of Mr. 
Pinson, because he says a necessary condition to getting 
private capital moving back into this industry is to give the 
airlines access to sufficient liquidity to fund the turnaround, 
so that investors can focus on the business risks they 
understand.
    How much in dollars and cents are you talking about, Mr. 
Pinson?
    Mr. Pinson. I really can't gainsay the judgment of the 
industry itself. It seems reasonable, but it's an awfully murky 
set of circumstances. I don't have any crystal ball that gives 
me a better judgment. As I say, they are telling you what their 
losses are, and I think the world needs assurance that somehow 
those losses will be met. It is my fond hope that some of those 
losses are actually going to be met by the private sector 
getting back in gear as they see this industry turning around 
and financing it, but I think the amount of necessary liquidity 
support that needs to be assured to the investors and to the 
industry is probably somewhere in the neighborhood of what they 
are asking for.
    The Chairman. The 5 billion?
    Mr. Pinson. No, I don't think the 5 billion will do it. I 
think the whole number is what, somehow or another, is the 
number you need to be focusing on, I think.
    The Chairman. What is the other figure?
    Mr. Pinson. The loan guarantees that they have been talking 
about.
    The Chairman. How long will the 5 billion carry them?
    Mr. Pinson. They say until September 30, I believe, or at 
least those are the losses they will burn.
    The Chairman. So in the 10-day period between now and the 
30th, they are going to be compensated a half billion a day, 
and then we are back to where we are right here this afternoon; 
is that what you are saying?
    Mr. Pinson. That's sort of what I'm saying. I don't think 
in the next 10 days the markets are going to suddenly revive 
and see a rosy future for this industry and start providing 
funds.
    The Chairman. So what have I done as your senator by voting 
for 5 billion if I am going to find myself in the same 
predicament 10 days from now as I am right this minute, so what 
have I done?
    Mr. Pinson. You have moved the ball 10 days further toward 
the goal post.
    The Chairman. Moved the ball?
    Mr. Pinson. That's about it.
    The Chairman. Senator Fitzgerald.
    Senator Fitzgerald. I think this package is way too much, 
and the thing I would want to ask Mr. Neidl and Mr. Pinson, the 
airline executives have said, and I think Mr. Mullin testified 
that his incentive compensation is going to be pretty much zero 
this year because their stock options are worthless, they are 
all under water. But let us face it, is this not a good time 
for those airline executives to issue options to themselves now 
while their stocks are pounded down to low levels, and then 
they get this government assistance, those stock options will 
produce gargantuan increases over the next couple of years. And 
is that not the case, that the best time to get your options is 
when the price of your stock is really low, the exercise price?
    Mr. Pinson. Well, I can't argue with the mathematics, 
unfortunately. I don't believe executives can grant themselves 
options, I think their boards grant the options.
    Senator Fitzgerald. I should say the board.
    What do you think about Mr. Wolf getting the right to be 
paid $40 million, he and the CEO this year, in return for 
having negotiated the agreement with United, even though it 
didn't go through. Do you think U.S. Air, that would be an 
appropriate payment for their company to make to Mr. Wolf while 
their company basically is hovering near insolvency?
    Mr. Pinson. I really can't comment.
    The Chairman. Oh, come on, you can comment.
    [Laughter.]
    Senator Fitzgerald. Would Dr. Cooper like to comment on 
that? Are you aware of that?
    Dr. Cooper. Yes, there was one of the stockholders who was 
at the meeting on TV yesterday, who said that $45 million 
destroys the credibility of U.S. Air asking for help.
    Senator Fitzgerald. Yes, I agree with you. Now, do you 
think that there should be conditions in the government bailout 
package? Mr. Roach said, nobody gives $5 billion without asking 
anything in return, and I said, Mr. Roach, I think you are 
going to see it happen. I think the railroading has been so 
persistent here. I mean, the memorial service had not even been 
over when this package was being put together and I have to 
say, I am very concerned, because I do not think there are 
adequate safeguards here to protect the taxpayers' money or to 
deter the airlines from asking too much.
    If they had to give up some common stock in return for the 
equity infusion, that would prohibit or deter airlines from 
asking for more money because the existing shareholders would 
be diluted out.
    Dr. Cooper. Senator, I mean obviously, executive 
compensation is something we consumer advocates love to 
complain about. But when you are looking at $18 billion, it is 
small potatoes, and it would be wonderful if they all said 
we'll work for a buck a year, but that's not going to save the 
American taxpayer a lot of money.
    So the bigger issues that you have raised about how do we 
get an equity position so that when the industry comes around, 
they will pay it back, or in the alternative, this $5 billion 
is, and as I understand the numbers that have been described to 
me, they said this is how much money I would have made in 
September, and I can guess the short-term pretty closely. This 
is how much money I would have made by next June, here is what 
I assume will happen to business, pay me the difference. It 
assumes no management efforts to control those costs, to shrink 
this industry. This was their projections and he has told you, 
it may have to shrink.
    Essentially there are no variable costs to be controlled 
here, there are no slots to be sold to Jet Blue, which might 
actually be able to startup faster, or Southwest says they were 
flying again, let's give them more space.
    So executive compensation is an important issue as a 
symbol, but there are big structural questions here and you 
have focused on them, as many of the other Members of the 
Committee have. So I didn't mention it. I don't want to seem 
that I was derelict in my duty.
    Senator Fitzgerald. Do you think we are bailing out the 
airlines as opposed to other industries because of their 
political clout?
    Dr. Cooper. Well, we accept the notion that the air 
industry is infrastructure, it's different, and you have heard 
many ways it is different.
    The Chairman. You keep saying infrastructure and the keep 
saying privatize, deregulate, deregulate, deregulate. I mean, 
come on.
    Dr. Cooper. Senator Rockefeller said he would have voted 
against deregulation. What I would like him to do is drive a 
harder bargain for the bailout. Right now that's what we can 
do, and to the extent we're going to do, let the industry 
manage which airlines go into which city. We're back to the old 
system, and I get a right to say which airline. Maybe the new 
entrants will be the spokes, and bigger carriers who want to do 
the transcontinental flights can be the fat pipes.
    Maybe we have to reorganize the industry that way to make 
sure we have got a lot of little entrants who at some point 
could grow. But if we are going to pay $18 billion, then this 
Committee ought to have its hand on the throttle to figure out 
what policymakes sense for the public.
    The Chairman. Very good. The Committee is indebted to each 
of you four. We thank you very much.
    The Committee will be in recess subject to call of the 
chair.
    (Whereupon, the hearing recessed at 6:15 p.m.)

                                  
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