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S. HRG. 109–1093 

AIRLINE FINANCIAL STABILITY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON AVIATION 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

JULY 13, 2005 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

DAVID RUSSELL, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

SUBCOMMITTEE ON AVIATION 

CONRAD BURNS, Montana, Chairman 

TED STEVENS, Alaska 

JOHN MCCAIN, Arizona 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

JOHN D. ROCKEFELLER IV, West Virginia, 

Ranking 

DANIEL K. INOUYE, Hawaii 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

BILL NELSON, Florida 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

(III) 

C O N T E N T S 

Page 

Hearing held on July 13, 2005 ............................................................................... 1 

Statement of Senator Burns ................................................................................... 1 

Statement of Senator DeMint ................................................................................. 44 

Statement of Senator Inouye .................................................................................. 2 

Prepared statement .......................................................................................... 2 

Statement of Senator Lautenberg .......................................................................... 46 

WITNESSES

Baker, Jamie N., Vice President, U.S. Equity Research, JPMorgan Securities, 

Inc. ......................................................................................................................... 30 

Prepared statement .......................................................................................... 31 

Hecker, JayEtta Z., Director, Physical Infrastructure Issues, U.S. Government 

Accountability Office ............................................................................................ 3 

Prepared statement .......................................................................................... 5 

May, James C., President/CEO, Air Transport Association of America, Inc. ..... 19 

Prepared statement .......................................................................................... 21 

Roach, Jr., Robert, General Vice President of Transportation, International 

Association of Machinists and Aerospace Workers (IAM) ................................ 36 

Prepared statement .......................................................................................... 37 

(1) 

AIRLINE FINANCIAL STABILITY 

WEDNESDAY, JULY 13, 2005 

U.S. SENATE, SUBCOMMITTEE ON AVIATION, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Committee met, pursuant to notice, at 9:58 a.m., Senate 

Russell 253, Hon. Conrad Burns, Chairman of the Subcommittee, 

presiding. 

OPENING STATEMENT OF HON. CONRAD BURNS, 

U.S. SENATOR FROM MONTANA 

Senator BURNS. We’ll call the Committee to order this morning, 

and there are quite a lot of things going on in this part of the 

world, and we want to thank our folks for coming in this morning. 

I welcome this panel of witnesses, and especially in our continuing 

efforts to work toward ideas for the next FAA reauthorization bill, 

we are examining the financial condition of the airline industry. It 

is our intent to focus on a wide array of internal and external factors that shape the industry today. I think it’s important this subcommittee understands the underlying principles, and problems in 

the industry in order to make an educated policy decision. As you 

know, as policymakers, we should operate with the idea to do no 

harm, and when we do know there are extenuating circumstances 

under legislation and sometimes we don’t see it coming. 

There are certainly several caveats to the airline industry. I anticipate that we will discuss them, among others, the relationship 

between the legacy carriers and the low-cost carriers, so-called rising fuel costs, aviation taxes and fees, labor and management relations, capacity concerns, fair pricing, aircraft leasing, industry consolidation, and the role that Chapter 11 bankruptcy plays in the industry. As if there is not enough on the platter already, this sort 

of fills the boat. 

Since 2000, many in the airline industry have experienced poor financial results and have lost somewhere around $35 billion with 

the expectation of heavy losses this year. A majority of those problems can be traced back to the horrific events of 9/11 and SARS, 

but there are also several factors that were in place, and starting 

to evolve prior to 9/11. 

Legacy carriers—the business models—have been criticized for 

years, but the fragile line between profitability and red ink was not 

exposed until we had seen the events of 9/11, and the effects of 

that along with the downturn of the overall economy. One could 

2 

argue that we are starting to see the actual results of deregulation 

now much more than the 1980s and 1990s. 

We now have prospering, low-cost carriers, evolving business, 

and aviation ventures, and because of it, more people are flying 

today. In fact, just last month we had a hearing on passenger levels and system capacity. Our traffic levels are back to record levels, 

planes are full, but many of the legacy carriers are still seriously 

struggling. 

It’s tough to understand why, in a business that seems to be 

booming, most of the legacy carriers are busting. For a Senator 

from Montana, it’s even more disconcerting to see our legacy traditional hub-and-spoke carriers in dire straits. The hub-and-spoke 

model has provided historical foundation for rural access to my 

state and many others that do not fit into the traditional low-cost 

carrier business plan. Legacy carriers are making significant gains 

in improving their bottom lines, but still reporting large financial 

losses. Today we look at some of the reasons why. 

Our panel consists of a broad spectrum of aviation experts, and 

I look forward to their testimony. This morning I want to thank 

them for coming, because we know the industry is vitally important 

to this country for commerce and I know you take your job very, 

very seriously. Senator Inouye, thank you for coming in this morning, also. 

STATEMENT OF HON. DANIEL K. INOUYE, 

U.S. SENATOR FROM HAWAII 

Senator INOUYE. Well, I thank you very much. I have a prepared 

statement I’d like to have made part of the record. Like a few of 

my colleagues, I do a lot of flying. In fact, last week, I spent more 

time in the air than on the ground. I spent 20 hours in Hawaii and 

22 hours in the air. And so I’m well aware of the low fares. I’m well 

aware of the packed aircraft, and, yet, I know that since 2001, we 

have a shortfall of $35 billion. About 150,000 have lost their jobs, 

so this is a serious situation, and we are looking for answers, and 

I would like to commend my Chairman for calling this hearing. 

[The prepared statement of Senator Inouye follows:] 

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

Most aviation observers understand that despite the low fares and packed airplanes that have become commonplace, the Nation’s airlines continue to struggle 

through the toughest financial period in the history of commercial aviation. This has 

not been a blip on the proverbial radar screen. 

This has been an extended economic slump that resulted in the collective loss of 

tens of billions of dollars by the major carriers and the elimination of nearly 150,000 

airline jobs over the past four years. 

Most Americans recognize how important a healthy aviation industry is for a 

country as large as the U.S. However, it is often easy to forget the complex factors 

affecting our airlines, particularly, when planes generally run on schedule and move 

passengers thousands of miles in a fraction of the time that other modes require. 

In my home State of Hawaii, the service air carriers provide is vital to our way 

of life. Hawaii residents use planes as a primary mode of transportation. Many do 

so on a daily basis as part of their commute to and from work. 

Whether travel, tourism, or trade, in Hawaii, we depend on the commercial aviation industry to provide us with timely contact between the islands, the continental 

U.S., and the rest of the world. Yet our two primary airlines, Hawaiian and Aloha, 

have operated under bankruptcy protection for much of the past two years. Their 

precarious financial situation has constantly threatened significant service disruptions, which would be devastating to the local economy. 

3 

Hawaii primarily counts on major carriers for service beyond our borders, and like 

our local carriers, these airlines are facing great financial difficulties. 

When the Federal Government shut down the Nation’s airspace for several days 

following the 9/11 attacks, most Americans experienced a temporary limit to their 

mobility in the wake of the tragedy. For the people of Hawaii, the shutdown directly 

and immediately impacted their livelihoods. For those needing medical assistance 

or facing subsequent emergencies, it became a matter of life or death. 

There are many rural or isolated communities that could face similar circumstances if a local airline fails or their access to the National Airspace System 

is reduced in the wake of extreme cost-cutting measures. In a globalized economy 

reliant upon air travel, the impact to rural communities could be increasingly detrimental. We must continually work to ensure that all of our citizens have a fair opportunity to access this nation’s unparalleled aviation infrastructure. 

I wish to take this opportunity to recognize the employees in the aviation industry. They have been especially resilient during this difficult period. They have seen 

nearly one-third of all airline jobs eliminated, and virtually every employee has seen 

their pay and benefits reduced. They understand intimately the importance of this 

industry and have gone above and beyond to see that it survives. 

Unfortunately, if we do not begin to solve the problems plaguing the air carriers, 

we will see more failures in coming months and certainly more jobs cut. The combination of excess capacity, record gas prices, and a market flush with consistent, 

low fares has effectively neutralized the major carriers’ intense, cost-cutting measures. The Bush Administration’s effort to add additional security and pension fees 

has not been helpful either. 

The U.S. airline industry is now at a crossroad. Some legacy carriers have spent 

the last few years aggressively working to compete will the budget carriers and are 

now approaching profitability. They are beginning to prove that they can adapt and 

survive. Yet at the same time, factors like spiraling gas prices are pushing others 

to the brink of bankruptcy or limiting their ability to get out of it. 

The financial stability of the airlines is one of the most important issues that we 

face this session. We must carefully consider the needs of the industry as a whole, 

make certain that urban, suburban, and rural communities can access air travel, 

and advance forward-thinking initiatives that will help ensure a prosperous, vibrant 

aviation industry for decades to come. 

Senator BURNS. Thank you very much, Senator, and your full 

statement will be made part of the record. We’ll just take the panel 

now this morning. As it’s listed here, Ms. JayEtta Z. Hecker, Director of Physical Infrastructure Issues, U.S. Government Accounting 

Office, GAO, and we welcome you this morning and look forward 

to your testimony. By the way, we would like to condense some of 

this. You bring up the highlights and then we’ll put your full statement in the record. Thank you. 

STATEMENT OF JAYETTA Z. HECKER, DIRECTOR, 

PHYSICAL INFRASTRUCTURE ISSUES, 

U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. HECKER. Thank you, Mr. Chairman. Senator Inouye, I’m 

very pleased to be here today. As you know, we’ve been conducting 

analyses of the airline industry at the direction of Congress for a 

number of years. We had a prior report last year that talked about 

the factors that were leading to the extremely difficult financial 

condition. The current work that I’m reporting on is focusing on 

bankruptcy and pension issues in airlines and my remarks—I do 

have a slide presentation. I don’t know if you have that. It may be 

useful because I have a number of charts that I think tell the story. 

Senator BURNS. We all have copies, I think, and as you know, 

this is a technology committee, of which we have none. 

Ms. HECKER. Hopefully paper will work in this instance. The two 

topics are the financial difficulties faced by the legacy carriers and 

4 

the major factors behind them, and then the effect of bankruptcy 

on the industry and competitors. 

On the first topic, there is, of course, no secret that the airlines 

face severe financial difficulties. There has been not only the significant change in demand, particularly the increased price sensitivity of business travelers, but there have also been enormous 

changes in the competitive environment where low-cost carriers 

now are available to 85 percent of all passengers. The low-cost carriers are really the price setters and have transformed their competitive environment in the airline industry. 

This really has led to the major effort by the legacy carriers to 

control costs, and the next slide, the one with the two lines, basically outlines the changes in the costs for available seat-miles for 

both the legacy carriers and the low-cost carriers, and you see they 

were going up until 2001, and then both were coming down, but 

the main point is that the difference has actually increased, so as 

the low-cost carriers have continued to expand, their costs-per-seatmile have actually gone down, and the difference—the cost disadvantage—has actually increased, and you see the factors there, 

labor, pensions, fuel, and a wide variety of other factors. 

Of course, the next page shows the fuel prices, and there is no 

doubt the prior page said that the difference, this is not the total 

fuel, but the difference in the fuel costs for low-cost carriers, they 

actually had a fuel advantage, more fuel efficient airplanes and 

more efficient use of airplanes, so all of the costs have been hurt 

by these rising prices, but, of course, on a differential basis. My 

main point is really this next chart about fixed obligations, and 

what is important here is its absence of the liquidity that really 

drives carriers into bankruptcy, along with inability to renegotiate 

obligations and acquire new capital. 

The first column is the cash on hand at the end of 2004 and then 

the next four bars basically outline the fixed obligations. These are 

fixed. These are not flexible with changing your business model, 

and how they severely strain and overpower the amount of cash on 

hand. The other thing is to see how diverse these factors are. There 

has been a lot of talk about pensions. Pensions is only one-sixth of 

the fixed obligation overhang that is so threatening the financial 

condition of the major carriers. 

The second objective, then, is to look at the whole issue of bankruptcy. There is widespread expectation of presumption that bankruptcy was used to harm competitors by either lowering prices or 

keeping capacity in the market longer. Our first chart on page 8 

basically outlines how bankruptcy and liquidations are more common in the airline industry. In fact, the airline industry is one of 

the worst performing sectors of all, and what we have here is, not 

only is the rate of bankruptcy and liquidation more common, but 

the potential to recover is also more difficult for carriers. 

Our data shows that of 160 bankruptcies since 1978, only 20 

have actually survived to this day. Another factor we found is the 

airline bankruptcies last longer, and as I said have these less successful outcomes. The next, page 9, is this growth of airline industry capacity and charted along with major airline liquidations, and 

the point here is that we found little evidence that bankruptcies 

are actually contributing to the overcapacity. As you see, it’s really 

5 

those gray areas, it’s the recessions that have been the only factors 

that lead to decreases in industry capacity. 

We have concluded that bankruptcies are not looked at for competitive advantage. It’s not a panacea. It involves many costs, many 

risks, and in our view is looked at by firms as a last resort. And 

if anything, the poor history really is a testimony to that. 

Our concluding observations then is that we, as you said, Mr. 

Chairman, the industry is really still playing out the deregulation 

policies of the 1970s. The restructuring is continuing. The emergence, the full, powerful, ever present emergence of low-cost carriers, as I said, is available to 85 percent of the population, and the 

legacy carriers profitability depends on controlling those costs 

where they still have that disadvantage. 

An important part of our conclusion, contrary to what is seen as 

accepted wisdom, bankruptcy and liquidation are a reflection of, 

but not the cause of industry stability, and in our view, some carriers will terminate pension plans through the bankruptcy process 

under the current conditions. Our most focused observation is this 

last point, though, and it’s the terminating pensions or amortizing 

their contributions over a longer period will not solve the underlying legacy problems, fundamental structural concerns and cost 

disadvantage, so even though there may be a potential for a temporary reprieve, it is only a limited part of the liquidity problem, 

and the cost-differential, and, thus, in our view, there shouldn’t be 

a sense that there is a silver bullet to somehow fix the dire financial condition of the legacy carriers. That concludes my remarks, 

Mr. Chairman. 

[The prepared statement of Ms. Hecker follows:] 

PREPARED STATEMENT OF JAYETTA Z. HECKER, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Mr. Chairman and members of the Subcommittee: 

We appreciate the opportunity to participate in today’s hearing to discuss the financial condition of the U.S. airline industry—and particularly, the financial problems of legacy airlines.1 Since 2001, the U.S. airline industry has confronted financial losses of unprecedented proportions. From 2001 through 2004, legacy airlines 

reported losses of $28 billion, and two of the nation’s largest legacy airlines—United 

Airlines and US Airways—went into bankruptcy,2 eventually terminating their pension plans, and passing the unfunded liability to the Pension Benefit Guaranty Corporation (PBGC).3 Two other large legacy airlines have announced that they are 

precariously close to following suit. 

In recent years, considerable debate has ensued over legacy airlines’ use of Chapter 11 bankruptcy protection as a means to continue operations, often for years. 

Some in the industry and elsewhere have maintained that legacy airlines’ use of 

this approach is harmful to the airline industry as a whole, in that it allows inefficient carriers to stay in business, exacerbating overcapacity and allowing these airlines to potentially under-price their competitors. This debate has received even 

sharper focus with US Airways’ and United’s defaults on their pensions. By eliminating their pension obligations, critics argue, US Airways and United enjoy a cost 

advantage that may encourage other airlines sponsoring defined benefits plans to 

take the same approach. 

Last year, we reported on the industry’s poor financial condition, the reasons for 

it, and the necessity of legacy airlines to reduce their costs if they are to survive.4

At the request of the Congress, we have continued to assess the financial condition 

of the airline industry, and, in particular, the problems of bankruptcy and pension 

terminations. Our work in this area is still under way.5 Nonetheless, we can offer 

some preliminary observations about what we are finding. Our statement today describes our preliminary observations in three areas: (1) the continued financial difficulty faced by legacy airlines, (2) the effect of bankruptcy on the industry and competitors, and (3) the effect of airline pension underfunding on employees, retirees, 

6 

airlines, and the PBGC. Our final report, which we expect to issue in September, 

will offer additional evidence and insights on these questions. 

In summary: 

• U.S. legacy airlines have not been able to reduce their costs sufficiently to profitably compete with low-cost airlines that continue to capture industry market 

share. Challenges that are internal and external to the industry have fundamentally changed the nature of the industry and forced legacy airlines to restructure themselves financially. The changing demand for air travel and 

growth of low-cost airlines has kept fares low, forcing legacy airlines to reduce 

their costs. However, legacy airlines have struggled to do so, and have been unable to achieve unit-cost comparability with their low-cost rivals. As a result, 

legacy airlines have continued to lose money—$28 billion since 2001—and are 

expected to lose another $5 billion in 2005. Additionally, airlines’ costs have 

been hurt by rising fuel prices—especially legacy airlines that did not have fuel 

hedging in place. 

• Bankruptcies are endemic to the airline industry, the result of long-standing 

structural issues within the industry, but there is no clear evidence that bankruptcy itself has harmed the industry or its competitors. Since deregulation in 

1978, there have been 160 airline bankruptcy filings, 20 of which have occurred 

in the last 5 years. Airlines fail at a higher rate than most other types of companies, and the airline industry historically has the worst financial performance 

of any sector. This inherent instability that leads to so many bankruptcies can 

be traced to the structure of the industry and its economics, including the highly cyclical demand for air travel, high fixed costs, and few barriers to entry. The 

available evidence does not suggest that airlines in bankruptcy contribute to industry overcapacity, or that bankrupt airlines harm competitors by reducing 

fares below what other airlines are charging. The history of the industry since 

deregulation indicates that past liquidations or consolidations have not slowed 

the overall growth of capacity in the industry. Studies conducted by others do 

not show evidence that airlines operating in bankruptcy harmed other competitors. Finally, while bankruptcy may appear to be a useful business strategy for 

companies in financial distress, available analysis suggests it provides no panacea for airlines. Few airlines that have filed for bankruptcy protection are still 

in business today. Bankruptcy involves many costs, and given the poor track 

record, companies are likely to use it only as a last resort. 

• While bankruptcy may not harm the financial health of the airline industry, it 

has become a considerable concern for the Federal Government and airline employees and retirees because of the recent terminations of pensions by US Airways and United Airlines. These terminations resulted in claims on PBGC’s single-employer program of $9.6 billion and plan participants (i.e., employees, retirees, and beneficiaries) are estimated to have lost more than $5 billion in benefits that were either not covered by PBGC, or exceeded the statutory limits. 

At termination in May 2005, United’s pension plans promised $16.8 billion in 

benefits backed by only $7 billion in assets (i.e., it was underfunded by $9.8 billion). PBGC guaranteed $13.6 billion of the promised benefits, resulting in a 

claim on the agency of $6.6 billion and an estimated $3.2 billion loss to participants. The defined benefit pension plans of the remaining legacy airlines with 

active plans are underfunded by $13.7 billion (based on data from the U.S. Securities and Exchange Commission, or SEC), raising the potential of additional 

sizeable losses to PBGC and plan participants. These airlines face $10.4 billion 

in pension contributions over the next 4 years, significantly more than some of 

them may be able to afford given continued losses and their other fixed obligations. Spreading these contributions over more years, as some of these airlines 

have proposed, would relieve some of this liquidity pressure but would not necessarily keep them out of bankruptcy because it does not fully address the fundamental cost structure problems faced by legacy airlines. 

Legacy Airlines Must Reduce Costs To Restore Profitability 

Since 2000, legacy airlines have faced unprecedented internal and external challenges. Internally, the impact of the Internet on how tickets are sold and consumers 

search for fares and the growth of low-cost airlines as a market force accessible to 

almost every consumer has hurt legacy airline revenues by placing downward pressure on airfares. More recently, airlines’ costs have been hurt by rising fuel prices 

(see figure 1).6 This is especially true of airlines that did not have fuel hedging in 

place. Externally, a series of largely unforeseen events—among them the September 

11th terrorist attacks in 2001 and associated security concerns; war in Iraq; the 

7 

SARS crisis; economic recession beginning in 2001; and a steep decline in business 

travel—seriously disrupted the demand for air travel during 2001 and 2002. 

Low fares have constrained revenues for both legacy and low-cost airlines. Yields, 

the amount of revenue airlines collect for every mile a passenger travels, fell for 

both low-cost and legacy airlines from 2000 through 2004 (see figure 2). However, 

the decline has been greater for legacy airlines than for low-cost airlines. During 

the first quarter of 2005, average yields among both legacy and low-cost airlines 

rose somewhat, although those for legacy airlines still trailed what they were able 

to earn during the same period in 2004. 

Legacy airlines, as a group, have been unsuccessful in reducing their costs to become more competitive with low-cost airlines. Unit cost competitiveness is key to 


713heck1.eps 713heck2.eps
8 

profitability for airlines because of declining yields. While legacy airlines have been 

able to reduce their overall costs since 2001, these were largely achieved through 

capacity reductions and without an improvement in their unit costs. Meanwhile, 

low-cost airlines have been able to maintain low unit costs, primarily by continuing 

to grow. As a result, low-cost airlines have been able to sustain a unit cost advantage as compared to their legacy rivals (see figure 3). In 2004, low-cost airlines 

maintained a 2.7 cent per available seat-mile advantage over legacy airlines. This 

advantage is attributable to lower overall costs and greater labor and asset productivity. During the first quarter of 2005, both legacy and low-cost airlines continued 

to struggle to reduce costs, in part because of the increase in fuel costs. 

Weak revenues and the inability to realize greater unit cost-savings have combined to produce unprecedented losses for legacy airlines. At the same time, lowcost airlines have been able to continue producing modest profits as a result of lower 

unit costs (see figure 4). Legacy airlines have lost a cumulative $28 billion since 

2001 and are predicted to lose another $5 billion in 2005, according to industry analysts. First quarter 2005 operating losses (based on data reported to DOT) approached $1.45 billion for legacy airlines. Low cost airlines also reported net operating losses of almost $0.2 billion, driven primarily by ATA’s losses. 


713heck3.eps
9 

Since 2000, as the financial condition of legacy airlines deteriorated, they built 

cash balances, not through operations, but by borrowing. Legacy airlines have lost 

cash from operations, and compensated for operating losses by taking on additional 

debt, relying on creditors for more of their capital needs than in the past. In the 

process of doing so, several legacy airlines have used all, or nearly all, of their assets as collateral, potentially limiting their future access to capital markets. 

In sum, airlines are capital- and labor-intensive firms subject to highly cyclical 

demand and intense competition. Aircraft are very expensive and require large 

amounts of debt financing to acquire, resulting in high fixed-costs for the industry. 

Labor is largely unionized and highly specialized, making it expensive and hard to 

reduce during downturns. Competition in the industry is frequently intense owing 

to periods of excess capacity, relatively open entry, and the willingness of lenders 

to provide financing. Finally, demand for air travel is highly cyclical, closely tied to 

the business cycle. Over the past decade, these structural problems have been exacerbated by the growth in low-cost airlines and increasing consumer sensitivity to 

differences in airfares based on their use of the Internet to purchase tickets. More 

recently, airlines have had to deal with persistently high fuel prices—operating profitability, excluding fuel costs, is as high as it has ever been for the industry. 

Bankruptcy Is Common in the Airline Industry, but There Is No Evidence 

That it Is Harmful to the Industry or Competitors 

Airlines seek bankruptcy protection for such reasons as severe liquidity pressures, 

an inability to obtain relief from employees and creditors, and an inability to obtain 

new financing, according to airline officials and bankruptcy experts. As a result of 

the structural problems and external shocks previously discussed, there have been 

160 total airline bankruptcy filings since deregulation in 1978, including 20 since 

2000, according to the Air Transport Association.7 Some airlines have failed more 

than once, but most filings were by smaller carriers. However, the size of airlines 

that have been declaring bankruptcy has been increasing. Of the 20 bankruptcy filings since 2000, half of these have been for airlines with more than $100 million 

in assets, about the same number of filings as in the previous 22 years. Compared 

to the average failure rate for all types of businesses, airlines have failed more often 

than other businesses. As figure 5 shows, in some years, airline failures were several times more common than for businesses overall. 


713heck4.eps
10 

With very few exceptions, airlines that enter bankruptcy do not emerge from it. 

Of the 146 airline Chapter 11 reorganization filings since 1979, in only 16 cases are 

the airlines still in business. Many of the advantages of bankruptcy stem from legal 

protection afforded the debtor-airline from its creditors, but this protection comes 

at a high cost in loss of control over airline operations and damaged relations with 

employees, investors, and suppliers, according to airline officials and bankruptcy experts. 

Contrary to some assertions that bankruptcy protection has led to overcapacity 

and under-pricing that have harmed healthy airlines, we found no evidence that 

this has occurred either in individual markets or to the industry overall. Such 

claims have been made for more than a decade. In 1993, for example, a national 

commission to study airline industry problems cited bankruptcy protection as a 

cause for the industry’s overcapacity and weakened revenues.8 More recently, airline 

executives have cited bankruptcy protection as a reason for industry over-capacity 

and low fares. However, we found no evidence that this had occurred and some evidence to the contrary. 

First, as illustrated by Figure 6, airline liquidations do not appear to affect the 

continued growth in total industry capacity. If bankruptcy protection leads to overcapacity as some contend, then liquidation should take capacity out of the market. 

However, the historical growth of airline industry capacity (as measured by available seat-miles, or ASMs) has continued unaffected by major liquidations. Only recessions, which curtail demand for air travel, and the September 11th attack, appear to have caused the airline industry to trim capacity. This trend indicates that 

other airlines quickly replenish capacity to meet demand. In part, this can be attributed to the fungibility of aircraft and the availability of capital to finance airlines.9


713heck5.eps
11 

Similarly, our research does not indicate that the departure or liquidation of a 

carrier from an individual market necessarily leads to a permanent decline in traffic 

for that market. We contracted with InterVISTAS-ga2, an aviation consultant, to examine the cases of six hub cities that experienced the departure or significant withdrawal of service of an airline over the last decade (see table 1). In four of the cases, 

both local origin-and-destination (i.e., passenger traffic to or from, but not connecting through, the local hub) and total passenger traffic (i.e., local and connecting) 

increased or changed little because the other airlines expanded their traffic in response. In all but one case, fares either decreased or rose less than 6 percent. 

Table 1: Case Examples of Markets’ Response to Airline Withdrawals 

Market Year Airline Effect on passenger traffic 

Change 

in fares 

(percent) 

Nashville, TN 1995 American Airlines 

eliminated hub.

Other airlines’ traffic increased. 

Origin and destination traffic 

increased.

¥10.2 

Greensboro, NC 1995 Continental Lite 

eliminated hub.

Other airlines’ traffic increased. 

Origin and destination traffic 

decreased.

+5.5 

Colorado Springs, 

CO 

1997 Western Pacific 

moved operations to 

Denver.

Other airlines’ traffic decreased. 

Origin and destination traffic 

decreased.

+43.6 

St. Louis, MO 2001 TWA acquired by 

American Airlines.

Other airlines’ traffic decreased. 

Little change in origin and 

destination traffic.

+5.4 

Kansas City, MO 2002 Vanguard Airlines 

suspended service.

Little change in other airlines’ 

traffic. Little change in origin 

and destination traffic.

+4.2 

Columbus, OH 2003 America West eliminated hub.Other airlines’ traffic increased. 

Little change in origin and 

destination traffic.

+3.6 

Source: InterVISTAS-ga2. 

Note: Little change in traffic means that traffic increased or decreased less than 5 percent and that originand-destination traffic increased or decreased less than 10 percent. Changes in passenger traffic and fares are 

measured from 4 quarters prior to the airline departure to 8 quarters after. 

We also reviewed numerous other bankruptcy and airline industry studies and 

spoke to industry analysts to determine what evidence existed with regard to the 

impact of bankruptcy on the industry. We found two major academic studies that 

provided empirical data on this issue. Both studies found that airlines under bankruptcy protection did not lower their fares or hurt competitor airlines, as some have 


713heck6.eps
12 

contended. A 1995 study found that an airline typically reduced its fares somewhat 

before entering bankruptcy. However, the study found that other airlines did not 

lower their fares in response and, more importantly, did not lose passenger traffic 

to their bankrupt rival and therefore were not harmed by the bankrupt airline.10

Another study came to a similar conclusion in 2000, this time examining the operating performance of 51 bankrupt firms, including 5 airlines, and their competitors.11 Rather than examine fares as did the 1995 study, this study examined the 

operating performance of bankrupt firms and their rivals. This study found that 

bankrupt firms’ performance deteriorated prior to filing for bankruptcy and that 

their rivals’ profits also declined during this period. However, once a firm entered 

bankruptcy, its rivals’ profits recovered. 

Legacy Airlines Face Significant Near-Term Liquidity Pressures, Including 

$10.4 Billion in Pensions Contributions Over the Next 4 Years 

Under current law, legacy airlines’ pension funding requirements are estimated 

to be a minimum of $10.4 billion from 2005 through 2008.12 These estimates assume 

the expiration of the Pension Funding Equity Act (PFEA) at the end of this year.13

The PFEA permitted airlines to defer the majority of their deficit reduction contributions in 2004 and 2005; if this legislation is allowed to expire it would mean 

that payments due from legacy airlines will significantly increase in 2006. According 

to PBGC data, legacy airlines are estimated to owe a minimum of $1.5 billion this 

year, rising to nearly $2.9 billion in 2006, $3.5 billion in 2007, and $2.6 billion in 

2008. In contrast, low-cost airlines have eschewed defined benefit pension plans and 

instead use defined-contribution (401k-type) plans. 

However, pension funding obligations are only part of the sizeable amount of debt 

that carriers face over the near term. The size of legacy airlines’ future fixed obligations, including pensions, relative to their financial position suggests they will have 

trouble meeting their various financial obligations. Fixed airline obligations (including pensions, long-term debt, and capital and operating leases) in each year from 

2005 through 2008 are substantial. Legacy airlines carried cash balances of just 

under $10 billion going into 2005 (see figure 7) and have used cash to fund their 

operational losses. These airlines fixed obligations are estimated to be over $15 billion in both 2005 and 2006, over $17 billion in 2007, and about $13 billion in 2008. 

While cash from operations can help fund some of these obligations, continued losses 

and the size of these obligations put these airlines in a sizable liquidity bind. Fixed 

obligations in 2008 and beyond will likely increase as payments due in 2006 and 

2007 may be pushed out and new obligations are assumed. 

13 

The enormity of legacy airlines’ future pension funding requirements is attributable to the size of the pension shortfall that has developed since 2000. As recently 

as 1999, airline pensions were overfunded by $700 million based on Security and 

Exchange Commission (SEC) filings; by the end of 2004, legacy airlines reported a 

deficit of $21 billion (see figure 8), despite the termination of the US Airways pilots 

plan in 2003. Since these filings, the total underfunding has declined to approximately $13.7 billion, due in part to the termination of the United Airline plans, and 

the remaining US Airways plans.14


713heck7.eps
14 

The extent of underfunding varies significantly by airline. At the end of 2004, 

prior to terminating its pension plans, United reported underfunding of $6.4 billion, 

which represented over 40 percent of United’s total operating revenues in 2004. In 

contrast, Alaska reported pension underfunding of $303 million at the end of 2004, 

or 13.5 percent of its operating revenues. Since United terminated its pensions, 

Delta and Northwest now appear to have the most significant pension funding deficits—over $5 billion and nearly $4 billion respectively—which represent about 35 

percent of 2004 operating revenues, at each airline. 

The growth of pension underfunding is attributable to 3 factors: 

• Assets losses and low interest rates. Airline pension asset values dropped nearly 

20 percent from 2001 through 2004 along with the decline in the stock market, 

while future obligations have steadily increased due to declines in the interest 

rates used to calculate the liabilities of plans. 

• Management and labor union decisions. Pension plans have been funded far 

less than they could have on a tax-deductible basis. PBGC examined 101 cases 

of airline pension contributions from 1997 through 2002, and found that while 

the maximum deductible contribution was made in 10 cases, no cash contributions were made in 49 cases where they could have contributed.15 When airlines 

did make tax deductible contributions, it was often far less than the maximum 

permitted. For example, the airlines examined could have contributed a total of 

$4.2 billion on a tax-deductible basis in 2000 alone, but only contributed about 

$136 million despite recording profits of $4.1 billion (see figure 9).16 In addition, 

management and labor have sometimes agreed to salary and benefit increases 

beyond what could reasonably be afforded. For example, in the spring of 2002, 

United’s management and mechanics reached a new labor agreement that increased the mechanics’ pension benefit by 45 percent, but the airline declared 

bankruptcy the following December. 


713heck8.eps
15 

• Pension funding rules are flawed. Existing laws and regulations governing pension funding and premiums have also contributed to the underfunding of defined benefit pension plans. As a result, financially weak plan sponsors, acting 

within the law, have not only been able to avoid contributions to their plans, 

but also increase plan liabilities that are at least partially insured by PBGC. 

Under current law, reported measures of plan funding have likely overstated 

the funding levels of pension plans, thereby reducing minimum contribution 

thresholds for plan sponsors. And when plan sponsors were required to make 

additional contributions, they often substituted ‘‘account credits’’ for cash contributions, even as the market value of plan assets may have been in decline. 

Furthermore, the funding rule mechanisms that were designed to improve the 

condition of poorly funded plans were ineffective. 17 Other lawful plan provisions 

and amendments, such as lump sum distributions and unfunded benefit increases may also have contributed to deterioration in the funding of certain 

plans. Finally, the premium structure in PBGC’s single-employer pension insurance program does not encourage better plan funding. 

The cost to PBGC and participants of defined benefit pension terminations has 

grown in recent years as the level of pension underfunding has deepened. When 

Eastern Airlines defaulted on its pension obligations of nearly $1.7 billion in 1991, 

for example, claims against the insurance program totaled $530 million in underfunded pensions and participants lost $112 million. By comparison, the US Airways 

and United pension terminations cost PBGC $9.6 billion in combined claims against 

the insurance program and reduced participants’ benefits by $5.2 billion (see table 

2). 


713heck9.eps
16 

Table 2: Airline Pension Termination Information 

(in millions of dollars) 

Airline 

Fiscal year of 

plan 

terminations 

Benefit 

liability PBGC liability Net claim on PBGC 

Estimated 

participant 

losses 

Eastern 1991 1,686 1,574 530 112 

PanAm 1991, 1992 1,267 1,212 753 55 

TWA 2001 1,729 1,684 668 45 

US Airways 2003, 2005 7,900 5,926 3,026 1,974 

United 2005 16,800 13,600 6,600 3,200 

Source: PBGC. 

Note: ‘‘Benefit liability’’ is the value of the benefits promised to participants and their beneficiaries immediately prior to plan termination. ‘‘PBGC liability’’ is the amount that PBGC pays after statutory guarantee 

limits are imposed. ‘‘Net claim on PBGC’’ is the difference between the PBGC liability and the assets PBGC 

obtains from the plan. ‘‘Estimated participant losses,’’ the difference between the Benefit Liability and the 

PBGC liability, equals the value of the benefits that plan participants and their beneficiaries lose when PBGC 

takes over a plan. 

In recent pension terminations, because of statutory limits, active- and high-salaried employees generally lost more of their promised benefits compared to retirees 

and low-salaried employees. For example, PBGC generally does not guarantee benefits above a certain amount, currently $45,614 annually per participant at age 65.18

For participants who retire before 65, the benefits guaranteed are even less; participants that retire at age 60 are currently limited to $29,649. Commercial pilots often 

end up with substantial benefit cuts when their plans are terminated, because they 

generally have high benefit amounts, and are also required by FAA to retire at age 

60. Far fewer non-pilot retirees are affected by the maximum payout limits. For example, at US Airways fewer than 5 percent of retired mechanics and attendants 

faced benefit cuts as a result of the pension termination. Tables 3 and 4 summarize 

the expected cuts in benefits for different groups of United’s active and retired employees. 

Table 3: United Airlines Active Employee Pension Termination Benefit Cuts 

Plan 

Active 

employees in 

plan 

Active 

employees 

with benefit 

cuts 

Extent of benefit cut 

1% to < 

25% 

≥ 25% to < 

50% ≥ 50% 

Management, Administrative, 

and Public Contact Employees 20,784 19,231 1,696 15,885 1,650 

Ground Employees 16,062 16,062 11,448 3,441 1,173 

Flight Attendants 15,024 11,109 1,305 7,067 2,737 

Pilots 7,360 7,270 3,927 2,039 1,304 

Source: PBGC. 

Note: Calculation estimates made with 1/1/2005 seriatim data. 

Table 4: United Airlines Retiree Pension Termination Benefit Cuts: 

Plan Retirees in 

plan 

Retirees with 

benefit cuts 

Extent of benefit cut 

≥ 1% to < 

25% 

≥ 25% to < 

50% ≥ 50% 

Management, Administrative, 

and Public Contact Employees 11,360 2,996 2,816 104 76 

Ground Employees 12,676 4,961 4,810 121 30 

Flight Attendants 5,108 29 27 1 1 

Pilots 6,087 3,041 1,902 975 164 

Source: PBGC. 

Note: Calculation estimates made with 1/1/2005 seriatim data: 

It is important to emphasize that relieving legacy airlines of their defined benefit 

funding costs will help alleviate immediate liquidity pressures, but does not fix their 

underlying cost structure problems, which are much greater. Pension costs, while 

substantial, are only a small portion of legacy airlines’ overall costs. As noted previously in figure 3, the cost of legacy airlines’ defined benefit plans accounted for 

a 0.4 cent, or 15 percent difference between legacy and low-cost airline unit costs. 

The remaining 85 percent of the unit cost differential between legacy and low-cost 

17 

* Individuals making key contributions to this testimony include Paul Aussendorf, Anne 

Dilger, Steve Martin, Richard Swayze, and Pamela Vines. 

carriers is attributable to factors other than defined benefits pension plans. Moreover, even if legacy airlines terminated their defined benefit plans it would not fully 

eliminate this portion of the unit cost differential because, according to labor officials we interviewed, other plans would replace them. 

Concluding Observations 

While the airline industry was deregulated 27 years ago, the full effect on the airline industry’s structure is only now becoming evident. Dramatic changes in the 

level and nature of demand for air travel combined with an equally dramatic evolution in how airlines meet that demand have forced a drastic restructuring in the 

competitive structure of the industry. Excess capacity in the airline industry since 

2000 has greatly diminished airlines’ pricing power. Profitability, therefore, depends 

on which airlines can most effectively compete on cost. This development has allowed inroads for low-cost airlines and forced wrenching change upon legacy airlines 

that had long competed based on a high-cost business model. 

The historically high number of airline bankruptcies and liquidations is a reflection of the industry’s inherent instability. However, this should not be confused with 

causing the industry’s instability. There is no clear evidence that bankruptcy has 

contributed to the industry’s economic ills, including overcapacity and underpricing, 

and there is some evidence to the contrary. Equally telling is how few airlines that 

have filed for bankruptcy protection are still doing business. Clearly, bankruptcy 

has not afforded these companies a special advantage. 

Bankruptcy has become a means by which some legacy airlines are seeking to 

shed their costs and become more competitive. However, the termination of pension 

obligations by United Airlines and US Airways has had substantial and wide-spread 

effects on the PBGC and thousands of airline employees, retirees, and other beneficiaries. Liquidity problems, including $10.4 billion in near term pension contributions, may force additional legacy airlines to follow suit. Some airlines are seeking 

legislation to allow more time to fund their pensions. If their plans are frozen so 

that future liabilities do not continue to grow, allowing an extended payback period 

may reduce the likelihood that these airlines will file for bankruptcy and terminate 

their pensions in the coming year. However, unless these airlines can reform their 

overall cost structures and become more competitive with low-cost competition; this 

will be only a temporary reprieve. 

This concludes my statement. I would be pleased to respond to any questions that 

you or other Members of the Subcommittee may have at this time.* 

ENDNOTES 1While there is variation among airlines in regards to the size and financial condition, we adhere to a construct adopted by industry analysts to group large passenger airlines into one of two groups—legacy and low-cost. Legacy airlines (Alaska, 

American, Continental, Delta, Northwest, United, and US Airways) predate airline 

deregulation of 1978 and have adopted a hub-and-spoke network model that can be 

more expensive to operate than a simple point-to-point service model. Low cost airlines (AirTran, America West, ATA, Frontier, JetBlue, Southwest, and Spirit) have 

generally entered the market since 1978, are smaller, and generally employ a less 

costly point-to-point service model. The 7 low-cost airlines have consistently maintained lower unit costs than the 7 legacy airlines. 2Two other smaller carriers—ATA Airlines and Aloha—are also in bankruptcy 

protection. Hawaiian Airlines just emerged from bankruptcy protection earlier this 

month. 3The Pension Benefit Guaranty Corporation’s (PBGC) single-employer insurance 

program is a Federal program that insures certain benefits of the more than 34 million worker, retiree, and separated vested participants of over 29,000 private-sector 

defined-benefit pension plans. Defined-benefit pension plans promise a benefit that 

is generally based on an employee’s salary and years of service, with the employer 

being responsible to fund the benefit, invest and manage plan assets, and bear the 

investment risk. A single-employer plan is one that is established and maintained 

by only one employer. It may be established unilaterally by the sponsor, or through 

a collective bargaining agreement. 4 U.S. Government Accountability Office, COMMERCIAL AVIATION: Legacy Airlines Must Further Reduce Costs to Restore Profitability (GAO–04–836) August, 

2004. 5We found all relevant data for assessing the financial condition of the airline industry, analyses of the effects of bankruptcy on the industry as a whole and six case 

18 

studies of hub markets affected by airline bankruptcy or service withdrawals, interviews with industry and subject area experts, and analyses of SEC and PBGC data 

to be sufficiently reliable for our purposes. 6Legacy airlines’ fuel costs as a percentage of total operating costs doubled from 

11.5 percent during the 4th quarter of 1998 to 22.9 percent during the 4th quarter 

of 2004. Fuel costs for these airlines were $5 billion higher in 2004 than in 2003— 

an amount roughly equal to their net operating losses. 7 Airlines may file for two types of bankruptcy. Chapter 7 of the bankruptcy code 

governs the liquidation of the debtor’s estate by appointed trustees of the court. 

Chapter 11 of the code governs business reorganizations and allows, among other 

things, companies to reject collective bargaining agreements and renegotiate contracts and leases with creditors with the approval of the court. Companies may also 

convert from a Chapter 11 reorganization into a Chapter 7 liquidation or may liquidate within Chapter 11. 8The National Commission to Ensure a Strong Competitive Airline Industry, 

Change, Challenge, and Competition, A Report to the President and Congress, August 1993. 9 Conversely, consolidation within the industry may help remove some capacity. 

The pending merger between America West and US Airways contemplates an airline with approximately 10 percent less total capacity than what the two carriers 

now operate independently. The U.S. Federal Government will own a significant 

stake in the merged company: the Air Transportation Stabilization Board will own 

11.2 percent of the company, and the PBGC will own at least 5 percent. 10Do Airlines In Chapter 11 Harm Their Rivals?: Bankruptcy and Pricing Behavior in U.S. Airline Markets, National Bureau of Economic Research Working Paper 

5047, Severin Borenstein and Nancy L. Rose, February 1995. 11The Effect of Bankruptcy Filings on Rivals’ Operating Performance: Evidence 

From 51 Large Bankruptcies, Robert E. Kennedy, International Journal of the Economics of Business; Feb. 2000; pp. 5–25. 12These estimates include only legacy airlines that continue to sponsor defined 

benefit pension plans and reported their estimated pension obligations to PBGC. 

Pension law provisions prohibit publicly identifying the airlines that have reported 

this information. 13Pension Funding Equity Act of 2004 (Pub. L. 108–218, April 10, 2004). The 

PFEA also changed the interest rate used to calculate future liability from the 30- 

year Treasury bond to a corporate bond rate, which effectively reduces future liabilities. 14SEC data and PBGC data on the funded status of plans can differ because they 

serve different purposes and provide different information. The PBGC report focuses, in part, on the funding needs of each pension plan. In contrast, corporate financial statements show the aggregate effect of all of a company’s pension plans on 

its overall financial position and performance. The two sources may also differ in 

the rates assumed for investment returns on pension assets and in how these rates 

are used. As a result, the information available from the two sources can appear 

to be inconsistent. PBGC data also are not timely. For more information, see GAO, 

Private Pensions: Publicly Available Reports Provide Useful but Limited Information 

on Plans’ Financial Condition (GAO–04–395) March 31, 2004. 15These 101 cases covered 18 pension plans sponsored by 5 airlines. 16Pension funding rules permit sponsors to choose the interest rate used to determine the maximum deductible pension contribution permitted from an interest rate 

‘‘corridor’’—a limited range of interest rates. In calculating the maximum deductible 

contribution, a higher interest rate produces a lower deductible contribution limit. 

The maximum deductible contributions referred to in this paragraph and figure 9 

are calculated using the lowest interest rate permissible from the interest rate corridor. 17For further information, see U.S. Government Accountability Office, PRIVATE 

PENSIONS: Recent Experiences of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules, GAO–05–294, (Washington, D.C.: May 31, 2005). 18This guarantee level applies to plans that terminate in 2005. The amount guaranteed is adjusted: (1) actuarially for the participant’s age when PBGC first begins 

paying benefits and (2) if benefits are not paid as a single-life annuity. Because of 

the way the Employee Retirement and Income Security Act of 1974 (ERISA), as 

amended, allocates plan assets to participants, certain participants can receive more 

than the PBGC guaranteed amount. 

19 

Senator BURNS. Thank you. Now we have Mr. Jim May, President and CEO of the Air Transport Association here. Thank you for 

coming. 

STATEMENT OF JAMES C. MAY, PRESIDENT/CEO, 

AIR TRANSPORT ASSOCIATION OF AMERICA, INC. 

Mr. MAY. Thank you, Mr. Chairman, and thank you, Co–Chairman Inouye, for allowing us to appear today. My starting point discussed at length in our written comments is the financial state of 

the industry. And unquestionably, as we all have acknowledged, 

the last few years have been our most difficult. 2001 to 2004 aggregate net losses were $32.3 billion, and it has left our airlines deeply 

in debt, which is a related issue that we need to be sensitive to. 

At the end of 2004, the industry’s net was more than $81 billion 

with a debt-to-capital ratio of 110 percent. 

Now, my comments will focus on why a financially stable airline 

industry is important to this country, the key factors inhibiting industry financial stability, and some of the things that we think 

need to happen in order to regain, not just stability, but sustainable growth in profit. Simply put, a stable industry, including both 

the passenger and cargo airlines, is critical to a healthy and robust 

U.S. economy. Pulitzer prize-winning economist Dan Gergen released his latest book last week and said as follows: ‘‘every day the 

airline industry propels the economic takeoff from our nation. It is 

the great enabler, leading together all corners of the country, facilitating the movement of people and goods that is the backbone of 

economic growth. And it also firmly imbeds us in that awesome 

process of globalization that is defining the 21st Century.’’ 

Now, the alternative to this vision is a wounded industry unable 

to provide the air transport demanded by the shipping and traveling public and unable to provide a return to shareholders. It is 

not an acceptable alternative. Over the past 4 years, airlines have 

engaged in dramatic efforts to reduce those costs that are within 

our control, and I’d like to stress that point. Reduce those costs 

that are within our control. Out of adversity, we have transformed 

ourselves in many ways, capital spending, $9.5 billion, a 62 percent 

reduction from year 2000 levels. Pay and work rule changes were 

hammered out to achieve a 20 percent productivity improvement. 

Operating costs have been trimmed, even to the point of removing 

pillows and pretzels, and operations have been streamlined to reduce fuel burn, and we have improved overall system efficiency, 

closed up, eliminated routes, and taken down frequencies. 

Now, in this difficult and painful process, as my good friend Mr. 

Roach knows, 135,000 dedicated men and women have lost their 

jobs. That’s an 18 percent reduction from August of 2001. 

Unfortunately, the benefits of these changes that have been 

made which brought the cost structures of the older network carriers much closer to those of their younger low-cost brethren, and 

I have a small disagreement with the first witness here on that 

point because I think we have reduced and narrowed the cost differences with the low prices have been more than offset by costs 

the airlines can’t control; fuel, taxes, and fees. Unfunded mandates, 

in particular those unfunded mandates caused by security imperatives. And with oil trading at an all-time high and the price of jet 

20 

fuel skyrocketing, and my colleague to my left will talk about the 

difference between the crack spread, which is the difference between what oil is trading, and what we are actually paying for jet 

fuel for airplanes. This industry cannot achieve a sustained profit 

sufficient to repair the damage of the last 4 years. 

We are looking at a rolling 12-month forecast for the price of oil to stay above $60 a barrel. Now, in short, those high fuel prices are 

overwhelming our ability to achieve profitability. It’s noted that X 

fuel minus the cost of the increased fuel, a number of our carriers 

would have had the most profitable second quarters in their history, so it’s those external costs. 

We are delighted at reports of improved revenues and system 

yields at some of the carriers, and certainly the possibility that one 

or two airlines might even report some small profits for the second 

quarter of this year, but domestic yields in particular are still weak 

and it remains to be seen if these revenue improvements will carry 

over into the fall and the winter quarters. At current oil prices, we 

predict a net industry loss for the year 2005 in excess of $5 billion. 

Now, our industry recovery is also inhibited by the many taxes 

and fees it must contend with, and I think this is an area where 

the government and this Congress could help more by doing less. 

Airlines will pay more than $15 billion in taxes and fees in 2005, 

resulting in the highest tax rate of any industry, according to one 

respected Wall Street analyst. Even a modest reduction of the tax 

burden will help restore the industry to financial health, facilitate 

jobs and economic growth and it’s not a new or revolutionary idea 

that I’m suggesting to you. More than 10 years ago, the national 

Commission to ensure a strong, competitive airline industry, the 

so-called Nanetta Commission, recommended, ‘‘the industry be released of its unfair tax burden’’. Now, that was 10 years ago. Looking forward, I think there is a tremendous opportunity for positive 

action approaches. Together, we have a chance to reshape the 

FAA’s air traffic control system to meet current and future needs, 

and reduce our costs in that system. Our antiquated air traffic control system based on ground-based radars should be retired to the 

Smithsonian, where it can be admired as one of the marvels of 

1950s technology. I think we need to proceed swiftly and purposely 

with the creation of the new satellite GPS-based system, one that 

will reduce costs, relieve congestion, authorize traffic flow, and 

open up air space for future growth. If the industry is to achieve 

sustained profitability, it is imperative that Congress and the FAA 

do three things. 

First, establish an ATC funding mechanism that distributes costs 

equitably among all system users, creating a reliable funding 

stream that’s bonding and flexible enough to accommodate changes 

in the way the system is used. We need to have the FAA operate 

the ATC more efficiently, including consolidating unnecessary facilities, decommissioning obsolete facilities and equipment, and 

rationalizing the workforce. 

There are 14,000 different communications entities within the 

FAA as part of the air traffic control system. That is unsafe. 

Finally, the FAA must develop and implement procedures and 

technologies that will increase current system capacity and efficiency as quickly as possible, and that will enable future growth. 

21 

Mr. Chairman, with the health of the airports or the re-authorization of the airports, and not only this industry and this committee, I think it’s time for an exercise in very difficult choices. If 

together we do it right, we are going to lay the foundation for a 

bright future for the airlines and the economy that we enable. We 

are going to be attacking those costs that we can’t attack without 

your help, and we are going to continue to attack the costs that we 

have some control over in our own systems. Thank you for the opportunity to appear. 

[The prepared statement of Mr. May follows:] 

PREPARED STATEMENT OF JAMES C. MAY, PRESIDENT/CEO, 

AIR TRANSPORT ASSOCIATION OF AMERICA, INC. 

The Air Transport Association of America, Inc. (ATA) appreciates the opportunity 

to comment on the financial health of the U.S. airline industry. Unfortunately, the 

overall financial picture remains grim because the price of oil continues to surge. 

Increasing oil and fuel prices have offset the recent modest improvement some carriers have experienced on the revenue front. We would like nothing better than to 

dwell on what little good news there is, but to do so would be misleading. The truth 

is, the financial health of the U.S. airline industry remains poor, and the industry 

still has a long way to go before it can be declared healthy again. 

The Current Industry Snapshot 

The U.S. airline industry in 2005 remains in critical condition and is poised to add over $6 billion to the $32.3 billion in losses incurred between 2001 and 2004. 

The current state of the industry is the result of factors and events that have altered industry fundamentals. The fact that industry fundamentals have changed 

distinguishes this down-cycle from all prior cycles. 

One fundamental that has changed is that spending on air travel has dropped to 

0.7 percent of U.S. GDP from its historical level of between 0.9 and 1.0 percent of 

GDP. This means that on a proportional basis Americans today are spending considerably less on flying than in previous years—amounting to roughly $29.5 billion annually. If spending had slipped to just 0.8 percent of GDP, the industry’s financial 

condition would be markedly different. 

All airlines have been affected by these fundamental changes, and all airlines 

have responded in kind by sharply reducing or limiting controllable costs, paring 

back capital spending, revising long-standing collective bargaining agreements, 

streamlining operations, and improving productivity. While there may be pockets of 

such costs still to be addressed at some airlines, no one should forget that more than 

100,000 employees—one out of six—have lost their jobs since 9/11. There is no question that the airline industry has drastically reduced controllable costs. 

Notwithstanding these Herculean efforts, industry profitability remains elusive, 

and the timing of the industry’s return to profitability is unclear. While recently 

there have been some hoped-for signs of recovery, those signs have been inconsistent 

and the industry’s financial health remains dependent on many factors outside of 

its control: a strong economy, effective security worldwide, reduced or stable oil 

prices, and an air traffic control system that will accommodate, safely and efficiently, the growth demanded by the American public. 

Notwithstanding these financial challenges, it should not be overlooked that airline safety has remained rock solid. ‘‘Safety first’’ remains the core industry value. 

In 2004, the National Transportation Safety Board (NTSB) reported only one fatal 

accident in over 10 million scheduled departures. In the three years 2002–2004, 

there were just three fatal accidents in 31 million scheduled departures. In those 

three years, airlines providing Part 121 scheduled operations carried nearly 1.9 billion passengers. Without question, scheduled air service is incredibly safe. 

The events and factors that knocked the U.S. airline industry into a condition requiring the equivalent of intensive care are well known and need not be repeated 

here. However, there are certain factors that warrant further attention because they 

continue to adversely affect the industry’s financial condition. The common thread 

running through these factors is that they are beyond the direct control of the airlines. 

1. The Cost of Fuel Forecloses Financial Recovery 

The simple truth is that, but for the high price of fuel, the U.S. airline industry 

today could earn a small profit. As industry fundamentals go, the price of fuel is 

22 

1Fimat, Energy Overview (July 8, 2005), found at http://research.fimat.com/dominoapps/ 

fimatres.nsf/C5934649E5F8BDB886257038004DFC75/$FILE/tcc1lnew.pdf. 2Jet Fuel Expense Surges Past Personnel Costs, MSNBC.com (July 11, 2005). 

the most significant force affecting the industry today. For the ten year period 

1992–2001, the median price of crude oil was $19.90. Even in 2001 and 2002, crude 

oil was relatively stable in the $25–$26 range. In 2003, the average price jumped 

to over $31 a barrel, and in 2004 the average price jumped again to more than $41 

a barrel. Today, crude is over $60 per barrel, and the 2005 price is expected to average at least $52 per barrel. In fact, the twelve month rolling forecast currently has 

crude oil at over $60 per barrel through July 2006.1 In essence, oil prices have nearly doubled in two years, and when compared to the 1992–2001 median average they 

have tripled. 

Jet Fuel prices have mirrored the price of crude oil, and 2005 prices are expected 

to surpass the 2004 record prices. The true cost impact on the airlines of this unprecedented increase is staggering and virtually defies comprehension. As the charts 

below show, the industry’s 2004 jet fuel expense would have been $11.8 billion at 

the average price paid during the 1992–2001 period, compared to the actual $21.4 

billion paid in 2004. We now expect the industry fuel bill to rise another $6.7 billion 

in 2005, to more than $28 billion, assuming fuel consumption remains unchanged. 

At some airlines, fuel costs now exceed personnel costs as the number one expense 

category.2


713may1.eps
23 

Given the vigorous competitive climate of the industry, discussed below, airlines 

have not been able to include in ticket prices the increased cost of fuel. To cover 

the jet fuel price increases from 2003 to 2004, for example, passengers would have 

had to pay on average an additional $21 per ticket. Yet ticket prices during this 

period fell because of intense competition. The industry would be in a much difVerDate Nov 24 2008 12:42 Nov 17, 2010 Jkt 062179 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\62179.TXT SCOM1 PsN: JACKIE

713may2.eps 713may3.eps
24 

3Goldman Sachs, ‘‘U.S. Energy: Oil—Super Spike Period May be Upon Us,’’ March 30, 2005. 4 A June 10, 2005 report issued by the Energy Risk Management Group of Fimat, for example, 

stated: ‘‘The response to Arlene’s approach shows with brutal clarity how sensitive the market 

is to any possible supply disruption. With the potential impact on production and transportation 

at least part of the rally was justified. . . . The storm headlines surprised and prompted waves 

of short covering and possibly a moderate amount of fresh speculative buying, as well.’’ 

http://research.fimat.com/dominoapps/fimatres.nsf/0B9A9C6DBB71AF2E8625701C004AA162/ 

$FILE/tcc1lnew.pdf. 5 ‘‘Oil Prices Surge All-time High,’’ MSNBC, June 17, 2005, at http://www.msnbc.msn.com/ 

id/5612507. 6Gary Chase, Lehman Brothers, ‘‘Industry Update,’’ March 15, 2005. 

7 ‘‘Tax policies often have had a major and adverse effect on the industry. Although the Commission concluded that tax changes alone will not restore the industry to profitability, we believe there are several tax provisions that impede the ability of the industry to return to financial health. We believe those provisions violate reasonable principles of common sense and good 

public policy and we are of the opinion changes must be made to relieve the airline industry’s 

unfair tax burden.’’ Change, Challenge and Competition: A Report to the President and Congress 

(August 1993), The National Commission to Ensure a Strong Competitive Airline Industry. 

ferent, healthier condition had the airlines been able to pass on their actual fuel 

costs. 

An operating fundamental of the industry is that airplanes run only on jet fuel. 

There is no alternative. The related economic fundamental is that the dramatic 

change in the price of fuel now appears to be permanent. The days of $20–$35 per 

barrel oil are over. We will be fortunate if the price slips back to $40–$50 per barrel. 

Given the worldwide demand for oil products and finite refining capacity, particularly in the U.S., some analysts predict even higher prices. A recent Goldman Sachs 

report suggests prices may rise as high as $105 per barrel.3 Moreover, the market 

is highly susceptible to any possible supply disruption, as the price spike in anticipation of tropical storm Arlene in early June illustrated.4 On June 17, oil surged 

to a then-all time high—exceeding $58 per barrel—over concerns about both supply 

and refining capacity.5 Last week, oil prices eclipsed $60 per barrel, continuing an 

apparently inexorable climb upward. 

The increase in the price of fuel has been rapid and dramatic. Because of the complexity of market forces at play in the airline industry, this fundamental economic 

change strongly affects the cost side of the ledger, increasing the revenues needed 

for profitability. As a result, complete recovery—defined by a return to profitability—remains foreclosed. When the industry might achieve profitability remains 

uncertain. As one market analyst observed recently: 

On a non-fuel basis, operating profitability . . . is as good as it was in the late 

1990s. While these facts are exciting . . ., they may also be totally moot if oil 

prices do not return to [historical norms] . . . Unfortunately, high fuel prices 

are consuming what would otherwise be an upcycle for the industry.6

2. Taxes and Fees Weigh Down the Industry 

The industry continues to be weighed down by excessive taxes and fees imposed 

on airlines and their customers. The negative economic impact of these taxes and 

fees is a drag on the industry and hampers its ability to return to profitability. This 

is one area in which the government could help more by doing less. As one analyst 

has noted: 

[T]he airline industry pays the highest Federal tax rate of any industry as it 

continues to lose massive amounts of money through user and security taxes 

that amount to an estimated 10 percent of revenues . . . in reality, in a highly 

competitive, weak revenue environment, the taxes are paid for by the airlines 

. . . 

Ray Neidl, Speech at the National Air Service Conference (January 24, 2005). 

The tax and fee burden on airlines operating in, to, and from the U.S. exceeded 

$14 billion in FY 2004 and are expected to exceed $15 billion in 2005. This tax burden distorts the normal functioning of market forces and fundamentally depresses 

the industry. Nonetheless, the appetite for taxing the industry remains strong. Since 

1988, the average tax on a $200 domestic round-trip ticket has increased 250 percent, while average domestic yields have actually declined 3 percent. This is so despite the 1993 recommendation, made by the National Commission to Ensure a 

Strong Competitive Airline Industry, to relieve the industry of its ‘‘unfair tax burden.’’ 7

25 

Aviation taxes have outpaced inflation and prices, and air transportation is taxed 

at a higher rate than the consumption of beer and liquor, telephone service, and 

most notably, bus and rail transportation, which face no Federal travel tax. 


713may4.eps
26 

8These include, but are not limited to, installation and maintenance of counter-manpads devices, additional in-line EDS baggage screening equipment, increased cargo screening on passenger and all-cargo flights, implementation of the DHS Secure Flight passenger screening program, and promulgation of a rule requiring airlines to transmit passenger manifest and related 

passport data one hour before departure of in-bound international flights. 9 ‘‘The statutory incidence of a tax indicates who is legally responsible for the tax. . . . Because prices may change in response to the tax, knowledge of statutory incidence tells us essentially nothing about who is really paying the tax. . . The [economic] incidence of a unit tax is 

independent of whether it is levied on consumers or producers. . . In general, the more elastic 

the demand curve, the less the tax borne by consumers. . . The key point to remember is that 

nothing about the incidence of a tax can be know without information on the relevant behavioral 

elasticities.’’ Public Finance (4th Ed.), Harvey S. Rosen (Princeton University Department of Economics). 

Federal Consumption Taxes and Fees High on Flyers* 

Uncle Sam Taxes Low-Priced Air Travel Above Sins, Luxuries, and Other Modes 

Product Percent Product Percent 

Plane Ticket: One-Stop ($100) 1 44.2 Heavy Firearms / Ammunition 11.0 

Plane Ticket: Non-Stop ($100) 1 25.6 Distilled Spirits ($20) 4 10.7 

Plane Ticket: One-Stop ($200) 1 25.6 Sport Fishing Equipment 10.0 

Plane Ticket: One-Stop ($300) 1 19.4 Pistol or Revolver 10.0 

Pack of Cigarettes ($4.50) 2 18.2 Can of Beer ($1.00) 5 5.0 

Plane Ticket: Non-Stop ($200) 1 16.3 Luxury Vehicle (Portion > $40K) 3.0 

Plane Ticket: Non-Stop ($300) 1 13.2 Telephone Service 3.0 

Arrow Components 12.4 Elec. Outboard Motors / Sonar 6 3.0 

Heavy Truck / Trailer / Tractor 12.0 Ship Ticket ($1,000) 7 0.3 

Gallon of Gasoline ($1.60) 3 11.5 Bus Ticket 0.0 

Bows 11.0 Rail Ticket 0.0 

1 Roundtrip with federally approved $4.50 PFC. 

2Taxed at 82¢ per pack. 

3Taxed at 18.4¢ per gallon. 

4Taxed at $2.14 per 750-milliliter bottle. 

5Taxed at 5¢ per can. 

6 Up to a maximum of $30.00. 

7Taxed at $3.00 per ticket. 

Note: The Federal Government also taxes the sale of tires over 40 pounds, coal, wine, vaccines, foreignissued insurance, and selected other items. 

*Analysis considers Federal taxes and fees only; does not examine the broader impact of State and local 

taxes, which can be especially high on alcohol and tobacco. 

Sources: ATA research; Internal Revenue Service; Bureau of Alcohol, Tobacco & Firearms. 

ATA appreciates this Committee’s efforts to upend the Administration’s proposed 

increase of the passenger security fee for FY 2006. As this Committee is well aware, 

security fees and taxes account for a significant portion of the overall tax and fee 

burden on the industry. In FY 2005, we estimate that the industry will provide to 

DHS over $3.2 billion in direct fees and taxes. Add to this the foregone revenue from 

certain federally mandated programs and the out-of-pocket expenses for other unfunded mandates, and very quickly the industry’s annual security cost burden exceeds $4 billion. That number will only increase as more passengers fly. Yet the Administration and Members of Congress continue to discuss and debate several new 

mandates.8 The airline industry cannot be expected to achieve profitability if the 

government continues to impose more and more taxes, fees, and unfunded mandates. 

Unfortunately, the ‘‘cash cow’’ view of the airline industry infects the rest of the 

world. Several G–8 member states recently proposed a ‘‘solidarity tax’’ on airplane 

tickets as a mechanism to raise money to assist developing countries address health 

and welfare needs. In the view of these countries, because the airline industry facilitates globalization, and because ‘‘airline passengers seldom belong to the poorest 

segments of the population,’’ a tax on air transportation is justified. The problem 

with this approach, of course, is that it is basically an ‘‘ends justify the means’’ argument and could apply to any number of issues regardless of merit. 

As we have said previously, it does not matter whether a tax or fee is imposed 

on passengers or airlines. It is the imposition of the tax that is significant,9 with 

the result being that the more the government collects for air travel, the less the 

airlines are able to charge. As Treasury Secretary Snow has stated, ‘‘Economics tells 

us that anything you tax, you get less of. That’s why high marginal taxes . . . are 

a bad idea—they kill jobs.’’ In our view, with the right tax policy, the government 

can foster job creation and financial stability in the industry. 

Unfortunately, excessive taxes on the airline industry are crippling a vital segment of our economy. The U.S. airline industry plays a major role in driving the 

27 

commerce of the United States and the growth of our national economy. An economically crippled airline industry is a drag on the national economy and ultimately 

will prevent it from realizing its full potential. Robust air transportation is critical 

to sustaining our recovery and catalyzing the next round of growth essential to our 

nation’s economic competitiveness. As airline job losses continue to mount, and service to small- and mid-size communities is cut, it is not simply the airlines and their 

employees who are suffering; it is the broader economy that feels the results. Air 

transportation grows both the national and local economies—its absence reverses 

that effect. 

3. Pricing Power Remains Inadequate for Airlines To Recover Costs 

Throughout 2004, and well into 2005, U.S. airlines were unable to raise prices. 

Numerous efforts failed because of the intense competitive nature of the industry 

and the fundamentals of supply and demand. Market analysts uniformly observed 

that all airlines lacked pricing power to pass through increased costs. For example: 

[L]egacy carriers and LCCs continue to fight strenuously for market share with 

a complete lack of pricing power creating an anemic revenue environment . . . 

Fuel . . . remains a major factor in the industry’s inability to make a profit, 

and we remind investors that this is not the first time the airlines have been 

faced with tough year over year comps. However, this is the first time that carriers have not been able to pass these costs on to the consumer as evident by 

several failed fare increases and the declining yields. 

Reno Bianchi and Steven K. Burton, Citigroup Corporate Bond Research, Airline Industry Research Report, December 21, 2004. 

The following chart illustrates the lack of pricing power from January 2001 

through the first quarter of 2005 by tracking mainline passenger yields: 


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28 

10 ‘‘Airfare Momentum Stalls After Successive Price Hikes,’’ Business Travel News, June 7, 

2005; ‘‘Airline Profits Are So Close, Yet Still So Far,’’ New York Times, June 12, 2005; ‘‘Northwest Pulls Fare Increase,’’ Aviation Daily, June 14, 2005. 11 ‘‘[Several airlines] raised fares on some routes, then cut them a day or two later when bookings fell . . .’’ ‘‘Even if they wanted to take advantage of the heavy demand for summer travel, 

the big airlines do not have carte blanche to raise fares, because low-fare airlines keep them 

from doing so.’’ New York Times, June 12, 2005. 12 Id. 13 Adjusted for inflation, domestic airfares, net of taxes, have dropped 51 percent over the past 

25 years. 14Year One—Taking Flight: 2004 Annual Performance Report, Federal Aviation Administration, Air Traffic Organization (March 2005) (the ‘‘ATO 2004 Annual Report’’), p. 23. 

Recently, airlines have been able to maintain some price increases, and this modest success offers a glimmer of hope for the future. At this point, however, it remains only a glimmer. During the second week of June, for example, multiple attempts at fare increases failed under competitive pressures.10 Passengers remain extremely price sensitive, and price competition among all airlines is robust.11 Consequently, even low-cost airlines are not sanguine about increasing revenue through 

fare hikes, as confirmed by Independence Air’s Eric Nordling: ‘‘The flying public is 

highly elastic; it is very sensitive to price.’’ 12

The simple truth is that if the airlines could raise their prices to cover fuel costs 

and the many taxes and fees they pay, they would have done so by now. They 

haven’t, and basic marketplace principles—competition and elasticity—are continuing to prevent them from doing so. It remains to be seen when, if ever, pricing 

power returns to the point where profitability can be restored notwithstanding increasing fuel prices. 

4. Expanding the Air Traffic Control System’s Capacity and Enhancing ATC 

Productivity Is Critical to the Financial Health of the Industry 

The American people want convenience and value for their money. That is why 

they are flying in record numbers this summer. U.S. airlines provide safe, convenient, and reliable service at a fair price.13 Maintaining system reliability, however, 

is becoming increasingly difficult as airlines, responding to marketplace demands for 

service, add flights. The financial health of the industry—today and in the future— 

depends in part on the ability of the FAA’s Air Traffic Control (ATC) system to provide the capacity needed to meet not only the demand for scheduled passenger and 

cargo operations, but also the growing appetite of the non-scheduled sector, including air taxis, business jet operations and, in the near future, Very Light Jets.14


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15 ATO 2004 Annual Report, p.23. 16 Next Steps for the Air Traffic Organization, Statement of the Honorable Kenneth M. Mead 

Before the Committee on Transportation and Infrastructure, Subcommittee on Aviation, United 

States House of Representatives (April 14, 2005) p. 2 (Mead Testimony), p.2. 17Federal Aviation Administration, Aerospace Forecasts, Fiscal Years 2005–2016, Table 36, X– 

37. 18 Joint Planning and Development Office, Next Generation Air Transportation System Integrated Plan (December 2004), p. 8. 

Inadequate ATC system capacity will stymie airline growth and the ability of the 

industry to achieve and maintain financial health. That, in turn, will adversely affect the commerce of the United States and the American public. Without a dramatic change in the way our nation’s airspace is managed, congestion and resulting 

delays will be overwhelming for consumers and businesses alike. As it is, 86.5 million ATC delay minutes were responsible for adding an estimated $6.2 billion to direct operating costs for U.S. airlines in 2004. The FAA is predicting that by the end 

of 2005 commercial aviation flights will have regained the peak levels of 2000.15 Operations at en route centers actually have surpassed the number handled in 2000.16

Just maintaining the safety and efficiency of our air traffic system at the current 

level of operations is not an option. The FAA will have to increase system capacity 

and productivity to accommodate an estimated 25 percent increase in the volume 

of air traffic in the next decade.17 In fact, the Joint Planning and Development Office is seeking to expand capacity by as much as 300 percent by 2015 to accommodate changes in aircraft size as well as the projected growth in demand.18 ATA 

members support these efforts. 

The alternative, measures that restrict operations such as those imposed at Chicago’s O’Hare International Airport, are unacceptable. Arbitrary restrictions on operations will undermine the public benefits Congress envisioned when it deregulated 

the industry. Ultimately, such restrictions will add new operating costs as access to 

the system is rationed. Indeed, within the Administration, the notion of ‘‘marketbased’’ solutions to allocate landing and take-off rights at certain airports is gaining 

currency already. These solutions could result in new fees and charges that airlines 

would have to pay. Realistically, given the fierce price competition within the industry, it is unlikely these new charges could be passed on to customers. 

The solution lies in a modernized ATC system that uses technology and operational measures to increase capacity and enable growth. In the near term, consolidating facilities and decommissioning outdated equipment and procedures should 

provide help at the margins. Capacity of the current system can be increased by 

leveraging existing on-board technologies and creating new satellite-based routes 

that are more flexible than existing routes; gains can also be achieved by doing a 

better job keeping slower airplanes separated from faster moving airplanes. A key 

measure is to manage the ATC system from a national perspective instead of the 

current patchwork of airspace components, each managed individually. This locallydriven system creates too many opportunities for bottlenecks and inefficient use of 

the airspace from a total system perspective. Looking forward, any new system must 

be built on a scalable architecture that maximizes flexibility and ease of growth. 

Conclusion 

The U.S. airline industry remains in dire financial condition, with several airlines 

in Chapter 11 and other airlines facing that possibility as oil prices continue to 

climb. The prospects for a return to stability and profitability remain uncertain in 

light of factors largely out of the control of the airlines. Nevertheless, it can be said 

that a glimmer of hope is on the horizon. People are flying again in record numbers, 

and airline cost-cutting measures are having a positive impact. 

Looking forward, Congress and the Administration will play a significant role in 

the financial health of the industry. The tax and fee burden remains excessive and 

should be reduced. By no means should new taxes and fees be added, no matter 

what the purpose. Further, when the Aviation Trust Fund comes up for reauthorization in 2007, it will be imperative that Congress support the FAA’s efforts to expand 

ATC system capacity to permit expected industry growth. At that time, Congress 

should adopt a new funding formula that fairly apportions trust fund contributions 

among system users according to their use of the ATC system. 

Senator BURNS. Thank you. Mr. Jamie Baker, Vice President, 

JPMorgan Securities, Incorporated, thank you for coming this 

morning. 

30 

STATEMENT OF JAMIE N. BAKER, VICE PRESIDENT, 

U.S. EQUITY RESEARCH, JPMORGAN SECURITIES, INC. 

Mr. BAKER. Thank you. Chairman Burns, members of the Committee, I do want to thank you for the opportunity to in fact speak 

here this morning. Again, my name is Jamie Baker. I’m the U.S. 

airline equity analyst at JPMorgan. Please do take note that the 

statements that I make here today don’t reflect the official position 

of JPMorgan on these issues. 

Let me start out by emphasizing that, and echoing some of the 

recent testimony that it is in fact fuel prices, not industry mismanagement, that can primarily explain why we have convened 

here today. Fuel prices are continuing to mask an underlying recovery in the airline industry, of which many are not aware, and 

I would suggest that with the exception of fuel, all of the relevant 

industry cockpit gauges, if you will, are in the green for the first 

time since September 11. 

Ex-fuel costs for the legacy carriers have not been this low since 

1997, and they are, in fact, headed lower. If you exclude one-time 

non-cash and focus on core costs, those that suggest future performance, then legacy carriers have in fact decreased their cost disadvantage to the low-cost carriers by nearly 50 percent. Air fares 

and revenues both continue to rise with no apparent negative offset 

on demand. U.S. capacity, while still growing is in fact growing at 

a slower rate than many of us feared at the beginning of this year. 

If in fact fuel casts were hypothetically not an issue, both American 

and Continental Airlines would have just enjoyed their most profitable second quarters in their corporate histories. While we are not 

suggesting legacy carriers can fully match the efficiency of some of 

the smaller, low-cost competitors, the gap between the two is clearly diminishing. But unfortunately, these carriers that I’m employed 

to follow, they don’t fly gliders, and therefore stripping out fuel expenses is merely an analytical exercise. Despite nearly a dozen 

mostly successful efforts at raising air fares this year, we estimated 

only $7 per barrel of crude has managed to be offset leaving the 

effective price of that still above historic norms. As such, liquidity 

is expected to decline significantly. Delta and Northwest will burn through more than $1 billion in 

cash this year inclusive of the capital they have raised here today, 

and furthermore, the industry’s ability to go deeper into debt, while 

seemingly never exhausted, is rapidly diminishing. Since 2000, airlines have borrowed more than $27 billion. They have seen their 

credit ratings fall substantially, and while legacy airlines have 

begun turning to nontraditional sources of capital such as the 

hedge fund community and the manufacturers, I think the ability 

to further tap these resources are unlikely unless pension reform 

can positively impact their credit ratings. 

Delta has disclosed that its projected minimum pension funding requirements under current rules will increase to $600 million in 

2006, and to more than $1.5 billion by 2008. Similarly, at Northwest, they are estimating $800 million for requirements for 2006 

and $1.7 billion for 2007. For this obvious reason, both Delta and 

Northwest are likely to seek bankruptcy protection and follow the 

damaging precedent set by United Airlines in terminating its defined benefit program. That is unless we are allowing for long-term 

31 

amortization period of deficits for sponsors agreeing to freeze their 

DB plans comes into law, and I would suggest sometime within the 

next 6 months or so. 

These are not my analytical opinion. The broader market implies 

between a 55 and 59 percent one-year bankruptcy probability for 

Northwest and Delta. For American and Continental, arguably two 

better positioned carriers, the implied bankruptcy probability over 

the next 4 years is roughly the same. I point out that these figures 

have actually worsened since my colleague, Mark Streeter, testified 

before the House 3 weeks ago. 

But legacy Chapter 11 filings, and the accompanying toll on 

workers, and likely service decline to smaller communities, these 

are not necessarily inevitable occurrences. Legacy airline management would much prefer to avoid the Chapter 11 process and instead be left alone to do what they currently are, further reducing 

their competitive disadvantage to the more youthful and fit, those 

carriers that have sprung up since deregulation. 

Now, if the government sponsors the flexibility to stretch payments over a period of several years, the sponsors, they must be 

forced to maintain fiscal discipline in my opinion. The price to legacy carriers of potential pension reform should include at a minimum restrictions on their ability to repurchase stock, pay dividends, or offer increased defined benefits, even if funded with cash. 

Members of the Committee, if the proposed pension legislation 

not supported by the legacy airlines does become law, I agree with 

the broader market that both Delta and Northwest will be forced 

to file bankruptcy within the next year or so. The ability of these 

carriers to complete their ongoing restructuring outside of the court 

process is almost directly tied to pension reform that does not result in onerous near-term deficit reduction contributions. With 

United having already sought its subsidy and therefore having set 

a damaging precedent, the government instead has an opportunity 

to allow other carriers the opportunity to make good on promises 

that they have already made to their employees, while further protecting taxpayers in the process. Thank you again for the opportunity to speak here this morning. 

[The prepared statement of Mr. Baker follows:] 

PREPARED STATEMENT OF JAMIE N. BAKER, VICE PRESIDENT, U.S. EQUITY RESEARCH, JPMORGAN SECURITIES INC. 

Chairman Burns and members of the Committee, thank you for inviting me to 

speak this morning. My name is Jamie Baker, I am the U.S. Airline equity analyst 

at JPMorgan. I would like to provide the Committee with an overview on the U.S. 

airline industry, its ongoing efforts at recovery, and how the pension issue and other 

factors will continue to impact this recovery. I will also focus certain comments on 

the remaining legacy airline defined benefit plan sponsors, AMR Corp, Continental 

Airlines, Delta Air Lines, and Northwest Airlines. Please note that my testimony 

and statements are my personal views and do not represent the official position of 

JPMorgan. 

Fuel Is Masking Fundamental Recovery 

Unfortunately for the airlines, fuel costs are masking a fundamental recovery that 

is well underway. Were an industry cockpit to exist, we would suggest all non-fuel 

gauges would be reading into the green, the first such instance since September 11, 

2001. For example, ex-fuel unit costs haven’t been this low since 1997, and they are 

expected to head lower still. Airfares and revenue are both continuing to rise, with 

no apparent offset on demand. Capacity, while still increasing domestically, is rising 

at a slower growth rate than feared, with the majority of that growth coming from 

32 

low-cost carriers. In fact, if fuel were not an issue, both American and Continental 

would have just concluded their most profitable second quarters in their history. 

While it is not our intent to suggest that legacy carriers can fully-match the efficiency and cost competitiveness of their smaller, low-cost carrier competitors, the 

chasm between the two sub-sectors is continuing to diminish. 

But Fuel Is a Reality, and Legacy Airlines Don’t Fly Gliders 

Regrettably, stripping out fuel expense is but a mere analytical exercise. Jet kerosene prices have actually risen by a greater degree than raw crude, in part given 

the shortage of refinery capacity. Year-to-date, jet kerosene has risen 44 percent vs. 

a 39 percent increase in the price of crude. 

Despite nearly a dozen, mostly successful efforts at raising fares in 2005, we estimate that merely $7 per barrel of crude agony has managed to be offset, leaving 

the effective price of that commodity still well above historic norms. While carriers 

will likely continue pressing fares higher this year and beyond, each successive fare 

increase is expected to generate a diminishing return, given the price-sensitivity of 

demand. 


baker1.eps baker2.eps
33 

Liquidity Is Under Pressure 

Legacy airline liquidity is expected to decline significantly in 2005. We estimate 

that Delta and Northwest will each burn through more than $1 billion this year, 

inclusive of the capital raised year-to-date, unless assuming cash reserves can somehow be replenished. 

The industry’s ability to go deeper into debt, while seemingly inexhaustible, does 

appear to be rapidly diminishing. Since 2000, U.S. Airlines have borrowed more 

than $27 billion, and have witnessed substantial declines in their credit ratings. 

And while legacy airlines have been turning to non-traditional lenders, such as 

hedge funds and the manufacturers, the ability to further tap these resources is unlikely, unless pension reform can positively impact their credit standings. 


baker3.eps baker4.eps
34 

Our Bankruptcy Probabilities Are Largely Shared By the Market 

By looking at credit market implied cumulative default probabilities (a more accurate analysis, in our opinion, than relying on equity values), the market ascribes between a 55 percent and 59 percent probability that Northwest and Delta will file 

bankruptcy within the next 12 months. Implied one-year risk for American and Continental, arguably two better-positioned carriers, is significantly lower, though their 

implied bankruptcy probability over the next four years remains in the mid-to-high 

50 percent range. 

Exhibit V: Credit Market Implied Cumulative Default Probabilities 

Cumulative Default Probability Before Time Period Expires (in percent) 

1 year 2 years 3 years 4 years 5 years 7 years 10 years 

AMR 12.5 29.1 45.2 57.1 61.1 69.9 80.0 

CAL 14.6 30.5 44.4 54.9 64.6 72.3 82.0 

DAL 59.0 75.6 80.1 85.0 87.8 93.9 97.8 

NWAC 54.7 71.1 73.8 80.8 84.0 91.8 96.6 

Source: JPMorgan, based on July 8, 2005 credit default swap quotes assuming 10 percent recovery in bankruptcy. 

Can the Airlines Raise Additional Capital? 

As of late, legacy airlines have been turning to non-traditional lenders. Delta has 

pre-sold frequent flier miles forward to American Express and tapped General Electric for a securitized loan. Continental recently sold miles forward as well and borrowed against its last major unencumbered assets (Air Micronesia, its Guam-based 

operation). 

It remains to be seen whether or not other vendors and manufacturers are willing 

to invest further in their airline partners. Nevertheless, the proposed America West 

/US Airways capitalization includes proceeds from Airbus, hedge funds, traditional 

money managers, and an airline maintenance provider (Air Canada). Therefore, we 

can conclude that the legacy airlines could perhaps tap some of these same sources 

for additional liquidity, especially if pension reform positively impacts the credit 

standing of the legacy airlines. 

Will Pension Reform Force Additional Legacy Airline Chapter 11 Filings? 

Under some pension reform proposals, the airlines that sponsor defined benefit 

plans will face incredibly onerous payments. Relative to the 2005 required minimum 

contribution of $450 million, Delta has disclosed that its projected minimum funding 

under the current rules will increase by 33 percent in 2006 to $600 million, by 111 


baker5.eps
35 

percent in 2007 to $950 million, and by 255 percent in 2008 to $1.7 billion. For 

Northwest, they are estimating $800 million in 2006, and $1.7 billion in 2007. 

For this reason, both Delta and Northwest are likely to seek Chapter 11, and follow the damaging precedent set by United Airlines in terminating its defined benefit 

plans. This, unless a rapid decline in fuel costs or reform allowing for a longer-term 

amortization of deficits for sponsors agreeing to freeze DB plans comes into law, 

sometime within the next six months or so. 

Continental is not as exposed to rising payments given the nature of the airline’s 

defined benefit plan relative to Northwest and Delta. Nevertheless, the combination 

of the current oil price environment, current industry revenue, and higher required 

pension payments could force Continental to consider Chapter 11 as well in 2006. 

AMR has enough liquidity-raising options and current liquidity to perhaps bridge 

the gap between today’s environment and one where industry revenue and stock 

market improvement make required pension payments more manageable. 

The issues surrounding credit balances and annual premiums, while important, 

are secondary to both the length of the amortization period and the interest rate 

to value liabilities in the cases of Delta and Northwest. 

For AMR, the interest rate assumption and premium payments are most critical 

given the company’s and its workers’ desire to maintain defined benefit plans rather 

than the freezing approach embraced by Delta and Northwest management. 

UAL is AMR’s largest competitor. Although UAL’s replacement defined contribution plan costs are significant, I nonetheless am concerned that AMR (and other legacy majors) will be at a strategic disadvantage to UAL going forward because of 

UAL’s successful elimination of its defined benefit plans. 

Multiple Bankruptcies Are By No Means Inevitable 

Legacy Chapter 11 filings, with their accompanying toll on workers and expected 

service declines to smaller communities, are not inevitable, in our opinion. Legacy 

airline managements would much prefer to avoid the process, and instead remain 

concentrated on the task at hand—further reducing their competitive disadvantage 

versus the more youthful and fit, those airlines that have sprung up since airline 

deregulation. Their ability to succeed, however, is largely predicated on favourable 

airline-specific pension reform and/or sharply lower energy prices. 

Should the government afford defined benefit sponsors the flexibility to stretch 

payments out over a period of several years, the sponsors must be forced to maintain fiscal discipline. Such discipline should include, though not be limited to, restrictions on the ability to repurchase stock, pay dividends, or offer increased defined benefits even if funded with cash. 

Conclusion 

If the proposed pension legislation not supported by the legacy airlines is passed 

into law, we agree with the market that near-term Chapter 11 filings become significantly more likely. Put differently, certain airlines are likely to pursue a Unitedtype strategy, whereby the PBGC shortfall will increase and taxpayers and plan 


baker6.eps
36 

participants will suffer as a result. Alternatively, pension reform that does not result in onerous near-term deficit reduction contributions would likely materially diminish bankruptcy risk from non-fuel related issues, and otherwise allow carriers 

the chance to make good on promises already made to employees, while further protecting taxpayers and stakeholders in the process. 

Thank you once again for allowing me to speak to you today. 

Senator BURNS. Thank you. Now we have Mr. Robert Roach, the 

International Association of Machinists and Aerospace Workers 

and many years ago, I was a member of your good union. 

Mr. ROACH. You can still be a member if you want to, Mr. Chairman. I’ll sign you right up. 

Senator BURNS. I don’t think I can throw those baggies like I 

used to in Kansas City. 

STATEMENT OF ROBERT ROACH, JR., GENERAL VICE 

PRESIDENT OF TRANSPORTATION, INTERNATIONAL 

ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS 

(IAM) 

Mr. ROACH. Mr. Chairman, thank you for the opportunity to 

speak today. My name is Robert Roach, Jr. I’m the Vice President 

of the Machinists Union. I’m appearing at the request of International President, R. Thomas Buffenberger. The Machinists Union 

represents more than 100,000 U.S. airline workers in almost every 

classification including ramp service workers, mechanics, public 

contact employees, and flight attendants. 

Mr. Chairman, the financial condition of the airline industry to 

date is clearly miserable, and without drastic and immediate 

change, the future continues to be bleak. 

September 11 was the start of the current crisis for airlines however the seeds for this calamity—excuse me, were planted many 

years earlier by the airlines themselves. When airlines were 

healthy, legacy airlines spent surplus cash by purchasing aircraft, 

foolish mega-mergers. 

One noted exception is Southwest Airlines, which prudently expanded their profitable margins while increasing cash reserves for 

the inevitable. However, it should be noted that Southwest Airlines, which is 95 percent unionized, pays the employees the highest wages and benefits in the industry. I want to reiterate that. 

Southwest Airlines pays the highest wages and benefits in the industry, while still maintaining profitability. 

At the same time, the airlines refuse to properly fund their pension plans and more than 100,000 participants at US Airways have 

lost money. To ask employees to further bail out corporations is 

disgraceful and to force retirees to subsidize corporate incompetence is unforgivable. The Machinists Union has met with ATA 

and airline CEOs on how to correct industry problems. I believe 

such partnerships should be continued and expanded. Norman Mineta convened an airline summit with government officials to jointly develop solutions to the problems. The IAM is proactive, but we 

cannot do it alone. 

In the airline industry we have suffered more than six Chapter 

11 bankruptcies. Hawaiian and Aloha being two of them, and 

United Airlines. My colleagues have said on this panel we believe 

Northwest and Delta are fastly approaching that line. We have reVerDate Nov 24 2008 12:42 Nov 17, 2010 Jkt 062179 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\62179.TXT SCOM1 PsN: JACKIE
37 

duced costs. We have lost pension money, and our health benefits 

have been reduced. 

I believe what you’re going to hear today is differences of opinion 

on how to fix the problem, and that you will hear we have the lowcost carrier, but the low-cost carrier advantage is because they are 

new and because they don’t have the certain wages and benefits 

that they have today, but as time goes on they will catch up, that’s 

why if you want to look at a low-cost carrier, look at Southwest 

Airlines as a model, that they are properly managed, and that they 

have been around 27 years and at the same time maintaining profitability. 

We cannot sit here today and unlike my colleagues, if oil prices 

are what they are, then we must do something, and we believe that 

that effort is a coordinated effort. We don’t think, as I said before 

this same committee on September 20, 2001, that you can just 

throw money at the problem. That happened in 2001 and we are 

in worse condition today than we were then. I think we need coordinated effort. I think with government, Department of Transportation or some Senate committee, Presidential commission, along 

with management and labor need to sit in a room with a commission and try to find coordinated solutions to the problems that will 

confront us in the future, and to do otherwise would be putting a 

band-aid on a bleeding artery. 

I thank this committee for the opportunity to speak to them and 

present our point of view, and we are prepared to work with this 

committee and management to develop solutions to the problems. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Roach follows:] 

PREPARED STATEMENT OF ROBERT ROACH, JR., GENERAL VICE PRESIDENT OF

TRANSPORTATION, INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE

WORKERS (IAM) 

Thank you, Mr. Chairman, and members of this Committee for the opportunity 

to speak to you today. My name is Robert Roach, Jr., General Vice President of 

Transportation for the International Association of Machinists and Aerospace Workers (IAM). I am appearing at the request of International President R. Thomas 

Buffenbarger. The Machinists Union represents more than 100,000 U.S. airline 

workers in almost every classification, including ramp service workers, mechanics, 

public contact employees and flight attendants. 

Mr. Chairman, the financial condition of the airline industry is clearly miserable, 

and without dramatic changes, the future continues to look bleak. From 2001 to 

2004, legacy carriers have lost more than $28 billion, and they are expected to lose 

an additional $5 billion in 2005. 

Of the 146 airline Chapter 11 filings since 1979, in only 16 cases are the airlines 

still in business. 

September 11, 2001, is often cited as the start of the current crisis for airlines. 

However, the seeds for this calamity were planted years earlier by the airlines 

themselves. 

When airlines were healthy, legacy carriers spent surplus cash by purchasing unnecessary aircraft, irresponsibly expanding operations, and pursuing foolish megamergers. One noted exception is Southwest Airlines, which expanded prudently into 

profitable markets while increasing its cash reserves for the inevitable, recurring industry slump. 

At the same time, these airlines refused to properly fund their employee pension 

plans, and now more than a hundred thousand participants and beneficiaries at US 

Airways and United Airlines have lost more than $5 billion of their promised pension benefits. 

To ask employees to bail out failed corporations is disgraceful. To force retirees 

to subsidize corporate incompetence is unforgivable. 

38 

The Machinists Union has met with the ATA and individual airline CEO’s to discuss how to correct the industry’s problems. I believe such partnerships should be 

continued and expanded. 

Earlier this year, I asked Transportation Secretary Norman Mineta to convene an 

airline summit so airline executives, labor leaders, and government officials could 

jointly develop solutions to the industry’s problems. 

The IAM has been proactive in our efforts to transform the industry, but we cannot do it alone. 

For a snapshot of the financial condition of the airline industry, one only has to 

look at the unprecedented sacrifices employees have been forced to make just to 

keep this industry alive. 

United Airlines 

Almost immediately after signing contracts with the IAM in 2002, United Airlines 

came to its unions seeking concessions. The IAM engaged in these discussions over 

a period of several months in an effort to keep the company out of bankruptcy. 

In support of the company’s attempt to obtain a loan guarantee from the Air 

Transportation Stabilization Board (ATSB) in November 2002, ramp service and 

public contact employees agreed to cuts that would save the company $160 million 

a year. 

This was happening as employees saw the value of the company stock held in 

their ESOP and employees’ 401(k) accounts dwindling. Many employees lost tens of 

thousands in retirement savings as a result. 

United failed in its attempts to reorganize outside of bankruptcy, and immediately 

after its Chapter 11 filing the company asked the bankruptcy judge to impose 

‘‘emergency’’ pay cuts of 14 percent on IAM members. The judge authorized this request. 

Laboring under these court-imposed pay cuts, IAM members went to the bargaining table and in the spring of 2003 agreed to permanent cuts in pay and benefits that would save United $460 million a year ($2.644 billion from 2003 to 2009). 

These concessions also included drastic reductions in retiree healthcare benefits for 

anyone retiring after July 1, 2003. As a result, many employees retired from the 

company in an effort to preserve these benefits. 

United then took steps to cut retiree benefits for existing retirees and filed a motion in court to ask a judge to impose cuts if agreements could not be reached with 

the retirees’ representatives. This heartless move saved United $50 million a year. 

In the Spring of 2004, the ATSB denied United’s bid for a loan guarantee a second 

time and, once again, United turned to its employees for more cuts. United also 

ceased funding its pension plans, the first in a series of steps which ultimately led 

to their termination by the Pension Benefit Guaranty Corporation. 

In January 2005, United once again sought ‘‘emergency’’ pay cuts from the bankruptcy court—this time it was 11 percent. The IAM and UAL reached a tentative 

agreement on June 17, 2005, that, if ratified by the membership, will provide 

United with an additional $176 million a year from 2003 to 2009. Savings attributable to the termination of IAM member’s pensions will save United another $217 

million a year. 

Successive rounds of cuts have delivered United annual savings of more than 

$853 million a year off the backs of IAM members. By the end of this bankruptcy 

case, IAM members will have sacrificed more than $4.6 billion for United Airlines, 

which is about three times more than the value of all loan guarantees given out 

by the ATSB. 

US Airways 

In US Airways’ first bankruptcy in 2002, IAM members agreed to two rounds of 

contract concessions totaling $276 million per year, or $1.8 billion over 61⁄2 years. 

Pay was cut by an average of 7.5 percent. Employees also experienced drastic increases in their contributions for healthcare coverage, which had the effect of reducing take-home pay even further. Employees’ share of healthcare premiums roughly 

doubled for single coverage, and almost tripled for family coverage, translating into 

an additional reduction in take home pay of 1 percent to 3 percent, depending on 

the employee’s classification. 

Immediately after filing for bankruptcy for the second time in as many years, US 

Airways management petitioned the court to impose ‘‘emergency’’ pay cuts of 23 percent for all union-represented employees, as well as reduced contributions to pension plans. Management and salaried employees’ pay was reduced by only 5 percent 

to 10 percent. 

On October 15, 2004, the bankruptcy court allowed an emergency 21 percent cut 

in pay. 

39 

US Airways then approached the IAM to negotiate permanent reductions to pay 

and benefits, and filed a petition with the bankruptcy court to reject the IAM’s collective bargaining agreements. Ultimately, the parties were not able to reach agreement and the court granted the company’s request to abrogate the IAM’s collective 

bargaining agreements on January 10, 2005. IAM members then voted to accept the 

company’s ‘‘last and final offer’’ that involved pay and benefits reductions even more 

drastic than what were ratified in the first bankruptcy. Under these latest terms, IAM members will give up $346 million a year in pay, 

benefits, and work rules. Mechanic and related employees will see their pay reduced 

by an average of 15 percent. Almost all Utility jobs are able to be outsourced, and 

roughly a third of mechanic and stock clerk jobs can be farmed out. 

In addition, the defined benefit pension plans were terminated, with the sole exception being the IAM’s multi-employer defined benefit National Pension Plan for 

our Fleet Service members, who experienced pay cuts of 12.8 percent to 20 percent. 

In addition to these drastic reductions in pay, holidays, vacation accruals, sick leave, 

and retiree medical benefits have also been significantly reduced. 

US Airways employees have accepted up to 1⁄3 reductions in their standard of living in a very short period of time. The typical middle class household budget does 

not have a cushion anywhere close to 1⁄3 of take-home pay; to be able to adjust to 

these kinds of reductions. Workers and their families are being forced into dramatic 

and drastic changes that affect the most basic, personal decisions, such as where 

to live, where and how to educate children, and making very hard choices regarding 

medical care. 

Many employees have concluded that a job with US Airways is one they cannot 

afford to keep, and as a result, the company is facing manpower shortages in many 

locations. This difficulty in finding employees willing to accept the meager wage 

scales imposed through bankruptcy is what caused US Airways’ Christmas meltdown in Philadelphia last year. That event clearly demonstrates the effect of low 

wages on the reliability of the industry. 

Hawaiian Airlines 

When Hawaiian Airlines approached its unions seeking concessions in an attempt 

to stay out of bankruptcy, the IAM stepped up to the plate. 

However, the company failed in its attempt to reorganize outside of bankruptcy 

and filed for Chapter 11 reorganization in the spring of 2003. As part of the reorganization, a Trustee was appointed due to serious concerns on the part of creditors 

about actions taken by the prior CEO. The Trustee sought cost reductions of more than $1.5 million from IAM members. 

The IAM and the company ultimately reached an agreement in the fall of 2004. Because of the sacrifices made by IAM members, the company successfully restructured and recently exited bankruptcy. 

Aloha Airlines 

In order to obtain $40 million in ATSB funds, employees at Aloha Airlines agreed 

to a 10 percent across the board pay cut in late 2002, designed to save the company 

$37 million annually. IAM members were willing to make these sacrifices to keep 

Aloha out of bankruptcy. 

Despite these cuts, management was unable to turn the airline around. The company filed for Chapter 11 protection in December 30, 2004, and returned to employees seeking an additional 10 percent pay cut, on top of the cuts agreed to just two 

years before, as well as reductions in health benefits, changes to work rules, and 

a freeze in benefit accruals under the company’s defined benefit pension plan. 

To force their demand, management went to court to seek abrogation of the IAM 

contract. IAM members ratified a second round of concessions this past winter. Despite reducing pay by more than 20 percent, the airline continues to struggle to reorganize. 

Air Wisconsin 

Air Wisconsin was once owned by United Airlines, but for many years has operated as an independent express carrier for United. When United filed for bankruptcy, it sought to restructure contracts with its express feeders and as a result, 

in 2003, Air Wisconsin came to its employees seeking concessions. IAM fleet and 

customer service members agreed to significant cuts in pay and benefits in order 

to preserve their jobs at the airline. 

Continental Airlines 

As part of a company-wide restructuring, Continental Airlines is seeking to reduce 

IAM-represented flight attendant costs by $72 million annually. Discussions with a 

Federal mediator are being scheduled. 

40 

Alaska Airlines 

Alaska Airlines management has demanded concessions and even locked out nearly 500 IAM ramp service members in Seattle, WA. By outsourcing our members’ 

work to the lowest bidder, Alaska Airlines now ranks dead last in the DOT’s ontime performance ratings. This is another example of how an airline’s shortsightedness is negatively impacting the reliability of our nation’s air transportation 

system. 

Northwest Airlines 

Northwest is also seeking significant cost savings from employees and termination 

of pension plans in a bid to avoid bankruptcy. 

Mr. Chairman, members of the Committee, the financial condition of the airline 

industry is an absolute disaster. Passengers have returned since 9/11, but the continued reliance on failed business plans jeopardizes our air transportation system. 

Southwest Airlines pays their employees more than any other major carrier, yet 

remains profitable, so the industry’s problems are clearly not the result of high labor 

costs. Nevertheless, employees have given more than their fair share, yet airlines 

are still struggling. Fuel prices are high, and employees are repeatedly asked to subsidize artificially low ticket prices. 

The industry needs new ideas. Airlines can’t continue refusing to charge at least 

what it costs to provide their service and then claim financial emergencies. 

I urge this committee to explore ways to correct the suicidal pricing plaguing the 

industry. Whether it be a mandatory fuel surcharge or other government intervention, some re-regulation of the industry is clearly necessary. Left alone, airlines will 

price themselves out of existence. 

I thank the Committee for inviting us to participate in these proceedings and listening to our concerns. 

I look forward to your questions. 

Senator BURNS. Thank you, Mr. Roach, for your testimony. I’m 

interested, Senator DeMint, do you have a statement this morning? 

Thanks for coming. 

Senator DEMINT. Just wanted to listen. 

Senator BURNS. You’ve come to a great place. I mentioned in my 

opening statement and the reference toward, you know the new 

carriers, the new low-cost carriers and Southwest as a model that 

so far has been very profitable, but I would look at them and say 

well, we know that they knew how to handle their fuel costs, that 

over time will run out. In your estimation, Mr. Roach, how long 

will it be that they will, before Southwest faces the same problems 

as say our legacy carriers? 

Mr. ROACH. Well, they are confronting the same problems today. 

Fuel hedging slowly decreases up to 2009. What has to happen, 

and I believe Southwest management is working toward solutions 

as they go along and managing the business as they go along to 

be prepared for that. I think if you look at the pricing of airline 

tickets on Southwest Airlines, versus US Airways or United, you’ll 

find that United and US Airways are charging less for tickets than 

Southwest Airlines, and so there is a serious problem. I think that 

we work with Southwest Airlines, and we represent 10,000 people 

there. We work with them to craft solutions to the problems that 

they will confront beyond 2009, such as ticketing problems, working with them in the areas of helping to move passengers through 

the airport, and having efficiencies in place, because, again, if we 

are going to have $60 a barrel of fuel, we can’t just act like it 

doesn’t exist. 

We have to understand it’s going to exist. We have to look at 

pricing of the ticket. Every Senator flew in here. When they got to 

a cab at the airport, they didn’t pay a surcharge. So you have to 

price the profitability, and that’s what Southwest Airlines is doing. 

41 

Senator BURNS. Mr. Baker, do you have a comment on that, how 

long will it be before they face some of the challenges that legacy 

carriers face? 

Mr. BAKER. Well, I would echo the point that they are facing 

many of those problems today. Our analysis suggests that if not for 

their hedge protection on pricing, on fuel pricing, they wouldn’t be 

capable of producing profit in this economy, and while it’s a factual 

statement that their labor rates are above the industry average, 

Southwest management now concedes that that puts them at a 

competitive disadvantage. And furthermore, many of the pricing 

changes that are taking place at the legacy level have negatively 

affected Southwest’s performance, the revenue performance in cities such as Fort Lauderdale; Hartford, Connecticut and other secondary cities. 

I would suggest that over the next several years, Southwest will 

have to tackle these issues. They have conceded that it will be difficult to achieve wage declines because those declines are going to 

have to take place if they are going to remain competitive with the 

further-improving legacy carriers. 

Senator BURNS. Well, I go to the airports right now and I’ll tell 

you what, I have never seen airports more full, and I have never 

seen Washington, D.C. so full of tourists since 9/11, so the travelers 

are back. As I mentioned in my statement, though, I come from a 

State that has a lot of tourist dollars and recreational flyers. But 

we also have a very healthy network of business up there and I am 

concerned about the rural connectivity because of the financial conditions of the legacy carriers. If it wasn’t for the hub-and-spoke situation, well, I think we fall into a situation where we could lose 

much of our service into rural areas. I initially asked, why do airlines insist that it’s so expensive to operate in the rural markets? 

From what I can tell, the planes seem to be full, and I know what 

it cost me to fly to Billings, Montana, roundtrip. You could make 

almost three round trips from Dulles to San Francisco. And I have 

a hard time justifying that, but I also know what the costs per mile 

are, and maybe what you’ve got to have, and you pretty much have 

to have a face in every window whenever that airplane leaves the 

airport, so I’m really concerned about those trends, so looking 

ahead, Congress has provided billions of dollars of direct and indirect assistance to airlines, and they continue to lose money. Chairman Stevens and I were discussing how to refinance the FAA. And 

your suggestions today, Mr. May, I take it you said over a thousand communication systems. Can you give me an example—— 

Mr. MAY. 14,000, Senator. And it’s extraordinary. We have an infrastructure that’s been built up within the air traffic control system over the past 35 years that is more. 

Senator BURNS. Can some of that be claimed as redundancy in 

case of emergency? 

Mr. MAY. Some of it can be claimed as redundancy in case of 

emergency, but I don’t think we need triple and quadruple 

redundancies, and I think that there is the capacity to do a transition—I hate to use this phrase before this committee, but transition to digital that might be particularly appropriate for the airlines. 

Senator BURNS. Appropriately delayed by the way. 

42 

Mr. MAY. I understand. 

Senator BURNS. Senator Inouye? 

Senator INOUYE. Listening to the testimony, I gather that there 

are two major causes of the airlines’ current difficulties, fuel prices 

and the government, taxes and fees. Then we hear the word 

globalization. And my question is how do we, number one, compare 

to the operations and the financial conditions of airlines abroad in 

Europe and Asia, for example? Ms. Hecker or anyone else? 

Ms. HECKER. I think Mr. May may have more detail, but I think 

generally the studies that have been done is that the U.S. does not 

compare favorably, that the top performing carriers because they 

have a very high growth market in Asia, and there has been a view 

that there has been more moderation in the U.S. in making the 

kinds of adaptations to the new market environment that, for example, Asian carriers have and some have failed. It’s not as if they 

have all succeeded, but their growth rates, their efficiencies, their 

business strategies have admittedly in a growth market been largely successful. 

Mr. MAY. Senator Inouye, I think it’s important to note that 

there are some very fundamental differences between some of the 

major European and Pan-Asian carriers, and those here in the 

United States. They rely to a very great extent on long haul international routes. The major big six and so-called carriers here in the 

United States do a tremendous amount of domestic short-haul business here in the United States, which is the essence of the huband-spoke system. As Senator Burns pointed out, without that huband-spoke system, we wouldn’t have service to a lot of small and 

rural communities represented by this committee on a daily basis, 

and the competitive nature of the low-cost carriers is frequently in 

that domestic business, and in particular, for medium-sized communities in that system. So that the 85 percent competitive route 

structure of the low-cost carriers with legacy carriers is having a 

dramatic impact on domestic yields for our carriers. 

We are actually doing and comparing, very favorably with the 

international carriers on our long-haul international routes, but as 

my friend Giovanni Bezziana would tell you, they have many of the 

same kinds of issues with taxes, fees, and fuel costs that we do. 

Mr. BAKER. Just to throw some numbers on top of that, Senator, 

for example, the U.S. carriers 75 percent of revenue is derived in 

the lower 48, the remainder coming in longer haul, and across the 

oceans, and internationally. For European carriers, those numbers 

aren’t reversed and for that reason, their exposure if you look at 

British Airways or Lufthansa, their exposure to low-cost carriers is 

less, because they don’t fly those long-haul routes. That’s for a very 

good reason. The low-cost model, which is a low-labor cost model 

is not applicable to long haul travel. That’s the reason Southwest 

doesn’t fly across the ocean, nor does Jet Blue, so it’s a reversal of 

the portion of revenues that are expensed to low-cost carriers that, 

I think, in large part explains the financial difference between the 

two geographic sectors. 

Senator INOUYE. None of the airlines of the United States have 

any government ownership interests, but, on the other hand, you 

take Saudi Airlines, and I suppose it’s owned by the family, the 

government, Japan Airlines has a government interest in it, China 

43 

Airlines may be completely government-owned. Is that a level playing field for us? 

Mr. MAY. Makes it particularly difficult for us, Senator Inouye, 

but it is the reality of what we are left to deal with. Nobody ever 

said it was going to be a fair situation, and it does have an impact, 

but again, I think the biggest differences are not our ability to compete on an international scale, but the difficulties we have with 

more domestic short haul. 

Senator INOUYE. An additional cost has been imposed upon our 

citizens, the cost of security, national security, and for example, 

airline security has just sky rocketed. In Europe and Asia, who 

pays for the security, airport security, for example, metal detectors? 

Mr. MAY. I’m not an expert on international security, but it’s my 

understanding that more of it is paid by the government, as opposed to the individual carriers. In the United States, we pay either direct fees or mandated, indirect mandated costs, a billion dollars a year for aviation security right now. 

Senator INOUYE. That’s what I wanted to get to, because recently, it has been suggested that the airlines pay for airport security. And I don’t think that’s the case in Asia and Europe. It’s a 

matter of their national security, isn’t it, Mr. Baker? 

Mr. BAKER. That’s correct. I don’t have the figures in front of me, 

but I would echo Mr. May’s comments that overseas governments 

tend to be much more generous in terms of affording that level of 

security to airports and passengers than here in the states, where 

it’s largely funded by the carriers out of ticket prices. 

Senator INOUYE. Mr. Roach, what has been the response of the 

Administration on your suggestion that there be a summit? 

Mr. ROACH. We had several meetings with Secretary Mineta. We 

visited with him in New York very recently. We have not established any summit meeting. While it has been favorably discussed, 

we have not had the meeting, and we think it’s important. 

Senator INOUYE. Are they open to your suggestion? 

Mr. ROACH. Yes. Secretary Mineta has been fair to establish, we 

talked to several CEOs of several carriers, United, US Airways, 

Northwest Airlines and they all seem favorable to getting it done. 

We think that the Secretary of Transportation, or some government 

agency, needs to call the meeting and then we’ll get everybody in 

the same room. We have had this on the Secretary’s plate. Similar 

meetings have been fruitful, but we think it’s important to get everybody in the same room to start talking about these issues. 

Senator INOUYE. While all of this financial condition is existing, 

what about equipment? Are we keeping up? 

Mr. MAY. Senator, I think one of the most positive messages we 

can deliver to this committee is that safety in particular is at an 

all-time high. We have never had a more safe period in the history 

of our industry than we’ve got going right now, and I think that’s 

a result of the extraordinarily, fine cooperation between the folks 

that Mr. Roach represents and our management, because no matter how great our difficulties, we have worked together to that common goal of keeping safety first, and we have got some extraordinary equipment that we are able to work with and take advantage of. 

44 

Senator INOUYE. Mr. Chairman, I have got a lot of questions. 

May I submit them? 

Senator BURNS. We can submit them and they can respond to 

them. Senator DeMint. 

STATEMENT OF HON. JIM DEMINT, 

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. Thank you, Mr. Chairman. I’m just sitting here 

trying to sort out how to fix this, and you have given significant 

review of the problem, and I think we have heard that some of the 

problems—clearly mismanagement over the years, as Mr. Roach 

talked about overreaching during good times, perhaps not making 

good decisions. We have also heard that labor used as considerable 

leverage over many years to push salaries and benefits way beyond 

sustainable levels. 

We have heard about the waste of FAA and problems with fuel 

costs, taxes and fees, and you know, my inclination is to say maybe 

we should sit back and let the market try to fix this, but I do see 

the government’s hand in this and we perhaps intertwined to let 

it go. But it doesn’t seem with all of what we have seen with the 

industry management, the labor that the government should come 

in and just try to fix this problem because we can. I’d just like to 

hear more from some of our witnesses of, I mean I don’t know how 

we can sustain an airline industry with so many losses. 

I’m perplexed at how it continues to attract capital. And this is 

seeing something where the market really needs to work here, and 

much less government, but I’d be interested in any comments that 

you have on what the government should do at this point. 

Mr. MAY. Senator—I’ll jump in here and I know Mr. Roach has 

some ideas, too. Mr. Baker said a minute ago—— 

Senator BURNS. Jim, pull your microphone a little, would you 

please. 

Mr. MAY. Thank you, sir. Mr. Baker said the market for Continental and American, except for fuel, would have been the most 

profitable quarters they have had in the history of the business, 

and I think the productivity gains that we are making, all of the 

changes that are taking place in the industry, and we make no 

bones we have been less than perfect in managing the business 

over the years, I think all of those changes have been extraordinary, and are leading to sustained profitability. 

Once we begin to address the uncontrolled costs, those costs over 

which we don’t have any control and they are fuel, which has had 

a dramatic impact on our business, taxes and fees, and unfunded 

mandates, we spend $50 billion a year for an industry that only 

earns roughly 80. But here in the United States on taxes and fees, 

security mandates, so on and so forth. So I would love to sit down 

with Mr. Roach and bring our CEOs together and talk about how 

we need to reform the air traffic control system, how we need to 

reduce the impact of taxes and fees, and Senator, if you’ve got some 

magic for $60 oil, I want to hear it, because we are at wit’s end. 

Mr. ROACH. It would be nice to let the market take care of the 

situation, but the market does not take care of it. For example, 

United Airlines and US Airways are currently in Chapter 11 insulated from the market and everybody else, Northwest, Delta, ContiVerDate Nov 24 2008 12:42 Nov 17, 2010 Jkt 062179 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\62179.TXT SCOM1 PsN: JACKIE
45 

nental, the other carriers, Southwest are now paying bills, and this 

is—the court is now running those through airlines. So if you can 

stay into Chapter 11 for 3 years and not go to the government and 

dump your pension plans, then the market is not taking care of the 

situation. It is the government, it is the courts causing the Northwest, Delta, everybody else to now follow suit, but the protection 

has been given through the law on the Chapter 11, so it is again, 

I think, very important that we try to grab solutions collectively. 

I don’t want to sit in the room and negotiate contracts with everybody. 

We need to sit down and figure out what it is we are going to 

do collectively working with the government. I don’t want the government to come in and mandate what we should do. We should 

have solutions, and we should have some input from a governmental agency as to what the industry can do to fix it and work 

together. 

Mr. BAKER. Senator, the testimony that I submitted today dealt 

with the issue of pension reform for the airlines. I think if carriers 

were seeking something to symbol as a handout, if you would, they 

would follow the precedent set by United Airlines. File Chapter 11, 

rid themselves of their obligations and put those obligations at the 

expense of workers to the government and to taxpayers. That to me 

smacks of subsidization. What certain carriers and lawmakers have 

proposed is simply allowing the carriers more time to make good 

on promises they have already made, and, therefore, substantially 

diminish in my opinion the near-term risk of bankruptcy. 

To me, this is a proposal that would potentially be less burdensome on workers and taxpayers. 

Ms. HECKER. If I can just add one point; that there is no doubt 

that pensions are an extremely serious issue. GAO, though, has 

done work widespread across the economy and the issue of pension 

underfunding, and pensions pushing liquidity problems on many 

industries is not exclusively a problem of the airline industry. And 

our work has vigorously called for broad and comprehensive pension reform that fixes the problems that the current system has 

created, both in this industry, and many others, where we have a 

nationwide severe crisis in the entire defined benefits system. 

Senator DEMINT. Thank you, Mr. Chairman. 

Senator BURNS. If it’s anything that’s getting our attention in 

this town right now is a situation we find with these pensions. This 

has the possibility of impacting the American taxpayer, to a greater 

extent than the S&Ls, and there are some folks up here that are 

very, very concerned about that, especially in the situation, and in 

light of our budgetary problems now, and I’m very, very concerned 

about it, and even though as your testimony would signify that 

only 6 percent of the operating is of their total overall operating 

capital is impacted by the pensions, and that sounds greater to me 

than the figures would indicate. 

Mr. ROACH. The issue of pensions, I’d like to say on behalf of our 

organization is that we saw this problem in 2000. This is not a new 

problem, and we went to the airlines and said this is a problem. 

You’re not in the pension business. Let’s sit down and work this 

out. And they refused. Why they refused—because under current 

pension law you didn’t have to make any contributions to those 

46 

pension plans, but this is not just something that happened yesterday. We saw the problem coming and we said let’s fix the problem 

before it becomes a crisis, and again because of the law, you’re able 

to push these payments back and then all of a sudden they were 

due. The bill came due and he couldn’t pay it so again, and I may 

sound like a broken record, we need to sit in a room together to 

figure out what to do next, because how do we address this problem in 2000, I suggested by the Machinists Union we would not be 

here today. Believe me. 

Senator BURNS. Can I suggest to you that the same thing is true 

in Social Security, Mr. Roach, and we are not getting much response from anybody to fix that report before it becomes uncontrollable and cannot be fixed. But then, as you well know, we all got 

ingrained in all of us here in this country that nobody gets excited. 

I can go down to your farm and tell you you’re going to have to 

repaint your barn in 2015, do you want to sign the contract now. 

I doubt that you would do that. And that’s, that’s the American 

people, but right now, the cry has gone out—we have to fix these 

other funds, but nobody wants to do that now, but they will when 

those checks are 2 weeks late or they are halved in two. Senator 

Lautenberg. 

STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY 

Senator LAUTENBERG. Thanks, Mr. Chairman. I’m sorry that I 

wasn’t here earlier. As everyone knows, there are always competing committees, and this one ranks very high on my agenda, but 

the other one had to deal with chemical safety, and in my State 

of New Jersey, we worry about those things. Honestly, I also worry 

about the airlines. The service that commercial aviation provides to 

our country and our world is essential. The expansion that this 

country has had over the years would never have been possible 

were it not for the availability of commercial air service, so I look 

with considerable misgivings about what might happen in the aviation industry if the price of oil and other expenses continue to increase. 

However, I’d like to ask a couple of questions that relate particularly to the pension problem. I come out of industry. I ran a pretty 

good-sized company, a company that I started with two others and 

now has 40,000 employees. We had a lot of experience in running 

the company and managing the works, and I know one thing: pension plans are under assault like the Chairman mentioned. Lord 

knows where we go in terms of satisfying the belief that people 

have that if they work for Company A or Company B and they had 

a pension plan and that 20, 25 years later they could go on with 

life and their families. Unfortunately, many are not able to do that. 

And it’s not particular to the aviation industry. It’s also true in 

other industries, especially manufacturing industries throughout 

our country. 

And so I must ask the question—kind of a generic question—that 

is: did everybody get treated equally when it came to protecting the 

pensions of employees in view of either credit reorganizations or 

bankruptcies? Are executive pension plans better funded than employee plans? Are executives taking the same heat that rank-andVerDate Nov 24 2008 12:42 Nov 17, 2010 Jkt 062179 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\62179.TXT SCOM1 PsN: JACKIE
47 

file employees take? Did they run the same risks as not being able 

to get their pensions protected? Mr. May, can you comment on 

that? 

Mr. MAY. My, I am not an expert on the issue, Senator Lautenberg. I will offer two brief observations, and would be happy to do 

some research and come back to more specifics, obviously. My 

sense is that defined benefit plans, no matter how they are constructed or who they are for, are facing some very real and significant difficulties, and it’s not just in the airline businesses. As you 

have pointed out, I was with somebody from General Motors the 

other day, and there are a number of concerns across industry. 

As to compensation for our executives, I think it has been 

slashed significantly across the board. I think there are very few 

of our executives that are coming anywhere close to their peers in 

other industries to compensation. As to whatever specific retirement plans that those executives may have, I don’t happen to be 

privy to those. I know most of it, I think you’d be far more expert 

in this than I, are filed in disclosures with the SEC, and I know 

it’s public information, and I would suspect that we could find the 

answer to that question there. 

Senator LAUTENBERG. Mr. Roach, how do you see it? 

Mr. ROACH. Well, traditional pension plans both executives have, 

which was shown in American Airlines when they had pay cuts 

and $45 million put aside in special funds for their executives. I 

think there has been testimony in other hearings that there are 

bonus payments that are made. They don’t call them pensions. But 

you are talking about millions of millions of dollars that go to executives, while employees pension benefit plans are being cut. It’s 

not a level playing field. 

Senator LAUTENBERG. I just wonder whether reserving pension 

plans or termination programs for executives has in any way impaired the airline’s ability to have some additional funding, in addition to the pain and the trauma that it causes for employees who 

have worked and depended on these pensions for a long time. 

Mr. ROACH. Not only does it affect the current employee, it affects the retired employee. The employee that is retired is expected 

an amount of health care, health care costs have increased in certain cases, but employee who has depended on a dollar amount for 

months. It has been very difficult as we create a lot of morale problems at the airlines because employees were planning to retire. As 

you move the older employee out, younger employees come, it also 

reduced costs. So it causes employees to stay around and work 

longer. 

It has created a lot of serious problems with people again being 

focused, and that goes back to the question of security. Employees 

must be focused at airports. They should not be focused about 

should I pay my mortgage. They have to be focused on the traveling passengers, as well as employees. I think there is a serious 

problem. A lot of times in this country you don’t want to confront 

things until there is a crisis, and I certainly agree with them and 

that’s why today we have proposals with Continental Airlines and 

Northwest Airlines to fix their pension plans in coordination with 

some of their ideas that we have to fix the plans. We have to bite 

48 

the bullet. We have to do what is necessary to get these problems 

fixed. 

Senator LAUTENBERG. Mr. Chairman, I would ask if you would 

consider one of these days having a hearing specifically on this 

question. I think it’s important to find out what kind of obligations 

the Pension Guaranty Fund is going to have. It could be enormous, 

and I don’t know what we do at that point. 

Senator BURNS. I would say to my friend that that is not under 

jurisdiction of this committee, but it sure has an effect on how we 

set policy for our airlines. I’ll guarantee you that. 

Senator LAUTENBERG. Information search would be a good idea 

if we could do it. I would ask whether recent events have effected 

equally the lower-cost carriers versus the legacy carriers. The competition is robust, as I see from some of the financial statements. 

Some of the regional and the smaller airlines seem to be able to 

weather this storm better. Is that true, Mr. May? 

Mr. MAY. Yes, sir, it is. And let’s maybe try and divide the business into three parts. The regional carriers are either wholly 

owned, or have significant operating relationships with the major 

carriers, and they have been earning profits for some reasonable 

period of time because they effectively have a guaranteed income 

because of the contractual relationships they have with their brothers. 

The Independence Airs and the smaller low-cost carriers are, 

Robert has pointed out Southwest is a prime example, have had a 

mixed bag. Independence Air, I think it will come as no surprise 

reading the papers, is losing a very significant amount of money. 

Herb Kelleher, who is on my board and a great contributor to our 

industry, has made it abundantly clear that if it weren’t for the 

fact he has hedged at $26 for oil, he would have lost money over 

the last year or so. And although he has hedges that aren’t quite 

as favorable going forward, they rise up into the 40s. A 40-some 

dollar hedge looks awfully attractive when oil is trading on the 

Nynex at 60, so I think there is a mixed bag among the low-cost 

carriers, but they are being impacted as well as our carriers are, 

although it’s easy to point out that the costs for the seat model is 

lower for those carriers. I think Mr. Baker is the bigger expert in 

this area. 

Senator LAUTENBERG. I would be interested in your comments, 

Mr. Baker. In terms of the financial viability, does the industry’s 

structure permit the legacy carriers whom we desperately need, to 

survive through these drops and these periods of high-cost operating expenses? 

Mr. BAKER. I believe most of them are well on the way to ensuring them whether it will allow them to endure the business. I 

would point out that in the first quarter of this year, if we just 

strip out fuel expense from both sub-sectors, low-cost carriers and 

legacy carriers, we actually witnessed the first year-on-year decline 

in low-cost carrier profitability in several years, whereas non-fuel 

profits, if you will, of legacy carriers, were up in excess of 25 percent, and the reason we witnessed the decline in low-cost carrier 

profits is because it coincides with these recovery efforts with the 

legacy carriers, choosing to no longer fall back and instead stand 

their ground and compete more effectively with these carriers. 

49 

There is no question in my mind, Senator, that a significant reinvention of legacy cost structure is under way. It’s just that that 

reinvention is being masked right now by the escalation of crude 

prices. 

Senator LAUTENBERG. Mr. May, Mr. Chairman—I’ll conclude 

with this. I assume that you look at the air traffic control system 

and see how it’s functioning. I think it functions very, very well, 

but I am concerned about the anticipated controller retirements, as 

well as the increase in volume of flights as we go to more regional 

jets, more activity in the air. We need a lot of space for military 

uses, et cetera, and the air space is not infinite. How will carriers 

be affected? Have you looked at that, sir, in terms of what the financial impact might be? Perhaps longer delays and problems that 

the FAA might not be able to quickly find solutions for? 

Mr. MAY. Senator Lautenberg, I think as I said in my oral testimony, we should take the current ATC system and retire it to the 

Smithsonian, where it can be admired as one of the marvels of 

1950s technology. It is capable of handling the traffic we have 

today. It is fully incapable of handling the traffic for the future. 

One example, Net Jets, has well over 600 aircraft. They are flying 

in and out of Teterborough in your state. That’s a phenomenon. We 

have ultralight jets on the horizon. We have any of a number of 

regional carriers that are putting more planes into the system, and 

fewer of the larger 57s, 67s, et cetera, so I think we have got a very 

significant problem on our hands in the future, and we are going 

to need to seriously engage in making it an exercise in difficult 

choices to make some fundamental change to this system from top 

to bottom. 

We have got to go to a fully-digital GPS-based system that can 

handle the traffic that’s coming our way. 

Senator LAUTENBERG. Mr. Chairman, an observation that I 

would like to be permitted to make is that I always believed that 

FAA should be operating similar to companies where the CEO is 

employed to do a job over a period of time, regardless of what political party is in place or that kind of thing. An organization where 

the mission is professionalized and we thanked the people doing it. 

We have good FAA people, but the fact of the matter is one of the 

reasons the system is so antiquated, and when we try to change 

it, there are discontinuities created along the way. We have spent 

billions of dollars with some of the top agencies in the country in 

trying to reform the air traffic control system, and every time we 

had a start, we run out of cash. It is a system, and it works surprisingly well, but it’s in overload mode most of the time. Thanks, 

Mr. Chairman. Thank you all very much. 

Mr. MAY. Senator, if I might be permitted, I know this is heresy, 

but if we could have maybe the Congress of the United States 

spend a little less time micromanaging the details of the FAA as 

to where ILS systems are going, and so on, and so forth, and earmarks, it would probably operate a lot more efficiently. 

Senator LAUTENBERG. Shocking suggestion. 

Senator BURNS. It is heresy. Let’s go over three areas. There are 

some areas of confusion, and in the area of Chapter 11 bankruptcy, 

I think we have kind of ironed that out this morning. Buying new 

aircraft. Yesterday I read the testimony of all that are here today, 

50 

Mr. Roach’s testimony questions the purchasing of new aircraft by 

struggling air carriers. Do any of you refute that argument, or are 

there long-term gains on that investment? Do we talk about efficiency, or is it just a bad business decision when we start talking 

about the replacement of equipment? 

Mr. ROACH. I think my testimony is the timing. You have to purchase new aircraft and you have, because there is more aircraft, it 

becomes less efficient, other aircraft becomes less efficient and it 

can’t be maintained when companies can’t pay their bills and ordering new aircraft, it’s a timing issue. 

Mr. MAY. I think the other factor that’s important, Mr. Chairman, is that I think our carriers, in particular the larger carriers, 

have learned a very good lesson from Southwest. Southwest has a 

single type of aircraft, 737. They are all effectively identical with 

the exception of the paint colors on the outside, and so they have 

managed their fleet in a very effective way. 

I think what we are seeing today is that many of the legacy carriers are significantly reducing the numbers of different airplanes 

in their fleet, and they are trying to upgrade, as Mr. Roach says, 

from a fuel efficiency point of view. I was with Boeing on Monday 

of this week up in Hartford, Connecticut, we were talking about 

the 787 which is the most fuel efficient aircraft ever designed, I 

think, and we are all looking for those efficiencies in our fleets, and 

we laid literally hundreds of aircraft down in the desert to get rid 

of older, less fuel efficient planes and bringing in more fuel efficient 

planes, so it is a process of renewal and standardization that is important for the industry. 

Senator BURNS. On the efficiency part of these new airplanes, is 

there anywhere we can go to see what the airlines use to measure 

the payout or the return on investment, as far as efficiency is concerned? I say that because we are dealing with some new technologies here on this committee with regard to lighting. 

When you look at optical lighting, that these old light bulbs that 

we see here today are on their last legs. A lot of people don’t realize 

that, and you see this optical lighting showing up in our traffic 

lights more than anywhere else. They use from 30 to 40 percent 

less electricity. So the payout, or the payback, for that investment 

is rather large. Do we see this kind of a situation in the aircraft 

that’s coming onboard now from the 787 or other types of aircraft 

that’s being introduced? 

Mr. MAY. I’m sure in our engineering team, along with Boeing 

or Airbus engineering teams would be happy to provide you and 

this committee with background. 

Senator BURNS. Now in the area of leasing, some in the industry 

have been critical for the role aircraft leasers have been playing by 

providing outside cash and loan support. What role, good or bad, 

do you think this section of the industry is having, and what do 

you see their future role, how will they evolve in the future? What 

role will they play? Mr. Baker, you’re probably in a better position 

to address that. 

Mr. BAKER. Mr. Chairman, I think one thing that really separates the current airline crisis from that which followed the first 

Gulf War, and that being of somewhat less significance, is in fact 

the rise of leasing companies. We were unable to witness the numVerDate Nov 24 2008 12:42 Nov 17, 2010 Jkt 062179 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\62179.TXT SCOM1 PsN: JACKIE
51 

ber of actual liquidations, names like Eastern, Banff, carriers no 

longer with us, and the removal of their capacity played a role in 

the resurrection or the return to profitability that we witnessed for 

all carriers during the mid-1990s. 

I think the role of the leasing community is largely what is preventing any liquidations from taking place, so I do think it is yet 

another example of a barrier to exit, and the airline industry is notorious in terms of there being very few barriers to entry. You and 

I are free to start an airline with surprisingly little red tape and 

capital requirement for us to actually start an airline, and then 

ceasing to operate that airline is entirely different. That said, the 

leasing community clearly has to be mindful of the overall value of 

the demand for aircraft globally, which is why leasing companies 

such as GE are in fact playing an important, and critical role in 

the resurrection of carriers, the redesign of carriers such as Delta 

Airlines. They are now both a potential or an actual barrier to exit, 

but they are also aiding the recovery efforts of these carriers. 

Senator BURNS. Tell me about in the airline industry. Why is it 

still attracting capital even though it has a very poor performance 

record? 

Mr. MAY. Senator, that’s a great question, and I wish I had the 

answer for it. I can’t remember the exact number, but there is 

something on the order of 16 to 20 applications resting at the FAA 

for people coming into the business, as tough as it is, and as horrible a record as it is, right now. 

Ms. HECKER. I think your interest in the role of manufacturers 

and lessors is right where the answers are, though. Those firms 

have been making money for a number of years, so they are playing the role, yes, in some recovery, but they are also keeping the 

capacity in the system, despite the limited pricing power, so it’s a 

dynamic that is a very important one in the sector. 

Senator BURNS. That tells me that I should be selling baggage 

carts rather than investing in the airline stock. Is that, everybody 

is making money but the airline, right? 

Mr. ROACH. Historically in its business everybody connected with 

the airline, with caterers, people that sell, lease airplanes, fix airplanes. They all make money. It’s the airline industry itself that 

doesn’t make money. You’re 100 percent right. 

Senator BURNS. We’ll have to look into that, I suppose. I started 

out there, when I came out of the Marine Corps, I worked for an 

airline. Now, the $64,000 question. That’s not very much. Looking 

at the debt, looking at the asset-to-debt ratio, how much more time 

have we got before they are all in Chapter 11? 

Mr. MAY. Senator, how much longer are we going to have $60 oil, 

and is it going to go to $70? I think you can measure the successful 

livelihood of the business in great measure with the price of oil. It’s 

that important to the equation. 

Senator BURNS. That we have very little control of right now. 

Right now China and there are a lot of foreign countries that are 

in the oil business, and are driving oil prices right now. But I 

would say on the other hand in Sydney, Montana, I don’t see many, 

and Williston, North Dakota, if you know what I mean. 

Mr. BAKER. Senator, I would suggest, barring a material price in 

crude or material pension relief, Northwest and Delta will be facing 

52 

Chapter 11 decisions within the next 6 months. Other carriers are 

in better positions in terms of liquidity profiles, like Continental. 

I would suggest if nothing changed, if revenue trends stopped improving, if fuel costs stayed precisely where they are at the pump 

today, that Continental would be facing a Chapter 11 decision 

sometime toward the end of 2006, beginning of 2007, and American 

once they went through the actions consistent with a carrier trying 

to avoid the process, so selling off key assets what have you, making an additional return to labor for another contribution there, 

they would be facing a late 2007, or late 2008, bankruptcy decision. 

Senator BURNS. Is consolidation an answer? 

Mr. BAKER. I don’t happen to believe that it is. I think that the 

America West-USAir example is probably the first and last significant form of consolidation that, that type of consolidation that we’ll 

see for sometime. I do believe that over time, assets belonging to 

failing carriers as they exit the industry, they will, will ultimately 

emerge with fewer airlines, but I think it’s more likely to occur if 

and when failures take place than through traditional M&A activity. Every airline cycle, for example, is accompanied by the loss of 

certain hubs after the first Gulf War. We lost National as a hub. 

We lost Raleigh-Durham. We lost San Jose. This time around we 

have lost Columbus, we have lost another iteration of Raleigh-Durham, and I would suggest going forward, somewhere down the road 

5, 10 years, hubs like Memphis, Cleveland and Salt Lake would be 

on my short list. 

Mr. ROACH. Senator, I think that the mergers and acquisitions, 

first of all, exit to the industry has been very difficult because of 

less service and Chapter 11, and people could hang on. We show 

a number of airlines leaving: TWA, American, Banff. There are a 

lot of airlines and 16 or 17 applications to start new airlines. 

We talked about the Social Security crisis, the people not willing 

to address their problem. We are there in this industry. We are at 

a crisis in this industry. There is no putting it off until tomorrow. 

Something has to get done. It has to get done now. Otherwise, we 

are going to see several more airlines in Chapter 11 before the year 

is over. 

Senator BURNS. The other members have questions, and we’ll 

submit those questions to you for written response, and if you’ll 

copy in the Committee with those responses, we would appreciate 

that. Thank you for coming today. I think overall we got a pretty 

good picture of our challenges. We didn’t talk about taxes and fees 

enough, but I think there is some work that the GAO has done, 

and the information that all of you have given us, especially from 

Mr. May’s office, where I think we are going to take a look at that, 

and we are going to make an argument for taxes and fees right 

now are a significant part. I think there is also an awareness now 

that even in security as the war on terror and as it becomes our 

enemy, that we can’t protect everybody, because Americans are a 

mobile society. And anything that infringes on that freedom of 

movement is looked upon as not very good for our society. We are 

going to have to take a look at our mass transit and our other 

transportation facilities, one of these days we are going to have to 

look at the security of this country, and it was suggested up in 

Montana the other day that we had volunteers. 

53 

We decided to send forces in two different ways in World War II 

to wage that war, and we left our own country vulnerable. And I’m 

saying we may be in the same situation, but there were voluntary 

groups, people volunteered to keep our country safe, and for observations and to respond to local emergencies. We may have to go 

back to that because we cannot, as a government, levy enough 

taxes to pay for all of it. And so I think you know there are a lot 

of us up here that are taking a different view of what our priorities 

are, especially in this area of transportation and keeping it secure. 

Thank you for coming this morning. We’ll leave the record open 

for a couple of weeks. If you’ll respond to those questions, why, we 

would appreciate that. 

[Whereupon, at 11:25 a.m., the hearing was adjourned.] 

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