GAO-02-133R Airline Industry Emergency Assistance

United States General Accounting Office

Washington, DC 20548

Comptroller General

of the United States

October 5, 2001

Congressional Requesters

Subject: Financial Management: Assessment of the Airline Industry’s Estimated

 Losses Arising From the Events of September 11

In the wake of the September 11, 2001, terrorist attacks on the United States, the

airline industry1 has estimated significant losses resulting from the temporary

shutdown of the nation’s airspace and the severe drop in passenger traffic since the

attacks. In response, on September 22, 2001, the President signed the Air

Transportation Safety and System Stabilization Act,2 which provides $5 billion in

emergency assistance to compensate the nation’s air carriers for these losses.

Specifically, the law stipulates that an amount equal to $5 billion will be made

available to compensate air carriers for direct losses incurred beginning September

11 as a result of any federal ground stop order issued by the Secretary of

Transportation, and incremental losses incurred beginning September 11 through

December 31, 2001, as a direct result of the terrorist attacks. Additionally, the law

allocates the $5 billion between passenger-only or combined passenger and cargo

carriers (passenger carriers) and cargo-only carriers (cargo carriers) and establishes

a maximum level of compensation for each class of carrier. Passenger carriers were

allocated $4.5 billion while cargo carriers were allocated $.5 billion. The law also

directs that the maximum amount of compensation paid to each carrier may not

exceed the lessor of (1) its allocated share of the $4.5 billion (passenger carriers) or

$.5 billion (cargo carriers) or (2) the actual direct and incremental losses incurred by

the carrier as a result of the September 11 terrorist attacks.

In letters dated September 26 and 27, 2001, you asked that we (1) perform an analysis

of the data and methodologies used by the airline industry to estimate the losses

through December 31, 2001, stemming from the terrorist attacks to determine

whether there is a reasonable basis for the estimate and (2) assess the overall

reasonableness of the $5 billion compensation package. This letter summarizes the

information we provided during our September 28, 2001, briefing pursuant to these

requests. The briefing slides, which provide more details about our analysis, are

attached.

 1

The airline industry estimates were prepared by the Air Transport Association, a trade organization

representing the principal U.S. airlines.

2

Public Law 107-42.
Page 2 GAO-02-133R Airline Industry Emergency Assistance

Results in Brief

Overall, our analysis indicates that there is a reasonable basis to assume that the

airline industry will incur losses resulting from the terrorist attacks of at least

$5 billion and possibly more through December 31, 2001. The airline industry’s “best

case” scenario, prepared by the Air Transport Association (ATA), estimated losses of

$10.1 billion by the end of the calendar year.3

 Our high-level analysis,4 using various

revenue and cost savings assumptions, indicates possible losses in the range of

$6.5 billion to $10.5 billion. The key differences between our estimates and ATA’s

relate primarily to

! ATA including cargo and passenger carriers in their revenue base, whereas we

only included passenger carriers;

! ATA assuming greater reductions in “other revenue” than we did; and

! ATA assuming lower cost savings relating to fuel and labor.

While it is reasonable to assume that overall industry losses will amount to at least

$5 billion, carrier-by-carrier losses are likely to vary significantly from the formuladerived allocations of the $5 billion. Therefore, some carriers may experience losses

higher than their individual formula amount, while others’ losses may be lower.

Because of this, the Department of Transportation (DOT) is initially disbursing only

50 percent of the allocations, and is currently assessing how best to provide for any

necessary adjustments to the amounts paid to each carrier. At present, there is no

provision in the law to reallocate any portion of the formula amount for an individual

carrier that is in excess of actual losses incurred by that carrier to other carriers

whose actual losses may exceed their allocated amounts. There is also no provision

to reallocate any amounts between cargo and passenger carriers should one group’s

actual losses not reach its total allocated share of the compensation. As you

requested, we will be assessing the actual losses incurred by the major carriers

compared to their allocations and report to you by July 1, 2002.

Scope and Methodology

We analyzed the ATA’s estimate of the losses expected as a result of the terrorist

attacks to determine the basis for its estimate. We also prepared a high-level

independent estimate of these expected losses using various revenue and cost

savings assumptions. Our analysis focused on passenger carriers and did not attempt

to estimate losses of cargo carriers. We know that cargo carriers experienced some

losses as a result of the events of September 11. At the same time, cargo volumes

should not be subject to the same downward influences as passenger volumes (i.e.,

passenger apprehension to fly). The data and assumptions used in our analysis were

 3

This estimate is based on revenue projections versus cash projections. Cash projections were used in

the industry’s earlier estimate of losses, which were higher.

4

Our analysis was based on aggregate passenger carrier data for key revenue and expense items that

are most likely to be impacted by the events of September 11.
Page 3 GAO-02-133R Airline Industry Emergency Assistance

derived from a number of sources including the DOT’s Bureau of Transportation

Statistics (BTS) and airline 10Q Securities and Exchange Commission filings. In

addition, we interviewed a number of airline industry analysts and discussed their

assessments of the airline industry’s projected revenues and losses following the

attacks. Lastly, we monitored press releases put forth by the airline industry and

various analysts related to the estimated loss.

We did not independently verify the information provided by ATA, BTS, or the

various industry analysts. We caution that many of the assumptions used in our

analysis (e.g., those for revenues, industry layoffs and fuel costs) can change rapidly

thereby significantly affecting our estimates of the airlines’ losses.

We conducted our review during the week of September 23, 2001, in accordance with

generally accepted government auditing standards.

We are sending copies of this letter to interested congressional committees. The

letter is also available on GAO’s home page at http://www.gao.gov. If you have any

questions about this letter, please contact Linda Calbom, Director, Financial

Management and Assurance, at (202) 512-9508 or by e-mail at calboml@gao.gov. Key

contributors to this assignment are listed in enclosure II.

David M. Walker

Comptroller General

of the United States

Enclosures
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Congressional Requesters

The Honorable Robert C. Byrd

Chairman

Committee on Appropriations

United States Senate

The Honorable Ernest F. Hollings

Chairman

Committee on Commerce, Science and Transportation

United States Senate

The Honorable John D. Rockefeller IV

Chairman, Subcommittee on Aviation

Committee on Commerce, Science and Transportation

United States Senate

The Honorable Ron Wyden

Subcommittee on Aviation

Committee on Commerce, Science and Transportation

United States Senate

The Honorable Lloyd Doggett

The Honorable John J. LaFalce

House of Representatives
Enclosure I

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September 28, 2001, Briefing to Congressional Requesters

Assessment of the Airline Industry’s Estimated

Losses Arising From the Events of September 11

Briefing for Congressional Requesters

September 28, 2001
Enclosure I

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2

• On September 22, 2001, the President signed the Air Transportation

Safety and System Stabilization Act (P. L. 107-42) to compensate air

carriers for losses incurred as a result of the terrorist attacks on

September 11.

• Section 101(a)(2) of the law stipulates that $5 billion will be made

available to compensate air carriers for

• direct losses incurred beginning September 11 as a result of any

federal ground stop order issued by the Secretary of Transportation

and

• incremental losses incurred beginning September 11 through

December 31, 2001 as a direct result of the terrorist attacks.1

• Section 103(b)(2) indicates that the maximum compensation for

passenger-only or combined passenger and cargo carriers (“passenger

carriers”) is $4.5 billion and the maximum for cargo-only carriers (“cargo

carriers”) is $0.5 billion.

Background

1For purposes of this briefing, we refer to both of these types of losses as “estimated losses.”
Enclosure I

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3

Objectives

You requested that we

• analyze the data and methodologies used by the airline

industry to estimate its losses through December 31, 2001,

stemming from the September 11, 2001, terrorist attacks to

determine whether there is a reasonable basis for such

estimates and

• assess the overall reasonableness of the $5 billion

compensation package compared to our high-level

estimates of industry losses.
Enclosure I

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4

Scope and Methodology

To meet our objectives, we

• performed an analysis of Air Transport Association2 (ATA) information to

determine the basis for its loss estimates,

• prepared a high-level independent estimate of the amount of losses for

the period from September 11, 2001 through December 31, 2001 based

on analysis of aggregate passenger carrier data for key revenue and

expense items that are most likely to be impacted by the events of

September 11,

• conducted interviews with industry analysts to obtain external

assessment information about industry revenues and loss estimates,

• monitored press releases of industry members and analysts that relate

to estimated losses, and

• provided draft pages of ATA-attributed information to ATA and

incorporated it’s clarifying changes as appropriate.

We conducted our review during the week of September 23, 2001, in

accordance with generally accepted government auditing standards.

2 ATA is a trade organization representing the principal U.S. airlines.
Enclosure I

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Scope and Methodology

The following should be noted.

• The data used in our high-level analysis were derived from

various sources including the Department of Transportation

(DOT), airline press release information, discussions with industry

analysts, and airline 10Q filings with the Securities and Exchange

Commission. We did not independently verify any of this

information.

• Many of the assumptions used in our analysis are subject to rapid

change (e.g., those for industry layoffs, load factors, and fuel

costs), which could significantly affect our high-level estimate.

• Our high-level analysis focused on passenger carriers only and

thus did not consider estimated losses of cargo carriers.
Enclosure I

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6

Industry Estimate

Industry Estimated Losses for Passenger and Cargo Carriers

(In millions, pretax)

Optimistic Projection1

Source: ATA. Analysis is based on revenue projections versus cash projections. Cash projections were

used in ATA’s earlier loss estimates, which were higher.

(1) Per ATA, this is considered to be its “best case” estimate of industry losses through 12/31/01.

Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total

Revenue Decrease $1,320.0 $2,904.0 $7,756.0 $11,980.0

Net Cost Savings 0.0 0.0 (1,853.0) (1,853.0)

Net Estimated Loss $1,320.0 $2,904.0 $5,903.0 $10,127.0
Enclosure I

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Industry Estimate

Key Industry Assumptions:

Revenue: Used a daily industry total operating revenue number of

$330 million as a baseline,

4-day revenue decline - 100% of baseline

16-day revenue decline - 55% of baseline

4th quarter revenue decline - 25% of baseline

Cost Savings - 4th Quarter:

Personnel - No net cost reduction anticipated through

December 31.

Fuel savings - 15% of capacity reduction (about 3% of revenue

reduction).

Other variable costs - 25% of revenue reduction for passenger

carriers. 10% of revenue reduction for cargo carriers.

No anticipated increases in fuel prices, security, or interest

costs.

Source: ATA
Enclosure I

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GAO Estimate

GAO Estimate of Losses for Passenger Carriers

(In millions, pretax)

Scenario #1 (Assumes 4th Quarter Revenue Decline of 25%)

Source: GAO analysis of DOT Form 41 data.

Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total

Revenue Decrease $1,163.1 $2,129.7 $5,669.9 $8,962.7

Net Cost Savings

Fuel (174.9) (144.4) (830.5) (1,149.8)

Personnel 0.0 0.0 (396.6) (396.6)

Other 0.0 (255.6) (680.4) (936.0)

Total Cost Savings (174.9) (400.0) (1,907.5) (2,482.4)

Net Estimated Loss $988.2 $1,729.7 $3,762.4 $6,480.3
Enclosure I

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9

GAO Estimate

Key GAO Assumptions:

Revenue: Baseline calculated using passenger carrier revenue for the same

period last year adjusted for year-over-year change from previous quarter.

4-day revenue decline - 100% of baseline total operating revenues.

16-day revenue decline - 50% of baseline passenger revenues plus 25% of

selected other revenues.

4th quarter revenue decline - 25% of baseline passenger revenues plus 25%

of selected other revenues.

Cost Savings:

Fuel - 4-day period based on 100% reduction in flight schedule adjusted for

fuel dumping and repositioning of aircraft. Other periods based on 20%

reduction in flight schedule.

Personnel - No savings assumed for the month of September. Staggered

layoffs (a total of 78,000 full time equivalents), adjusted for assumed

severance packages, projected to become effective during November and

continue through December.

Other - Includes landing fees, passenger services, commissions, and other

variable costs. 4-day period assumed these costs were offset by

additional costs incurred by airlines related to stranded passengers, etc.

Remaining periods assumed variable cost savings would amount to 12%

of revenue reduction.
Enclosure I

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GAO Estimate

GAO Estimate of Losses for Passenger Carriers

(In millions, pretax)

Scenario #2 (Assumes 4th Quarter Revenue Decline of 35%)

Note: Other than revenue decline, all assumptions are the same as scenario #1.

Source: GAO analysis based on DOT Form 41 data.

Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total

Revenue Decrease $1,163.1 $2,129.7 $7,937.9 $11,230.7

Net Cost Savings

Fuel (174.9) (144.4) (830.5) (1,149.8)

Personnel 0.0 0.0 (396.6) (396.6)

Other 0.0 (255.6) (952.5) (1,208.1)

Total Cost Savings (174.9) (400.0) (2,179.6) (2,754.5)

Net Estimated Loss $988.2 $1,729.7 $5,758.3 $8,476.2
Enclosure I

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GAO Estimate

GAO Estimate of Losses for Passenger Carriers

(In millions, pretax)

Scenario #3 (Assumes 4th Quarter Revenue Decline of 45%)

Note: Other than revenue decline, all assumptions are the same as scenario #1.

Source: GAO analysis based on DOT Form 41 data.

Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total

Revenue Decrease $1,163.1 $2,129.7 $10,205.8 $13,498.6

Net Cost Savings

Fuel (174.9) (144.4) (830.5) (1,149.8)

Personnel 0.0 0.0 (396.6) (396.6)

Other 0.0 (255.6) (1,224.7) (1,480.3)

Total Cost Savings (174.9) (400.0) (2,451.8) (3,026.7)

Net Estimated Loss $988.2 $1,729.7 $7,754.0 $10,471.9
Enclosure I

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Summary

Industry Estimates versus GAO Estimates of Losses

(In millions, pretax)

1) Industry estimates include both passenger and cargo carriers.

2) GAO estimates include passenger carriers only.

Sept 11 - Sept 14 $ 988.2 1,320.0 $ 988.2 $ 988.2 $ 

Sept 15 - Sept 30 2,904.0 1,729.7 1,729.7 1,729.7

Q/E Dec 31 5,903.0 3,762.4 5,758.3 7,754.0

Total Estimated Loss $10,127.0 $6,480.3 $8,476.2 $10,471.9

Scenario #3

GAO (2) Industry (1)

optimistic Scenario #1 Scenario #2
Enclosure I

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Summary

Differences in Key Assumptions:

Revenue: ATA included cargo and passenger carriers in their

revenue base whereas we only included passenger carriers.

ATA also assumed greater reductions in other revenue than

did we. In addition, ATA used somewhat more pessimistic

projections of passenger traffic for the latter half of

September.

Costs Savings: ATA used lower projections of fuel cost

savings. In addition, ATA assumed effective dates for labor

savings due to layoffs (after adjusting for severance) would

be after December 31, 2001 and therefore, did not include

any cost savings for labor. GAO assumed savings from

layoffs (after adjusting for severance) would begin to take

effect in November.
Enclosure I

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Analyst Estimates

Analyst Estimates - Passenger Carriers Only

Estimated Loss thru 

December 31, 2001

(pretax)

Paine Webber $5.1 billion

Deutsche Banc $6 billion

SalomonSmithBarney $8.5 billion
Enclosure I

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Conclusions

Conclusions

• While the industry may be somewhat pessimistic in its optimistic

estimate of losses, which totals $10.1 billion through

December 31, 2001, our analysis indicates that there is a

reasonable basis to assume that at least $5 billion in losses will

be incurred through December 31, 2001.

• Because we did not assess cargo-only carrier estimates of

losses, it is unknown whether such losses will equal or exceed

their $0.5 billion allocation.

• Carrier-by-carrier actual losses on a relative basis are likely to

vary significantly. Therefore, some carriers may experience actual

losses significantly higher than their allocated portions of the

$5 billion, while others may be lower.
Enclosure I

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Conclusions

Conclusions, continued

• At present, there is no provision in the law to reallocate any portion

of the formula amount for an individual carrier that is in excess of

actual losses incurred by that carrier to other carriers whose actual

losses may exceed their allocated amounts.

• There is also currently no provision to reallocate any amounts

between cargo and passenger carriers should one group’s actual

losses be less than its total allocated share of the compensation and

the other group’s losses exceed its allocated share.

• Because of this inherent uncertainty, DOT is initially disbursing only

50% of the allocations, and is currently assessing how best to

provide for any necessary adjustments to the amounts paid to each

carrier.

• As you requested, we will be assessing the actual losses incurred

by the major carriers compared to their allocations/payments

received and report to you by July 1, 2002.
Enclosure II

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GAO Contacts and Staff Acknowledgments

GAO Contacts

Linda M. Calbom, (202) 512-9508

John C. Fretwell, (202) 512-9382

Steven C. Martin, (202) 512-3389

Acknowledgments

In addition to those named above, Triana Bash, Alan Belkin, Mark Connelly, Joseph

Kile, Phillip McIntyre, Ruth Sessions, and Peggy Smith made key contributions to this

letter.

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