GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

United States General Accounting Office

Washington, DC 20548 

June 4, 2004 

The Honorable John McCain 

Chairman 

The Honorable Ernest Hollings 

Ranking Minority Member 

Committee on Commerce, Science, and Transportation 

United States Senate 

The Honorable Don Young 

Chairman 

The Honorable James L. Oberstar 

Ranking Democratic Member 

Committee on Transportation and Infrastructure 

House of Representatives 

Subject: Aviation Assistance: Compensation Criteria and Payment Equity under 

the Air Transportation Safety and System Stabilization Act 

In response to the September 11, 2001, terrorist attacks on the United States, the 

Congress enacted the Air Transportation Safety and System Stabilization Act 

(Stabilization Act)1 that provided, among other things, $5 billion in emergency 

assistance to compensate the nation’s air carriers for losses incurred as a result of the 

attacks. Pursuant to a previous congressional request, we monitored the Department 

of Transportation’s2

 (DOT) progress in administering the emergency assistance 

program. As a result of our work, we reported3

 on the payment process DOT 

employed to administer the program, details on the losses claimed by the air carriers, 

and the payments disbursed under the program. 

 

1

 Air Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (Sept. 22, 

2001). This act was later amended by the Aviation and Transportation Security Act, Pub. L. No. 107-71, 

§ 124, 115 Stat. 597, 631 (Nov. 19, 2001). 

2

 The Stabilization Act directed the President to take actions to compensate air carriers. The President 

subsequently delegated his authority to do so to the Secretary of Transportation, 66 Fed. Reg. 49,507 

(Sept. 27, 2001). 

3

 U.S. General Accounting Office, Aviation Assistance: Information on Payments Made Under the 

Disaster Relief and Insurance Reimbursement Programs, GAO-03-1156R (Washington, D.C.: Sept. 

17, 2003).
Page 2 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

Now, Section 824 of the Vision 100 – Century of Aviation Reauthorization Act 4

requires that we report on the criteria and procedures used by DOT to compensate 

air carriers under the Stabilization Act emergency assistance program with a 

particular focus on whether it is appropriate to compensate air carriers for the 

decrease in value (asset impairment) of their aircraft after September 11, 2001, and to 

ensure that comparable air carriers receive comparable percentages of the maximum 

compensation payable. DOT published its criteria and procedures in a series of 

guidelines and regulations promulgated between September 2001 and August 2002. 

The DOT regulations relevant to asset impairment and comparable compensation, 

among others, are the subject of a suit pending in the U.S. Court of Appeals for the 

District of Columbia Circuit. Since DOT’s regulations are subject to the court’s 

review, we will not specifically address the appropriateness of DOT’s criteria and 

procedures as they relate to these matters. The litigation is discussed in more detail 

later in this report. In light of the ongoing litigation, we met with your staff and 

agreed that we would (1) describe the measure(s) by which the air carriers were 

compensated under the Stabilization Act as well as DOT’s criteria and procedures, 

such as policies on impairment, established to administer the program and (2) 

determine if there are possible scenarios under which air carriers, comparable in size 

and type (cargo or passenger), conceivably could receive different levels of 

compensation. 

In order to address the first objective, we reviewed the Stabilization Act, analyzed 

DOT’s regulations and implementation guidance, and interviewed the DOT staff who 

administered the program. Additionally, we reviewed and analyzed the arguments 

contained in the legal briefs filed by the air carriers and DOT in the U.S. Court of 

Appeals for the District of Columbia Circuit. For the second objective, we 

determined if there were possible scenarios under which comparable air carriers 

could potentially receive different amounts of compensation. On the basis of our 

previous work,5

 we identified various factors that influenced the amount of 

compensation a carrier could receive and illustrated the impact of these factors in 

several different scenarios. We discussed these scenarios with the DOT officials who 

administered the program to obtain assurances that our scenarios were 

representative of situations that they observed in administering the program. We 

were unable to base our scenarios on details from actual claim files because of the 

confidential and proprietary nature of much of those data. We requested comments 

on a draft of this report from the Secretary of Transportation or his designee. Written 

comments from the Assistant Secretary of Administration are reprinted in the 

enclosure. Our work was performed from February 2004 through May 2004 in 

accordance with U.S. generally accepted government auditing standards. 

RESULTS IN BRIEF 

Sections 101 and 103 of the Stabilization Act established three criteria on which to 

base air carriers’ compensation amounts: (1) direct losses incurred as a result of the 

 

4

 Vision 100 – Century of Aviation Reauthorization Act, Pub. L. No. 108-176, § 824, 117 Stat. 2490, 2595 

(Dec. 12, 2003). 

5

 Work performed for GAO-03-1156R was conducted from September 2001 through August 2003 and 

was performed in accordance with U.S. generally accepted government auditing standards. 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 3

federal ground stop order and incremental losses incurred from September 11 

through December 31, 2001, as a result of the terrorist attacks; (2) carrier type (e.g., 

passenger or cargo); and (3) a calculated formula amount based upon each carrier’s 

percentage of industry capacity and the total amount of compensation available 

under the legislation. Because the statute required that the maximum air carrier 

compensation amounts be equal to the lesser of direct and incremental losses as 

determined by DOT or this formula amount, the formula effectively “capped” the 

amount of compensation an air carrier could receive for its September 11-related 

losses. DOT published a series of procedural rules describing the compensation 

process and provided additional guidance for how it would determine, among other 

things, direct and incremental losses, including policies relating to the exclusion of 

asset impairment losses. Generally, DOT excluded impairment losses for a number of 

reasons, including DOT’s view that these losses were presumed to be typically 

experienced over a period much longer than the September 11 through December 31, 

2001, compensation period and that it would be difficult, if not impossible, to 

separate impairment losses due to the terrorist attacks from impairment losses 

associated with the general economic slowdown generally acknowledged to be under 

way at the time of the attacks. 

A number of factors influenced the amount of compensation air carriers ultimately 

received under the Stabilization Act. Conceivably, these factors could result in 

scenarios in which comparable air carriers could have received different levels of 

compensation. For example, two air carriers could have comparable losses related to 

September 11, but be subject to different formula caps because they had different 

capacity levels. If one or both carriers had losses that exceeded the formula amount, 

the formula would cap the compensation amount at different levels. Other factors 

unique to individual air carriers, such as geographic location and carrier forecasts, 

influenced the amount of direct and incremental losses an air carrier reported and 

affected the compensation levels air carriers could potentially receive. For example, 

air carriers located on the East Coast where the market showed a greater sensitivity 

to the terrorist attacks may have incurred more revenue decline and more direct and 

incremental losses than carriers on the West Coast. Also, because forecasts formed 

the basis of a carrier’s direct and incremental losses, an optimistic forecast could 

have resulted in more direct and incremental losses than a pessimistic forecast. 

These and other factors or combinations of factors influenced the levels of 

compensation in different ways for different carriers. 

Three air carriers are seeking from the U.S. Court of Appeals for the District of 

Columbia Circuit a judicial determination that DOT’s regulations implementing 

provisions of the Stabilization Act relating to direct and incremental losses are 

inconsistent with that act and reflect “arbitrary and capricious” administrative 

actions by DOT. As of June 4, 2004, the court had not issued its decision, nor had the 

carriers participating in this lawsuit settled their compensation claims with DOT. 

DOT officials also told us the claims of a small number of other carriers also remain 

pending. Therefore, the emergency assistance program, although substantially 

completed, is still ongoing. 

In commenting on a draft of this report, DOT said it found our report to be accurate 

and well reasoned. DOT offered additional support for and amplification of what it 

felt were key issues. DOT’s comments are reprinted in the enclosure. 
Page 4 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

CRITERIA AND PROCEDURES USED BY DOT UNDER THE STABILIZATION ACT 

The Stabilization Act established that air carriers could be compensated for direct 

and incremental losses caused by the terrorist attacks and related ground stop order, 

subject to a cap based on a formula allocation of the total compensation amount. 

DOT published a series of procedural rules describing the compensation process and 

provided additional guidance for how it would determine, among other things, direct 

and incremental losses, including policies relating to the exclusion of asset 

impairment losses. 

Statutory Criteria

Sections 101 and 103 of the Stabilization Act6 established three criteria on which to 

base air carriers’ compensation amounts: (1) direct losses incurred as a result of the 

federal ground stop order7 and incremental losses incurred from September 11 

through December 31, 2001, as a result of the terrorist attacks;(2) carrier type (e.g., 

passenger or cargo); 8 and (3) a calculated formula amount based upon each carrier’s 

percentage of industry capacity and the total amount of compensation available. 

Each carrier was to receive maximum compensation equal to the lesser of these 

demonstrated direct and incremental losses or the formula amount. 

The Stabilization Act distinguished between passenger and cargo carriers. It allocated 

$4.5 billion9

 to be used to compensate passenger-only carriers and combined 

passenger and cargo carriers; the remaining $500 million was to be used to 

compensate cargo-only carriers. The Stabilization Act, as illustrated in step 1 of figure 

1, specified how to calculate the air carriers’ formula amounts. For passenger 

carriers, the available amount of compensation ($4.5 billion) was to be multiplied by 

the ratio of the individual carrier’s August 2001 available seat miles (ASM), a measure 

of available capacity, to total available seat miles of all applying carriers. Similarly, 

for cargo carriers, the available amount of compensation ($500 million) was to be 

multiplied by the ratio of the latest quarterly data available for revenue ton miles 

(RTM), a measure of utilized capacity, to total revenue ton miles of all applying 

carriers. This formula effectively capped the amount of compensation an air carrier 

could receive for its September 11-related losses. Direct and incremental losses 

exceeding the formula amount were not compensated. 

 

6

 Pub. L. No. 107-42, § 101(a)(2)(A) and (B) and § 103(b). 

7

 The Federal Aviation Administration ordered a federal ground stop order (a shutdown of the nation’s 

airspace) from September 11 through the morning of September 13, 2001, although some planes were 

allowed to reposition and return to their starting locations during that time. Certain airspace and 

airports were not returned to pre-September 11, 2001, status until later. For example, Ronald Reagan 

Washington National Airport, which services Washington, D.C., was phased back into operation 

beginning October 4, 2001. 

8

 In addition to passenger and cargo carrier types, an amendment to the Stabilization Act later 

authorized the President to set aside a portion of the $5 billion for certain classes of air carriers, such 

as air tour operators and air ambulances. Pub. L. No. 107-71, § 124. 9

 Under the amendment to the Stabilization Act, $35 million of this amount was set aside for smaller air 

carriers and distributed using a modified formula calculation. 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 5

Figure 1: Calculation of an Air Carrier’s Maximum Compensation Amount 

Structured Payment Process

As we reported in September 2003, DOT developed a structured payment process to 

implement the statutory provisions set forth in the Stabilization Act and expedite the 

distribution of funds. Generally, DOT’s compensation process consisted of a series of 

payment rounds. In each payment round, as initial estimates of losses were replaced 

with actual accounting data for the compensation period, air carriers were allowed to 

receive an increased percentage of their total compensation. Maximum compensation 

equaled the lesser of the carrier’s direct and incremental losses as determined by 

DOT or the carrier’s formula amount, as shown in step 2 of figure 1. 

The department published program guidance in a series of Federal Register notices 

of final regulations10 that took effect immediately without a formal comment period. 

However, in publishing each set of notices, DOT solicited comments from air carriers 

and others, and responded to them in subsequent notices. Table 1 summarizes the 

chronology of the procedural rules and the amount of maximum compensation 

allowed under each payment round. 

Table 1: DOT Procedural Rules 

Publication Date 

Significant issues 

addressed in guidance 

Maximum percentage of 

compensation allowed 

Program 

Guidance Letter 

October 1, 2001a Structure of the payment 

process and policies for 

initial disbursement of funds 

50% 

Rule #1 October 29, 2001 Round 2 application and 

submission deadlines 

85% 

Rule #2 January 2, 2002 Various air carrier comments 

Rule #3 April 16, 2002 Round 3 application, audit 

requirements, clarification of 

emerging issues, and air 

carrier comments 

100% 

Rule #4 August 20, 2002 Various air carrier comments 

Source: GAO analysis. 

Note: Based on Program Guidance Letter (Oct. 1, 2001); 66 Fed. Reg. 54, 616 (Oct. 29, 2001); 67 Fed. Reg. 250 (Jan. 2, 

2002); 67 Fed. Reg. 18, 468 (Apr. 16, 2002); 67 Fed. Reg. 54, 058 (Aug. 20, 2002). 

a

Draft versions of the Program Guidance Letter were distributed to air carriers immediately after the Stabilization Act was 

signed into law. 

 

10 These regulations are codified at Title 14, Code of Federal Regulations Part 330 (2004). 
Page 6 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

Principle for Determining Direct and Incremental Losses

An integral part of the payment process was the determination of direct and 

incremental losses. DOT generally calculated an air carrier’s direct and incremental 

losses as the adjusted difference between forecasted and actual financial results for 

the period September 11 through December 31, 2001. Specifically, DOT presumed 

that the difference between an air carrier’s pre-September 11 forecasted financial 

results and actual financial results for the compensable period would approximate 

the carrier’s direct and incremental losses related to the terrorist attacks. DOT 

expected the carrier to make adjustments to this difference for items the carrier 

could demonstrate to the department’s satisfaction were unrelated to the terrorist 

attacks. For example, an air carrier could exclude unrelated income, such as an 

unforecasted tax settlement from a prior year that was received during the 

compensable period, if it was substantiated with appropriate tax and accounting 

records. 

Under DOT’s basic principle of calculating losses, revenue decline was the primary 

driver of losses. DOT offset these losses with any cost savings as well as any 

incremental gains or profits incurred after the federal ground stop order through the 

end of the compensable period that were deemed to have resulted from the terrorist 

attacks. 

Issues Addressed in the Procedural Rules

Although the basic principal for determining direct and incremental losses appears 

straightforward, several issues arose during the administration of the program. As a 

result, DOT published specific guidance on how impairment and certain cost savings, 

among other issues, should be considered in the calculation of direct and incremental 

losses. 

Impairment Losses 

In its April 16, 2002, rule, DOT defined the criteria that certain items, such as 

impairment losses, were required to meet in order to be included in the calculation of 

losses and be compensated. The procedural rule said such items must be presented 

to DOT for review on a case-by-case basis and be (1) a direct result of the terrorist 

attacks of September 11; (2) fully borne (incurred) within the September 11 to 

December 31, 2001, period; (3) permanent; (4) nonduplicative; and (5) reported in 

accordance with U.S. generally accepted accounting principles, except if these 

principles would require or allow treatment inconsistent with the Stabilization Act. If 

items claimed by air carriers did not meet these standards, DOT generally excluded 

them from the calculation of direct and incremental losses. 

Applying these criteria, DOT determined that impairment losses, representing the 

permanent devaluation of an asset (such as aircraft) as a result of a decline in the 

market value of the asset or revenue-generating capabilities, ordinarily did not meet 

all of the above-stated criteria of a compensable loss and were generally excluded. 

DOT believed that impairment losses were typically experienced over a period of 

time much longer than the September 11 through December 31, 2001, compensation 

period and, therefore, generally would not qualify as “incurred” compensable losses 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 7

under the Stabilization Act. DOT also explained that it lacked the “practical ability to 

monitor accounting for those assets in the future to ensure that they recapture excess 

compensation” if the assets were returned to service. Additionally, impairment losses 

were considered duplicative. DOT’s April 2002 procedural rule stated “the theoretical 

basis for an impairment charge is an expected decline in asset value that reflects an 

expected permanently reduced demand and reduced ability to generate revenue. 

However, since we are already compensating carriers for the actual decline in 

revenue they are experiencing through the end of the year, there is an inherent 

duplication in also compensating them for the associated asset devaluation costs.” 

Further, DOT claimed that its position was consistent with a Financial Accounting 

Standards Board Emerging Issues Task Force statement that “impairment of longlived assets as a result of the September 11 events would in many cases be impossible 

to measure separately from impairment due to the general economic slowdown that 

was generally acknowledged to be under way.”11

A number of carriers objected to the exclusion of impairment losses on the basis that 

these losses had “real world” impacts on air carrier finances, such as a carrier’s 

ability to obtain credit, and that asset write-downs are recognized as losses under 

U.S. generally accepted accounting principles. Additionally, for some carriers, 

excluding impairment losses reduced their direct and incremental losses to less than 

the maximum possible compensation as calculated by the formula amount and 

therefore decreased the amount of compensation they received. 

Cost Savings 

Generally, DOT presumed that management actions taken after September 11 to 

achieve cost savings were prompted by the terrorist attacks, implicitly if not 

explicitly, and should, therefore, offset revenue decline, and in turn reduce 

compensable losses.12 In the April 16, 2002, procedural rule, DOT gave the following 

reasons for its decision to offset revenue decline with cost savings: (1) cost reduction 

plans developed prior to September 11 would have been accounted for in the preSeptember 11 forecasts, (2) post-September 11 cost reduction plans were attributable 

to changed expectations after the attacks, (3) excluding post-September 11 cost 

reductions would result in compensating carriers for losses not actually incurred, and 

(4) DOT interpreted the Congress’s statutory language as “indicating an intent that 

carriers not receive increased compensation for achieving savings in costs, which 

they have an independent obligation to their managements and shareholders to 

achieve, and which it is reasonable to expect them to undertake to mitigate the need 

for compensation.” 

Some air carriers objected to DOT’s presumption of considering all cost savings as 

related to the terrorist attacks and requested a case-by-case review approach. For 

example, one air carrier, which took significant actions to reduce food service 

 

11 The Emerging Issues Task Force (EITF) No. 01-10, “Accounting for the Impact of the Terrorist 

Attacks of September 11, 2001,” November 14-15, 2001. EITF assists the Financial Accounting 

Standards Board by promptly identifying, discussing, and resolving financial accounting issues within 

the framework of existing authoritative literature. 

12 Offsets, in some cases, may not necessarily reduce an air carrier’s resulting compensation amount if 

the resulting direct and incremental losses exceeded, and therefore were capped by, the formula 

amount. 
Page 8 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

expenses, argued that its actions to cut costs exceeded the industry’s average 

expense decrease in food service. Therefore, the carrier concluded, its actions went 

beyond what was reasonably expected of an air carrier to accomplish after the 

terrorist attacks and the excess amount should be excluded from the calculation. 

DOT did not agree with the air carrier’s argument. 

SCENARIOS RESULTING IN DIFFERENT LEVELS OF COMPENSATION 

On the basis of our previous work and interviews with DOT officials, we determined 

that a number of factors influenced the amount of compensation air carriers 

ultimately received under the Stabilization Act. Conceivably, these factors could 

result in scenarios in which comparable air carriers could have received different 

levels of compensation. For example, as described in scenario 1 below, two 

comparable air carriers could have had comparable losses related to September 11, 

but be subject to different formula caps because they had different capacity levels. If 

one or both carriers had losses that exceeded the formula amount, the formula would 

cap the compensation amount at different levels. Additionally, as illustrated in 

scenarios 2 through 5, other factors unique to individual air carriers influenced the 

amount of direct and incremental losses air carriers reported as well as the affected 

compensation levels they could potentially receive. Scenarios 2 through 5 assume 

that the two carriers were comparable in terms of size (in this case, capacity as 

defined by the Stabilization Act) and incurred losses less than their formula caps, 

thus making them eligible for compensation not to exceed their direct and 

incremental losses. DOT officials who administered the compensation program 

agreed that these illustrations are representative of situations observed during their 

review. 

Scenario 1: Formula Impact

As discussed previously, each carrier’s formula amount was calculated based upon 

the air carrier’s measure of capacity. It is possible that two carriers could be 

comparable in organizational structure or even annual revenues, but yet report 

different amounts of capacity. As a result, two comparable air carriers could 

potentially have comparable losses related to September 11, yet be eligible to receive 

different formula amounts. If both of these carriers had losses that exceeded the 

formula amount, the formula would cap the carriers’ compensation amounts at 

different levels. 

For example, carrier A and carrier B are comparable carriers in that they both 

reported $50 million in annual revenue and incurred $10 million in direct and 

incremental losses related to the attacks during the compensable period. However, 

carrier A reported more available seat miles for the required August 2001 period than 

did carrier B. As a result, and as shown in table 2, carrier A received $10 million while 

carrier B’s compensation was capped by the formula amount. 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 9

Table 2: Impact of the Statutory Formula (Dollars in Millions) 

Gross 

revenues 

Direct and 

incremental losses Formula cap 

Compensation 

received 

Carrier A $50 $10 $11 $10 

Carrier B $50 $10 $8 $8 

Source: GAO analysis of hypothetical data. 

In another example of the formula impact, two cargo carriers similar in all aspects 

except that they transport different types of cargo could also receive different levels 

of compensation as a result of the formula cap. For cargo carriers, the statutory 

measure of capacity used in the formula calculation is actual revenue ton miles flown 

(not available capacity, as was the case with passenger carriers.) This could result in 

a carrier that transports generally heavier cargo reporting more revenue ton miles 

than a carrier hauling lighter cargo. For example, assume that carriers C and D are 

similar in all aspects except for the nature of their cargo. Although both carriers fly 

identical planes that generate the same revenue, carrier D, as a result of its lighter 

cargo, transported less tonnage than carrier C and, therefore, if compensated 

pursuant to the formula, would receive less compensation than carrier C. 

Scenario 2: Geographic Location

The primary location of an air carrier’s operations may have influenced the amount of 

losses an air carrier incurred after September 11. As stated previously, revenue 

decline was the primary driver of an air carrier’s direct and incremental losses. If a 

carrier, due to its geographic location or affiliation with a particular airport, suffered 

more revenue decline (i.e., flew fewer passengers due to the terrorist attacks or had 

planes grounded for an extended period due to security concerns)13 than a carrier 

comparable in size and type, it is likely that this carrier could have incurred more 

losses and received more compensation than the comparable carrier. 

After the terrorist attacks, passenger traffic declined across the nation; however, 

traffic through the northeast corridor (where the terrorist attacks occurred) declined 

more sharply than in other areas. To illustrate how this situation affected comparable 

carriers, assume a majority of carrier E’s operations are centered in the northeast, 

while a majority of carrier F’s operations are centered in the Northwest. In this case, 

carrier E in the Northeast carried fewer passengers during the compensation period 

and reported a larger revenue decline than carrier F. Although carriers E and F are 

comparable in size, carrier E received more compensation as a result of larger direct 

and incremental losses. 

 

13 For example, Ronald Reagan Washington National Airport was closed due to security concerns after 

the September 11, 2001, terrorist attacks until October 4 when flights gradually resumed. 
Page 10 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

Scenario 3: Impact of the Inherent Imprecision of Forecasts

Forecasts of financial results for the September 11 through December 31, 2001, 

period formed the basis of DOT’s calculation of direct and incremental losses.14 The 

precision of the forecasts influenced the amount of direct and incremental losses an 

air carrier could report on its application. Recognizing the importance of the quality 

of the forecasts, DOT required the air carriers to provide the two most recent 

forecasts (e.g., August and July forecasts) and their corresponding actual 

performance. DOT officials said they extensively reviewed this information and 

generally requested additional data to determine the reasonableness of each carrier’s 

forecast. DOT reviewed year-over-year trends of historical data, comparisons to 

similar carriers’ forecasts, related documentation maintained by other DOT offices, 

and rates of return. As a result of these procedures, DOT said it revised, amended, or 

recreated many air carrier forecasts in order to normalize or control for forecasts that 

could significantly affect the calculation of a carrier’s losses.15 Even with these 

procedures, the inherent imprecision of forecasting could still have influenced many 

carriers’ ultimate compensation determination. 

Assume carriers G and H are comparable passenger carriers that reported the same 

financial results for the compensable period. However, carrier G had forecasted $100 

million in revenues for the compensable period, whereas carrier H had produced a 

slightly more optimistic forecast of $105 million. Although the revenue forecasts for 

both carriers G and H might have been considered reasonable, carrier H received 

more compensation as a result of its more optimistic forecast, as shown in table 3. 

Table 3: Impact of Optimistic Forecast (Dollars in Millions) 

 Pre-9/11 

forecast 

Actual 

financial results 

Direct and 

incremental losses 

Carrier G 

Revenues $100 $80 ($20) 

Expenses $110 $110 $0 

Gain/Loss ($10) ($30) ($20) 

Carrier H 

Revenues $105 $80 ($25) 

Expenses $110 $110 $0 

Gain/Loss ($5) ($30) ($25) 

Source: GAO analysis of hypothetical data. 

Scenario 4: Quality of an Air Carrier’s Application

To receive compensation, the Stabilization Act required that air carriers demonstrate 

losses related to terrorist attacks to the “satisfaction of the President using sworn 

financial statements or other appropriate data.” DOT’s procedural rules specified the 

nature and content of the data to be included in applications as well as additional 

criteria and requirements. For example, in the third payment round, DOT required 

 

14 As previously discussed, baseline losses used to determine compensation for individual air carriers 

were calculated as the difference between forecasted and actual financial results for the September 11 

through December 31, 2001, period. 

15 DOT said several small air carriers did not produce forecasts. In that event, DOT created forecasts 

for them based upon historical financial and operational data. 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 11

agreed-upon procedures to be performed by independent public accountants on the 

information submitted by the air carriers. 16 The purpose was to verify that the 

amounts submitted either agreed with or reconciled to the carriers’ financial systems 

and other supporting documentation. Despite these guidelines, the review team 

stated that the quality and amount of supporting documentation accompanying the 

air carrier applications varied widely. Some applications contained extensive 

supporting documentation; in other cases DOT staff had to request that additional 

information be submitted to support the carrier’s claims. DOT told us that if losses or 

adjustments to losses submitted by the air carriers were ultimately not supported to 

DOT’s satisfaction, the losses were excluded from amounts eligible for 

compensation. 

Scenario 5: Management Response to the Terrorist Attacks

After the terrorist attacks occurred, the federal government shut down the nation’s 

airspace. When air travel resumed, passenger traffic had significantly declined, 

reducing operating revenues for most carriers. To mitigate the reduction in revenue, 

some carriers took aggressive measures to reduce costs, conserve cash, and preserve 

liquidity. Alternatively, some carriers did not take as immediate or aggressive actions 

to reduce costs, while others that already had low-cost structures had fewer 

opportunities in their business models to cut costs. As previously discussed, DOT 

offset cost savings, whether achieved through management action or as a by-product 

of volume decline, against revenue decline in the calculation of direct and 

incremental losses. Said in another way, the amount of cost savings achieved reduced 

the levels of compensation air carriers could potentially receive. 

To illustrate, suppose carriers I and J were comparable in size and forecasted 

identical financial performance for the compensable period. After the attacks, carrier 

I aggressively cut costs and reduced expenses 10 percent during the period 

September 11 through December 31, 2001. Carrier J took fewer, less aggressive 

measures to reduce costs, and at the end of the period, expenses were reduced by 

only 5 percent. As shown in table 4, carrier I’s cost savings reduced its direct and 

incremental losses by more than carrier J’s, and therefore carrier I received less in 

compensation than carrier J. 

Table 4: Impact of Aggressive Cost Reduction (Dollars in Millions) 

Pre-9/11 

forecast 

Percentage of 

cost savings 

achieved 

Actual financial 

results 

(after cost reductions) 

Direct and 

incremental 

losses 

Carrier I 

Revenues $400 $320 ($80) 

Expenses $450 10% $405 ($45) 

Gain/Loss ($50) ($85) ($35) 

Carrier J 

Revenues $400 $320 ($80) 

Expenses $450 5% $428 ($22) 

Gain/Loss ($50) ($108) ($58) 

Source: GAO analysis of hypothetical data. 

 

16 Small air carriers were required to submit simplified agreed-upon procedures. 
Page 12 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

PENDING LITIGATION 

DOT’s regulations as partly described in this report are the subject of pending 

litigation. Three air carriers are seeking from the U.S. Court of Appeals for the 

District of Columbia Circuit a judicial determination that DOT’s regulations 

implementing provisions of the Stabilization Act relating to direct and incremental 

losses are inconsistent with that act and reflect “arbitrary and capricious” 

administrative actions by DOT.17 In particular, the air carriers contended that DOT’s 

payment rules and assumptions improperly combined two categories of losses under 

Section 101(a)(2) of the act into one by offsetting losses that were incurred during 

the federal ground stop order with any incremental gains after the federal ground 

stop order. Also, the air carriers contended that DOT improperly excluded aircraft 

impairment costs, among others, as compensable losses under the act. They argued 

that these rules establish “overly simplistic” criteria and “irrebuttable presumptions,” 

and, further, that they result in “impermissibly” different percentages of allowable 

maximum compensation among comparable air carriers. 

DOT, in defending its regulations argued that, among other reasons, it permissibly 

interpreted the Stabilization Act as providing for one “loss period,” September 11 

through December 31, 2001, with two types of compensable losses, direct and 

incremental. It also argued that its regulations provide a rational basis for 

determining how certain items, such as aircraft impairment or cost savings, should be 

recognized in calculating carriers’ compensation. 

The court held oral arguments on these issues in October 2003 after receiving the 

parties’ legal briefs from April through June 2003. As of June 4, 2004, the court had 

not issued its decision, nor had the carriers participating in this lawsuit settled their 

compensation claims with DOT. DOT officials told us the claims of a small number of 

other carriers also remain pending. Therefore, the emergency assistance program, 

although substantially completed, is still ongoing. 

AGENCY COMMENTS 

We requested comments on a draft of this report from the Secretary of 

Transportation or his designee. The Assistant Secretary for Administration provided 

the department’s written comments, stating that the report correctly described DOT’s 

administration of the program and concurring with our finding that various factors 

can cause differences in compensation amounts. The department characterized our 

report as accurate and well reasoned and provided additional support and 

amplification of what DOT considered to be key issues. Its comments are reprinted in 

the enclosure. DOT also provided separate specific technical comments that we 

considered and incorporated into this report as appropriate. 

 

17 The carriers also allege that in promulgating the April 16, 2002, and August 20, 2002, rules, DOT failed 

to follow proper rule-making procedures required by the Administrative Procedure Act, 5 U.S.C. § 553. 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 13

We are sending copies of this report to the Secretary of Transportation and interested 

congressional committees. This report will also be available at no charge on GAO’s 

Web site at http://www.gao.gov. If you have any questions about this report, please 

contact me at (202) 512-9508, or Phillip McIntyre, Assistant Director, at (202) 512-

4373. You may also reach us by e-mail at calboml@gao.gov or mcintyrep@gao.gov. 

Other key contributors to this report were Abe Dymond and Ruth Walk. 

Linda M. Calbom 

Director, Financial Management and Assurance 
Page 14 

GAO-04-725R Aviation Assistance: Criteria and Payment Equity

Enclosure 

Comments from the Department of Transportation 
GAO-04-725R Aviation Assistance: Criteria and Payment Equity 

Page 15

(190119) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.