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95–437 PDF 2015

S. HRG. 113–671 

DOMESTIC CHALLENGES AND GLOBAL 

COMPETITION IN AVIATION MANUFACTURING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON AVIATION OPERATIONS, 

SAFETY, AND SECURITY 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 31, 2014 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JOHN D. ROCKEFELLER IV, West Virginia, Chairman 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

MARK BEGICH, Alaska 

RICHARD BLUMENTHAL, Connecticut 

BRIAN SCHATZ, Hawaii 

EDWARD MARKEY, Massachusetts 

CORY BOOKER, New Jersey 

JOHN E. WALSH, Montana 

JOHN THUNE, South Dakota, Ranking 

ROGER F. WICKER, Mississippi 

ROY BLUNT, Missouri 

MARCO RUBIO, Florida 

KELLY AYOTTE, New Hampshire 

DEAN HELLER, Nevada 

DAN COATS, Indiana 

TIM SCOTT, South Carolina 

TED CRUZ, Texas 

DEB FISCHER, Nebraska 

RON JOHNSON, Wisconsin 

ELLEN L. DONESKI, Staff Director 

JOHN WILLIAMS, General Counsel 

DAVID SCHWIETERT, Republican Staff Director 

NICK ROSSI, Republican Deputy Staff Director 

REBECCA SEIDEL, Republican General Counsel and Chief Investigator 

SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND SECURITY 

MARIA CANTWELL, Washington, Chairman 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARK PRYOR, Arkansas 

AMY KLOBUCHAR, Minnesota 

MARK BEGICH, Alaska 

BRIAN SCHATZ, Hawaii 

CORY BOOKER, New Jersey 

JOHN E. WALSH, Montana 

KELLY AYOTTE, New Hampshire, Ranking 

Member 

ROGER F. WICKER, Mississippi 

ROY BLUNT, Missouri 

MARCO RUBIO, Florida 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

TED CRUZ, Texas 

DEB FISCHER, Nebraska 

RON JOHNSON, Wisconsin 

(III) 

C O N T E N T S 

Page 

Hearing held on July 31, 2014 ............................................................................... 1 

Statement of Senator Cantwell .............................................................................. 1 

Statement of Senator Ayotte ................................................................................... 3 

Statement of Senator Wicker .................................................................................. 37 

WITNESSES

Hon. Mark Kirk, U.S. Senator from Illinois .......................................................... 5 

Gerald Dillingham, Ph.D., Director, Physical Infrastructure Issues, U.S. Government Accountability Office ............................................................................. 6 

Prepared statement .......................................................................................... 9 

Bertrand-Marc Allen, President, Boeing Capital Corporation ............................. 21 

Prepared statement .......................................................................................... 22 

Keith Crane, Ph.D., Director, RAND Environment, Energy, and Economic 

Development Program; Professor, Pardee RAND Graduate School, Washington Office, RAND Corporation ....................................................................... 28 

Prepared statement .......................................................................................... 30 

(1) 

DOMESTIC CHALLENGES AND GLOBAL 

COMPETITION IN AVIATION MANUFACTURING 

THURSDAY, JULY 31, 2014 

U.S. SENATE, 

SUBCOMMITTEE ON AVIATION OPERATIONS, SAFETY, AND

SECURITY, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:33 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Maria Cantwell, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. MARIA CANTWELL, 

U.S. SENATOR FROM WASHINGTON 

Senator CANTWELL. The U.S. Senate Committee on Commerce, 

Science, and Transportation Subcommittee on Aviation Operations 

and Safety will come to order. 

I want to thank my colleague Senator Ayotte for helping us get 

this morning’s hearing underway, and my colleagues who are here, 

Senator Wicker and especially Senator Kirk from Illinois, who is 

going to be our first witness presenting today. 

I am also pleased that we are going to be hearing from a distinguished panel. 

Today’s hearing is entitled ‘‘Domestic Challenges and Global 

Competition in Aviation Manufacturing.’’ Aviation manufacturing 

is one of America’s largest employers, and commercial and general 

aviation industries support over 1.2 million jobs. 

But these jobs are threatened, if we fail to remain competitive. 

American companies like Boeing and Gulfstream are leaders in 

their respective markets, and they work hard to continue to innovate. 

Don’t get me wrong, I am all for competition. It drives innovation. It creates new models of efficiency. It drives down costs to 

consumers. 

But what we are going to hear about at this hearing today are 

some of the unique challenges American manufacturers face as 

they compete on an international basis, sometimes against foreign 

competitors who are either state-owned or state-subsidized. And according to one U.S. manufacturer, some of these competitions can 

be as much as up to a 55 percent discount on airplanes. 

So while U.S. manufacturers struggle to continue to be innovative, they also have to face the fact that sometimes these unfair 

competition issues drag on forever and ever. 

2 

The WTO case against E.U. subsidies of Airbus has dragged on 

now for more than 12 years, and while that time has happened, 

they often face a loss in competitive advantage in dealing with various issues. 

According to Ron Kirk, who was the U.S. Trade Representative 

at the time of the WTO ruling on this most recent case between 

Boeing and Airbus, it cost Boeing’s market share and lost sales of 

over 342 aircraft. 

So the WTO is unlikely to solve the problem before competitors 

eat into market share or job loss. 

In a recent Finance hearing, Stephen Ezell of the Information 

and Technology and Information Foundation said, ‘‘When you consider we have lost one-third of manufacturing jobs in the prior decade,’’ meaning our challenges with the downturn of the economy, 

he said, ‘‘if we don’t get our act right, we could lose 20 percent to 

30 percent more in the coming decades. It is not inevitable. It 

shouldn’t happen. It doesn’t have to happen.’’ 

That is why we are here today, to talk about everything we can 

do in aviation manufacturing to stay competitive. Because of the 

massive resources required to develop, produce, and market commercial airplanes, when we talk about aviation, we are often not 

talking about companies, as far as competition, but sometimes talking about actual countries. 

China, as Dr. Crane will tell us in his report, has made the creation of national aviation manufacturing a priority and has spent 

billions of dollars to reach that goal. 

Russia is currently selling its own passenger aircraft and has 

signed an agreement with China to develop a wide-body plane intended to compete on a global scale. 

Countries like France, Britain, Germany, and Spain, despite a 

WTO ruling in 2012 against the E.U. for giving $18 billion in illegal aid, recently continued to support the new Airbus 350 to the 

tune of almost $3 billion in launch aid. 

So at a time when everybody is looking at how to compete in the 

marketplace, we have to realize that this marketplace also brings 

a lot of competition that is supported by these individual governments. 

The state-owned commercial aircraft corporation of China, 

Comac, enjoys the full support of Chinese government and industrial leaders. And next year, Comac’s C919, a jet designed to compete with the 737, will fly for the first time, with delivery starting 

in 2018. 

While many experts expect the C919 will be behind the technology of other products in its class, we know that they are going 

to continue to work on closing the technology gap. 

That is why we need to do everything we can to make sure that 

American aerospace stays competitive. I believe in American innovation, but we also need a level playing field. 

We also face our own domestic challenges. We need to continue 

to develop a skilled workforce that manufacturers can depend on. 

We need to make our certification process more efficient to allow 

innovation. We are going to hear from Mr. Dillingham about that 

today. And we also have to make sure that while we are improving 

3 

that certification process, we continue our most important mission 

and focus on safety. 

We also need to continue to make innovation improvements, like 

greener skies and jet fuel issues. 

Finally, we need to reauthorize the Export-Import Bank. There 

are 60 countries across the globe that have credit agencies similar 

to the Export-Import Bank, and many of them are more aggressive 

in the ways that they provide assistance. 

According to a study released this week by the National Association of Manufacturers, Japan’s credit export agency is nearly four 

times the size of the Ex-Im Bank, while Japan’s economy is less 

than half of our size. And over the last 8 years, China has expanded its export credit authorization by 867 percent. In 2013, the 

value of China’s export credit authorization was five times that of 

the Ex-Im Bank. 

Now, I want to point out that the United States, because of the 

Export-Import Bank, is part of the Aircraft Sector Understanding, 

an official organization that we will hear more about today that 

really focuses on making sure there is a fair focus on cost and expenses, and that they are no more expensive than traditional financing. If somehow we got rid of the Export-Import Bank, the 

United States would no longer be a participant in the very discussions that some of the critics of the Export-Import Bank say that 

they want to be able on a global basis to make sure that there are 

fair rates competitive with the financial ones involved in the financial sector overall. 

So I hope that we can address these issues in this hearing today. 

I recently visited Gulfstream Manufacturing, and I continue to 

focus on visiting various aerospace manufacturing across the 

United States. This is a very important sector that employs many 

Americans, and we want to keep very competitive in this area. 

Now I will turn to my colleague, Senator Ayotte. 

STATEMENT OF HON. KELLY AYOTTE, 

U.S. SENATOR FROM NEW HAMPSHIRE 

Senator AYOTTE. I want to thank Chairwoman Cantwell for holding this hearing to discuss the challenges facing domestic and global competition in aviation manufacturing. 

It is certainly wonderful to see our colleague Senator Kirk here 

today. I look forward to hearing from him, as well as to have Senator Wicker here at this hearing. 

According to the Federal Aviation Administration, in 2013, the aviation industry supported over 10 million jobs, contributed $1.3 

trillion to total economic activity, and accounted for 5.2 percent of 

our U.S. GDP. 

Furthermore, air carriers operating in the U.S. airspace trans- ported more than 837 million passengers and moved $61.2 billion 

revenue ton-miles of freight. 

The FAA released a report earlier this summer stating that civil 

aircraft manufacturing continues to be the top net exporter in the 

United States with a $54.3 billion positive impact on our trade balance. 

As someone who strongly supports free trade, I find this to be 

very encouraging for the industry. But we all know that we need 

4 

to continue to be vigilant to ensure that this industry, which is so 

important to our economy, is more competitive in this global marketplace with the challenges that we face from competitors around 

the world. 

Clearly, this is an industry that is an important driver of our 

economy in terms of not only the growth of the economy but also 

the creation of jobs. 

In my home state, New Hampshire, we have a very strong aviation manufacturing presence. Not only do we have Boeing suppliers 

that create very important jobs for my constituents, but we also 

have four prominent businesses in New Hampshire that provide 

key parts to major aviation companies. I would like to highlight 

them briefly: Cobham Antenna Systems in Exeter, New Hampshire; Astronics Corporation in Lebanon; Safran Aerospace that has 

recently opened a plant in Rochester, New Hampshire; and GE in 

Hooksett. 

Each of these companies I have had the pleasure of visiting, almost all of them, and they play a very important role in terms of 

what we are seeing. But they have also expressed to me, each of 

them, the challenges they face in terms of competition in this country. 

Cobham specializes in air-to-air refueling; audio, video, and data 

communications; defense electronics; and life-support and mission 

equipment. It is a major supplier for the Joint Strike Fighter, Boeing 787, and Global Hawk UAV. 

Astronics is a leader in advanced high-performance lighting, electronic power, avionics data products, and automatic test systems 

for the global aerospace and defense industries. 

Safran is actually a multinational company, and we are pleased 

that they just opened a plant in Rochester, New Hampshire, that 

will really be supporting the aviation industry. Safran is going to 

create 400 new jobs in New Hampshire. One of the challenges that 

Safran has faced that it has met in an innovative way is it has 

partnered with our local community college, in terms of getting the 

trained workforce it will need to have these 400 new manufacturing jobs in New Hampshire. 

So I think that is a model that we need to look at, too, partnering 

with local colleges to ensure that our workers have the training 

that they need to meet these advanced manufacturing jobs that are 

needed in aviation. 

And, of course, GE’s aviation facility in Hooksett is very important to our state. They manufacture compressor valves, tubes, and 

airfoils for all GE engine programs, as well as build advanced turbo 

fan engines for the Super Hornet and our Growler. 

I had the privilege of touring this facility recently, and I very 

much appreciate what they do in terms of defending our Nation. 

As we hear from our panelists today, I will be particularly interested in their thoughts regarding what we can do to make this industry not only more competitive globally, as we talk about things 

like reauthorizing the Ex-Im Bank, but also to understand from 

you what we can do, thinking about our tax code, to ensure that 

we are more competitive as we compete with other countries 

around the world. The regulatory climate that this industry operates in is so important, and ultimately to our economy. How that 

5 

regulatory climate here in the United States compares to their 

global competitors, and how competitive that climate is or isn’t for 

the aviation industry is so important. 

Finally, I hope that the witnesses will also discuss, importantly, 

the reauthorization of the Export-Import Bank. I have previously 

supported that reauthorization. One thing I will say about this reauthorization in and of itself, if every government program would 

return money to reduce the deficit, then I think that we would 

have a lot better time here in terms of the trillions of dollars of 

debt that our Nation is facing. 

I think it would be one thing if other countries around the world 

didn’t have an equivalent to the Export-Import Bank, but that is 

not the reality that our companies are facing. 

That said, what I do want to hear from our panelists about 

today, while I support the importance of this reauthorization, I 

would like to hear what types of reforms we do need to consider 

as we debate reauthorizing the Export-Import Bank. And one of the 

things we need to make sure is that our small and midsized companies have access to this capital as well to make them competitive 

in the global marketplace, because the reality is that many of the 

businesses in this country are small and midsized companies, and 

we hope that these small and midsized companies, if they have 

more access to capital, will go on to be our next generation of larger 

companies. 

So I would like to hear about that today and what makes sense 

in terms of reforms that can be made to help particularly small and 

mid-sized companies. 

I want to thank all of you for being here today. I look forward 

to hearing from the witnesses. 

And again, I want to welcome our colleague, Senator Kirk. It is 

great to have him here today. 

Senator CANTWELL. Thank you very much, Senator Ayotte. 

Senator Kirk, we do welcome you. You come from a very important aviation state. Thank you for making time this morning in 

your schedule to talk about how you see aviation competition. 

STATEMENT OF HON. MARK KIRK, 

U.S. SENATOR FROM ILLINOIS 

Senator KIRK. Madam Chair, could I deliver my statement standing, talking to the board? 

I am surprised that the Senate knows so little about the C919. This aircraft is being developed with $29 billion in Chinese subsidies for the R&D for the aircraft. 

If you don’t recognize this aircraft, it is a competitor to the 737, 

which as Senators, you guys probably always fly, one of the bestselling midrange U.S. airliners. 

We want to make sure that just as the C919 hits the market in 

2018, as we expect, we have an Export-Import Bank to finance 

sales of U.S. aircraft overseas. These days, when you get on an airplane for United or American, you are overwhelmingly likely to be 

flying in a made in the USA aircraft. We want to make sure that 

you are not flying China in the future days. 

There are so many jobs associated with civil aviation in the 

United States, as the Chairwoman pointed out. This aircraft is now 

6 

coming on to compete with us. There should actually be two aircraft shown on this board. There is a Russian jet coming that is 

called the Superjet that will also compete in the 737 space. 

I want to make sure that we have the Export-Import Bank to 

take on these competitors to make sure that our U.S. dominance 

of this field is continued. 

So let’s keep U.S. aviation going and make sure it is always 

made in the USA. That is very important for Senators who are always flying, to make sure you are always in U.S.-built and manufactured aircraft that meet U.S. standards. You want to make sure 

that that continues. 

And that concludes my statement. So remember, you guys, the 

C919, it is coming to get us. And this is the time to not stop the 

operation of Ex-Im. 

I will continue for just another moment. These aircraft generally sell for between $50 million to $100 million each. When we have 

heard about the discounts that the Chairwoman mentioned, sometimes you can get the price down to $50 million or $25 million, 

which would really wipe us out if it is priced that low. 

There is a huge supply chain standing behind each one of these 

aircraft. Make sure this is all-American, to make sure that we keep 

going. 

With that, let me conclude my brief on the C919. Thank you. 

Senator CANTWELL. Thank you, Senator Kirk. 

Could I just ask you, what do you think the impact is in the state 

of Illinois? 

Senator KIRK. In the state of Illinois, we have about $175 million 

in exports, which are funded by Ex-Im Bank, with over 100 companies. 

Senator CANTWELL. Thank you. 

Anybody else, questions for our colleague? 

Senator KIRK. I expect to get your votes, guys. 

[Laughter.] 

Senator CANTWELL. As they say, a picture is worth a thousand 

words, so thank you very much. You have painted a very precise 

picture this morning. 

Senator KIRK. Thank you. 

Senator AYOTTE. Thank you. 

Senator KIRK. Thanks, guys. 

Senator CANTWELL. OK, we will now hear from our second panel. 

We are going to hear from Dr. Gerald Dillingham, Ph.D., Director 

of Civil Aviation for the U.S. Government Accountability Office; Dr. 

Keith Crane, Ph.D., Environmental Energy from the RAND Corporation; and Mr. Marc Allen, President, Boeing Capital Corporation. 

So if all those witnesses could join us up here, we would appreciate it. 

We are going to start with you, Mr. Dillingham. 

STATEMENT OF GERALD DILLINGHAM, PH.D., 

DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, 

U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Dr. DILLINGHAM. Thank you, Madam Chairwoman, Ranking 

Member Ayotte, and members of the Subcommittee. 

7 

We have conducted several reviews examining the efficiency of 

FAA’s aircraft certification and approval processes, and industry’s 

concern about inconsistent regulatory interpretation. 

FAA has implemented several initiatives to address these longstanding issues, but these issues persist. 

Congress established requirements in Section 312 and 313 of the 

2012 FAA Reauthorization Act to spur additional action on these 

items. In response to those requirements, FAA chartered two rulemaking committees, one on the aircraft certification process and 

another on the consistency of regulatory interpretation. 

Both committees produced a series of recommendations to assist 

FAA in addressing these issues. My statement today focuses on, 

one, FAA’s progress in implementing the recommendations of the 

two committees; and two, the challenges that could impede the successful implementation of the recommendations and how these 

challenges might be addressed. 

Regarding the certification process recommendations, FAA has 

established 14 initiatives to address these recommendations. These 

initiatives include developing a comprehensive roadmap of major 

change initiatives, improving the project sequencing process, and 

updating the aircraft certification regulation. 

Most of these initiatives are scheduled to be completed within 

the next 3 years. However, FAA has established performance 

metrics for only five of the 14 initiatives, and has not developed 

metrics to measure the overall effectiveness of the collective efforts. 

These metrics are essential in helping FAA and the industry determine whether these initiatives are leading to improvements. 

Moreover, although several initiatives are said to be on track, we 

are concerned that FAA expects to miss milestones for two of the 

most important, critical recommendations due to concerns raised by 

the unions representing inspectors and engineers. Missing these 

milestones increases the risk of delays in schedule implementation 

of the initiatives. 

Turning to the regulatory consistency recommendations, FAA 

has begun implementing these recommendations. In its July 2013 

report to Congress, FAA included a preliminary plan for implementing these recommendations. 

FAA has also indicated that its final plan would include an implementation strategy, assign responsibilities to individuals in offices, and establish milestones and measures of effectiveness. This 

plan is projected to be completed next month, which is about 8 

months beyond the initial target date. 

Looking ahead to potential recommendation implementation 

challenges, FAA will likely be under increased pressure to establish 

more efficient processes as new aircraft material, aircraft types, 

and NextGen avionics are introduced into the national aerospace 

system. 

FAA could significantly increase its chances of improving its 

processes and successfully adapting to the changes in the industry 

by working to address some key challenges. Specifically, FAA 

should focus on, one, identifying the necessary resources to sustain 

these efforts when faced with fiscal pressures; two, managing the 

cultural shift required to implement a risk-based approach in making certain certification and approval decisions. 

8 

This shift necessitates buy-in, support, and accountability 

throughout the agency, from the highest FAA management levels 

to the designees and safety inspectors in the field. 

Additionally, FAA must ensure early and continuous involvement 

of industry stakeholders, and establish and use performance 

metrics that measure outcomes rather than outputs to help show 

what is actually being achieved through these initiatives, and to 

hold those responsible for implementation accountable for the results. 

Thank you, Madam Chairwoman. That concludes my statement. 

[The prepared statement of Dr. Dillingham follows:] 

Aviation Manufacturing 

Status of FAA’s Efforts to Improve Certification and Regulatory Consistency 

Why GAO Did This Study 

Among its responsibilities for aviation safety, FAA issues certificates for new aircraft and parts, and grants approvals for changes to air operations and aircraft, 

based on federal aviation regulations. Various studies, GAO’s prior work, and industry stakeholders have raised questions about the efficiency of FAA’s certification and 

approval processes, as well as the consistency of its staff in interpreting aviation 

regulations. Over time, FAA has implemented efforts to address these issues, but 

they persist as FAA faces greater industry demand and its overall workload has increased. The 2012 FAA Modernization and Reform Act required FAA to work with 

industry to resolve these issues. In response, FAA chartered two committees—one 

to address certification processes and another to address regulatory consistency— 

which recommended improvements in 2012. In 2013, FAA published an implementation plan for addressing the certification process recommendations and promised to 

publish an implementation plan for addressing the regulatory consistency recommendations at a later date. 

This testimony provides information on FAA’s progress in implementing the (1) 

certification and approval process recommendations and (2) regulatory consistency 

recommendations. It also discusses future challenges industry stakeholders believe 

FAA will face in implementing these recommendations. This testimony provides the 

same information as GAO–14–728T, which was based on GAO products issued from 

2010 to 2014, updated in July 2014 through reviews of recent FAA documents and 

interviews of FAA officials and industry representatives. 

What GAO Found 

The Federal Aviation Administration’s (FAA) Aircraft Certification Service (Aircraft Certification) is responsible for addressing the certification and approval process recommendations, and has made progress. Aircraft Certification is implementing 

and has set milestones for completing 14 initiatives, several of which were originally 

begun as part of earlier certification process improvement efforts. The initiatives 

range from developing a comprehensive road map for major change initiatives, to 

improving Aircraft Certification’s process for prioritizing requests for certifications 

and approvals (project sequencing), to reorganizing the small aircraft certification 

regulation. According to an update prepared by FAA in May 2014, one initiative has 

been completed and most are on track to be completed within 3 years. However, according to this update, two initiatives will not meet planned milestones, including 

the one for improving FAA’s program for delegating authority to organizations to 

carry out some certification activities. Also, a third initiative for improving consistency of regulatory interpretation was at risk of not meeting planned milestones. 

Two additional initiatives, while on track for meeting planned milestones in May 

2014, faced challenges because of opposition by FAA’s labor unions, including one 

for improving Aircraft Certification’s project sequencing process. GAO found in October 2013 that Aircraft Certification continued to lack performance measures for 

many of these initiatives, a condition that persists. In 2010, GAO had previously 

recommended that FAA develop a continuous evaluative process with performance 

goals and measures. FAA agreed but has not yet fully addressed the recommendation. Aircraft Certification officials discussed plans to develop metrics in three 

phases, beginning in July 2014 and in the future, for measuring (1) the progress 

of implementing the initiatives throughout FAA, (2) the outcomes of each initiative, 

and (3) the return on investment for FAA and the industry resulting from implementing the initiatives as a whole. 

9 

1See National Academy of Sciences, Improving Aircraft Safety: FAA Certification of Commercial Passenger Aircraft, National Research Council, Committee on FAA Airworthiness Certification Procedures (Washington, D.C.: June 1980); Booz Allen & Hamilton, Challenge 1000: Recommendations for Future Aviation Safety Regulations (McLean, VA: Apr. 19, 1996); RTCA Task 

Force 4, Final Report of the RTCA Task Force 4 ‘‘Certification’’ (Washington, D.C.: Feb. 26, 1999; 

and Independent Review Team Appointed by Secretary of Transportation Mary E. Peters, Managing Risks in Civil Aviation: A Review of FAA’s Approach to Safety (Washington, D.C.: Sept. 

2, 2008). 2See GAO, Aviation Safety: Certification and Approval Processes Are Generally Viewed as 

Working Well, but Better Evaluative Information Needed to Improve Efficiency, GAO–11–14 

(Washington, D.C.: Oct. 7, 2010) and GAO, Aircraft Certification: New FAA Approach Needed 

to Meet Challenges of Advanced Technology, GAO/RCED–93–155 (Washington, D.C.: Sept. 1993). 3GAO, Aviation Safety: Status of Recommendations to Improve FAA’s Certification and Approval Processes. GAO–14–142T (Washington, D.C.: Oct. 30, 2013). 4GAO–11–14. 

FAA’s Flight Standards Service (Flight Standards) is responsible for addressing 

the regulatory consistency recommendations, and is finalizing plans to do so. FAA 

has not published a detailed plan with milestones and performance metrics, and officials told GAO that they intend to publish a plan by August 2014. Flight Standards officials said they were making progress in addressing the committee’s top priority recommendation—mapping all FAA policy and guidance to relevant federal 

aviation regulations and developing an electronic system that maintains this information and that is accessible by FAA and industry users. As part of this effort, officials told GAO that Flight Standards has begun eliminating obsolete guidance and 

linking existing policy and guidance to the regulations. 

Going forward, Aircraft Certification’s and Flight Standards’ efforts may face challenges that could affect successful implementation of the committees’ recommendations. Many of these recommendations represent a significant shift in how FAA normally conducts business, and if the workforce is reluctant to implement such 

changes, FAA’s planned initiatives for addressing the recommendations could be delayed. Also, the fact that FAA has not yet implemented performance measures for 

most of the initiatives is a concern for both GAO and the industry. As GAO concluded in October 2013, without performance measures, FAA will be unable to gather the appropriate data to evaluate the success of current and future initiatives. 

PREPARED STATEMENT OF GERALD L. DILLINGHAM, PH.D. DIRECTOR, PHYSICAL

INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Chairwoman Cantwell, Ranking Member Ayotte, and Members of the Subcommittee: 

I appreciate the opportunity to testify today on the status of the Federal Aviation 

Administration’s (FAA) efforts to improve its certification and approval processes. 

As you know, FAA is responsible for aviation safety, and part of this responsibility 

entails issuing certificates for new aircraft and aircraft parts and equipment and 

granting approvals for such things as changes to air operations and aircraft, based 

on Federal aviation regulations. FAA’s current efforts to improve these processes are 

aimed at: (1) improving its decision-making process for issuing certificates and approvals, (2) keeping pace with emerging technology, and (3) enabling industry 

growth and innovation. Studies published since 1980,1 our prior work,2 industry 

stakeholders, and experts have long raised questions about the efficiency of FAA’s 

certification and approval processes and varying interpretations and applications of 

its regulations in making certification and approval decisions. More recently, several 

aviation industry groups have asserted that these issues persist, resulting in delays 

and higher costs for their members. These delays have been generally attributed to 

heavy staff workloads and a lack of staff resources to begin new work on certifications and approvals. With greater industry demand and the introduction of new 

aircraft, equipment, and technology into the national aviation system, FAA’s workload has increased and is expected to grow further over the next decade. We previously concluded that it will be critical for FAA to follow through with reforms to 

its certification and approval processes to meet industry’s future needs.3

Over time, FAA has initiated various efforts and initiatives to improve its certification and approval processes and interpret regulations more consistently, including 

efforts in response to findings and recommendations we made in 2010.4 However, 

to bring further attention to these issues and spur additional action, Congress included the following requirements for FAA in the FAA Modernization and Reform 

10 

5Pub. L. No. 112–95, §§ 312 and 313, 126 Stat. 11, 66 and 67 (2012). 

6GAO–14–142T. 

7GAO–14–142T. 

8GAO–11–14. Specifically, we recommended that FAA develop a continuous evaluative process 

and use it to create measurable performance goals for the actions, track performance toward 

those goals, and determine appropriate process changes. We also recommended that FAA develop and implement a process in Flight Standards to track how long certification and approval 

submissions are wait-listed, the reasons for wait-listing them, and the factors that eventually 

allowed initiation of the certification process. FAA partially addressed the first recommendation 

and fully addressed the other. 9GAO–11–14; GAO, Aviation Safety: Additional FAA Efforts Could Enhance Safety Risk Management, GAO–12–898 (Washington, D.C.: Sept. 12, 2012); GAO, Aviation: Status of DOT’s Actions to Address the Future of Aviation Advisory Committee’s Recommendations, GAO–13–657 

(Washington, D.C.: July 25, 2013); GAO–142T; GAO, FAA Reauthorization Act: Progress and 

Challenges Implementing Various Provisions of the 2012 Act, GAO–14–285T (Washington, D.C.: 

Feb. 5, 2014); and GAO, Aviation Safety: Additional Oversight Planning by FAA Could Enhance 

Safety Risk Management, GAO–14–516 (Washington, D.C.: June 25, 2014). 

Act of 2012: 5 (1) work with the industry to assess and recommend improvements 

to the certification and approval processes (Section 312) and (2) address the findings 

from our 2010 report related to FAA interpreting regulations more consistently (Section 313). To meet these requirements, FAA chartered two aviation rulemaking committees in April 2012—the Aircraft Certification Process Review and Reform Aviation Rulemaking Committee (Certification Process Committee) and the Consistency 

of Regulatory Interpretation Aviation Rulemaking Committee (Regulatory Consistency Committee)—which made recommendations to FAA in May 2012 and November 2012, respectively. In an October 2013 statement, we made preliminary assessments of the two committees’ recommendations and FAA’s responses,6 finding that 

both FAA-chartered committees took reasonable approaches in their work and made 

relevant, clear, and actionable recommendations to FAA. However, we also discussed challenges to making further improvements to the certification and approval 

processes, most notably that FAA has not developed performance metrics for measuring the outcomes of the initiatives.7 In 2010, GAO made two recommendations requiring, among other things, that FAA develop a continuous evaluative process with 

performance goals and measures for assessing its actions to improve the efficiency 

of its certification and approval processes, and a method to track submission approvals.8

This testimony discusses FAA’s continuing efforts related to its certification and 

approval processes. More specifically, it provides information on: (1) FAA’s progress 

in implementing the Certification Process Committee recommendations, (2) its 

progress in implementing the Regulatory Consistency Committee recommendations, 

and (3) future challenges that others and we identified that FAA faces in implementing these recommendations. We provided this testimony previously, on July 23, 

2014, before the Subcommittee on Aviation, Committee on Transportation and Infrastructure, House of Representatives. We were subsequently invited to provide testimony on similar issues before this subcommittee. Because the issues of concern 

were the same for both subcommittees, this testimony presents the same information as the July 23, 2014 testimony (GAO–14–728T). This statement is primarily 

drawn from several GAO products issued since 2010.9 We have updated the information in July 2014 related to our previous work on the certification and approval 

processes through a review of more recent FAA and industry documents, including 

the committees’ reports to FAA, FAA’s reports to Congress in response to the committees’ recommendations as well as additional government and industry documents 

and reports related to this topic. This review included the May 2012 Certification 

Process Committee’s and the November 2012 Regulatory Consistency Committee’s 

report to FAA; FAA’s August 2012 and July 2013 reports to Congress on the results 

and plan for implementing recommendations made; and FAA’s implementation 

plans to address the committees’ recommendations. We also conducted interviews 

with FAA officials and industry stakeholders—including Boeing, the largest U.S. 

aircraft manufacturer—and representatives from all eight trade associations that 

participated in the two aviation rulemaking committees. Related GAO products are 

footnoted throughout the statement. The reports and testimonies cited in this statement contain detailed explanations of the methods used to conduct our prior work. 

We provided a draft of the new information contained in this statement to the Department of Transportation (DOT) for technical review and addressed its views in 

the body of our statement where appropriate. 

The work upon which this testimony is based was conducted in accordance with 

generally accepted government auditing standards. Those standards require that we 

plan and perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. We 

11 

10 Administered under 14 C.F.R. Part 183, FAA has the authority to designate private individuals to act as representatives of the agency for examining, inspecting, and testing persons and 

aircraft for the purpose of issuing certificates. In 2005, FAA established the organization designation authorization program to consolidate all existing organizational delegation types into 

this single program. 70 Fed. Reg. 59946, Oct. 13, 2005. 11 NextGen is a Federal effort to transform the U.S. national airspace system from a groundbased system of air traffic control to a satellite-based system of air traffic management. 

believe that the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

Background 

Located in FAA’s Office of Aviation Safety (Aviation Safety), the Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for new aviation products to be used in the 

national airspace system as well as for new operators in the system, such as air 

carriers, based on Federal aviation regulations (see fig. 1 below). FAA inspectors 

and engineers interpret and implement these regulations governing certificates and 

approvals through FAA policies and guidance, including orders, notices, and advisory circulars. Additionally, FAA also has the authority to use private individuals 

and organizational entities, known as designees, to carry out many certification activities on behalf of the FAA Administrator in order to enable FAA to better concentrate its limited staff resources on safety-critical functions.10

Figure 1: Federal Aviation Administration’s Organizational Structure for 

Processing Certificates and Approvals 

Source: GAO presentation of FAA information. GAO–14–728T 

Note: The Flight Standards Service’s oversight responsibilities include air operators (e.g., air 

carriers and air taxi services) and air agencies (e.g., flight schools and repair stations). 

In Aircraft Certification, approximately 880 engineers and inspectors issue certifications and approvals to the designers and manufacturers of new aircraft and aircraft engines, propellers, parts, and equipment, including the avionics and other 

equipment required for modernizing the air traffic control system under the Next 

Generation Air Transportation System (NextGen).11 Since 2005, Aircraft Certification has used a project sequencing system to nationally prioritize certification submissions on the basis of available resources. In Fiscal Year 2013, Aircraft Certification issued 3,496 design approvals, 57 production approvals, and 536 airworthiness certificates. 

In Flight Standards, approximately 4,000 inspectors issue certificates and approvals allowing individuals and entities to operate in the national airspace system. 

These include certificates to commercial air carriers, operators of smaller commercial aircraft, repair stations, and flight training schools and training centers. Flight 

Standards field office managers in over 100 field offices initiate certification projects 

within their offices on a first-come, first served basis. In Fiscal Year 2013, Flight 

Standards issued 259 air operator certificates and 159 air agency certificates. 

When FAA receives aviation industry submissions for certificates and approvals, 

it must determine whether or not resources are available to begin the project. According to FAA, the agency considers its highest priority to be overseeing the continVerDate Nov 24 2008 12:23 Jul 16, 2015 Jkt 075679 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\95437.TXT JACKIE

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12 

12 According to a recent DOT’s Office of Inspector General (OIG) report, as of October 2013, 

Flight Standards faced a significant backlog of aviation certification applications, with 138 applicants wait-listed for more than 3 years. See DOT OIG, Weak Processes Have Led to A Backlog 

of Flight Standards Certification Applications, Federal Aviation Administration, Report Number 

AV–2014–056 (Washington, D.C.: June 12, 2014). 13 Congress has historically prohibited FAA from collecting additional funding through the implementation of new aviation user fees. The latest prohibition is contained in the Consolidated 

Appropriations Act, 2014, Pub. L. No. 113–76, 128 Stat. 5, 578 (2014). 14FDA reviews applications from manufacturers that wish to market medical devices in the 

United States. To facilitate prompt approval of new devices and clearance of devices that are 

substantially equivalent to those legally on the market, Congress passed the Act to authorize 

FDA to collect user fees from manufacturers. In return, the Act requires FDA to meet performance goals tied to the agency’s review process. Pub. L. No. 107–250, 116 Stat. 1588 (2002). 15FAA, Detailed Implementation Plan for the Federal Aviation Administration Modernization 

and Reform Act of 2012, Pub. L. No. 112–95, Section 312, Jan. 31, 2014. 16 14 C.F.R. Part 23. In June 2013, a joint FAA-industry committee recommended to FAA 

changes to part 23. According to FAA officials, FAA will devise a plan to implement the recommendations and initiate new rulemaking for part 23 in 2015. 

ued operational safety of the people and products already operating within the national airspace system. The same staff that provide this oversight are also tasked 

with other oversight activities, such as processing new certifications and approvals 

that FAA considers to be lower priority. FAA wait-lists new certification and approval projects when resources are not available to begin the work. Flight Standards, in particular, has historically had difficulty keeping up with its certification 

workload across its regions and offices, a problem that persists.12 FAA has considered ways to supplement its annual budget by expanding its sources of funding to 

deal with its increasing workload and staff shortages. However, FAA has limited options as it cannot levy fees on its customers for most of the services it provides to 

industry, including aviation product certifications and approvals.13

Attempts have been made to provide FAA with additional funding from industry 

stakeholders for processing certifications and approvals. In 2007, the administration 

submitted a reauthorization proposal to Congress that called for major changes to 

FAA’s funding and budget structure. These changes were intended to provide a 

more stable, reliable basis for funding in the long term, in part by allowing FAA 

to impose fees on manufacturers for the various activities and costs related to aircraft certification and approval. Congress has previously authorized other agencies 

to charge these types of ‘‘user fees’’ for services rendered for processing product certification and approval. For example, the Medical Device User Fee and Modernization Act of 2002 authorized the Food and Drug Administration (FDA) to charge and 

retain a fee for providing services related to reviewing medical device products.14

However, this broad authority has not been granted to FAA. 

Most FAA Initiatives to Improve Its Aircraft Certification and Approval 

Process Are on Track 

In May 2012, the Certification Process Committee made six recommendations to 

Aircraft Certification to streamline and reengineer the product certification and approval processes, improve efficiency and effectiveness within Aircraft Certification, 

and redirect resources for support of certification. The Certification Process Committee further recommended that FAA develop measures of effectiveness for its activities and a means of tracking its progress. In August 2012, FAA reported its plan 

to Congress for addressing the Certification Process Committee’s recommendations, 

and, in July 2013, the agency issued an implementation plan with 14 initiatives. 

FAA updated this plan in January 2014 and plans to issue further updates on the 

status of the initiatives periodically.15

Most Initiatives Are on Track for Meeting Planned Completion Milestones 

Since the January update, Aircraft Certification has continued its efforts to address the recommendations to improve its certification and approval processes and 

is implementing the 14 initiatives. These initiatives touch on various aspects of Aircraft Certification’s work and, according to FAA several predate the committee’s recommendations and were part of on-going continuous efforts to address long-standing 

certification issues and to improve the certification process. The initiatives range 

from developing a comprehensive road map for major change initiatives, to improving the project sequencing process, to reorganizing the small aircraft certification 

regulation.16 Figure 2, based on an interim May 2014 update that FAA provided to 

us, summarizes FAA’s determination of the status of the 14 initiatives. 

13 

17FAA grants ODAs for several types of certifications and approvals, including production certificates, parts manufacturer approvals, and type certificates. Some companies, such as Boeing, 

are granted ODA status for more than one type of certification or approval. 18FAA issues special conditions to address new and novel design features during the aircraft 

certification process. 

Figure 2: Status of the Federal Aviation Administration’s Certification 

Process Initiatives (Section 312), as of May 2014 

Source: GAO presentation of FAA information./GAO–14–728T 

Note: Future completion shown in the figure indicates when an initiative is planned to be 

completed. 

aFAA delegates authority to organizations under the organization designation authorization 

program to carry out certain functions on behalf of the agency. 

b Instructions for continued airworthiness include such things as maintenance manuals and 

inspection programs for maintaining operational safety of aviation products. 

c 14 C.F.R. Part 21 is the regulation under which aircraft products and parts are certificated. 

dThe validation process is a form of certification to establish compliance for airplanes designed 

outside their countries in order to issue a type certificate for these airplanes. 

e No due date has been assigned to this initiative. 

f 14 C.F.R. Part 23 is the regulation under which small airplanes are certificated. 

gThis initiative is on hold until issuance of the implementation plan for addressing recommendations to improve regulatory consistency. 

According to the May 2014 update that FAA provided to us, 1 of the 14 initiatives 

has been completed, and 10 initiatives are on track for completion within planned 

time frames. FAA deployed a tracking system to monitor the implementation of the 

initiatives in June 2013, but the agency indicated it is still finalizing the mechanisms for authorizing staff with the appropriate level of review and approval rights 

in the system. Also, ten of the initiatives were on track for meeting their planned 

completion milestones. For example, the initiatives to expand the authority for approving aircraft emissions data and noise compliance under the organization designation authorization (ODA) program are on track to be completed in 2015.17 In 

addition, the initiative to expedite rulemaking by, among other things, adopting a 

rulemaking prioritization tool to update airworthiness standards for special conditions is scheduled to be completed in September of this year.18 Further, three of the 


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14 

19The Aerospace Industries Association represents major U.S. aerospace and defense manufacturers and suppliers, and the General Aviation Manufacturers Association represents leading 

global manufacturers of general aviation airplanes and rotorcraft, engines, avionics, and components. 20FAA Order 8100.15B, change 1, Organization Designation Authorization Procedures, Feb. 3, 

2014. 21PASS is the labor union that represents some of FAA’s inspector workforce, among others. 22Title 14 of the Code of Federal Regulations Part 21, Certification Procedures for Products 

and Parts, is the basis for evaluating and certifying aircraft, engines, and propellers. The steps 

in the certification process include the applicant’s conceptual design, the application for design 

approval, definition of the design standards, plans to demonstrate the design meets those standards, generation and substantiation of compliance data, determination of compliance, and 

issuance of the type certificate. 23SMS is a formalized process that involves collecting and analyzing data on aviation operations to identify emerging safety problems, determining risk severity, and mitigating that risk 

to an acceptable level. This approach to aviation safety is becoming the standard throughout 

global aviation industry. See GAO–14–516 and GAO–12–898. 

initiatives were in danger of getting off track between 2011 and 2013 and are now 

back on schedule. 

Some Initiatives Will Not Meet or Are at Risk of Not Meeting Planned Milestones 

Although most initiatives are on track, according to FAA’s May 2014 interim update, 2 of the 14 initiatives will not meet planned milestones: 

• Improve effectiveness of the ODA program: FAA and two aviation industry 

groups—the Aerospace Industries Association and General Aviation Manufacturers Association 19—developed a plan to improve the effectiveness of the ODA 

process, which is used to authorize organizations to act on behalf of FAA in conducting some safety certification work. In conjunction with the plan, FAA revised the order that outlines the new ODA procedures.20 However, this initiative was purposely delayed to provide industry with additional time to adapt 

to the changes in the ODA procedures. Representatives of three industry associations we interviewed for this testimony supported the use and expansion of 

ODA by FAA. In contrast, while the Professional Aviation Safety Specialists 

(PASS) agrees with the concept of ODA, it has concerns related to expanding 

the program because representatives contend that oversight of the program requires significant FAA resources.21 PASS also contends that due to current 

staffing shortages and increased workload, FAA does not have enough inspectors and engineers to provide the proper surveillance of the designees who 

would be granted this additional delegation authority. On May 14, 2014, the 

DOT OIG announced a review of FAA’s oversight of the ODA program. The OIG 

plans to assess FAA’s: (1) process for determining staffing levels for ODA oversight and (2) oversight of delegated organizations’ program controls. 

• Update 14 C.F.R. Part 21: FAA chartered another aviation rulemaking committee in October 2012 to evaluate improvements to the effectiveness and efficiency of certification procedures for aircraft products and parts,22 along with 

incorporating new safety management system (SMS) concepts into the design 

and manufacturing environment.23 The committee submitted its report to FAA 

in July 2014. FAA indicated that the government shutdown in October 2013 delayed some of the actions that the agency had planned to move this effort into 

the rulemaking process, including submission of the application for rulemaking. 

According to FAA, however, this delay will have no effect on completion of the 

final rule, which is planned for 2017. 

According to FAA’s May 2014 update, 1 of the 14 initiatives was at risk of not 

meeting planned milestones, which increases the risk that FAA will miss its established implementation time frames for the initiative for addressing its associated 

recommendation. 

• Improve consistency of regulatory interpretations: The May 2014 interim update 

also indicated that the initiative for improving the consistency of regulatory interpretation is at risk of getting off track or off schedule. This initiative responds to the Regulatory Consistency Committee’s recommendations for improving the consistency of regulatory interpretation within both Aircraft Certification and Flight Standards. However, Aircraft Certification is relying on Flight 

Standards to complete the implementation plan for addressing the recommendations. Therefore, Aircraft Certification has placed this initiative on hold. (The 

next section of this statement discusses in more detail FAA’s response to the 

Regulatory Consistency Committee’s recommendations.) 

15 

24 As previously mentioned, Aircraft Certification instituted a sequencing program in 2005 to 

prioritize the processing of all new certification and approval applications based on the availability of its resources. 25 ICAs include such things as maintenance manuals and inspection programs that are necessary for maintaining the continued operational safety of aviation products, such as aircraft, 

and aircraft parts and equipment. 

In addition, FAA officials told us that implementation of 2 of the 14 initiatives, 

while shown as being on track for meeting planned milestones in the May 2014 interim update, face challenges because of opposition by FAA labor unions: 

• Improve project sequencing process: 24 According to the interim May 2014 update 

that FAA provided to us, this initiative was listed as on track. However, FAA 

officials told us the status for this initiative will change to ‘‘will not meet 

planned milestone’’ in the next revision of the implementation plan expected in 

July 2014. They explained the change in status is a result of their not expecting 

to obtain concurrence from the National Air Traffic Controllers Association 

(NATCA), which represents Aircraft Certification’s engineers, among others, on 

the proposed process changes until December of this year. NATCA has expressed concerns about FAA’s plans to change the project sequencing process. 

The group recommended to FAA that instead of continuing with project sequencing, it should institute a system that manages projects locally on a firstcome first-served basis, except for projects that fix an unsafe condition. FAA 

plans to implement the new process, assess its effectiveness, and modify as necessary, and issue the order for all Aircraft Certification offices’ project sequencing by December 2016. 

• Expand delegation authority for approving instructions for continued airworthiness (ICA) 25 to ODA: Similarly, in May 2014, FAA characterized the initiative 

as on track for meeting the planned milestones, but FAA officials told us this 

initiative may face challenges as well. The Certification Process Committee 

noted that the volume of ICAs is rapidly increasing and that ICA delegation is 

underutilized, and recommended that FAA delegate some ICA review activity 

to improve and streamline the certification process. However, in December 

2013, PASS presented a white paper to FAA that outlined its concerns and reasons it considers this to be a high-risk area that is critical to maintaining adequate safety and aircraft maintenance. PASS strongly disagreed with FAA’s 

plan to expand delegation of ICAs and the Certification Process Committee’s decision for making this recommendation. In response, in April 2014, FAA sent 

a memorandum to PASS to address the concerns and questions contained in the 

PASS white paper, as well as justify moving forward on the initiative. A PASS 

representative we interviewed for this testimony told us that PASS continues 

to have concerns about FAA’S expansion of the ODA program. FAA considers 

this issue to be resolved with PASS and has decided to go forward with the initiative. 

Most Certification Process Improvement Initiatives Lack Measures of Effectiveness 

As of May 2014, FAA had not developed metrics for measuring the effectiveness 

of 9 of the 14 initiatives it has undertaken, nor has it determined metrics to measure the effectiveness of its actions as a whole. According to FAA officials, they plan 

to develop these metrics in three phases. For the first phase, to be included in the 

July 2014 update of its implementation plan, FAA will include metrics to measure 

the progress of the implementation of the initiatives. For the second phase, FAA 

plans to subsequently develop metrics for measuring the outcomes of each initiative. 

For the third phase, working with the Aerospace Industries Association, FAA plans 

to develop metrics for measuring the global return on investment in implementing 

all of the initiatives, to the extent that such measurement is possible. We believe 

that this plan for establishing performance measures is reasonable. 

FAA Has Made Some Progress in Addressing Recommendations to Improve 

the Consistency of Its Regulatory Interpretations, but Details Are 

Unclear 

Unlike FAA’s efforts to improve the certification process, although FAA has made 

some progress towards addressing the regulatory consistency recommendations, the 

details remain unclear about how FAA will structure its efforts. In November 2012, 

the Regulatory Consistency Committee made six recommendations to Aircraft Certification and Flight Standards to improve: (1) the consistency in how regulations 

are applied and (2) communications between FAA and industry stakeholders. In 

July 2013, FAA reported to Congress on its plans for addressing the regulatory consistency recommendations, and included its preliminary plan for determining the 

16 

26GAO–14–285T. 

feasibility of implementing these recommendations. The report also indicated that 

FAA would develop a detailed implementation plan that would include an implementation strategy, assign responsibilities to offices and staff, establish milestones, 

and measure effectiveness for tracking purposes. We found in February 2014 that 

FAA expected to publish such a detailed implementation plan by late June 2014, 

more than 6 months after its initial target date of December 2013.26 In June 2014, 

FAA officials told us that the implementation plan was under review within FAA 

and estimated that the agency would issue its detailed plan in August 2014. 

Until this detailed plan is released, the specific initiatives for addressing the recommendations are unknown; thus, we cannot analyze information on the status of 

any planned efforts similar to the information we provided above for the certification process initiatives. Further, FAA’s July 2013 preliminary plan does not specify how FAA plans to measure the effectiveness of the initiatives. FAA indicated that 

‘‘although there may not be any baseline for each recommendation against which 

to compare improvements, FAA intends to consider: (1) identifying metrics, (2) gathering and developing baseline data, and (3) periodically measuring any changes, 

positive or negative, in rates of completion.’’ FAA officials provided the following information on how the agency is planning to respond to the six recommendations. 

A Master Source Guidance System 

The Regulatory Consistency Committee recommended that Aircraft Certification 

and Flight Standards: (1) review all guidance documents and interpretations to 

identify and cancel outdated material and electronically link the remaining materials to its applicable rule, and (2) to consolidate Aircraft Certification’s and Flight 

Standards’ electronic guidance libraries into a master source guidance system, organized by rule, to allow FAA and industry users access to relevant rules and all active and superseded guidance material and related documents. This recommendation for creating the master source guidance system is the top priority of the Regulatory Consistency Committee. FAA officials indicated that establishing this system 

will require two main components: 

• As a first step, for linking (mapping) all relevant guidance materials to the regulations, FAA plans to determine which ‘‘guidance’’ documents exist across regional and field offices—including orders, notices, and advisory circulars—outside FAA’s electronic guidance libraries, which are being used to answer questions, interpret or analyze regulations, and provide guidance on regulatory matters. In December 2013, Flight Standards sent out a memorandum requesting 

that staff discontinue using any guidance documents outside those found in the 

guidance libraries, to be effective January 15, 2014. The memorandum also 

asked for the staff to submit any unofficial guidance worth preserving to FAA 

for review. Flight Standards then conducted a review to determine which of the 

unofficial guidance documents submitted should be added to the guidance libraries. Several members of the Regulatory Consistency Committee responded 

in an e-mail to FAA to express serious concerns about this approach and stated 

that the committee did not envision the cancellation of any guidance before FAA 

developed a methodology to include or exclude such guidance. The committee 

members further noted that FAA’s memorandum provided no method to allow 

existing certificate holders to retain certifications that were based on any applied guidance that had been cancelled. Further, these members requested that 

FAA either withdraw the memorandum or address the issues they raised and 

extend the date for FAA staff to comply with the memorandum. However, two 

other Regulatory Consistency Committee members we interviewed considered 

FAA’s actions to get staff to discontinue the use of unofficial guidance in the 

field to be an appropriate first step. 

• Second, FAA plans to develop a master source guidance system with the capability to consolidate information from Aircraft Certification’s and Flight Standards’ electronic guidance libraries as well as legal interpretations from the Office of Chief Counsel into a master guidance system to allow FAA and industry 

users access. Specifically, the Regulatory Consistency Committee recommended 

that this system be searchable so that FAA and industry users can easily access 

relevant rules and find the relevant guidance for the rule. FAA officials assessed the possibility of using the existing Aviation Safety Information Management System, but determined that it is not adequate because: (1) users cannot 

search for guidance by word and (2) it is not compatible with other FAA data 

systems. According to FAA officials, with about $750,000 in approved funding 

17 

for this project, FAA’s information technology division is in the process of developing a dynamic regulatory system that should provide the needed capabilities. 

Officials indicated that when users conduct a search for a particular topic in 

this system, the search results should bring up multiple entries for specific 

guidance. Initially, Flight Standards plans to use an Excel spreadsheet for storing the guidance and then transition to the new system once it is deployed. 

Flight Standards hopes to test out a first version of this system within calendar 

year 2014. However, the officials were unsure of the total cost of developing and 

deploying the system. 

Representatives from four of the committee stakeholders we interviewed for this 

testimony acknowledged that creating this system is a major effort for FAA because 

of the volume of FAA guidance that potentially exists across regional and field offices, some of which may not be in Aircraft Certification’s and Flight Standards’ 

electronic guidance libraries. Representatives of five industry stakeholders we interviewed provided insights on how FAA might devise a plan for creating and 

populating this system. Three of these noted that FAA will need to ensure that the 

various types of guidance—such as orders, notices, and advisory circulars—include 

links to the original Federal aviation regulations. One of these stakeholders recommended that FAA develop the system to allow a user looking at FAA guidance 

to also see all relevant background information on related decisions, and the past 

actions related to the guidance in question and their relation to the original regulation. Because of the large volume of FAA guidance, some stakeholders also suggested that FAA begin by first choosing a starting date for which any new rules or 

other new guidance it issues would include links to the relevant original regulations. 

However, one stakeholder we interviewed noted that FAA should consider 

prioritizing its effort by first mapping the guidance materials for specific key regulations and then the guidance for less significant regulations. 

Instructional Tools for FAA Personnel for Applying Policy and Guidance 

The Regulatory Consistency Committee noted multiple instances where FAA guidance appeared to have created inconsistent interpretation and application, and confusion; the Consistency Committee recommended that FAA develop a standardized 

decision-making methodology for the development of all policy and guidance material to ensure such documents are consistent with adopted regulations. In interviews 

for this testimony, FAA officials also provided some updates on how the agency will 

respond to the recommendation to develop instructional tools for its policy staff. 

FAA officials told us they had not initiated any efforts yet to address this recommendation, but would begin by focusing on developing instructions for policy staff 

to use for populating the master source guidance system. In August 2014, FAA 

plans to form an internal work group to establish a document management framework and work processes that can be used by Aircraft Certification’s and Flight 

Standards’ policy division staffs as they map existing guidance documents to applicable source regulations in the master source guidance system. The officials expected the work group would issue an internal directive for FAA personnel on work 

processes to be used in populating the guidance system by June of 2015. 

FAA and Industry Training Priorities and Curriculums 

The Regulatory Consistency Committee recommended that FAA, in consultation 

with industry stakeholders, review and revise its regulatory training for applicable 

agency personnel and make the curriculum available to industry. FAA officials told 

us that FAA has begun to develop improved training for its field staff—the third 

recommendation of the Regulatory Consistency Committee—so that field inspector 

staffs are better equipped to answer routine compliance-related questions confidently and in a consistent manner. In addition, the officials told us starting in 

2015, FAA plans to conduct a gap analysis of existing training for all FAA staff who 

are responsible for interpreting and applying certification and approval regulations. 

For this analysis, FAA plans to assess whether existing training can be modified 

to sufficiently address any gaps. FAA also plans to coordinate with industry to share 

the results of this review and analysis by the end of 2015. 

Regulatory Consistency Communications Board 

The Regulatory Consistency Committee made two similar recommendations for 

FAA to consider: (1) establish a Regulatory Consistency Communications Board 

comprising various FAA representatives that would provide clarification on questions from FAA and industry stakeholders related to the application of regulations 

and (2) determine the feasibility of establishing a full-time Regulatory Operations 

18 

27 Under this operations center concept, FAA would establish a 24-hour/7-day operations center staffed (virtually) by policy and/or legal personnel trained and experienced in the regulations, policy and guidance associated with flight operations, aircraft maintenance, aircraft certification and aircraft production. 28GAO–11–14. 29Specifically, in January 2013, FAA accepted the recommendation of the Rulemaking 

Prioritization Working Group that FAA should adopt a prioritization model across its lines of 

business for prioritizing rulemaking projects. In response, as we reported in prior work, FAA 

developed a tool that provides a standardized basis for evaluating and prioritizing potential rulemaking projects to be used by each line of business. See GAO–13–657. 

Communication Center 27 as a centralized support center to provide real-time guidance to FAA personnel and industry certificate/approval holders and applicants. 

FAA officials also discussed the agency’s conceptual approach and plans for establishing a board—likely by the end of calendar year 2014—to address these two recommendations. The purpose of the board would be to provide a neutral and centralized mechanism with a standardized process for addressing and resolving regulatory 

compliance issues between FAA and industry. According to the committee, this 

board would be comprised of representatives from the relevant headquarters policy 

divisions in FAA to help answer complex regulatory interpretation issues that arise 

between FAA inspectors and engineers, and industry during the certification and 

approval processes. FAA officials told us the board’s process, once established, would 

use a modified version of the agency’s current Consistency and Standardization Initiative (CSI), a process established as a means for industry to appeal FAA decisions 

and actions. 

As we found in 2010, resolution through the CSI can be a lengthy process, with 

the total length of the process depending on how many levels of appeal the industry 

stakeholder chooses.28 However, as we also found, industry stakeholders have generally been reluctant to use CSI for initiating appeals and raising concerns with the 

local field office for fear of retribution. FAA officials told us in interviews that the 

modified process would help address the retribution issue, because it would rely instead on multiple sources to raise issues—not just solely on industry—and would 

be the final arbiter for FAA and industry in disagreements on certification and approval decisions. According to FAA officials, the board could also serve the function 

of the proposed operations center recommended by the committee to be a resource 

for assisting FAA personnel and industry stakeholders with interpretation queries 

and establishing consistency in regulatory application. FAA officials indicated that 

the agency had decided not to establish the communications center because: (1) the 

board could serve a similar function and (2) FAA has limited resources available to 

staff a communications center. 

Several industry stakeholders we spoke with told us they support FAA’s preliminary plans to establish the board and modify the CSI process as part of this effort. 

For example, several stakeholders told us that they support FAA’s plans to modify 

the current CSI process. One of these stakeholders noted that a modified process 

would be more effective if it allowed for industry stakeholders to raise issues anonymously. Also, another stakeholder noted the board would not be beneficial until 

after FAA has established the master source guidance system because the board 

should be able to refer to that guidance in demonstrating how it makes decisions. 

Clarity in Final Rules 

The Regulatory Consistency Committee recommended that FAA improve the clarity of its final rules by ensuring that each final rule contains a comprehensive explanation of the rule’s purpose and how it will increase safety. FAA officials told us 

that this recommendation has been addressed through the work of the Aviation 

Rulemaking Advisory Committee’s Rulemaking Prioritization Working Group.29 The 

officials told us that, as a result of this effort, all final rules, are now well-vetted 

across FAA. The industry representatives we interviewed had mixed opinions about 

whether FAA had addressed this recommendation as intended. For example, two 

stakeholders were in agreement with FAA that the agency had addressed it while 

two other stakeholders noted that FAA’s new rules are still not as clear as they 

should be. Two stakeholders also said that it is often not the final rules but the 

guidance that accompanies or follows the final rules that is unclear and contributes 

to inconsistent interpretation and application among FAA staff. 

Challenges that Could Affect Successful Implementation of the Committees’ 

Recommendations 

In our previous work on organizational transformations, we noted that implementing large-scale change management initiatives—like those the committees 

tasked FAA with—are not simple endeavors and require the concentrated efforts of 

19 

30GAO, Results-Oriented Cultures: Implementation Steps to Assist Mergers and Organizational 

Transformations, GAO–03–669 (Washington, D.C: July 2, 2003). 31GAO–03–669, and GAO, VA Health Care: Additional Efforts to Better Assess Joint Ventures 

Needed, GAO–08–399 (Washington, D.C.: Mar. 28, 2008). 32GAO, National Airspace System: Transformation Will Require Cultural Change, Balanced 

Funding Priorities, and Use of All Available Management Tools, GAO–06–154 (Washington, 

D.C.: Oct. 14, 2005). 33GAO–11–14. 34GAO–14–142T. 

both leadership and employees to realize intended synergies and accomplish new organizational goals.30 People are at the center of any serious change management 

initiative because people define the organization’s culture, drive its performance, 

and embody its knowledge base. The best approach for these types of initiatives depends upon a variety of factors specific to each context, but there has been some 

general agreement on a number of key practices that have consistently been found 

at the center of successful change management initiatives. These include, among 

other things, securing organizational support at all levels, developing clear principles and priorities to help change the culture, communicating frequently with 

partners, and setting performance measures to evaluate progress.31 In this final section of this testimony, we discuss challenges for FAA in implementing the committees’ certification and approval and regulatory consistency recommendations that relate to these key practices. 

Organizational Support 

FAA officials and industry representatives we spoke to noted that shifting priorities as well as declining resources may prohibit FAA from devoting the time and 

resources needed for completing the initiatives in the planned time frames. They 

agreed that a primary challenge for FAA will be having the dedicated resources that 

will be needed to successfully implement the committees’ recommendations. We 

have previously found that successful organizational transformations and cultural 

changes require several years of focused attention from the agency’s senior leadership.32 This lesson is consistent with our previous work on organizational transformation, which indicates that support from top leadership is indispensable for fundamental change. Top leadership’s clear and personal involvement in the transformation represents stability for both the organization’s employees and its external 

partners. Top leadership must set the direction, pace, and tone for the transformation. Additionally, buy-in and acceptance among the workforce will be critical 

to successful implementation of the initiatives to address the two committees’ recommendations. 

Additionally, as we described in our 2010 report, FAA prioritizes ensuring the 

continued operational safety of the people and products already operating in the national airspace system over processing new certifications and approvals. We reported 

in the 2010 report that Flight Standards staff had little or no incentive to perform 

certification work under the system in which their pay grades are established and 

maintained.33 Other than inspectors involved with overseeing air carriers, Flight 

Standards inspectors are typically responsible for a variety of types of certificate 

holders. Each certificate is allocated a point value based on the complexity of the 

certificate or operation, and the combined point value for each inspector’s oversight 

responsibilities must meet or exceed the points allocated for the inspector’s grade. 

However, not all of the inspectors’ duties—including certification work—receive 

points in this system, and inspectors are subject to a downgrade if entities in their 

portfolio relocate or go out of business. 

Commitment to Cultural Change 

FAA and industry representatives also cited FAA’s organizational culture as a primary challenge for FAA in successfully implementing these initiatives. They noted 

that many of the certification process and regulatory consistency initiatives FAA is 

attempting to implement represent cultural shifts for FAA staff in how regulations, 

policy, and guidance are applied, and ultimately how certification and approval decisions are made. As we have previously found, the implementation of recommendations that require a cultural shift for employees can be delayed if the workforce is 

reluctant in accepting such change.34

Communication with Stakeholders 

Further, industry representatives have identified the lack of communication with 

and involvement of stakeholders as a primary challenge for FAA in implementing 

the committees’ recommendations, particularly the regulatory consistency recommendations. Successful agencies we have studied based their strategic planning, 

20 

35GAO, Executive Guide: Effectively Implementing the Government Performance and Results 

Act, GAO/GGD–96–118 (Washington, D.C.: June 1, 1996). 36GAO, NextGen Air Transportation System: FAA’s Metrics Can be Used to Report on Status 

of Individual Programs, but Not of Overall NextGen Implementation or Outcomes, GAO–10–629 

(Washington, D.C.: July 27, 2010). 37GAO–14–142T. 

to a large extent, on the interests and expectations of their stakeholders, and stakeholder involvement is important to ensure agencies’ efforts and resources are targeted at the highest priorities.35 However, representatives of two industry organizations we interviewed told us that FAA did not provide the opportunity for early 

input and that outreach is low regarding the certification process recommendations, 

and representatives of four industry organizations indicated that FAA has not 

sought their input in responding to the regulatory consistency recommendations. 

They reported that FAA had neither kept in contact with or advised them of its 

plans nor engaged the Regulatory Consistency Committee participants in the drafting of the detailed implementation plan that is expected to be published in August. 

As an example, as previously discussed, when Flight Standards published a memo 

in December 2013 calling for the cancellation of non-official guidance, several members of the Regulatory Consistency Committee were unaware of the change and expressed surprise and dissatisfaction with the action and offered their assistance. 

Representatives of one industry group noted that FAA sought their input on addressing the Certification Process Committee’s recommendations for subsequent revisions of its implementation plan. 

Setting Performance Measures 

FAA has not fully developed performance metrics to ensure that any initiatives 

it implements are achieving their intended outcomes. We have previously found that 

agencies that have been successful in assessing performance use measures that 

demonstrate results and provide useful information for decision making.36 Earlier 

in this testimony, we reported that FAA had not completed developing performance 

measures for either the certification improvement or the regulatory consistency initiatives: 

• FAA had developed performance measures for 5 of the 14 certification process 

initiatives as of May 2014 and plans to further develop measures in three 

phases. In addition, most of the initiatives are scheduled to be implemented by 

2017. Although we have assessed FAA’s plan for developing these metrics as 

reasonable, the agency may miss an opportunity to gather early data for evaluating the effectiveness of its actions and making any needed corrections. 

• There is no detailed plan for implementing initiatives addressing the consistency of regulatory interpretation recommendations and measuring their outcomes. In recent meetings, FAA officials told us they have had difficulty in determining how to measure the outcomes of its regulatory consistency initiatives 

and have not been able to determine what specific performance metrics could 

be used. 

Going forward, it is critically important that FAA develop outcome-based performance measures to determine what is actually being achieved through the current 

and future initiatives, thereby making it easier to determine the overall outcomes 

of each of the initiatives and to hold FAA’s field and headquarters offices and employees accountable for the results. We are not making any new recommendations 

because the recommendation we made in 2010 for FAA to develop outcome-based 

performance measures and a continuous evaluative process continue to have merit 

related to this issue. To its credit, FAA has initiated some efforts and sound planning for addressing the committees’ recommendations. However, it will be critical 

for FAA to follow through with its initiatives and plans for developing performance 

metrics to achieve the intended efficiencies and consistencies. As we noted in our 

October 2013 statement, however, some improvements to the certification and approval processes, will likely take years to implement and, therefore, will require a 

sustained commitment as well as congressional oversight.37

Chairwoman Cantwell, Ranking Member Ayotte, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to 

any questions at this time. 

Senator CANTWELL. Thank you, Dr. Dillingham. We look forward 

to asking you questions about the certification process and where 

we need to be to continue to make innovations and improvements. 

21 

Mr. Allen, welcome. Thank you very much for being here. We 

look forward to your testimony. 

STATEMENT OF BERTRAND-MARC ALLEN, PRESIDENT, 

BOEING CAPITAL CORPORATION 

Mr. ALLEN. Madam Chairman, Ranking Member Ayotte, thank 

you very much for the opportunity to address the competitive landscape with respect to commercial aviation, the U.S. Export-Import 

Bank, and our industry’s international competition. 

My name is Marc Allen, and I am the President of the Boeing 

Company’s product finance and aviation lease unit, Boeing Capital 

Corporation. I am proud to be here on behalf of Boeing, our 168,000 

employees and more than 15,000 U.S. suppliers that support over 

1.5 million jobs across the country. 

We are unique in that 80 percent of our commercial airplane 

products are sold overseas, while 80 percent of our expenditures, 

just under $50 billion, are made in the United States. 

As a starting point, it is important to understand that aerospace 

is a unique industry on the global stage. Unlike other market sectors, it is considered a matter of national prestige, national competitiveness, and even national dominance for some. 

In aerospace, it is not so much companies that compete as it is 

countries, with all their traditions, aspirations, and occasional 

grievances. Other countries have seen how aerospace helped the 

United States become the dominant economic and military power 

through the 20th century. Likewise, they saw how Europe, with 

massive state support and direction, along with three export credit 

agencies, created and sustained an indigenous commercial aviation 

industry virtually from scratch during the 1970s. 

Today, Canada, China, Russia, are all making significant efforts 

in developing new platforms to compete on the large commercial 

airplane market with equally important investments being made in 

regional jet development in Brazil and Japan. 

The Chinese aspiration, like the Europeans during the 1970s, is 

to develop a full family of airplanes from regional jet to narrowbody to eventually wide-body airplanes. The path is undoubtedly a 

long one. But every element of the Chinese government, industry, 

and national spirit are committed to that goal. 

Boeing is very much a partner with China’s aviation industry, 

even as we recognize that our airplanes will also have to compete 

against Comac, the Chinese state-owned aerospace firm. 

For Boeing, the China model is simple. It is compete and collaborate, not one or the other. At Boeing, we don’t shy away from competition. What we want, just as every competitor wants, is a fair 

chance and an even playing field. 

This brings us to the role of export credit generally, and the Export-Import Bank, in particular. 

First, some background on the current regime governing export 

credit assistance. In 2011, a multilateral agreement called the Aircraft Sector Understanding was reached, ensuring that in aviation, 

there is no such thing as cheap export credit. No such thing. It is 

a term often employed by Ex-Im critics. 

But under the Aircraft Sector Understanding that the chairwoman mentioned earlier, interest rates and fees for government 

22 

export credit are set at levels that make such credit equal to or 

usually higher than the cost of commercial financing. 

Furthermore, U.S. carriers can borrow money through domestic 

capital markets at even lower rates than their foreign competitors 

can obtain through either export credit or commercial finance. 

Ex-Im’s critical role as a backstop lender is powerfully shown by 

contrasting the last two economic downturns. My submitted testimony discusses in further detail how, because Ex-Im was able to 

fill the liquidity gap after 2008, Boeing jobs held strong and deliveries to foreign customers continued. In marked contrast, in the 

aftermath of 9/11, where Ex-Im could not engage, U.S. carriers had 

to abandon deliveries that led to more than 30,000 Boeing layoffs. 

If U.S. export credit is in doubt, airplane customers will likely 

hedge their bets by turning to companies like Airbus that do have 

export credit guarantees. And if Ex-Im goes away, it is predictable 

Europe and Airbus will use export credit pricing to provide the 

aerospace industries there an advantage over ours, with China, 

Russia, and other emergent players to follow. 

Boeing would then have to offer financing to many customers 

through my group, BCC, effectively transforming ourselves, as 

McDonnell Douglas did 2 decades ago, from an aerospace innovation company to a finance company. This is not a scenario that 

would happen immediately, but we would get there eventually. And 

Boeing’s workers and the communities we support would pay the 

price. 

Congress has an important decision to make in the coming weeks 

over the position of America and the great global aerospace competition already underway. Without the important leveling mechanism provided by the Ex-Im Bank, Boeing and its extensive U.S. 

supply chain would be at a significant disadvantage in the global 

commercial airplane markets, which we conservatively estimate to 

be worth $3.6 trillion over the next 20 years. 

This Nation wants to build long-term strategic relationships with 

trading partners around the world. We want to lead progress toward open markets. Ex-Im is a key tool for sitting at the table to 

do that. Without Ex-Im, the existing disciplines will collapse, and 

we will have no say in it. 

In the end, this Congress and our country have to decide together whether it is worth playing the role of leader in this space. 

Thank you very much for this opportunity to discuss these important issues. I look forward to questions. 

[The prepared statement of Mr. Allen follows:] 

PREPARED STATEMENT OF BERTRAND-MARC ALLEN, PRESIDENT, 

BOEING CAPITAL CORPORATION

Thank you for the opportunity to address the competitive landscape with respect 

to commercial aviation, the U.S. Export-Import Bank, and our industry’s international competition. These interconnected issues are of great importance not only 

to The Boeing Company but, as my testimony will show, to America’s position as 

the world’s leader in aerospace. 

My name is Marc Allen, and I am President of The Boeing Company’s product 

finance and aviation leasing unit, Boeing Capital Corporation (BCC). At BCC, our 

mission is to ensure every Boeing customer has the financing they need to buy and 

take delivery of Boeing’s great American aerospace products. We do that through 

outreach to the financial markets, demonstrating the value of investing in aerospace 

assets. We do that through arranging financing for our customers from third parVerDate Nov 24 2008 12:23 Jul 16, 2015 Jkt 075679 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\95437.TXT JACKIE
23 

ties, such as lessors, commercial banks, capital markets, and yes also the very important U.S. Export-Import Bank (Ex-Im). And lastly, we also execute our mission 

by directly providing customers with backstop financing commitments and other financing solutions, in effect serving as the lender of last resort. 

Before serving at BCC, I had the privilege of serving in Beijing as president of 

Boeing China. And before that, I was Boeing’s vice president of global law affairs 

and general counsel to the company’s international operations. All three of these 

roles have deeply shaped my perspective on the topic of today’s hearing. In my general counsel role, I led the Company’s legal strategy for the United States’ WTO 

case against the EU over illegal Airbus subsidies. In my Boeing China role, I got 

to experience firsthand the realities and importance of our Collaborate-and-Compete 

relationships, where engagement with respected partners equally blends with 

emerging marketplace competition. From each of these stops, I have developed a 

very personal awareness of the extent to which sovereign national interest is a reality—a high impact reality—for the modern world of global aerospace. 

I am proud to be here on behalf of Boeing, our 168,000 employees and more than 

15,000 U.S. suppliers that support 1.5 million jobs across the country. We are 

unique in that 80 percent of our commercial airplane products are sold overseas 

while 80 percent of our expenditures—just under $50 billion—are made within the 

United States. Or, put simply, Boeing is one of the few American companies that 

still employs large numbers of people in this country—at middle-class wages and 

benefits—to build things sold in large numbers outside this country. 

I know the merits and track record of Ex-Im have been widely debated in recent 

weeks. There is probably little you have not heard on the subject. Today, I aim to 

focus my statement on aspects of global export credit assistance that has not received much attention, by: 

• Providing broader strategic context about aerospace—and new, well-funded 

emerging players such as China that should inform your deliberations and decisions about Ex-Im’s future; 

• Discussing the critical role of the Bank in maintaining a functioning—and 

fair—market for commercial airplanes; and 

• Finally, assessing some of the global consequences—for Boeing and the U.S. 

aerospace industry—of failing to re-authorize the Ex-Im Bank. 

A Global, National Competition 

As a starting point it’s important to understand that aerospace is a unique industry on the global stage. The rest of the world, rising economic powers especially, regard aerospace as a matter of national interest. Aerospace is not considered just another industry that produces goods or services and thus jobs and economic growth. 

It is considered a matter of national prestige, national competitiveness and, for 

some, national dominance. 

Furthermore, countries like Russia, China and Brazil have seen how aerospace 

helped make the United States the dominant economic and military power during 

the 20th Century. Likewise, they saw how Europe, with massive state support and 

direction—along with three export credit agencies—created and sustained an indigenous commercial aviation industry virtually from scratch during the 1970s. Airbus 

now enjoys the status of commanding up to one-half, or more, of the global market 

for commercial airplanes. This position used to be held by McDonnell Douglas, before its commercial airplane business collapsed in the 1990s in large part from the 

pressure introduced by an emergent Airbus. It is especially important to note—for 

those who say government export credit isn’t needed and doesn’t matter—that this 

period of decline coincided with McDonnell Douglas’ devoting more and more of its 

dwindling capital to finance customer purchases of its aircraft rather than investing 

in new products. In the decision between being a bank or an aerospace innovator, 

it chose bank, and lost. 

The airline business is part of this, too. Just as it is common around the world 

to see state ownership of aerospace manufacturers, it is equally common to see state 

ownership of aviation businesses, like airlines. For many nations, the movement of 

people and goods into and out of their borders is too important not to assure directly, regardless of the country’s level of economic or rule of law development. 

The takeaway is that in global aerospace markets, it is not so much companies 

that compete; as it is countries—and all their traditions, aspirations, and occasional 

grievances. Whether the players on the manufacturing side are Canada and Bombardier; Russia and UAC; China and COMAC; and on—it is broadly assumed 

around the world that national governments will support their domestic aerospace 

and aviation industries. 

24 

In the realm of national competition against state-sponsored aerospace entities— 

both established and emergent—the United States regularly finds itself on a playing 

field that is constantly subject to tilt pressures, in this way and that. The role of 

the United States thus must be, and has been, to lead the way in pressing for an 

even playing field. As a nation and an industry, we have done this by suing the European Union successfully in the World Trade Organization over the illegal Airbus 

subsidies. And we have likewise done it by prudently deploying Ex-Im for over 80 

years now; the use of export credit assistance by the U.S. being comparatively minor 

by our competitors’ standards. Yet the carefully targeted application of export credit 

has been extremely effective in addressing aspects of the otherwise uneven playing 

field. 

The Global Model for Aerospace Competition 

Having seen the economic and employment benefits Europe has achieved with 

aerospace using massive state support over the past four decades, several nations 

are attempting to repeat the playbook. Canada, China, and Russia are making significant efforts at developing new platforms to compete on the large commercial airplane market, with equally important investments being made in regional jet development in Brazil and Japan. These emerging players see no reason not to aim for 

the same glide path with their respective development efforts. 

Canada and China are the two most advanced examples of this set, with Canada’s 

Bombardier in flight testing for a new 150+ seater, the CSeries. China is not far 

behind Canada, with the first article of its similar sized plane, the C919, currently 

in final assembly. And meanwhile, its regional jet offering, the ARJ–21, is in final 

stages of flight testing and certification before a scheduled Entry into Service in 

2015. 

The development of the C-Series and C919 are important for the global aerospace 

community. The Chinese aspiration, like the Europeans during the 1970s, is to develop a full family of airplanes—from regional jet to narrow-body to eventually widebody airplanes that can compete with the full range of large commercial airplanes 

offered by Boeing. The path is undoubtedly a long one, as the technological barriers 

are high but hardly insurmountable. But every element of the Chinese government, 

industry, and national spirit are committed to the goal. 

In keeping with this type of commitment and aspiration, many of the governments of the nations listed above deploy vast resources into and coordination across 

their countries’ supply chains, research and development, financial systems, and domestic airlines. These efforts are all directed towards the ultimate objective of growing their domestic aerospace capability, capacity, and market share. We are all familiar with the billions that Europe poured into Airbus. We may be less familiar 

with the support that the Canadian government has provided Bombardier. And 

maybe even less familiar with the support the emerging competitors in China, Russia, etc. are getting from their states, though it too will rate in the tens of billions 

of dollars. 

The emerging nations, of course, have the advantage today, unlike Europe before, 

of not having to start their programs from scratch. All are working hard, and with 

some success, to leverage the technology lessons-learned by Boeing, Airbus, and others. And they are constantly looking for global partnerships that can yield progress 

for them in terms of complementary transnational partnerships. So, for example, 

Russia recently signed with China a Memorandum of Understanding to forge a partnership to explore joint development of wide-body airplanes. 

The complexity of the world we live in could not be made any clearer than by the 

fact that the very nations that aspire to emerge as successful aerospace competitors 

are also some of our most important customers and respected partners, whether 

that is China, Japan, Brazil, or Russia. Just as Boeing and McDonnell Douglas before faced the challenge of selling into the key market of Europe as Airbus emerged, 

so too will the current manufacturers face the challenge of selling into these markets as their own product offerings emerge. Yet, successful competition within these 

markets will be critical, just as our ultimate successful competition in Europe has 

been, to Boeing’s long term staying power. 

These realities were made real to me during my time living and working in 

China. There, Boeing is very much a partner with China, including with COMAC, 

even as we recognize that over the long term our airplanes will also have to compete 

with COMAC’s. We looked for issues on which we could, together, make the pie bigger for us all, like initiatives on air traffic control and biofuels. For us, the model 

was simple: it was about compete AND collaborate. It was not one or the other. It 

was both. And it is notable that recently the leaders of our governments, too, have 

acknowledged this as the model for our broader relations. At July’s Strategic & Economic Dialogue in Beijing Secretary of State John Kerry said it well, ‘‘We are deterVerDate Nov 24 2008 12:23 Jul 16, 2015 Jkt 075679 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\95437.TXT JACKIE
25 

mined to choose the path of peace and prosperity and cooperation, and yes even 

competition but not conflict. When the United States and China work with each 

other, we both stand to gain a great deal and that’s why we are committed to a 

new model of relations of great-country relationship; a mutually-beneficial relationship in which we cooperate in areas of common interest and constructively manage 

the differences.’’ 

At Boeing we don’t shy away from competition. In fact, we welcome it. Competition makes us better and benefits our customer and those whom they serve. What 

we want—just as every competitor wants—is just a fair chance and an even playing 

field. This brings us right to the heart of the discussion about the roles of export 

credit generally and the Export-Import Bank in particular. 

Role of Export-Credit 

As a company—and as a nation that cares about global competitiveness in aerospace—we are fortunate the majority of the emerging aerospace competitors have 

adopted an agreed approach to the use of export credit for airplane sales. Through 

the OECD, and via an OECD arrangement known as the Aircraft Sector Understanding (ASU), the aerospace nations have been able to agree on the most important mechanism for the control of export credit, which is price. 

In 2011, in large part thanks to the good work of the U.S. Government, a multilateral agreement was reached that has ensured that in aviation there is no such 

thing as ‘‘cheap export credit,’’ a term often employed by critics of Ex-Im. Every 

banker, lessor, or capital markets player in-the-know will tell you that thanks to 

the 2011 ASU, export credit for airlines, at every credit level, costs the same or 

more than commercial bank credit. Standard & Poor’s said it clearly in a recent report on Ex-Im: ‘‘the overall cost of ECA-supported financing, particularly for stronger airlines, is now equivalent to, or even higher than, that of alternative financing 

sources.’’ And the leading independent academic source who conducted blinded bank 

bids to assure real world conditions in measuring price has published data showing 

the same. 

The oft-heard complaints against Ex-Im that it allows foreign airlines to buy airplanes with ‘‘cheap credit’’ are without merit. In prior generations, that certainly 

may have been the case; but as explained above, the 2011 ASU assures it is not 

today and will not be again—the 2011 ASU requires quarterly resets to ensure the 

rates stay at or above the liquid market. 

Since the complaint is also sometimes made that the supposed ‘‘cheap credit’’ 

gives foreign airlines who fly to the U.S. an advantage over U.S. airlines, it bears 

noting that U.S. carriers can and do borrow money domestically through the U.S. 

capital markets at even lower rates than the commercial bank credit at which the 

2011 ASU is pegged. This provides U.S. carriers millions of dollars in advantage 

over foreign airlines who do not have the benefit of the geopolitical security, which 

a U.S. airline can offer the capital markets in any bond issuance. 

Bottom line, there is no such thing as ‘‘cheap export credit’’ for airplanes. 

So why then is export credit useful and relevant? We do not have to look far back 

in history to answer that question. Just compare what happened in our industry following the devastating attacks of 9/11 and the more recent global economic recession that began in 2008. 

Taking the more recent first, after the recession, liquidity disappeared across all 

financial sectors. In aviation, many of our international airline customers still had 

strong demand for their product—travel. But they could not persuade financial institutions to lend to them; for the same reason so many Americans during that timeframe had a hard time getting a home loan. They had good earnings, strong credit 

histories, and reputable backgrounds; but we faced a liquidity crisis, and our banking system was not engaging in business as usual. In the midst of that crisis, if our 

customers had failed to show up with money to buy the planes they had agreed to 

buy from us 5 or 7 years earlier, U.S. aerospace would have had its own crisis, and 

inevitably, layoffs. Instead, strong U.S. leadership worked as intended. In the wake 

of the crisis, Ex-Im stepped forward, providing loan guarantees in support of roughly one-third of our airplane deliveries at that time. On those guarantees, Ex-Im 

made money that went to the American taxpayer via the U.S. Treasury. 

Contrast that with what happened in the wake of 9/11. Following the attacks, the 

U.S. airlines faced their own crises. The U.S. Government, recognizing our national 

sovereign interest in aviation, provided U.S. domestic carriers with billions of dollars in direct assistance. Yet the airlines, facing operational challenges and without 

liquid financing options to see them through, had to walk away from airplane deliveries they had previously agreed to take. Boeing in turn had to reduce production. 

More than 30,000 Boeing employees lost their job in the resulting layoffs. Countless 

more did in the supply chain. 

26 

The difference between the episodes is stark and summed up in a word: Jobs. 

Returning to the first scenarios, the recent global recession, it is important to note 

that after the liquidity crisis was averted and the jobs were preserved, Ex-Im next 

acted perfectly in line with U.S. policy: walking back from aviation just as quickly 

as it had stepped forward during the crisis. This year, Ex-Im deliveries will be down 

from the one-third high water mark of the crisis, to roughly 10 to 15 percent of deliveries. 

When I talk to the leaders of banks, leasing companies, and capital markets players, I hear a resounding message: ‘This is how it is supposed to work.’ They not only 

do not object to Ex-Im’s participation at the 10 to 15 percent range; they endorse 

it. They do so for the simple reason that they know Ex-Im is good policy that helps 

them, helps growth, and helps stabilize markets. This is hardly the response you 

would expect if Ex-Im were ‘‘crowding out’’ commercial players from financing airplanes, as Ex-Im critics often contend. 

The result of the 9/11 episode also had a lesson-learned for the U.S. airlines. They 

are now much more likely to demand airplane manufacturers provide them backstop 

lending commitments when they execute contracts for airplanes. They no longer just 

rely on the expectation financial markets will be there for them when they get down 

the road 5 or 7 years to the agreed deliveries. 

Boeing, via BCC, can and does provide backstop financing to some of our customers—most particularly our U.S. and European customers who are not eligible for 

Ex-Im guarantees. But Boeing cannot provide backstop financing to all our customers. Boeing is and chooses to be an aerospace innovator, not a bank. We have 

seen firsthand the risks of the other strategy in our own and other industries. Anyone who desires the U.S. to maintain its lead in global aerospace should reject it. 

Our focus should be on innovation, not finance. 

This is where Ex-Im comes in. Our U.S. airline customers are not the only ones 

to feel the pinch to have backstop lending commitments in place; our foreign airline 

customers equally feel it. They too need certainty that if the financial markets seize 

up when they come to pick up their airplanes in 7 years time there will be a backstop finance option for them. Ex-Im takes that concern off the table for them. In 

effect, it is providing them geopolitical risk insurance that no one but a sovereign 

nation can offer in any meaningful and consistent fashion. 

This is why Europe has not one, but three, export credit agencies in place to support Airbus. Germany, France, and Great Britain all stand by to provide backstop 

ECAs to Airbus buyers. 

Role of U.S. Export Import Bank 

Ex-Im is a great and necessary equalizer. Ex-Im allows Boeing and thousands of 

companies in its supply chain to compete on the value of its products, rather than 

forcing important customers to choose between the world’s most innovative aerospace product or the world’s most secure backstop lending. When you consider that 

airplane purchases are regularly worth billions of dollars, which can make up a significant share of a carrier’s market value, an airline CEO must be absolutely certain 

he will not land his company in default on such an obligation. And a backstop lending commitment is fundamental. 

Because of the great interest the airlines naturally have in securing backstop 

lending, if the availability of U.S. export credit is in doubt, airplane customers can 

be expected to hedge their bets by building preference in their order backlogs to 

those planes—Airbus—that do have export credit guarantees. It is for this reason 

the Financial Times recently said an Ex-Im shutdown ‘‘would be a serious blow to 

Boeing and GE and a big boost to Airbus and Siemens . . . It would also make it 

harder for U.S. companies to compete against China.’’ 

The logic is simple. If the U.S. is not at the table to lead building partnerships 

with China and the other emerging producers, the effort to expand the current multilateral export credit regimes to them will fail; they will use export credit in predictable ways; the playing field will tilt. 

Ex-Im is the tool the U.S. must use in order to sit at the table and persuade other 

countries to continue even-playing field habits in the use of export credit. The multilateral 2011 ASU agreement tells the whole story. By ensuring that export credit 

for airplanes is not ‘‘cheap credit,’’ it has ensured there is no subsidy in play. It has 

ensured there is no unfair advantage for any country, or for any segment of the 

aviation industry. But that simple and powerful mechanism will fail if competitors 

do not join the multilateral agreement; or worse, if they leave it altogether. 

Case in point is a recent letter from a European turboprop manufacturer, ATR, 

to the OECD. It complained China was selling a competing product, the MA600, 

using the Export-Import Bank of China to subsidize the sale. ATR’s complaint sugVerDate Nov 24 2008 12:23 Jul 16, 2015 Jkt 075679 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\95437.TXT JACKIE
27 

gests the financing was being used to subsidize up to 55 percent of the cost of the 

plane. 

It is not hard to envision the future when countries with emerging airplane manufacturers that carry the aspirations of an entire nation enter the market with export 

credit support like that. The best response the U.S. has remains Ex-Im. Through 

the statutory authorizations, Ex-Im has authorities to match subsidization when 

necessary to ensure fairness. More importantly, by simply holding that authority, 

Ex-Im creates the incentive and leverage for other nations to enter into the existing 

multilateral agreements that ensure everyone’s even playing field. 

Russia is a good example. Though Russia has not yet joined the multilateral 

agreement, to date, it has implicitly been willing to abide by ASU terms by entering 

into working together relationships with European export credit agencies. This is 

and must remain the model for engagement. As former Deputy Secretary of Defense 

John Hamre recently noted in a compelling piece on the absurdity of abandoning 

Ex-Im, ‘‘Our domestic dispute over the proper role of government within American 

society is now causing America to retreat on the world stage.’’ We cannot both retreat from Ex-Im and also lead the emerging aerospace economies into a disciplined 

multilateral order that uses prudent policy mechanisms to eliminate subsidies. To 

lead, we need Ex-Im. 

A World Without Ex-Im 

It does not take a creative mind to understand the dangers to an Ex-Im retreat 

are not singular. They are multi-dimensional. Who can believe, for example, that 

after an Ex-Im shut down, the Europeans (read: Airbus) will continue to abide by 

the terms of the 2011 ASU? 

If Ex-Im goes away, it is predictable Europe and Airbus will abandon ASU terms 

and use export credit pricing to provide its aerospace industry an advantage over 

ours. If history is a guide, it will do so on its own. But even if Europe resisted the 

temptation, can we believe it would continue to resist in the face of the practices 

ATR is already complaining about from emerging competitors? The slippery slope 

is obvious; and U.S. aerospace interests will suffer as a result. 

Over the span of two decades, illegal European launch aid—some $18 billion in 

net advantage according to the WTO—gave rise to Airbus and put McDonnell-Douglas out of the commercial airplane business. Consider the repeating scenario, as Europe races to protect or expand its market share from encroaching new competitors 

when it comes to export credit financing rates; and at the same time the U.S. Export-Import Bank is no longer available for American companies. 

Export credit is not an unknown commodity to the world after all. Over 60 nations 

offer such programs. Germany, France, China, India, Italy, to name just a few use 

export credit at a rate that dwarfs U.S. usage. They each provide multiples of three 

to five times more export credit as a share of GDP than the U.S. does through ExIm. 

In the near term, to make up for Ex-Im’s absence, Boeing would have to offer financing to many customers, effectively transforming ourselves—as McDonnell Douglas did two decades ago—from an aerospace innovation company to a finance company. So many workers and so many communities across this country that depend 

on Boeing would pay the price. This is not a scenario that would happen immediately—but we would get there eventually. 

Already, the political attacks on Ex-Im have taken a toll on our customers. Some 

of whom have made or are considering multi-billion dollar commitments to Boeing 

are telling us they are worried credit assistance will not be available down the road. 

We are telling them not to worry; that the U.S. always does the right thing, after 

exhausting every other available alternative. We give them hope because we ourselves have hope. We know a majority of members of Congress, in both the House 

and Senate, support Ex-Im. We know that Congress will do the right thing. But believe me, there are days this debate makes us all wonder whether we will stick to 

a path of sustain global competitiveness, or take an unwarranted and unwise detour 

towards unilateral export credit disarmament. 

Conclusion 

Congress has an important decision to make in the coming weeks over the position of America in the great global aerospace competition that is already underway. 

This is a campaign among nations, even as it is waged by companies. At Boeing, 

we are not asking for any special favors, much less any advantages like those long 

enjoyed by Airbus, or now being enjoyed by our emerging competitors. The U.S. Export-Import Bank allows Boeing—as well as other U.S aerospace companies—the 

ability to market and sell our products on their merits in the face of state-subsidized 

competitors. Without this important leveling mechanism, Boeing and its extensive 

28 

U.S. supply chain would be at a significant disadvantage in a global commercial airplane market we conservatively estimate to be worth $3.6 trillion over the next 20 

years. Mr. Hamre said, ‘‘This is another example where America’s domestic politics 

are causing us to retreat as a global leader.’’ I do not believe it; but only because 

I am unwilling to allow myself to believe it. Mr. Hamre was right: we want the 

world to buy U.S. manufactured goods. We want to build long term strategic relationships with trading partners around the world. We want to lead progress towards 

open markets. Ex-Im is such an important tool for all of that. In the end, this Congress and our country have to decide together whether it is worth playing that role. 

Thank you very much for this opportunity and I look forward to your questions. 

Senator CANTWELL. Thank you, Mr. Allen. 

Dr. Crane, thank you very much for being here. 

STATEMENT OF KEITH CRANE, PH.D., DIRECTOR, RAND 

ENVIRONMENT, ENERGY, AND ECONOMIC DEVELOPMENT 

PROGRAM; PROFESSOR, PARDEE RAND GRADUATE SCHOOL, 

WASHINGTON OFFICE, RAND CORPORATION 

Dr. CRANE. Thank you, Chairman Cantwell and Ranking Member Ayotte, for this opportunity to testify on the competition to U.S. 

aviation manufacturing from China. 

I am going to try to address two different questions. The first is 

exactly what is likely to emerge from China in terms of a competitive threat over the next several years. The second is what can the 

U.S. Government do about that. 

As has been mentioned here, the Chinese government has set a 

strategic goal of creating a competitive commercial aviation manufacturing industry. Of course, commercial aviation is not the only 

industry in which it has those aspirations. We have seen that in 

solar panels, wind, and high-speed rail, and some other industries 

as well. 

But as part of this, they created Comac in 2008 and provided 

more than $7 billion in launch aid, and have been continuing to 

provide subsidized credit and other financing for this manufacturer. 

So what does this effort mean for U.S. commercial aviation manufacturing, including Boeing? Almost all the experts we interviewed in China and in the States believe that Comac will succeed 

in certifying the C919, that it is flight-worthy. 

Opinions differed, however, in terms of the challenges Comac 

faces in terms of making it a commercial success. By the time 

Comac hits full production, and I think the 2018, 2019 timeframe 

is probably quite optimistic, it will be technologically outdated. It 

will be competing against already newer Boeing and Airbus models 

that have already come online, as well as competing against cheaper, proven used Boeing and Airbus products. 

So Comac has a real problem in the sense that it is not just going 

head-to-head in terms of new aircraft, but also has this very large 

fleet of used aircraft out there that is highly serviceable. 

In addition to that, it faces real problems in terms of lacking the 

very extensive post-purchase service and support network, financing capability, and, most importantly, reputation that Boeing and 

Airbus have. 

So to become a global competitor, those are very large hurdles to 

overcome. 

29 

One area, however, in which China may become more successful, 

is in general aviation, where they have already purchased a manufacturer from my home state of Minnesota, Cirrus, and have recently signed a joint venture agreement with Cessna to put together the Cessna Citation model. 

It is also making inroads into the component market. All the 

major component manufacturers for global aviation have operations 

in China. Those supplier facilities are in part to service the C919 

but also to provide parts to other operations. 

Going forward, I would be surprised if these joint ventures don’t 

become fully integrated into their international operations, and we 

would see more components coming out of China that originally 

may have come out of other countries. 

So the bottom line here is that I have doubts that China can succeed in becoming an original equipment manufacturer competitive 

with Boeing and Airbus, but we do see some real potential in terms 

of expanding its exports and production of components, and potential in general aviation as well. 

What should the U.S. Government do about this situation? 

First and foremost, both USTR and the Commerce Department 

and State Department should closely monitor the development of 

the C919 and potential succeeding aircraft like the C29, which is 

supposed to be a wide-body aircraft, and intervene promptly with 

WTO and other bilateral forums if there is a sense that they are 

using subsidies, which they have been in other supported foreign 

markets. I mean, this is an area where, usually, the squeaky wheel 

gets the grease. You may want to be a little more proactive. 

Continue to press the Chinese Government in bilateral forums 

and at WTO to really rethink this industry-specific industrialization policy, which has been so costly and, in many ways, such a 

failure in so much of the world. 

Ensure that Chinese aircraft components when they submit for 

certification at FAA do not incorporate intellectual property. Theft 

of intellectual property is, of course, a major problem, including in 

this industry. 

And then work with U.S. companies and operations in China to 

have them voluntarily report the pressures they are facing from 

China in terms of making investment decisions. 

I would also engage in bilateral discussions with the E.U. to discourage the use of purchases of components, which are often called 

offsets, a marketing tool in the sale of commercial aviation products. 

Although I don’t see a dramatic change in China’s policy of national champions likely in the near future, persistent efforts to reduce these trade-distorting effects through countervailing duties 

and other measures may serve to mitigate some of the effects of 

these policies. 

Thank you very much. 

[The prepared statement of Dr. Crane follows:] 

30 

1The opinions and conclusions expressed in this testimony are the author’s alone and should 

not be interpreted as representing those of RAND or any of the sponsors of its research. This 

product is part of the RAND Corporation testimony series. RAND testimonies record testimony 

presented by RAND associates to federal, state, or local legislative committees; government-appointed commissions and panels; and private review and oversight bodies. The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that 

address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. 2This testimony is available for free download at http://www.rand.org/pubs/testimonies/ 

CT416.html. 

PREPARED STATEMENT OF KEITH CRANE,1 DIRECTOR, RAND ENVIRONMENT, ENERGY, AND ECONOMIC DEVELOPMENT PROGRAM; PROFESSOR, PARDEE RAND GRADUATE

SCHOOL, WASHINGTON OFFICE, RAND CORPORATION

‘‘THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES

IN COMMERCIAL AVIATION MANUFACTURING’’ 2

Thank you, Chairman Cantwell and Ranking Member Ayotte, for the opportunity 

to testify today on competition to U.S. aviation manufacturing from China. 

Although China’s government has had a long-standing interest in manufacturing 

commercial aircraft, to date it has not had much success. 

Until recently, China’s aircraft manufacturing industry produced aircraft almost 

exclusively for the Chinese military. Consequently, almost all of China’s commercial 

aircraft have been imported from foreign manufacturers. In 2008, the Chinese government consolidated its efforts to develop a commercial aircraft manufacturing industry by setting up a new state-owned commercial aircraft manufacturing company, the Commercial Aircraft Company of China (COMAC), to build two domestic 

aircraft: a regional jet, the ARJ–21, already under development, and a narrow-bodied aircraft, the C919. 

What does this mean for U.S. commercial aviation manufacturing? In this testimony I will briefly discuss: 

• The effectiveness of the policies and mechanisms the Chinese government has 

used to create ‘‘national champions’’ in this industry; 

• The effectiveness of steps taken by foreign manufacturers to increase sales in 

the Chinese market while seeking to prevent transfers of key technologies to 

potential future Chinese competitors; 

• Policy options for the U.S. and the European Union to effectively respond to 

Chinese industrial policies; and 

• The costs of China’s current industrial policies. 

More details on all of these points are in the full RAND report, ‘‘The Effectiveness 

of China’s Industrial Policies in Commercial Aviation Manufacturing’’ available on 

the RAND website free of charge at http://www.rand.org/pubs/researchlreports/ 

RR245.html. My testimony this morning comes directly from that work. 

China’s Commercial Aviation Manufacturing Industry 

The Chinese government sees designing and manufacturing passenger jets as an 

important indicator of China’s technological prowess. Aviation manufacturing more 

broadly is seen as driving economic growth and innovation and as providing a key 

basis for national defense. To achieve the goal of creating a globally competitive 

commercial aviation manufacturing industry, the Chinese government has adopted 

a strategy of first engaging in domestic production and assembly using foreign designs, then developing its own designs with foreign assistance, culminating in the 

completely independent domestic development of commercial aircraft without foreign assistance. 

To create an indigenous commercial aviation manufacturing industry, the Chinese 

government has employed the following policy instruments: 

(1) Setting up ‘‘national champions’’; 

(2) Providing launch aid; 

(3) Compelling state-owned airlines to purchase Chinese aircraft; 

(4) Targeting orders to foreign manufacturers with assembly operations in China 

or who source from China; 

(5) Stipulating that foreign suppliers enter into joint ventures with Chinese partners; and 

(6) Encouraging foreign countries to purchase Chinese aircraft through diplomatic 

persuasion and the provision of loans. 

31 

China’s aviation manufacturing industry is large, although primarily focused on 

the production of military aircraft. The entire industry employs over 250,000 people. 

The smaller, commercial component of the industry has more than doubled output 

between 2005 and 2010. The entire industry has also become increasingly technologically sophisticated. However, in our view, Chinese government policies pursued 

to support the creation of ‘‘national champions’’ in commercial aviation manufacturing have not yet borne fruit. Although output of components for commercial aviation has grown rapidly over the last decade, the shares of China’s industry in world 

exports and in gross industrial output in China remain very small and have not 

markedly risen. 

For example, the ARJ–21 is constructed largely if not entirely from components 

manufactured by foreign companies; the C919 will also depend on modules manufactured by foreign manufacturers, although these modules will be assembled in China. 

China’s industry continues to struggle with systems integration: projected dates for 

the certification of the ARJ–21 have been postponed several times; the C919 is also 

delayed. 

So what does the future hold for China’s efforts? 

The experts we interviewed believe that in the coming years Chinese manufacturers will continue to improve the quality and technological sophistication of their 

products. Almost all believe that COMAC will succeed in certifying the C919. Opinions differed concerning likely numbers of aircraft sold and delivered. One expert 

noted that current sales contracts are quite ‘‘soft’’ and that there are several ways 

by which buyers can avoid consummating the final sale, not least by cancelling orders due to delays in deliveries. 

Moreover, by the time COMAC hits full production, the C919 will be technologically outdated compared to Airbus’s and Boeing’s new models, the A320neo and 

737 Max, respectively. Most of those we interviewed felt that COMAC will not truly 

be able to break into the international commercial aircraft market until it manufactures its next aircraft, the C929, following the C919 and quite possibly, not even 

then. To develop the C929, COMAC will need another round of substantial financial 

support from the Chinese government over a relatively long period of time. Even 

then, many, if not most of the experts we interviewed were skeptical that COMAC 

could compete successfully with Airbus and Boeing. 

In short, COMAC has yet to show that it will be able to produce commercially 

viable aircraft, much less show that it can become a commercially competitive aircraft manufacturer. Many of the experts we interviewed while conducting this research are skeptical that COMAC will be able to compete successfully with Airbus 

and Boeing. 

However, one area where China is likely to be more successful than in commercial 

aviation is general aviation, smaller aircraft used for private, charter, or corporate 

use. China has been buying its way into the international market. CAIGA’s, China’s 

state-owned enterprise active in general aviation has acquired Cirrus, a U.S. manufacturer. It has also recently signed a joint venture agreement with Cessna to assemble Cessna’s Citation model in China. 

Foreign Investment in China 

Despite the limitations of the Chinese commercial aviation industry noted above, 

why are foreign companies engaged in manufacturing commercial aviation products 

in China? There are several reasons: 

• Provide support to Chinese customers. China’s commercial aircraft fleet currently accounts for 9.6 percent of the global fleet. In light of the size of China’s 

market, aircraft manufacturers and suppliers of major aviation components 

need to have operations in China to provide service to their customers. 

• Benefit from a competitive source of parts. Foreign aircraft manufacturers and 

their suppliers have also turned to China for competitively priced parts. Chinese suppliers have provided intricately machined components and other technologically sophisticated components, such as parts manufactured from composite materials, at competitive prices. 

• Set up assembly operations to generate sales to Chinese airlines. Manufacturers 

have found that assembly operations in China, such as Airbus’s joint venture 

in Tianjin, facilitate sales of aircraft to Chinese airlines. 

• Purchase Chinese components as a marketing tool to encourage Chinese purchases of aircraft. 

• Participate in the C919 program. A slew of manufacturers have recently set up 

joint venture operations in China so as to be eligible to be a supplier for the 

C919 program. 

32 

• Enhance the company’s image in China. Foreign companies have found that a 

manufacturing presence in China provides goodwill, increasing the likelihood 

that Chinese customers will purchase their products. Setting up manufacturing 

facilities for high priority projects for the Chinese government, such as commercial aviation manufacturing, is believed to generate goodwill for all of a company’s activities in China. 

Most major international commercial aviation manufacturers now have joint ventures in China. Foreign companies have set up these operations for a variety of reasons, but Chinese pressure for purchases of components manufactured in China and 

stipulations that suppliers for Chinese domestic aircraft set up joint ventures in 

China have definitely played a role. It would be surprising if these facilities are not 

eventually fully integrated into the global manufacturing base of these companies. 

Although some facilities, like Airbus’s assembly operation in Tianjin, may remain 

dedicated to serving the Chinese market, over the course of the next decade we expect to see more supplier facilities in China specialize in specific products or modules and supply these to the foreign partner’s global operations. 

Many of the managers of foreign manufacturers with whom we held discussions 

argued strongly that sales of products manufactured by joint ventures in China do 

not compete with imports from the United States or Europe. They argued that the 

joint ventures serve to create, not destroy jobs in their home countries. Sales made 

by the joint venture would not have been made if the joint venture had not existed; 

imports of parts and components for assembly by Chinese joint ventures generate 

employment in the United States or Europe. However, in the long-run, in our view 

more components are likely to be manufactured in China. 

Those we interviewed on this topic stated that their Chinese partners were becoming more technologically sophisticated, but only a few voiced fears of losing their 

technological edge to Chinese companies, as long as their own (foreign) companies 

continue to innovate. Their companies’ extensive marketing networks, incorporation 

of their products on aircraft manufactured by Airbus, and Boeing, and manufacturing know-how provide them with strong incumbent advantages. 

Challenges for Foreign Companies 

Foreign commercial aviation manufacturers, like many companies, find investing 

in China challenging. All of the companies with whom we spoke while conducting 

research for the report had been active in China for years and had developed strategies and programs to safeguard their intellectual property and technologies. The 

most common approach is to manufacture key components outside of China; the 

joint venture then imports the component for final assembly. 

Another intellectual property safeguard is that materials and components used on 

aircraft must be certified by aviation regulatory agencies like the Federal Aviation 

Administration. This global regulatory system for the aviation manufacturing industry helps to lessen the theft of intellectual property in China. Because Chinese manufacturers must obtain international certification for their components even if components are to be used in Chinese aircraft, foreign companies that believe their intellectual property rights have been injured by Chinese companies are in a position 

to intervene to prevent the certification and hence sale of those products. 

It is worth noting that foreign (non-Chinese) aviation product manufacturers underlined the importance of innovation in preventing the emergence of Chinese competitors. This is especially important in subcomponents where the barrier posed by 

certification is not as high. Many companies now design products specifically for 

China. A number of these companies noted that by focusing on quality, improving 

manufacturing efficiency, and distribution, they have been able to out-compete their 

Chinese competitors even at the lower end of the market. 

Policy Options for the United States 

Both the United States and the European Union face a conundrum. China’s leadership appears convinced of the efficacy of industrial policies to foster new industries and expand exports. In contrast, the United States and the European Union 

have attempted to move away from industrial policies because of cost, lack of efficacy, and in the interests of creating a level playing field for international trade. 

In both the United States and the European Union, the ‘‘squeaky wheel’’ rule 

reigns. Trade issues are placed on bilateral agendas or brought to the WTO only 

if a domestic company complains. Trade negotiators focus on other industries where 

competition from Chinese firms threatens to have immediate consequences rather 

than markets like commercial aviation manufacturing which U.S. and European 

firms still dominate. In a world in which immediate problems are given all the attention, what can and should the U.S. Government and the EU do with regards to 

commercial aviation manufacturing? Several recommended options include: 

33 

(1) Push for more transparent tenders for purchases of aircraft by Chinese stateowned airlines; 

(2) Ensure that Chinese aircraft components submitted for certification by the 

FAA or EASA do not incorporate intellectual property taken from other companies; 

(3) Work with domestic companies with operations in China to voluntarily report 

whether and how investment decisions in China have been influenced by Chinese industrial policies; 

(4) The U.S. Government should engage in bilateral negotiations with the EU to 

discourage the use of purchases of components as a marketing tool by Airbus 

and Boeing; 

(5) Continue to press the Chinese government in bilateral forums and at the 

WTO to dispense with industry-specific industrial policies; 

(6) Monitor the development of the C919 and succeeding aircraft and intervene 

promptly through the WTO and bilateral forums in response to efforts to use 

subsidies or other supports to enter foreign markets. 

Without a dramatic change in China’s policy of ‘‘national champions’’ none of 

these measures are likely to create a level playing field in China for Western manufacturers. However, persistent efforts to reduce the trade distorting effects of China’s industrial policies through countervailing duties or other measures may serve 

to mitigate some of the effects of China’s policies. 

Implications for the Government of China 

In our view, the Chinese government would benefit from a careful assessment of 

its current policies of government support for commercial aviation manufacturing 

and whether this activity is a good use of China’s resources. China is spending well 

over $7 billion for the C919; the ARJ–21 has also been expensive. Yet many experts 

we interviewed were skeptical that either the C919 or the ARJ–21 will ever be commercial successes. In light of the many hurdles facing COMAC, in our view this is 

an opportune time for the Chinese government to rethink its investments and policies targeting specific industries. Focusing its energies on creating a business environment friendly to all firms, private, foreign, and state-owned alike, will be much 

more likely to result in a higher payoff. 

One of the lessons of the post-World War II era has been the importance of the 

free flow of ideas and people for technological advances. The rise of the modern multinational corporation has played a key role in these advances. These companies are 

adept at creating multinational teams, drawing on talent from across the globe, to 

develop new products and processes. They have developed systems for developing 

and deploying new technologies and products. 

One of the goals of China’s leadership has been to put the country at the forefront 

of global advances in science and technology. China has talented engineers and scientists and has registered significant advances in a large number of industries, including space and telecommunications. It also has a number of successful multinational companies of its own. However, to the extent foreign companies are not 

given the same treatment as their Chinese counterparts, as has been the case in 

the wind turbine and high speed rail industries, or are afraid that their intellectual 

property rights will not be safe, they will remain cautious about what technologies 

they bring to China. 

If China wishes to become fully integrated into the global commercial aviation 

manufacturing industry, China’s government would be well advised to change its 

current policies so as to create a more equitable business environment for both foreign and Chinese commercial aviation manufacturers. The benefits of such a policy 

change for China would be considerable in terms of better allocation of investment, 

tighter integration into global technology supply chains, and the substantial savings 

of putting funds currently going to support ‘‘national champions’’ to better uses. 

Thank you Chairman Cantwell, Ranking Member Ayotte, and members of this 

Subcommittee for the opportunity to testify before you this morning. I look forwarding to answering your questions. 

Senator CANTWELL. Thank you. 

I thank the witnesses for their testimony. 

I think to me the issue here, and I think, Mr. Allen, you, certainly, described what I call ‘‘co-opetition,’’ the challenges of the 

21st century where you have to compete and cooperate at the same 

time, knowing where you differentiate on those issues. And Dr. 

34 

Crane’s testimony, certainly, outlined that innovation usually wins 

the day. 

But obviously, innovation can, certainly, be hampered by the 

level of subsidization that happens. With the WTO, we can see that 

we are still 12 years down the road from the first filing of that 

case. Now we have a WTO decision, but there still has been no real 

remedy in the marketplace. So I think that that clearly paints a 

picture for where we are. 

I had a couple questions for you, Mr. Allen, on this issue of how 

do we continue to work toward private sector financing in aviation. 

So the majority of aircraft financing isn’t through the Export-Import Bank. You gave testimony to that. 

But there are times, I think you put in your written testimony, 

that the U.S. marketplace, like after 9/11, or in the economic downturn, where you really do have to rely on those resources for financing. So if you could talk about those kinds of economic 

downturns. 

And, two, you mentioned the Aircraft Sector Understanding. So 

if we didn’t have an Export-Import Bank, we would no longer be 

party, is that correct, to the actual discussions of how to keep that 

financing at market-based rates? The rest of the participants being 

more heavily subsidized aviation manufacturers, I mean, we are 

the voice at the table for that actual discussion of keeping marketbased rates. Is that correct? 

Mr. ALLEN. Ex-Im is the critical tool that gives us, as a Nation, 

the leverage necessary to bring a set of multiple nations to the 

table for negotiations. So without Ex-Im, we might have a nameplate and a chair at the table, but we would have no influence, no 

effectiveness. We would have no meaningful seat at the table, because the ASU is based on the countries staring each other in the 

eye, recognizing that each one has the ability to harm the other 

through subsidization, and coming to an agreement because of that 

strong-backed position to say we need an even playing field. 

How do we make sure that the price mechanism here is fair and 

even across all of industry so that there are no subsidizations involved? You only get that when you step forward with a match to 

somebody who is a first mover in subsidies. 

Europe has historically been a first mover in subsidies. And so 

has much of the economic development that we have seen driven 

out of Asia. We see subsidies across the world. 

So the USTR and Export-Import Bank are critical tools that fight 

against that. And if we take the bank away, we can expect ourselves to be at significant disadvantage, unable to bring others to 

the table. 

Senator CANTWELL. And you are not even talking about the financing. You are talking about trying to shape the world debate 

about where this should go, a level playing field. 

Mr. ALLEN. Even on the specific issue of financing, the only way 

we will be able to bring other nations to the table to negotiate an 

even playing field on financing is if we have the Export-Import 

Bank framework that tells them they have no advantage to lean 

forward and subsidize through financing their industries. 

35 

Senator CANTWELL. And what about in an economic downturn 

like we saw in 2008, 2009? What happened then to private financing? 

Mr. ALLEN. Private financing, as we saw through the global recession, can disappear in a minute. We call them liquidity crises, 

where the underlying fundamentals are still there for any particular industry or even homebuyer, but the bank is not willing to 

lend, because of its own sense of uncertainty in the face of the crisis. 

That is what happened in 2008 and 2009. And the Ex-Im Bank, 

one of its important roles, is to be that backstop lender who steps 

in in a moment of crisis and makes sure that the financial markets 

stay open when the underlying demand is there. 

So we saw, for example, great demand for travel out of Asia 

throughout the global recession. It never slowed down. It never 

missed a beat. Those airlines, however, would have been very challenged to find financing on the open market during that time, just 

like most U.S. homeowners couldn’t get a loan for a house during 

that time. 

So the Ex-Im Bank stepped in and its participation in the finance for airplanes increased over that timeframe. It saved jobs. It 

kept the industry smooth. It stabilized things. 

Senator CANTWELL. Well, certainly, any numbers that you have 

on what that job loss would have been without that financing I 

think would be helpful. While we hope it never happens again, the 

kind of downturn, I think it just points to some things people aren’t 

thinking about, what a tool it is in those kinds of environments. 

I will turn this over to my colleague, Senator Ayotte. 

Senator AYOTTE. Thank you. 

I wanted to, Dr. Dillingham, ask you about the Ex-Im Bank. I 

know that you are focusing on certification issues, but also the 

GAO has done work on the Ex-Im Bank, looking at it as well. Is 

that right? 

Dr. DILLINGHAM. Yes, we have. 

Senator AYOTTE. Because I definitely have some questions for 

you on the certification issue as well. But one thing, as I said in 

my opening statement, I have previously supported the Export-Import Bank. But I think an issue that does need to be addressed is 

this issue I raised about support for smaller and medium-sized 

companies and giving them a better chance to remain competitive 

in the global marketplace by obtaining credit that is not otherwise 

available through the commercial markets. 

So as I look at the numbers for the Ex-Im Bank, more than 80 

percent of the banks’ financing benefits major firms. In fact, 10 

companies receive 75 percent of the Ex-Im Bank financing. 

So what suggestions do you have, if there are reforms made as 

we reauthorize the bank, in a restructure that would make this 

more friendly for smaller and medium-sized companies, because 

right now it seems pretty centered in large companies. Not that I 

am opposed to them being able to be competitive in the global marketplace, but I think this is an important question, especially in a 

state like New Hampshire, where we have the presence of larger 

suppliers, but a lot of smaller and medium-sized companies as well. 

Dr. DILLINGHAM. Thank you, Ranking Member, for the question. 

36 

We did in fact do a report for another Committee of the Congress 

that we published earlier this year. As part of that report, much 

of the information that both you and the Chairwoman have provided to date, we had that information in our report. We did not 

make any policy recommendations. 

We talked about the idea that small companies, as well as large 

companies, benefit from the existence of the Ex-Im Bank. But we 

didn’t make any more specific policy recommendations beyond putting the facts of how it has helped across the industry. 

Senator AYOTTE. So you have not made any analysis as to how 

we can look to ensure that medium and smaller sized businesses 

also have access to this opportunity for credit that is not otherwise 

commercially available? 

Dr. DILLINGHAM. Not in the particular area of aviation that I am 

working in. But we have a part of GAO that has done that kind 

of work, and I can have them be in touch with you and your staff 

to provide that kind of information. 

Senator AYOTTE. I think that is really important, because I think 

that is a question that many of my colleagues often have about the 

Export-Import Bank. 

And I don’t know if, Dr. Crane or Mr. Allen, you have any comments on those issues? 

Mr. ALLEN. If I could, thank you very much for the question. It 

is very important. 

No one in our industry works alone. No one works alone. We are 

a small business. Why? Because we have over 15,000 suppliers in 

the United States alone. The companies that you mentioned in 

your state are a great example for that. 

So as Export-Import Bank supports the sales of airplanes, such 

as to markets like Kenya, which was the leading borrower with ExIm guarantees in this current year, what they are doing is supporting jobs at the small and medium-size businesses that make up 

the backbone of what it takes to build an airplane. 

So we appreciate the support of the bank because of the way it 

lets us work together in delivering those final integrated products. 

But no one works alone. 

Senator AYOTTE. I, certainly, appreciate that there are a lot of 

smaller and medium-size companies that are suppliers to Boeing, 

and appreciate the impact on those suppliers. 

But I am also thinking of the businesses that aren’t necessarily 

suppliers, but are on their own seeking financing, and how easy are 

we making it for them to be able to use this tool. This is a global 

marketplace, I think we all acknowledge. 

I don’t know if you have any comments on that, Dr. Crane. 

Dr. CRANE. No. 

Senator AYOTTE. Thanks. 

I did want to ask about the certification process, Dr. Dillingham. 

This has been an issue I have heard a lot from the aviation industry about, in terms of concerns that this certification process, that 

we do need to very much improve how the FAA handles this process because it makes us less competitive, if industry can’t get 

through that process in a timely fashion to ensure that they are 

getting the certification they need. 

37 

And so what are the top line, most important things you think 

we can do to really hold FAA more accountable for a greater emphasis, to ensure that we are more competitive in this certification 

process? 

Dr. DILLINGHAM. I think the actions that Congress took in the 

2012 FAA reauthorization, where it mandated that FAA work with 

industry to come up with solutions, and not only work with them 

but come up with solutions, but work with industry to actually implement those solutions. 

I think that is the top-line thing that needs to be done, that FAA 

needs to implement those recommendations. They need to have the 

metrics associated with that implementation to show what progress 

has actually been made. 

The point that I was trying to make in my oral statement, the 

difference between output and outcome, not just implementing the 

recommendations, but showing the Congress and industry what difference it has made in terms of the implementation of the recommendation. 

And in the context of what we are talking about today in terms 

of competition, that is critically important, because, as you said, to 

the extent—and most of these are in fact small industries. If they 

are delayed in their certification or delayed in their approval, it 

costs money, it costs time, it does not allow for the quick and efficient export of products, because you need that FAA certification 

before you can start moving products offshore, as such. 

So it is very critical that those recommendations be implemented, and Congress continue to monitor, as this committee is 

doing, that those recommendations are implemented and measured. 

Senator AYOTTE. Thank you. 

Senator CANTWELL. Senator Wicker? 

STATEMENT OF HON. ROGER F. WICKER, 

U.S. SENATOR FROM MISSISSIPPI 

Senator WICKER. Mr. Allen, more than 60 countries have established ECAs, export credit agencies. We are told that the elimination of the Ex-Im Bank would amount to unilateral disarmament 

on the part of the United States and U.S. manufacturers. I assume 

you agree with that? 

Mr. ALLEN. Very strongly. 

Senator WICKER. But let me ask you, is the Ex-Im Bank a really 

good idea, or is it a necessary evil that we have to have in terms 

of government involvement in corporate credit, that we would rather not have if the other countries didn’t act as they do? 

Mr. ALLEN. For 80 years, the wisdom of the Export-Import Bank 

policy has been ensuring that there are stabilization mechanics 

built into our export economy. 

It has likewise been an important enabler of the development of 

economies that would not otherwise have access to capital markets. 

So the essential question, is it a necessary evil or good policy 

tool, I would say it is good policy tool. It is a good policy tool. And 

like every good policy tool, that means its implementation is what 

makes it shine. And so the implementation of Ex-Im is industryspecific. 

38 

So we in aviation think about it just a bit more narrowly. We 

think about it in terms of the OECD and the Aircraft Sector Understanding. And our fundamental question always is, is the ASU 

doing its work to ensure that this good policy is being used to good 

ends? 

That is why I hammered during my written testimony on this 

important fact that there is no cheap export credit in aviation, because if there were, then I could understand the barbs and the criticism from the other side. But there isn’t, precisely because of this 

multilateral engagement. 

So it is good policy. It is being implemented well. It is saving 

jobs. And in that respect, I don’t see how the last 80 years are anything other than a terrific proof point. 

Senator WICKER. If we didn’t have ECAs all over the world, you 

are saying that modern day, 21st century governments would invent such things to promote international trade. Is that what you 

are saying? 

Mr. ALLEN. There is a constant pressure in any governmentmanaged industrial process to have industrial success. So other 

countries will constantly revert to places of subsidization. 

We have to be able to always have the tools necessary to even 

the playing field. So just on that basis alone, and that is a defensive basis, you need the Export-Import Bank. There is also this 

positive basis of developing markets. 

Senator WICKER. Now let me just ask you, we have GE Aviation 

in Mississippi. We are very pleased to have them in Batesville and 

Ellisville. They are a major supplier to Boeing. 

How would the employees of these manufacturing plants in 

Batesville and Ellisville be impacted were the Ex-Im Bank Bank to 

be eliminated? 

Mr. ALLEN. Well, the single word is ‘‘jobs.’’ Madam Chairwoman 

made the great point about how important it is to quantify the jobs 

at stake. 

Well, after the 2001 attacks, 9/11, Boeing suffered roughly 30,000 

layoffs. That scale of layoffs, of course, rippled in multiples through 

our supply chain. A big part of that was because the U.S. airlines 

found themselves unable to take delivery of Boeing airplanes, unable to access the markets for financing. 

No Ex-Im Bank. No support able to backstop their operation. 

And the result was the need to reduce the production rate and the 

loss of jobs. Those jobs impact the entire supply chain. 

Senator WICKER. Dr. Crane, do you have a position on whether 

the Ex-Im Bank should be reauthorized? 

Dr. CRANE. Not my area. 

Senator WICKER. OK. 

And, Dr. Dillingham? 

Dr. DILLINGHAM. No, sir. GAO would not make that kind of 

statement. 

Senator WICKER. OK. 

Are any of the three of you aware, do these other ECAs around 

the globe return funds to their respective treasuries as Ex-Im Bank 

does? 

Mr. ALLEN. Sir, I don’t know that myself. 

39 

Dr. CRANE. Some do, so don’t. There have been some pretty dramatic losses over the course of the years by some of these, and others have done like the Ex-Im Bank. 

Senator WICKER. And we have not seen that with Ex-Im Bank. 

Is that correct? 

Mr. ALLEN. That is correct. 

Senator WICKER. Thank you very much. 

Thank you, Madam Chair. 

Senator CANTWELL. Thank you, Senator Wicker. 

Dr. Crane, I wanted to ask you about China’s efforts. They have 

made this a national priority. Obviously, sometimes you hear people say, you guys have an R&D tax credit. Where would you put 

our R&D tax credit compared to the efforts that you are seeing in 

China? 

Dr. CRANE. There has been an interesting debate in China, with 

the advent of President Xi. At the party’s Third Plenum, there was 

a statement that they want to use more market means to allocate 

resources. 

What the R&D tax credit does, it doesn’t stipulate whether you 

are providing R&D for aircraft or for pharmaceuticals or automobiles or food. So it is not a process of picking winners. 

The recent approach in China—— 

Senator CANTWELL. If you were just going to measure where they 

are and where we are with R&D, what would you say? Are they 

on par? 

Dr. CRANE. They are very much into this old style picking winners. So Comac is not just one instance, as I mentioned before. 

There is a whole host of industry. If you look at the five-year plans, 

they are targeted. They have had some success at times. Other 

times, they have not had very much success. 

But I think the big difference is between having a policy like the 

R&D tax credit, which really doesn’t pick winners, and a policy in 

which someone up at the top does. And I think markets have 

shown that the R&D tax credit is a much better way to go. 

Senator CANTWELL. I would be interested in a comparison in a 

dollar figure, too. I have a feeling that even though we have an 

R&D tax credit, it is dwarfed by the amount of money that is spent 

in this area. But I am happy to hear data from you on that. 

Dr. CRANE. On research and development spending? 

Senator CANTWELL. Their whole effort in support of aviation compared to what a broad policy like R&D might do. 

Dr. CRANE. A lot of money spent on aviation, though, is for bricks 

and mortar. And, as Boeing well knows, launch costs are incredibly 

expensive, and only part of that is research and development. A lot 

of it is the whole process of paying people to start production. 

Senator CANTWELL. Mr. Dillingham, on your recommendation 

list, as you go through, basically saying the FAA needs to implement these policies as it relates to certification, one of the things 

that I think we need to deal with is the rate and level of innovation. 

So, for example, Boeing built a plane that was substantially 

using composites, the 787. So in that case, the FAA created a center for excellence, well before the certification process, so they could 

40 

identify with both the public and private sector what the issues 

were related to that huge shift in manufacturing. 

Where do you see that coming into play? What are the tools that 

could best help the FAA understand the rate and level of innovation, and stay on top of it? Because obviously, we are not going to 

hire tens of thousands of aviation experts, just to be on top of the 

latest technology at the FAA. We want them to have a process to 

be knowledgeable about it. What is the best way to do that? 

Dr. DILLINGHAM. Thank you, Madam Chairwoman. The instance 

that you cite, I think it was related to the Dreamliner, Boeing’s 

Dreamliner and it containing more composite material than ever 

before. And that is the way wave of the future, I think, both for 

big aircraft and for smaller aircraft. 

The process that FAA has initiated is the organizational delegation or designee program, which allows for industries with the appropriate skills and resources and knowledge to act in concert with 

FAA, with FAA oversight, to be able to approve those kinds of innovations and to help spur innovation. 

It is part of what the Congress mandated in the 2012 reauthorization. FAA needs to expand that process to bring in more industry partners. They need to make sure the FAA oversight of those 

industry partners of that kind of operation is adequate, and that 

those inspectors that work with industry are fully trained. 

As you said, there is no way the FAA can kick all the tires. They 

need the help of industry. That is part of the recommendation that 

the Congress mandated and is part of why we say it is a critical 

and priority effort that they implement those recommendations. 

Senator CANTWELL. Thank you. 

Mr. Allen, to my colleague Senator Ayotte’s focus on small business, which I always look at this, since I chair the Small Business 

Committee, that something like 90 percent of the transactions at 

Ex-Im Bank are small business. But because aerospace is such an 

expensive product and some of the other manufacturers, whether 

it is GE when you look at it just from a revenue perspective, obviously these bigger industries are a larger percentage of the actual 

dollars spent. 

So do you oppose looking at ways to further incent small business or setting goals within the Ex-Im Bank to help small businesses? 

Mr. ALLEN. Not at all. We have watched over the last several 

years as Ex-Im Bank has developed an increasingly strong infrastructure to reach out to small business. They have been very effective. They are now at over 90 percent of their transactions being 

for small business. So that commitment is very much in response 

to the policy directive that Congress established for the bank, and 

the bank has executed well on it. We support it wholeheartedly. 

Senator CANTWELL. And there are many people in the supply 

chain who are suppliers to both Boeing and to Airbus. Is that correct? 

Mr. ALLEN. Correct. In the aerospace industry, really, no one 

works alone. So the need to have the integrated supply chain all 

the way down is, A, imperative, but B, for the suppliers, they also 

have to supply on multiple sides to be able to continue their own 

strength. 

41 

Senator CANTWELL. And we are interested obviously in more innovation all down the supply chain. Is that right? I mean, that is 

what gives us the advantage, to have that supply chain continually 

innovating on their particular production? 

Mr. ALLEN. Yes. We have worked very hard, especially when the 

787 is discussed, to look for ways where we can engage with our 

supply partners in the supply chain on elements of innovation in 

the new airplane platform. Innovation normally is not contained 

just in a small bubble. It is normally in a broader ecosystem. So 

we do try to support that. 

Senator CANTWELL. I noticed as we were in Yakima, Washington, 

at a GE facility, then the GE facility. And somebody was showing 

us a strand of metal that basically was as thin as the hair on your 

head, that thin. They said, yes, we are producing this for Airbus 

there in Yakima, Washington, because they could produce that 

product more cost-effectively, more precise to what the end customer wanted. 

Lots of these industries are also getting support from Ex-Im 

Bank. Is that correct? 

Mr. ALLEN. Yes. And what you describe is a great example of 

how complicated the world has become, because supply chains are 

so integrated and economies are so integrated. But it is one of the 

reasons why it is all the more important that the macro level infrastructure, like the disciplines that the Aircraft Sector Understanding sets, are maintained, because they become the stability in 

this fast-moving world of great change. 

Senator CANTWELL. You mean they are constantly on top of the 

dialog of preventing distortions? Is that what you are saying? 

Mr. ALLEN. That is right. 

Senator CANTWELL. Thank you. 

Senator Ayotte? 

Senator AYOTTE. Thank you. 

I would ask this question of Dr. Crane and Mr. Allen. 

I know that there was a discussion you just had, Dr. Crane, with 

the Chair about the R&D tax credit. Can you tell me what your 

view is in terms of what our tax rate does, in terms of competitiveness for the aviation industry, because we have the highest corporate tax rate in the world? What is our overall tax rate? Does 

that impede our competitiveness in a global economy when we are 

competing against countries that have lower tax rates? 

Dr. CRANE. I think it is more, as an economist speaking, it is 

more the distortions. What an economist would argue would be 

that you want to have a very simplified, clean tax rate, because the 

effective tax rate for companies varies very, very widely, as you 

know. So to establish both a level playing field, but also ensure 

that there are adequate revenues for the U.S. Government, the 

most—— 

Senator AYOTTE. Simplify. 

Dr. CRANE. Simplify. 

Senator AYOTTE. There have been a lot of discussions about simplifying and lowering, so that it is easier to administer, in terms 

of the government side, but also ensures competitiveness on the 

other side. 

42 

Dr. CRANE. It also saves a lot of cost on the corporate side. I 

mean, if you had a very simple, clean tax rate, it saves in terms 

of accounting and legal fees as well. 

Senator AYOTTE. Mr. Allen? 

Mr. ALLEN. Simplified and competitive are really important principles. I am not our tax specialist, but I would also be delighted to 

take back the question to the company and make sure we come 

back to you with our thoughts and our ideas, because we do believe 

that we need to keep pushing toward more simplification and more 

competitiveness. 

Senator AYOTTE. I would appreciate that, because as we think 

about our competitiveness, I think about where do we stand vis a`

vis other countries in terms of our tax code. I also think about the 

regulatory climate. 

And, Dr. Crane, you had mentioned the issue of certification that 

Dr. Dillingham touched on. You mentioned it in the context of 

China stealing our intellectual property, which they have a clear 

record of doing and in many instances where companies, I am sure, 

like Boeing are always worried about that, with their technology, 

and other U.S. companies. 

So what thoughts do you have in terms of the certification process that we should be looking at to make America more competitive? 

Dr. CRANE. As you well know, FAA, the certification process, is 

extraordinarily important, because almost everybody flies. And getting in an aircraft, it is just imperative that those aircraft are safe. 

And one of the things FAA has done very constructively has 

worked with the Chinese aviation regulatory industry, so they establish the same types of procedures and the same type of careful 

analysis to make sure that everything that goes into Chinese aircraft is certified. 

And I think that because of the very high safety issues that you 

have with aircraft, it is really imperative to have a very strict regulatory regime. 

Senator AYOTTE. How good is their regulatory regime? 

Dr. CRANE. Thanks to U.S. Government support and the FAA, 

and I think this is a benefit to everyone in the world, it has become, on the aviation side, they have really adopted both European 

and U.S. approaches to this, as compared to food quality—— 

Senator AYOTTE. I was going to say, if their milk is any indication, I don’t want to fly in a Chinese plane. 

But yes, I think this is obviously a very important issue for the 

safety of our airways. 

But also, what challenges do we face on the intellectual property 

front with the Chinese? We know that this is a big challenge for 

our country, in terms of our developing lots of great technology. 

And often, rather than invent their own technology, they are taking 

ours. 

Dr. CRANE. Every Western company we talked to is well aware 

of this with China. What they have done is they have just made 

sure that key components are not manufactured there, precisely because of this. It is the only way to protect themselves. 

43 

Companies do take steps. They are not always successful. But we 

have had 35 years now of investment in China since the opening 

in 1978, 1979. 

I think it is good to be vigilant. I am glad the U.S. Government 

has made it a high issue. 

It really damages, long term, the Chinese economy as well. I 

think it is a very shortsighted approach, and I think continuing, 

that your statements and other statements are very helpful to kind 

of hammer that into the Chinese leadership. 

Senator AYOTTE. Thank you. I appreciate that. 

I have a question that I am going to submit to you, Mr. Allen. 

It is on an issue that is not directly before this committee, but I 

also serve on the Armed Services Committee. 

I know Boeing is a prime contractor for the A–10 wing replacement program, and Congress has previously authorized and appropriated funding for replacement of A–10 wings in 2014. It is my 

understanding that the Air Force hasn’t obligated any funds toward that yet, even though it has been appropriated by the Congress to do that. 

Do you know whether or not the Air Force has obligated this or 

whether you are undertaking this? If you don’t, if you can take this 

question for the record, I would appreciate it. 

Mr. ALLEN. Yes, I will take that question for the record. That A– 

10 is a great airplane. I know that we are meeting our delivery 

commitments, because we are midstream on the program. But I 

don’t know where the Air Force is on next decisions and steps. 

Senator AYOTTE. I will submit a full question to you for the 

record, if you can get back to me, I would appreciate it. 

Mr. ALLEN. Will do. 

Senator AYOTTE. Thank you. 

Mr. ALLEN. We will take it to our defense team. 

[Response from Mr. Allen for the record follows:] 

As of September 22, 2014, the A–10 WRP Program has not received an order for 

the 9 wings that were appropriated in FY 2014. 

Senator CANTWELL. Well, I want to thank all the witnesses for 

your testimony today. You certainly have helped us illuminate the 

challenges that we face in aviation and certainly provided us with 

some suggestions on how we meet those challenges. 

I appreciate Senator Ayotte being here and arranging the schedule so we can have this hearing. 

The Subcommittee is going to continue to focus on what the 

United States needs to do to maintain its competitiveness in aviation. We very much get that it is a competitor-partner world. 

But we also need these very important tools like the Ex-Im Bank 

and the aircraft sector, the organizing tools to have the debate and 

to make sure we are continually creating a level playing field, so 

we can move forward with our innovation. 

Again, I thank all the witnesses for this testimony. 

44 

If other members who are not here have questions, we will have 

the record open for two weeks and certainly hope that you would 

help us in getting responses in that timeframe. 

We are adjourned. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

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