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42–111—PDF 2007

S. HRG. 110–363

AIRPORT AND AIRWAY TRUST FUND:

THE FUTURE OF AVIATION FINANCING

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 12, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia ..................... 3

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 5

Lott, Hon. Trent, a U.S. Senator from Mississippi ............................................... 7

WITNESSES

Blakey, Hon. Marion C., Administrator, Federal Aviation Administration,

Washington, DC ................................................................................................... 11

Orszag, Dr. Peter, Director, Congressional Budget Office, Washington, DC ...... 12

Dillingham, Gerald, Director, Civil Aviation Issues, Government Accountability Office, Washington, DC ........................................................................... 14

Hansen, Mark, professor, Department of Civil and Environmental Engineering, University of California, Berkeley, CA ....................................................... 16

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Blakey, Hon. Marion C.:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 39

Responses to questions from committee members ......................................... 50

Dillingham, Gerald:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 62

Responses to questions from committee members ......................................... 82

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 5

Hansen, Mark:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 85

Lott, Hon. Trent:

Opening statement ........................................................................................... 7

Prepared statement .......................................................................................... 90

Orszag, Dr. Peter:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 92

Responses to questions from committee members ......................................... 106

Rockefeller, Hon. John D., IV:

Opening statement ........................................................................................... 3

Smith, Hon. Gordon:

Prepared statement .......................................................................................... 108

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 109

(III)

(1)

AIRPORT AND AIRWAY TRUST FUND:

THE FUTURE OF AVIATION FINANCING

THURSDAY, JULY 12, 2007

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:09 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Schumer, Stabenow,

Salazar, Grassley, Lott, Smith, and Roberts.

Also present: Thomas Barthold, Acting Chief of Staff, Joint Committee on Taxation.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

Today we will explore the state of the Airport and Airway Trust

Fund, also known as the Aviation Trust Fund. I thank our witnesses for being here, especially Dr. Mark Hansen, who flew from

the Bay Area to join us.

Dr. Hansen, in addition to a thank-you from the Finance Committee, I am authorized to say that you will receive 4,824 Frequent

Flyer Miles for your trip. [Laughter.]

Thirty-seven years ago, Congress enacted the Aviation Trust

Fund to finance capital investment in the aviation system and to

cover a small portion of the system’s operating cost. Much has

changed since 1970, both with the Aviation Trust Fund and with

aviation generally. Trust fund revenues have gone from zero to

about $12 billion a year.

The nature of the trust fund has also changed. In the trust fund’s

first year, Congress, in the Nixon administration, fought over

whether the trust fund should finance just capital projects or overall aviation operations as well. In the last 37 years, the trust fund

has evolved to become a hybrid of the two. The Aviation Trust

Fund now finances nearly half of FAA operations.

Finally, the amount of money remaining in the trust fund, what

folks call the ‘‘uncommitted balance,’’ has also fluctuated wildly.

The uncommitted balance of the fund has gone from zero in 1970

to a high of over $11 billion in 1999, to less than $2 billion today.

Much of the recent drop in the fund’s balance occurred after 9/11,

when many Americans just stopped flying.

Roughly half of the trust fund’s revenue comes from passenger

ticket taxes, so the post 9/11 downturn in the trust fund’s balance

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* For additional information on this subject, see also, ‘‘Present Law and Background Information Relating to Financing of the Airport and Airway Trust Fund and Airports,’’ Joint Committee on Taxation staff report, July 11, 2007 (JCX–42–07).

came as no surprise. That downturn also argues for a more predictable stream of revenue to fund the aviation system.

While the trust fund has changed a great deal, aviation itself has

changed even more. In 1973, in response to a series of hijackings,

airlines started screening passengers and their carry-ons. A few

years later, airline deregulation occurred, removing the requirement that airlines serve certain areas, like rural Montana.

In the 1980s, air traffic controllers went on strike. Airline bankruptcies piled up, and the Aviation Trust Fund lapsed for the first

time, as Congress was unable to agree on how to reauthorize its

taxes.

The 1990s brought the Internet, and with it, online booking of air

travel. At the beginning of this decade, 9/11 was not only a watershed event in American history—and world history—it also permanently changed the way that we fly.

What does the future hold? More change. By 2016, the U.S. air

traffic system will handle an estimated 61,000 flights a day. That

is an increase of about one-third. In the same year, 2016, the number of passengers on U.S. flights will increase from about 740 million trips per year to around 1 billion per year.

Technology is also changing. Jets are more affordable than they

used to be, and their use in business aviation has increased accordingly. Business aviation is expected to increase even more in the

coming years.

Jets are also changing the commercial sector, as we saw on Sunday, with the introduction of Boeing’s 787 Dreamliner that is lighter, quieter, and greener than today’s planes. The Dreamliner is

being touted as the next generation of commercial aircraft.

There is wide agreement that we need a next generation of the

air traffic control system as well. The NextGen system will lead to

a safer, more efficient air traffic system.

But questions remain: how much will this new system cost, and

who is going to pay for it? Those are the questions we will try to

answer today and at the subcommittee hearing next week.

Throughout our work, this committee will be working to find and

to fund an air traffic system that is fair, reliable, and efficient. I

hope that today’s hearing will be a positive step in that direction.*

As for Dr. Hansen’s miles, I have just learned that those miles

are redeemable only for magazine subscriptions. [Laughter.] So, Dr.

Hansen, I guess you will have some reading material for the flight

home.

I thank everybody for joining us, and I would like to turn to Senator Grassley.

Senator GRASSLEY. I wonder if I could have Senator Rockefeller

go ahead of me?

The CHAIRMAN. Sure. Senator Rockefeller?

I would like to just introduce and say that Senator Rockefeller

has done a lot in this area, as has Senator Lott. I want to thank

you, Senator, for all that you have done and am very interested in

your comments.

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OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

A U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Well, thank you, Mr. Chairman. I appreciate that very much. In fact, I have been either Ranking or Chair

of the Aviation Committee of Congress for over 10 years now. Senator Lott and Kay Bailey Hutchinson have done the same thing.

Senator Lott and I have crafted this bill, and I think we have

crafted a very strong reauthorization bill that lays the groundwork

for the Agency to modernize the air traffic control system, to fund

infrastructure, improve safety, and protect small community service.

Now, what do I mean by that? There is one thing that has to be

made very, very clear, and that is that we are the only industrialized nation in the world that does not have a digitalized air traffic control system. The only one. That is an enormous waste of

time. It is enormously expensive to keep it going and to keep it repaired.

We are going to have to—we have no choice—not only maintain

the analog system which we now have—which monitors all these

planes, some 36,000 planes in the air at any given time, on average, during a day, two-thirds of which are general aviation planes,

incidentally—and we are going to have to build a digitalized system to catch up with other countries. So that is sort of a little background on that.

So we face this very difficult task of reauthorizing aviation taxes,

always a popular, warm-hearted subject. Senator Lott and I have

proposed a simple adjustment to fuel taxes as a way to bring some

equity among the users of the system. I understand that some of

my colleagues have other ideas, and we will be able to discuss this

in other meetings.

I do not believe that commercial airline passengers should continue to subsidize corporate jets. Let me put that more clearly.

Under the present analog system of air traffic control, which is inefficient, which is deteriorating, and which is expensive——

Senator ROBERTS. Would the Senator yield just for a moment?

Senator ROCKEFELLER. No, I will yield when I am finished.

Senator ROBERTS. Just for a brief question.

Senator ROCKEFELLER. Yes, sir?

Senator ROBERTS. Could you say ‘‘business jets’’ instead of ‘‘corporate jets?’’ Just a suggestion.

Senator ROCKEFELLER. Yes. And when I talk about general aviation, 90 percent of all general aviation is excluded from what I am

talking about, from the fees that I am going to be talking about.

Senator ROBERTS. I understand that, sir. It is just, some people

use the word ‘‘corporate’’ as a pejorative as opposed to a ‘‘business’’

jet, a small business jet coming from Dodge City, KS. Just a suggestion.

Senator ROCKEFELLER. All right. My people say ‘‘corporate,’’ your

people say ‘‘business.’’ We will figure out a neutral word.

And 92 percent of all the costs of the air traffic control system,

the analog one which we now have, are paid for by legacy or commercial passengers and airlines. Eight percent, even though twothirds of the flights in the air at any given moment, many of

them—not all of them, many of them—using the air traffic control

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system are paid for by general aviation. By any standard, this is

totally unfair to consumers of commercial aviation.

So I do not want to have this system where commercial airline

passengers continue to subsidize jets. I will just leave out the word

for the moment. Corporate jets, I would say.

The current tax system is unfair to rural customers—to rural

customers—because of the higher fares our constituents have to

pay. We need to develop a system that is fair to the 700 million

passengers a year, and that reflects the enormous growth of general aviation.

General aviation is going to continue to grow by leaps and

bounds, far ahead of commercial aviation, especially high-end jets,

which I would refer to as corporate jets, that use the air traffic control services but do not really pay for it and do not want to. They

do not want to. It is an ever-increasing burden on our aviation system. These are facts.

Ninety-two percent of the costs of the system is paid for by commercial airlines, which means people. The Commerce Committee

took one important step towards developing part of a comprehensive funding system for the FAA.

I believe that the Commerce Committee’s creation of a new $25

surcharge, which goes into the trust fund which has already been

spoken of by the Chairman, is dedicated only for the building of a

digitalized air traffic control system, that $25 fee.

Now, figure—whatever you want to call it, a corporate jet, a business jet, a large jet, small jet—a $25 fee if you are flying from here

to anywhere is not exactly a back-breaker. I am told that it will

buy a pack of Coke to put on board.

So the surcharge is dedicated only for air traffic modernization.

For no other purpose can it be used. We have to have that digitalized system to keep our planes safe. It must be a fundamental

component of the Agency’s future financing.

The general aviation community has aggressively opposed paying

the $25 surcharge, despite the fact that only 10 percent of high-end

business jets would be required to pay it. Again, I repeat: 90 percent of all general aviation planes are excluded from this horrendous $25 fee, which I do not consider much of a back-breaker.

Ninety percent of the fleet would be exempt under what Senator

Lott and I propose.

In concluding, let me make it very clear. If we do not restore equity to the financing structure that funds the FAA, then, as Chairman of this Aviation Subcommittee, I will address the equity issue

by looking for ways to limit the access of general aviation to congested air space. This only makes sense.

You look at the busiest airports, you look at the commercial aviation, you look at the people sitting on tarmacs in West Virginia and

Dodge City, KS, and all kinds of other places, in Iowa and Montana, and they cannot take off because cities are congested. Well,

they are mostly congested with private airplanes trying to land.

So, I will address that equity issue by limiting the access of general aviation to congested air space. There are ways to do that, and

we will find those ways. Teterboro. I mean, I really believe that

once corporate CEOs are delayed getting into Teterboro or other

5

places and they are forced to sit on hot tarmacs like our constituents are, they may be inclined to pay their $25, or whatever.

So, Mr. Chairman, I think this is a very, very serious matter of

equity. There will be those who claim that it is going to ruin the

general aviation industry. There are others who can show you

reams of studies showing that most—at least half, and a growing

proportion—of the corporate jets that we make are sold in Europe

where these fees are already, at higher levels, tacked onto the cost.

So, equity, fairness, and modernity, is what we seek. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Lott has also been very involved in this issue. It is a

break from custom, but Senator Lott, before Senator Grassley

speaks, I would defer to Senator Lott. Maybe Senator Grassley,

first. If you are ready to go I will let you speak first, then Senator

Lott.

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Aviation is a very important part of the

American economy. It is vital to all rural and urban communities

that the people there are able to travel timely, safely, and costefficiently worldwide. Whether it is the businesswoman, the tourist,

or the grandparent visiting grandchildren, efficient, affordable, safe

air travel is imperative and expected.

Congress is faced with reauthorizing aviation legislation. This

committee oversees all the dedicated taxes funding aviation. Since

2001, the aviation world that existed in the last reauthorization

has changed dramatically.

With this reauthorization, we will have the opportunity to reshape our system to reflect today’s realities and to further modernize our air traffic system and airports to provide more efficient

and safe travel. The United States has one of the best records of

aviation safety. However, we are back to the level of air traffic that

we saw before 9/11, and it is forecasted that we will continue to

grow much in the future.

We must prepare for tomorrow. It has become obvious that the

solutions of the past do not reflect the flying realities of today. Certainly the funding solutions of the past, then, will not offer the

funding solutions for the future.

Reauthorization is always contentious. While we may have differing approaches on how to provide funds to the trust fund, we

can agree on some major principles. All of us have a vested interest

to ensure a stable, dependable, predictable revenue flow to the

trust fund.

First, we need to ensure that we have adequate funding to modernize our air traffic control system. In light of the capacity issues

and the 1950s equipment being used to manage our skies, we cannot miss this opportunity to provide the funds that will allow the

next generation of air traffic control to be implemented as quickly

and prudently as possible.

I think of this 1950s technology and I remember the first 1950s

television set I had a chance to view. We viewed just ‘‘snow,’’ as

you might call it. Now as we put that 1950s television away probably 30 years ago, we are now still using 1950s technology for what

6

we are doing here. So now is the right time to replace the old radar

technology with real-time GPS technology. The American people

deserve our investment in this new technology.

Second, we need to honestly look at the diversity of the airport

system to structure funding for the safety and fairness of every airport in America. It is important throughout this process to remember the needs of rural States and communities, and I think, of

course, of Iowa.

It is true that, with our elaborate air transportation system, people who live near hub airports have the opportunity to take advantage of air travel somewhat efficiently and at reasonable prices.

However, those in rural areas have more difficulty. This challenge

has become even more difficult after 9/11, when most small communities were reduced to one air carrier with less frequent flights.

Commercial carriers only fly into 500 airports, although that is

a business choice and there are other airports they could serve.

However, it is also reasonable to understand that it is more expensive for them to do business in rural America.

Over the past decade, a new prong has developed in the aviation

industry. Traditionally, the focus has been on just two main categories: commercial aviation and the private airplanes for individual or business use.

Today we have a growing new class of business aviation, which

includes new dynamic fractional jet ownerships. The new business

class is anticipated to grow at a much faster rate than other segments. This new prong is providing valuable opportunities for businesses to enhance efficiencies and productivity, and is also a potential way for rural areas to have more transportation opportunities.

While this is good news and may be a saving grace for struggling

rural economies, the growth of business aviation is creating more

stress on our national air traffic system.

Under current law, the trust fund has been overwhelmingly

funded by excise taxes paid by the American flying public. Those

excise taxes have been included in the passengers’ ticket expense,

and the commercial carriers have been a trusted and steadfast

partner as an agent of the Federal Government in collecting and

remitting the excise taxes through the passenger ticket system.

As we evaluate the funding for the future, this committee will

need to make decisions over the funding responsibilities that

should be allocated to all participants to include the passengers,

the airlines, and the owners and operators of the aviation inventory

across the country.

Finally, we on this Finance Committee have a fiduciary responsibility to try to ensure that the excise tax system is straightforward,

that it is fair, and not an administrative burden. We will also continue to review tax schemes and their opposite point of view.

We will work to ensure that wrongdoers cannot whipsaw the government trust, nor manipulate unfair competitive advantage over

the honest taxpayer by scamming the trust out of the excise taxes

designed to fund the safety of the skies.

In fact, this committee’s continued vigilance over fuel fraud

scams continues to pay off for the trust funds. Just this week, a

U.S. Attorney announced indictments of three Houston men in a

7

scheme where they purchased $10 million in kerosene and later

sold it as diesel fuel in Houston area stations.

They conspired to avoid paying millions of dollars in Federal fuel

excise taxes, cheating the American people of the funds to build

roads and maintain airports, to the detriment of the honest taxpayer.

As we work through this reauthorization, I expect ongoing reviews for any lack of compliance in all areas of excise, including the

aviation taxes that we are discussing. I would appreciate the input

from all of our government witnesses as to the areas that they

could be helpful with in this reporting and enforcement so that we

do not have these scams.

Thank you.

The CHAIRMAN. Thank you very much, Senator.

Senator Lott?

OPENING STATEMENT OF HON. TRENT LOTT,

A U.S. SENATOR FROM MISSISSIPPI

Senator LOTT. Well, thank you, Senator Baucus, Mr. Chairman,

for having this hearing. I know that you and Senator Grassley and

the committee have a lot of things you are working on, so having

these hearings is not easy.

But I do want to urge that there be a second hearing at some

point that is a balanced hearing from the industry so that we can

get not just the government views we are going to hear from this

morning, but so we can get some information from the industry,

commercial, general aviation, airports, the whole spectrum——

The CHAIRMAN. I might say, Senator, there is going to be a subcommittee hearing on this very question next week.

Senator LOTT. And I do want to urge that we make sure that it

is a balanced group.

The CHAIRMAN. It will be. Balance is in the eyes of the beholder,

but I think both in your eyes and in this Senator’s eyes, it will be

balanced.

Senator LOTT. Very good. I want to take a minute—and I apologize for this, because I always try to make it a rule to be brief in

my opening statements so we can actually hear the witnesses—to

make a particular point to thank a couple of other people.

First, I want to thank Senator Rockefeller for the way he has

handled this legislation in the Commerce Committee. We talk

about doing things in a bipartisan way around here, but we do not

find a way to do it very often.

Senator Rockefeller and I have been total partners in this effort.

We have been sensitive to each other’s concerns. We have stood together and fought off attacks which were sometimes misinformed

and unfortunate to say the least. But I just wanted to say publicly

how much I appreciate the way Senator Rockefeller has handled

this.

Senator Grassley talks about rural and small State service of the

industry. Certainly Senator Rockefeller and I are sensitive to that.

Represented here today are Kansas, Iowa, Montana, West Virginia,

Mississippi. We have one big State with a great airport, Detroit,

but I assure you, we want to make sure that we do things that

8

allow the industry to provide the best possible and most affordable

service to the smaller States and more rural areas.

I also want to take a minute to recognize the outstanding service

of the FAA Administrator, Marion Blakey, who is here today. She

has been a real champion for the industry. I think she has provided

courage, strength, outstanding leadership. She is accessible. She

does not live in the ivory tower of the Department of Transportation. She actually comes up here and meets with Senators of both

parties and talks through problems, concerns, and solutions.

I do not know how many more times she is going to appear before this committee. I suspect she would be happy if it were the

last one. But she has done a great job in trying to emphasize the

needs of the industry, highlighting the importance of modernizing

our air traffic control system and the need for proper financing.

She could have sent just plain vanilla: oh, let us just extend it and

be happy. She did not do that.

She sent a proposal—a significant proposal—forward. It got

twisted around a little bit as it went up the line, but she was not

deterred. She supported what she had to support when it came to

the Congress, and we dumped on it some. She did not run for the

hills, she just hung right in there. When we, shall we say, polished

it up a little bit, made a few little changes, she said, good, let us

do that. She is a woman of action.

So, I just wanted to acknowledge her tremendous service in this

very important position and thank her for being here today, and

wish her well in the future. And it has nothing to do with the fact

that she actually spent her younger years in Mississippi. [Laughter.]

Now, on the subject at hand, I have been working in this area

a good portion of my career in Congress, now 35 years. I have

spent a lot of time working in transportation generally because I

think transportation is about growth and economic development,

the creation of jobs and future accessibility.

I am talking the whole package: lanes, trains, planes, ports and

harbors. We need it all. We are not doing enough in hardly any of

those areas, but I think particularly in aviation.

We have struggled along, but it is time we make the big leap,

that we really look to the future. If we do not, we are going to have

congestion, we are going to have unsafe air lanes, and we are going

to have Europe and the rest of the world leaving us in their dust.

So we have to do something. I worked on FAA reauthorization in

2000 with Chairman Bud Schuster. In 2004, it was truly bipartisan: McCain, Hollins, Rockefeller, and I.

So this is the third time. For some weird reason, this one looks

like it is the hardest of all. It is because we are trying to do a little

something more. We are trying to have a fairer distribution of our

efforts in who pays for what. So we can just kind of muddle along

if we want to, or we can really try to modernize.

Now, the industry came in before the Commerce Committee and

said, great, we want reauthorization and we want modernization.

But so far, nobody wants to contribute to that effort or they want

somebody else to pay the price. That somebody is always the commercial side.

9

Everybody says, yes, we want a great new industry, we want

modernization, and we want the commercial airlines to pay for all

of it. Oh, by the way, we want more for everything else in our particular area of concern. I will not name anybody here because I am

not here to make anybody mad at this point. [Laughter.] But I am

prepared to do it down the line.

Now, here is the problem. The Commerce Committee reported

our bill May 16. The Finance Committee has its sequential opportunity and they have this hearing, another hearing, and then somewhere along there we have to act. But the FAA reauthorization expires the end of September.

Generally the attitude of Congress now is, what, me worry? Do

not worry, we will have money in the fund. The authorization, all

the taxes and fees, expire September 30. People say, oh, well, that

is all right, we have some money left in the fund. You had better

check it, because there is not as much in there as you think.

Everybody says, oh, well, do not worry, we will just extend everything for a year. Do not count on it. This Congress has not been

able to pass gas so far—[laughter]—let alone extend anything. We

are playing with fire here. Now, we need to find a way to do something here. It is not partisan. This is about service to the American

people and an industry that is critical to our future.

So all of you who are lying over in the weeds saying, I am going

to get my part no matter what, and by the way, the airlines are

going to pay for it, forget it. This time we are going to have a fair

bill or no bill. I am prepared to go to the mat. Maybe we need to

wring the system out a little bit.

So, I think we need to do this. We need to modernize. I have people, representatives—probably some of them in this room—saying,

well, wait a minute. Maybe we do not need any more extra money.

We can actually do everything we need to do with what we are

going to get. Not. All that guarantees is that we will push off another 5 years the process to get to the next generation. This is the

time, now, to replace our antiquated existing system and go for the

modern system.

I associate my remarks with everything that Senator Rockefeller

said. This is one place where I believe this Congress can actually

get something done that will be good for the American people, for

the people who fly in our industry, and for the industry itself. So

I have been storing up those remarks. I assure you, I could have

a lot more animated remarks at the appropriate time.

But if everybody does not quit trying to hide and let somebody

else do this, and we want bigger, more modern airports, more landing strips, better pay for our workers, more profits or for the airlines not to be bankrupt, we would like business jets to be built,

hey, I like all of that.

But everybody is going to have to ‘‘ante up and kick in now.’’ A

great comment from Morgan Freeman in the movie, ‘‘Glory.’’ This

is a time when we’ve got to all ‘‘ante up and kick in.’’ The Finance

Committee has to step up to the question of how we finance this

next generation.

Thank you very much, Mr. Chairman, for allowing me to have

a little extra time here and for having this hearing.

10

The CHAIRMAN. I appreciate that, Senator. I deeply apologize to

the witnesses for this flight delay. [Laughter.]

Senator ROBERTS. Mr. Chairman, a parliamentary inquiry.

The CHAIRMAN. The Senator will state it.

Senator ROBERTS. My question is, we have heard 45 minutes of

testimony from people who have worked very hard on this for over

2 years, and I congratulate them. They are my colleagues and my

friends. But it is 45 minutes basically in favor of user fees, with

the inference that the general aviation industry is opposed to modernization. They are not. They would like to pay—they would not

like to pay, but they will pay—an increase in the fuel tax.

Now, I have 5 minutes of questions to ask of the witnesses, but

we have had 45 minutes. That is not fair and balanced. That is not

Fox. That is not even CNN.

I just wonder, with 5 minutes—and I am not on the subcommittee. So when we have the witnesses, i.e., from general aviation, I do not know if I could be a guest or watch, or whatever else

it is. But there are just a couple of things that have been said. I

am not trying to set the record straight, I just have a different

view.

We have spent a great deal of time making very brief comments

in terms of opening speeches, which really have been a very natural kind of speech from people who have worked so terribly hard

to modernize the system, which I respect.

So, having said that, I just wonder, in the go-around here, with

the number of people, are we going to be limited to 5 minutes and

that I only ask questions and I simply let the 45 minutes sit out

there without any further comment, or what?

The CHAIRMAN. Well, Senator, I would say that the strength of

your arguments, given your——

Senator ROBERTS. Can I summarize in 5 minutes?

The CHAIRMAN. No. I think the fair way to handle this, basically,

is to let us get to the witnesses. When we get to questions, we will

give you a little more time.

Senator ROBERTS. I would guess that perhaps the people who

have made the speeches will be long gone by then. Maybe I can

write them a note or meet with them on the floor.

The CHAIRMAN. You will get time. Let’s go to the panel. But you

will get time, Senator. You make a fair comment. It is a fair point.

All right.

Let’s begin with our witnesses, now. First, with Marion Blakey,

Administrator of the Federal Aviation Administration. Ms. Blakey

has headed up the FAA since 2002.

Peter Orszag, Director of the Congressional Budget Office.

Thanks, Dr. Orszag, for all that you have done. You are a regular

before this committee, and I am sure many other committees, too.

Thanks for all that you do.

Gerald Dillingham, Director of the Physical Infrastructure Issues

at GAO. Thank you, sir, for being here.

Mark Hansen, whom we have already introduced. Although professor of Civil and Environmental Engineering at Cal-Berkeley, his

areas of research include transportation, economics, and air transportation.

11

Finally, Tom Barthold, Acting Chief of Staff, Joint Committee on

Taxation, will not issue a statement but is here to provide the committee with answers to technical questions.

Ms. Blakey, proceed.

STATEMENT OF HON. MARION C. BLAKEY, ADMINISTRATOR,

FEDERAL AVIATION ADMINISTRATION, WASHINGTON, DC

Ms. BLAKEY. Thank you very much, Chairman Baucus. I will try

to go quickly, because I do realize that we are under some time

constraints. But I have to say to you, to Senator Grassley, and to

the entire committee, I have had the pleasure of working with most

of you directly and it has been a genuine pleasure.

I also want to thank you for your focus on aviation safety. The

U.S. aviation system is the safest system in the world and we continue to keep that record intact, so I do want to thank you on that

as well.

What brings me here today is the very real concern faced by industry, government, and passengers alike. As has been noted, the

taxes that fuel the Airport and Airway Trust Fund will expire on

September 30, 80 days away. We need Congress to act. Indeed, the

flying public is depending on this committee for the leadership and

support for which you have been known for all these many years.

To be sure, America’s aviation system is reaching critical mass.

Unless we transform it with state-of-the-art technology as Senator

Rockefeller is noting and provide a stable revenue stream to pay

for it, America is going to be unable to handle the growth that is

headed our way.

Forecasters are anticipating a billion passengers by 2015, and

with the airlines using smaller aircraft and the advent of personal

taxis, very light jets, there is little question that the aviation activity will grow dramatically across all segments of the industry. We

welcome that, but we have to be able to accommodate it.

As we have before us the lessons of 2000, 2006, and so far, 2007,

we do need to pay attention: long lines on the tarmac right now,

wasted fuel, wasted time, a system that quietly and steadily grinds

to a slower and slower pace, with delays, missed connections so

often from those rural airports we were talking about, and high

frustration.

What is more, the annual cost of delays is $9 billion right now.

We can prevent this gridlock, but we do have to take action. The

time is right. The FAA has shown over the past several years that

we are very capable of managing the effort to the NextGen.

In the mid-1990s, Congress freed us from antiquated personnel

and acquisition rules, slicing miles of red tape. Your direction was

to operate more efficiently, and we have done so. I am very proud

to tell you this morning that over 90 percent of our major capital

programs are on schedule and within budget this year.

With all of this as context, we know the linchpin of our success

in launching a next generation air transportation system lies in

this reauthorization. Our best efforts at operating more like a business will fall short without a specific and direct link between our

revenues and the cost of operating the system.

As this committee well knows, aviation is absolutely critical to

our economy. Indeed, the failure to put NextGen in place could cost

12

the United States over $22 billion by 2025. That means delayed

flights, delayed packages, gridlock, all the things we have talked

about. But the tough issue is, how do we pay for it?

Today’s tax system is unfair to commercial airline passengers,

while the fastest-growing segment of aviation—which we are very

proud of and very proud to enable—are business jets, and they are

paying relatively little. It is a matter of equity.

Let me just show you one chart, because I think it makes it pretty clear why. This illustrates between two types of aircraft, a large

commercial jet and a business jet, what the actual taxes are that

are being paid in right now. You see we are talking about $3,600 on a flight from JFK to LAX, whereas, for a business jet, it is $300, less than a tenth. The

cost to the FAA to handle those flights? Exactly the same.

The tax revenue is also vulnerable to fluctuations in ticket prices

because of our reliance on a 7.5-percent excise tax. It has nothing

to do with the cost to provide the service. And when we are trying

to fund long-term capital investments in NextGen, this is an inherently unstable and unpredictable way to operate from a revenue

standpoint.

The primary goal of the Administration’s comprehensive reform

legislation is to tie the cost of providing the service to our revenue

and to ensure that we do have adequate funding for the major capital investments coming up.

The key to success is to have a direct link between cost and revenues. It is a simple business principle, and it works. To operate

more efficiently, the system will have to be flexible as costs change,

because they will, allowing the FAA to be nimble when it comes to

making adjustments that our customers are going to require.

The CHAIRMAN. I have to ask you to summarize.

Ms. BLAKEY. To wrap it up?

The CHAIRMAN. Please.

Ms. BLAKEY. Let me just show you one thing, because I think it

might be interesting for you all to see. Over here I have the future

of the aviation system. We are talking about a digital, satellitebased system. This very lightweight, small unit is the one that will

be on the ground, helping to guide, with the system that is in the

air, those satellites that are already in place, the NextGen.

It is critically important to be able to put this whole system together. So I would like to ask you to make the most of the next

80 days. We definitely need this reauthorization.

The CHAIRMAN. Thank you very much, Ms. Blakey.

[The prepared statement of Ms. Blakey appears in the appendix.]

The CHAIRMAN. Dr. Orszag?

STATEMENT OF DR. PETER ORSZAG, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Dr. ORSZAG. Mr. Chairman, Senator Grassley, members of the

committee, I am pleased to appear before you today, although I

have to say, after the type of week I am having, Dr. Hansen’s Frequent Flyer Miles are looking pretty appealing. [Laughter.]

My testimony makes four points. First, about 80 percent of the

FAA’s funding for 2007 was provided from the Airport and Airway

Trust Fund, as my first chart in the packet that you have in front

13

of you shows. The remaining 19 percent was appropriated from the

general fund.

The trust fund is an accounting mechanism in the Federal budget that records specific cash inflows from revenues related to air

transportation and cash outflows from programs that receive resources from the fund.

Annual spending is not automatically triggered by the collected

tax revenue, but is instead controlled by budget authority and obligation limits in each year’s Appropriations Act.

The trust fund receives revenue from taxes levied on the transportation of persons and cargo by air and on jet fuel and gasoline

used in both commercial and general aviation.

The breakdown is shown in the next chart, with roughly twothirds of it coming from passenger taxes. Since 2003, receipts have

grown an average of about 7 percent annually, roughly the annual

gain in nominal GDP over the same period.

CBO has estimated the trust fund’s future balances under certain assumptions, and these projections have received a lot of attention, so I want to explain them carefully.

Under our baseline assumptions over the 2008 to 2017 period, the Airport and Airway Trust Fund would have a total of $158 billion credited to it through those revenues that I just mentioned,

and outlays from it would total $135 billion.

Some people have suggested that, therefore, there are additional

resources that could come from uncommitted balances in the trust

fund. It is very important, however, to realize that the spending

that is part of those projections is based on our baseline assumptions, which are defined from the Budget Act, and they may not

correspond to what actually will occur.

They take an enacted level of budget authority this year and simply inflate it out using overall inflation, and that may not correspond to what is appropriated in the future or what the future

needs are.

In fact, if you adopted the Vision 100 funding formula or S. 1300,

as ordered reported, which will change the general fund contribution, you wind up with only $1.6 billion in uncommitted funds at

the end of 2017, a much different picture.

The second point in my testimony is that congestion and delays

in air travel have been steadily increasing. In 2006, more than 650

million passengers boarded domestic flights. The increasing stress

on the air traffic control system resulting from rising demand for

air travel has been exacerbated by a decline in the average size of

aircraft. The average domestic passenger aircraft had 10 fewer

seats in 2006 than in 1998.

The growth in demand for air traffic services and airport capacity has not been matched by increases in those services or that capacity, and delays are the result. In the most recent data for the

first 5 months of 2007, more than 25 percent of flights arrived

more than 15 minutes late, and of those flights 65 percent were

more than 30 minutes late. Passengers bear a large portion of the

resulting economic cost in the time lost to those delays, nearly 81

million hours in 2006 alone.

The third point in my testimony is that the FAA’s proposal for

substantial investments in a new air traffic control system has two

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important components: first, the Agency proposes to develop and

build substantial new facilities and equipment that it estimates

could cost between $15 and $22 billion by 2025; and, second, in

order to pay for that, the FAA has proposed replacing the current

system of taxes and fees, largely based on passenger volume and

fares, with fees based on aircraft operations and taxes on fuel and

international departures.

That brings me to my final, and perhaps most fundamental

point. Broadly speaking, either taxpayers or users of air traffic control services will pay for the air traffic control system. Although

some benefits of air traffic accrue to the economy as a whole, most

of the benefits accrue to the users of aviation services, the people

who are flying. Therefore, a strong economic case can be made that

users of air traffic control services should pay for a substantial portion of the associated cost.

In addition, most of the current taxes that are levied are based

on the number of passengers and the fares they pay, about twothirds of the trust fund’s collections, for example. The link between

individual passengers and the costs they impose on their air traffic

control system, however, is weak. As has already been pointed out,

the differences in the taxes paid are substantially different than

the costs that are imposed on the system.

I am not going to comment directly on the FAA’s cost allocation

model that was proposed, but the general concept of more closely

linking the fees that are paid to the costs that are imposed on the

system, including the cost of congestion, is a sound economic principle that would better align the incentives for expansion and for

use of the air traffic control system with the underlying costs.

Thank you very much.

The CHAIRMAN. Thank you, Dr. Orszag.

[The prepared statement of Dr. Orszag appears in the appendix.]

The CHAIRMAN. Mr. Dillingham?

STATEMENT OF GERALD DILLINGHAM, DIRECTOR, CIVIL

AVIATION ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE,

WASHINGTON, DC

Mr. DILLINGHAM. Thank you, Mr. Chairman, Senator Grassley,

Senator Rockefeller, Senator Lott, and members of the committee.

My testimony this morning addresses three issues: first, to what

extent can FAA’s current funding structure support its activities,

including NextGen; second, what might be some unintended consequences of selected funding provisions in the Senate and House

reauthorization bills; and, third, what are some of the critical unanswered questions that should be a part of the discussion about

the cost of NextGen and funding the FAA?

With regard to the viability of the current funding structure, we

think that FAA’s current funding structure, which consists primarily of the Airport and Airway Trust Fund and the general fund,

can support FAA activities, including NextGen. Both FAA and the

CBO project that this structure would generate substantially increasing revenues over the next decade.

Those forecasted revenues could support a substantial amount of

additional spending. There is, however, a considerable amount of

uncertainty within the structure, including the extent to which revVerDate 11-MAY-2000 15:00 May 13, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 42111.000 SFIN1 PsN: SFIN1
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enues actually materialize as forecasted, the ongoing cost of both

operating and modernizing the air space system, as well as the increasing competition for general funds.

In any event, Congress could also choose to provide additional

funding within the existing structure by raising the rates of one or

more of the current excise taxes, or increasing the general fund

contribution. Despite its ability to provide adequate revenues to

match planned spending, FAA’s current funding structure does

raise concerns about equity and efficiency.

This is the case because today’s air space user may pay more or

less than the cost of the air services they receive. As a result, the

operators may not have sufficient incentives to use scarce air traffic

resources in the most efficient manner.

With regard to our second issue, unintended consequences of selected funding provisions, some examples of these provisions in S.

1300 are those that would require the FAA Administrator to impose a surcharge of $25 on most flights and the provision that

would authorize debt financing for capital projects.

On one hand, a surcharge would help pay for NextGen capital

projects and create an incentive for efficient use of air traffic services. On the other hand, some stakeholders question the equity of

charging the same fee for all sized aircraft that are subject to this

fee. These stakeholders also raise the possibility that such a fee

could lead to reduced air services for small and rural communities.

The bill’s provision to allow FAA to seek debt financing in the

capital market is a proposal that could possibly create a stable revenue source, but it would also cost the government more than paying for its investments with appropriations or borrowing from the

Treasury.

House bill 2881 contains a provision which allows raising the

Passenger Facility Charge and a series of FAA fees. Raising the

cap on PFCs would provide additional revenues for aviation infrastructure investment. It would, however, likely benefit larger airports more than smaller airports, and could also reduce the demand for air travel.

The new and increased fees for FAA certification and registration

would also provide additional revenues for FAA. This is an outcome

which we support because some of the fees have not been raised

for more than 40 years.

For example, it would still cost the same $5 it cost in 1964 to

register an aircraft with the FAA. The caution we offer here is that

when fees are established for aviation activities, care must be

taken that they do not have a negative impact on safety.

Turning now to some unanswered questions. The questions include: what is the precise technological content, schedule of implementation, and cost of NextGen infrastructure?

A second question: what are the estimated cost savings that FAA

can realize from operational improvements and other cost-saving

activities over the next several years?

To what extent can the infrastructure needed for NextGen be acquired in public/private partnerships or leased to save money and

provide maximum flexibility as technology advances?

Mr. Chairman and members of the committee, as you know, a

timely reauthorization is critically important. During the last reauVerDate 11-MAY-2000 15:00 May 13, 2008 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 42111.000 SFIN1 PsN: SFIN1
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thorization of the tax structure in the mid-1990s, the debate lasted

for 2 years. The taxes and fees expired and the cost to the aviation

system was roughly $5 billion in taxes and fees that were never recovered.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Mr. Dillingham.

[The prepared statement of Mr. Dillingham appears in the appendix.]

The CHAIRMAN. Finally, Mr. Hansen?

STATEMENT OF MARK HANSEN, PROFESSOR, DEPARTMENT

OF CIVIL AND ENVIRONMENTAL ENGINEERING, UNIVERSITY

OF CALIFORNIA, BERKELEY, CA

Mr. HANSEN. Thank you for the opportunity to accumulate miles

and give my own perspective on the trust fund and how it should

be changed to develop an air transport system that the U.S. needs

and deserves.

In my view, such a system must do three things: it must evolve

in response to changing needs, be financed with tax contributions

from all user classes that contribute to this need, and, when necessary, allocate services in a manner that gives priority to those

who pay.

The U.S. has always led the world in finding new ways to both

supply and use civil air transport. The Giants moved to San Francisco after improved air transport made it readily accessible to the

rest of the Nation.

We innovated airline deregulation, which has been adopted in

most of the developed world. Deregulation created a whole new

class of air carrier, the low-cost carriers which are now sprouting

up around the globe.

Deregulation made air travel affordable to the masses, but less

palatable to high-end users. This led to a strong growth in the market for business jets, deliveries of which tripled in the 1990s. These

jets allow those with means to fly nonstop between thousands of

U.S. airports, and to do so on their own schedule. A wide range of

methods for providing on-demand air transportation have allowed

a diverse set of customers to participate in this market.

Innovation in on-demand air transport continues. A new generation of 2- to 6-seat very light jets is entering the market. They will

enable fundamentally new service concepts. For example, Day Jet

is pioneering the use of VLJs as shared taxis, providing next-day

service to individual customers.

Another example is a company called MVP Air that is poised to

enter the intercollegiate athletic travel market. Using 30-seat jet

aircraft, MVP plans to transport college teams on routes which are

not well-served by commercial air carriers.

Consider, for example, a Big Sky game in which Montana visits

Northern Arizona. A charter would take just 3 to 4 hours campus

to campus, while the best commercial airline option would require,

each way, two stops, 10 hours, and 200 miles of airport access travel.

The economics of on-demand air travel rest primarily on individuals’ and companies’ willingness to pay more for air transport in

exchange for time savings. For the Big Sky, we calculated, for an

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athletic charter to make sense, we would have to value collegiate

athletes’ time at $3.70 an hour, about half the new minimum wage.

While the athletes would no doubt agree that their time is worth

more than this, we will see what the colleges think. This typifies

the kind of decisions that will determine the ultimate market potential for on-demand air transport.

Infrastructure and air traffic service providers must strive to accommodate traffic changes resulting from on-demand air transport.

As on-demand air service providers have joined traditional airlines

on higher-altitude jet routes, minimum vertical separations have

been reduced, sectors redesigned, and control decision support tools

introduced to make more room.

But faced with possible proliferation of on-demand small jet services, some believe that even more fundamental transformation is

required. The transformed system, NextGen, is envisioned to increase en route and terminal capacity by as much as threefold over

the next 20 years.

Recognizing uncertainty in just how far the on-demand phenomenon will go, NextGen proponents seek a system where this is

determined by the market without regard to infrastructure limitations. The broad outlines of this system are being developed, as we

all know, by the Joint Program and Development Office.

NextGen offers a technical solution, but it is equally important

to solve the problem of finance. This is where trust fund changes

are required. Commercial airlines generate 95 percent of the funds

for the current system.

If the structure of the taxes feeding the trust fund is not

changed, we face the prospect of financing a system designed to

serve an increasingly diverse set of users through a system of taxes

that falls overwhelmingly on just one subset. This is obviously unfair and regressive. It is also inefficient and risky. It is inefficient

because it makes air travel artificially expensive and on-demand

air transport artificially cheap. It is risky because trust fund receipts will depend on the demand for commercial air travel, while

system costs depend on the totality of flight traffic. NextGen should

be financed in a balanced manner that reflects how each type of

user contributes to the cost of the required system transformation.

If NextGen cannot be financed in this way, we should plan for

a more limited set of capacity enhancements geared to the needs

of commercial airlines. For this to work, FAA must have the authority to restrict access to congested parts of the system in a manner that favors those who are footing the bill. This can be done administratively or through market mechanisms.

It may be that non-airline users would prefer this solution,

agreeing to avoid certain parts of the system in exchange for a reduced tax burden. The key point is that they should not have both

unrestricted access and a virtually free ride. Thank you.

The CHAIRMAN. Thank you, Mr. Hansen. That was very helpful.

I appreciate it very much.

[The prepared statement of Mr. Hansen appears in the appendix.]

The CHAIRMAN. I will begin with you, Ms. Blakey. The key question is, what is the cost of NextGen? There are lots of estimates.

They are all over the lot. But if this committee is going to deterVerDate 11-MAY-2000 15:00 May 13, 2008 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 42111.000 SFIN1 PsN: SFIN1
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mine what the proper balance of taxation should be, fees should be,

say, between commercial aviation and general aviation, we need to

know how much money we need to raise. So we need a pretty firm

estimate as to what NextGen, which you all agree is needed, is

going to cost.

Ms. BLAKEY. A lot of work has been done on this, Senator, over

the last 12 to 18 months. At this point we are very clear that the

cost of NextGen for the next 5 years for the infrastructure, meaning from the standpoint of the revenues we are talking about, is

$4.6 billion. That is what we will need over the next 5 years to

keep NextGen on track. We know that over the course of the entire

period we are talking about somewhere between $15 and $22 billion.

The CHAIRMAN. The entire period is what, in years?

Ms. BLAKEY. Out to 2025. Out to 2025. Now, that is a range, but

it is a range because there are variables: how fast or slow do you

go; what is the cost of money? As well as, in the far-out years there

are some technologies that have yet to be developed.

But I would say, there is no corporation in America that can tell

you exactly how much its capital investments are going to be in

2025, but the estimate we are giving is a good one.

The CHAIRMAN. Now, in addition to providing new technology, is

the FAA taking into consideration the points made by Mr. Hansen,

the small jets and the problems that on-demand are going to create, and all the various ramifications that he mentioned?

Ms. BLAKEY. For the investments that I am spelling out, we are

striving to serve the needs of all of the users of the system. So the

on-demand, the new very light jets, the GA (general aviation) community, as well as, of course, the commercial carriers; that investment will allow us to accommodate all of those.

The CHAIRMAN. Mr. Hansen, do you agree that the FAA’s formulation of NextGen will take into account the future developments

that you foresee?

Mr. HANSEN. I believe it absolutely takes those demands into account. FAA’s forecasts project very large increases in certain segments of GA, particularly the high-performance jets, and those

forecasts are certainly related to the NextGen planning.

NextGen is inherently a high-risk venture, it is a mega-project,

and as such there are many risks to its success. But these do not

include the failure to anticipate the possible demand for ondemand air services.

The CHAIRMAN. Ms. Blakey, again, your estimates up to 2025 are

how much that it is going to cost in addition?

Ms. BLAKEY. For the infrastructure, $15 to $22 billion. There is

also a cost of equippage, because you have to have aircraft

equipped to work in the system, and that is between $14 and $20

billion.

The CHAIRMAN. Who is going to pay for that?

Ms. BLAKEY. That will be paid by the operators of those aircraft.

The CHAIRMAN. Other comments from either Dr. Orszag or Mr.

Dillingham as to the amount that NextGen is going to cost and

whether to adequately foresee the points made by Mr. Hansen?

Mr. DILLINGHAM. Mr. Chairman, I think that there is still a lot

unknown in terms of what NextGen is going to cost. I agree with

19

the Administrator that the further out you get, the less you can

really expect to have tight estimates. But there are some things,

like exactly what is going to be in NextGen, that are still a work

in progress.

Also, issues of the research and development and the demonstration projects that are going to precede the implementation of

NextGen are still works in progress. So it is much closer than it

was 18 months ago, but there is still that range that we need to

be aware of.

The CHAIRMAN. Dr. Orszag?

Dr. ORSZAG. CBO has not analyzed the cost of NextGen itself.

But I would note—and that is why I used the FAA’s numbers in

my oral remarks—that there is a general tendency or concern for

initial estimates to turn out to be too low, so just a broader concern

about the degree to which we underestimate capital investment

costs as they turn out.

The CHAIRMAN. So how much do we have to generally increase

taxes and fees by what yearly amount to reach a reasonable estimate? Has anybody estimated that? How much? Is it a billion more

per year? Two billion more per year? What?

Ms. BLAKEY. On average, over the period of developing the NextGen and putting it in place, it is $1 billion a year. That is

what we estimate. I would also point out that the estimates that

we see, the range we are putting out here for you, are very consistent with what the Europeans are also planning for and funding.

So there is a very parallel cost structure to the one that we are discussing here.

The CHAIRMAN. Does that assume the same proportionate contribution and general revenue?

Ms. BLAKEY. That is simply a question of, how much does it cost?

It does not go to the question of how much should be general revenue versus how much should come from specific taxes and fees.

The CHAIRMAN. But do you recommend the same proportion?

What is it, about 20 percent is general revenue today? Is that correct?

Ms. BLAKEY. Nineteen.

The CHAIRMAN. Nineteen. Do you think that should be maintained?

Ms. BLAKEY. It is very close to what the administration proposed

in our proposal. Yes. Exactly.

The CHAIRMAN. And does anybody have a view on that? Dr.

Orszag?

Dr. ORSZAG. I do not necessarily have a view on it. That component has often been justified or motivated by the argument that

there is a public good or there is some larger economic benefit

being provided by an air traffic system.

The CHAIRMAN. Thanks. All right.

Senator Grassley?

Senator GRASSLEY. I have two questions I have to get an answer

on, but something just came up here, so do not take a long time

to answer. But you were talking about demonstrations. What are

the demonstrations all about? I thought other people elsewhere in

the world are doing what we are talking about doing and we wanted to catch up with the rest of the world.

20

Ms. BLAKEY. There are a lot of developments around the world

and we are——

Senator GRASSLEY. Well, if other people are doing it, is that not

demonstration enough for us that we can move ahead?

Ms. BLAKEY. Well, I think what is accurate is that we have pioneered a fair amount of the technology we are talking about, but

that same technology—the core of it is something called Automatic

Dependent Surveillance Broadcast—is being put in place in a number of places. Russia and Sweden just announced they were going

forward with it. Australia is going forward with it. The Europeans

are going forward with it.

But it is still important, obviously, as we put these things in

place, you have to also develop all of the benefits in terms of how

you use technologies like that, and we are very much working on

that to make sure that demonstrations support, how far can you

get in terms of weather information in the cockpit, all sorts of

things that it can do.

Senator GRASSLEY. All right. Thanks for educating me.

Now let me ask you what I have to have answers for. Mr.

Dillingham, in your statement you mentioned that the proposed

$25 surcharge could have a negative effect on air service for small

and rural communities. Tell us a little bit more about how that can

happen, because this is very important to rural America.

Mr. DILLINGHAM. Yes, sir. Senator Grassley, what I was referring

to was that, by and large, regional carriers are the ones that served

the small and rural communities, and in many cases the profit

margin for those regional carriers is relatively slim. This $25, in

some cases, could push them over the brink so that they would stop

that service.

Then coming in from the other side is the essential air service,

which services small and rural communities as well. What that

would mean is that communities would then be eligible for essential air services and that would have the government probably having to lift the cap for essential air services communities as well. So,

that is what we mean by the potential for an impact on them, because the profit margin is so small, $25 up and down each time.

Senator GRASSLEY. All right.

Then that is a danger if you start looking more for the essential

air service. For years, that program has always been under attack

in Congress and people have been trying to eliminate it.

Mr. DILLINGHAM. Yes, sir.

Senator GRASSLEY. And so if it had more demand, it would probably be more in trouble.

Mr. DILLINGHAM. Yes, sir. I think that one of the considerations

that will have to be made in terms of the $25, or any fee that is

attached, is how is it going to affect small and rural communities.

Senator GRASSLEY. All right.

Now, for all of you—or at least the four of you who have spoken—what do you think about replacing the current 7.5 percent ad

valorem ticket tax with a tax on passengers that is based on distance traveled?

Ms. BLAKEY. Well, certainly distance traveled is a much closer

approximation of the actual cost of the system. It still is the case

that it costs approximately the same to move a small jet as a large

21

jet, and so the numbers of people on board, again, it gets to be a

question of, how close do you want to come to what it is actually

costing us to do? But distance traveled does have, as I say, more

relationship than certainly just a flat excise tax, which is what we

are working with right now.

Dr. ORSZAG. I would concur with that judgment. I should probably clarify something that I had said during my oral remarks. If

you are looking to make an efficient allocation of the costs and the

fees collected, you want to tie the fees collected to the additional

costs that are imposed on the system from an activity, and that

tends to be related to—the first approximation—the flight itself

and less to the number of people on the flight.

Therefore, I agree that moving towards distance traveled sort of

moves in that direction. Still, fundamentally, two jets with half the

number of people as a larger jet will impose twice the cost but pay

the same tax if they are flying the same distance under that kind

of proposal.

Senator GRASSLEY. Mr. Dillingham?

Mr. DILLINGHAM. Senator Grassley, I agree that it does move the

system towards a closer link between costs and revenues, at least

in the en route sector. However, it does not address the terminal

sector. But it is a closer approximation than we have now with the

ticket tax, which has no relationship.

Senator GRASSLEY. All right.

Mr. Hansen?

Mr. HANSEN. I would not support that proposal over the current

ticket tax. I think much of the flight activity in the current system

is generated by the motivation to serve business users who pay

higher fares and prefer higher frequencies.

In that respect, I think the current system does better than the

system you suggested, and they both do a lot worse than a system

that is not based on payload at all, but on flight activity.

Senator GRASSLEY. I am done.

The CHAIRMAN. Thank you.

Senator Rockefeller?

Senator ROCKEFELLER. Administrator Blakey, I think you get the

sense that you are much admired by this committee. But one of the

facts of life is, your term expires on September 13th of this year.

If we were to move forward with this bill and we were able to get

it through this committee, the financing part of it, and it would be

on the floor and it would be on the floor in September, would this

committee have any chance of convincing you to stay on, at least

until the end of September?

Ms. BLAKEY. Senator Rockefeller, you and I have talked about

the fact that I am a 1-term FAA Administrator, and I committed

to 1 term, and that I will serve. You know how much I would like

to see this bill come to successful fruition. If it were helpful to the

Secretary of Transportation, the administration, and this committee, and if we were running to the finish line, I would do everything I could in whatever capacity I could. You know that.

Senator ROCKEFELLER. That is generous and that is kind.

Administrator Blakey, the FAA recently completed a cost allocation study to determine which aviation system users generated

what specific costs. You had a chart, but can you tell the committee

22

again what your study tells us about jets and piston aircraft, and

commercial and GA use of the system, who pays what, currently?

Ms. BLAKEY. I would be happy to. We did a very detailed cost allocation. It analyzed 600 different costs in the system, 600 different

unit costs, and broke them out in terms of where they needed to

be allocated from the standpoint of the use of the system.

And whenever it was a fixed cost and it was one that we felt you

could legitimately put against the existing commercial service, that

is where we put it. So remember that, in terms of variable costs,

we then assigned them as we saw the use of high-altitude terminals, differences in airports, et cetera.

It comes down to this. The costs right now, 97 percent are borne

by the commercial aspects of aviation, commercial users, whereas

the fact is, they are using 73 percent of the cost.

Right now, general aviation is using 16 percent of the cost and

they are paying 3 percent. That is how it breaks out. There are additional costs in there, because obviously there are things like public use aircraft, the use of the military, et cetera, so there is a delta

there, but that is really how it breaks out.

Senator ROCKEFELLER. My final question is also to you. You got

a lot of heat for the fuel tax increase that you proposed for general

aviation in the administration’s bill, about a 50-percent increase, as

I recall it. But you were actually giving general aviation a break,

and I want to probe you with this question.

If you had taken into account the full array of costs that general

aviation imposes on the system, the analog system, like lowactivity towers and flight service stations which you recommended

to be paid for by the general fund, how much higher would the general aviation fuel tax have been to cover those costs?

Ms. BLAKEY. You know, you are right about the heat on this, so

I did look at that pretty carefully. Wherever possible, as I say, we

took those costs off of general aviation. If GA piston users were

paying their fully allocated costs, the general aviation gas tax

would have to be nearly $4 a gallon. For jet fuel, it would have to go up to $1.15 per gallon. Our proposal contrasts pretty favorably with those rates, as you can see,

but that is what it would actually cost to cover the service.

Senator ROCKEFELLER. I thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Roberts, here is your chance.

Senator ROBERTS. Thank you. The key, it seems to me, is modernization. I think we all agree to that. I would say that the general aviation community, other than being described indirectly or

directly by some on the committee, is not unreceptive to an increase in the gas tax. Most of the piston-driven airplanes, however,

do not use instrumentation that gets into the cost in regards to the

FAA.

I understand that when Senator Rockefeller says that 90 percent

of the general aviation community has been exempted from this,

that is what some call affectionately the ‘‘mosquito air force.’’ I

know the reason for that, and I see their reason for that. I also

have the opportunity to talk to Ted Stevens on the floor from time

to time, so consequently I understand that.

23

Basically, I think it is not the fee, not the $25, it is the structure

that I think the general aviation community is so upset about, or

so worried about, so concerned about, because they are for modernization as well.

In terms of the structure, we are talking about the administrative costs, we are talking about a new system, we are talking about

a new Federal responsibility of what kind of a program you or your

successor will have to administer. I would call it a user fee bureaucracy, but that is a pejorative, and so I will not do that.

So all of general aviation is opposed to the fee, even the ones, i.e.,

the 90 percent of the so-called ‘‘mosquito air force,’’ and I think

that should be made part of the record.

I want to say that I fully respect and admire the work done by

Senator Lott and Senator Rockefeller and the time that they have

put into this. But I cannot help but be reminded from Mr. Dillingham’s comments about the thin margin of profit in regards to

what I call our regional puddle jumpers, which I fly a lot.

As a matter of fact, there came a day in a thunderstorm, going

from Kansas City to Wichita, that I decided I would not do that

any more, and so I drive a lot in Kansas.

But be that as it may, the first essential air service subsidy—or

investment, if you want to call it that—in regards to transportation

to rural America by air started in Dodge City, KS and in Wichita,

and it was an outfit called Air Midwest.

The first person to testify in favor of that was because of a public

hearing and a complaint by a bus union. The buses came to Dodge

City once a week, just like the stage. So we thought that that really was not a problem, but they wanted a hearing.

That person was me, representing Senator Pierson and Senator

Dole. At that time, we had Air Midwest serving Wichita, Great

Bend, Dodge City, Garden City, Liberal, Diamond, and then on to

Denver. At six stops, that is 150 bucks under this proposed $25 fee.

Now, that is not a lot of money, but they operated on a very thin

margin. Like everything else, plans do not usually work out exactly

the way people want. We got into some real high fuel costs and we

got into some mergers, and now we have essential air service.

But it goes from Wichita, I think, from Dodge City to Denver,

and Wichita, perhaps, to Garden City on certain flights to Denver,

so that fee would be dropped. But I just wanted to underline the

importance of Mr. Dillingham’s comments in that regard and to indicate that that was back prior to 1980. So, I have been interested

in this for a long time.

Let me just say that I think that there is an impression—it is

not an intended impression, but I think there is an impression—

that when we use the words ‘‘corporate aircraft’’—and Jay, I did

not mean to get into this and interrupt your presentation, although

I have been known to do that in the past and you have been known

to put up with me, which I appreciate.

But some examples of general aviation, business aviation, if you

will—I see we call it ‘‘gulf stream’’ instead of ‘‘business,’’ but then

that is beside the point. Angel Network provides free air transportation for cancer patients. Aero Chapter in Chesterfield, MO uses

jets and turbo-props to transport donated organs. Medical Impact

24

Health Care System, six of them from West Virginia. A dialysis

clinic in Tennessee.

I think we ought to remember that general aviation is not some

kind of a corporate villain in regards to how we describe people.

Anywhere Map is in Pittsburg, KS. I will not get into the owners.

Ethanol products. Mr. Grassley has left. Ethanol products out of

Wichita, KS. I do not know, Senator Rockefeller, whether the president and the athletic director of the esteemed university in West

Virginia, i.e., the Mountaineers, would not, or should not, have a

business jet, small business jet that would go to all the Bowl games

that you win, in football or basketball games in the Final Four, the

Sweet Sixteen, or whatever. I just do not know that. But that is

what I am trying to point out, that these are folks who many times

have no real access to commercial aircraft. So I just want that impression to be set straight.

General aviation members. We have just gone through a drought,

a blizzard, and a town being wiped away by a tornado, and now

many counties are under water in Kansas. We have had many general aviation members volunteer planes to move equipment and

people just as fast as they can. They move, as I said, organ transplants, taking families to visit service members in military hospitals, and also natural disasters.

So I do not know what we would have done without the general

aviation industry, on top of the National Guard, on top of FEMA,

on top of the Salvation Army, on top of the Red Cross in the four

disasters that we have had in Kansas. So, I think that they are certainly good citizens in that respect.

Now, my questions, and I will try to make them brief. Thank you

for your patience. Administrator Blakey, on page 5 of your testimony you claim that the current funding system incentivizes incredible growth in the general aviation traffic.

If this is true, why does the FAA’s most recent aerospace forecast

state that, at the end of 2006, non-commercial aircraft activity remained 16 percent below activity in 2000, given that the tax system has not changed that much over this period of time?

We have had preferential tax treatment, and should have had,

for the airlines, more especially with the pensions, so that is not

a question. But why is the tax system now attributable to forecasted growth in this sector of aviation? Do other factors not play

a role in the forecast?

Ms. BLAKEY. There are a lot of factors that play a role in the

forecast, and of course there is a lot that is lumped into the category that you are talking about.

What we are clear about though is that, in terms of the growth

in business aviation, turbine users, there is a 35-percent growth in

that sector since the year 2001. It is remarkable, it is excellent, but

it is growing at twice the speed of commercial airline traffic. So we

do have to look at this in the segmented form.

I also would note one thing, because I think it is important. I

could not agree with you more, Senator, about the importance of

a lot of the charitable and public use activity in general aviation.

It has always been a backbone in this country; for so much, it is

important. It is important to know that, both under S. 1300 and

25

under the administration’s proposal, those are tax-exempt operations.

Senator ROBERTS. I understand.

Ms. BLAKEY. And they will remain so under these bills as well.

Senator ROBERTS. I understand that.

Do you have a cost estimate for administering any new user fees

as to who would do that: what kind of regulations, what kind of

paperwork, when they fill it out, this, that, and the other?

Ms. BLAKEY. I think it is one of those things that depends on

what it is and how broad a group, and you can make a number of

estimates on this. We think it would be a relatively low amount,

because obviously there are services all over this country that send

out billing and invoices at a very cost-efficient rate.

Whether it is done entirely internally within the U.S. Government structure or whether it is done as something that is done on

a competitive basis by people who do this for a living, it is a very

small percentage of revenue that comes in under most of the scenarios. It does depend on who is it that is being billed, how frequently, and how much.

Senator ROBERTS. The testimony of the good doctor from CBO

states that congestion and delays simply represent a cost increase.

Your testimony also notes that 2007 is expected to be the worst

year ever for transportation delays. At these large hub airports,

what percentage of the annual operations are attributed to general

aviation and what percentage for commercial aviation?

Ms. BLAKEY. I will have to look for a precise figure for that. If

I can get it for you while we are up here, I will certainly do that.

At the large hub airports, it is a larger percentage, obviously, of

commercial than of GA.

But again, business aviation is going into the large hub airports.

That is part of the purpose, of course, is being able to get to our

large metropolitan centers. Let me see if I can get you a percentage

on that, though. I will take a look.

Senator ROBERTS. Well, you can get back to me on that.

Ms. BLAKEY. All right.

Senator ROBERTS. Why do we not do that so you do not have to

take the time.

[The information appears in the appendix on p. 60.]

The CHAIRMAN. Senator, why don’t you give me a little indication

of how much longer you will be here?

Senator ROBERTS. One minute and 37 seconds longer. [Laughter.]

The CHAIRMAN. All right. Thank you.

Senator ROBERTS. So the airlines determine the flight schedules,

which are a key cause for delays and congestion. I am not saying

that is a one-for-one cause by any means. The congestion, in turn,

increases the strain and cost on the system.

The 4.3-cent per gallon fuel tax on commercial aviation encourages, obviously, airlines to operate using the most efficient routes.

If we are to eliminate this tax outside the price of fuel, I do not

know what incentive that the airlines would have to use the most

efficient routes. All of us fly airlines. All of us fly the commercial

airlines.

I am not going to get into names, but there are three or four that

are no more than a cattle car and the rest of them are doing the

26

best that they can. So I just do not think that really giving the airlines a tax break is the best way to start modernization. I think

we have to foster better cost-efficiency.

One other thing. Mr. Dillingham, I see in your Footnote 14 that

GAO has concerns with the study that the FAA conducted to allocate costs. The FAA then based its reauthorization proposal on that

study. Do you believe the FAA’s cost allocation study is fair?

Mr. DILLINGHAM. Senator Roberts, we looked early on at FAA’s

cost allocation study and we determined that, based on what we

were able to do at that point in time, that there were some issues

with the analysis and the way that it was done that caused us

some problems in terms of being able to say that it was an accurate

delineation of costs. However, this is the second study that FAA

has done with regard to cost allocation and this was a much better

done study, more methodologically sound.

I think that some additional work needs to be done to be completely satisfied with this, but unless something major changes, the

general conclusion that the general aviation community is not paying as much for the services that it uses as it should would still

hold true.

Senator ROBERTS. But the general aviation community, again,

has not said they are not willing to pay more in a gas tax. It is

the user fee and the user fee structure, and that—I do not want

to say elephant, or that trunk, is under the nose of the tent. I do

not know where the $25 goes.

One last comment, Mr. Chairman.

The CHAIRMAN. Yes. You have used almost 15 minutes.

Senator ROBERTS. I apologize. Professor Hansen, you flew all the

way here from California to recommend that Congress——

The CHAIRMAN. And over one minute and 37 seconds.

Senator ROBERTS [continuing]. And the Finance Committee actually relinquish jurisdiction on setting aviation taxes and give that

authority to an advisory panel. You have also said that business

jets were able to move the Giants to San Francisco and the Dodgers to L.A. I tossed that in.

You, sir, are a very brave man to advise us that we ought to give

up this jurisdiction. The only thing I see here is, you obviously

must be from Berkeley. [Laughter.] I am done. I am done.

The CHAIRMAN. Thank you.

Senator Lott?

Senator LOTT. Thank you, Mr. Chairman. I will try to save you

a little time by just asking a couple of questions.

First of all, I think it is very important, Madam Administrator,

that we clarify whether or not you are likely to have enough money

coming into the system over the next 5 years to move into the next

generation of modernization. I think it is GAO who says, well,

there may be enough.

But there are questions about it because services may change

and all kinds of events could intervene to, in fact, cut that down.

But I am hearing from certain segments of the industry that do not

want to have to contribute anything more that, hey, what are you

up to here? I mean, you have more than a billion coming in a year

above what you actually need.

27

Now, we need to clarify that. If we do not need more money, I

still think we need to change around some of the responsibilities

and make sure it is fair. But do we need some additional revenue

or not?

Ms. BLAKEY. Senator, we are looking at the fact that the NextGen essentially does cost, on average, $1 billion more a year

to be able to support that.

The fact is, the reason why we are advocating a cost-based structure is that we believe it is critical to bring in what it takes to fund

the system, because there are several key assumptions here. It depends on, as they say, pick your number.

How much are we funding AIP for? If the funding for the airports program continues to increase at the rate historically it has,

I would say that this is a major factor in whether or not the assumptions are correct. It puts a lot of pressure on there being adequate money there.

We also do not know, because of the fluctuations in ticket prices,

how much revenue will be coming in. We see those as being very

significant factors in terms of whether there is enough money.

And the final thing I would say is, as I have looked at the CBO—

and we do not fundamentally disagree with the analysis that CBO

has put forward—it does suggest that spending has to be held

down between now and 2010.

We want, as much as possible, to front-load the funding for the

NextGen because that is the way we can handle the delays we have

right now, and that is the way we can get the benefits, the cost

benefit analysis, which works much better for these investments.

So waiting until way out on the curve has a lot of costs that are

fundamental to the system.

Senator LOTT. Thank you.

Only one other question, and I will address this to GAO. It is

with regard to cost estimates of what a fee would cost. There are

legitimate concerns that it would lead to bureaucracy, difficulty in

complying with the fees, and so forth.

Now, I understand you did a review of air traffic control systems

of other countries, including systems that were funded by user fees.

Based on that experience, what do you estimate it would cost to

collect the $25 surcharge that has been proposed here?

Mr. DILLINGHAM. Senator Lott, it is hard to say how much it would cost to collect the $25 surcharge, but let me tell you, in reference to the work that we did for the Commerce Committee, we

looked at several international ATSPs, or Air Traffic Service Providers, that did charge and collect a user fee.

Basically, Euro Control collected most of those fees for the European community. We found that it came to less than 1 percent,

closer to three-tenths of a percent for the billable that they had. We

found a similar thing in Canada, which is more like the U.S. than

some other places.

Again, it was less than 1 percent, closer to about two-tenths of

a percent. In some cases—I think someone mentioned it earlier this

morning—these things can be contracted out to organizations

where that is what their business is. So, bottom line, from what we

can see, it is a relatively short expense on this.

Senator LOTT. Thank you.

28

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus.

Let me just, first of all, say thank you to the witnesses for traveling so far and participating in this hearing on this very important issue.

Let me ask two or three questions. First, to Administrator

Blakey, with respect to the impact of the proposed tax and user fee

program that you and the Commerce Committee have proposed,

what would be its impact on rural areas?

I share the concerns of Senator Roberts in terms of those States

that are very, very big where you essentially have what I call the

two Americas, you have the America that is close to the big hub

airport, as we do in Denver, with 3 million people, and you have

those places that are served by essential air service, which are 200

or 300 miles away.

The ability to be able to access quality air transportation is very

different in rural communities than it is in larger communities.

That is just a real fact of life. So what would be the consequence

in terms of moving forward with the Commerce Committee proposal in terms of transportation in rural areas?

Ms. BLAKEY. Well, we are very concerned about, and want to foster transportation to, small communities in rural areas. It is a fundamental good in all of this. So we have tried in every way in our

proposal to take into account the low-activity towers, the small operations certainly are ones that we were proposing not be costed

into the cost of the fees and taxes that would be on both commercial and general aviation, but would be funded from the general

fund. So, that was one way that we looked at care to small communities.

I would also point out that the $25 fee, as we did the analysis

on that, also we do not think would have significant impact. We are

looking at the specifics on all of this, because obviously it is a part

of a package that you all will be putting together of a larger financing picture. But as we see it, it would have a relatively small

amount of impact, and frankly no impact for those who are using

essential air service.

Senator SALAZAR. All right. Let me just say this. As we move forward, I have not taken a position here and do not know whether

I will be supporting this proposal or trying to come up with another

proposal, or where I am going to be on it.

But for me, one of the key issues, as we fundamentally restructure what we are going to be doing in terms of fees and taxes with

respect to aviation for NextGen, is going to be how we deal with

the reality of essentially what is the second-class transportation

system that we have through the air into rural communities. It is

going to be a key issue for me.

Let me ask you a second question, if I may. That is, with respect to the costs, I think you said we need about $4.5 billion for

NextGen for the next 5 years. I will note, in a very parenthetical

sense here, that we are spending $10 billion a month in Iraq today,

which is something that we are talking about on the floor. But you

talk about $4.5 billion to essentially rehabilitate and take our air

29

transportation system in America to the kind of quality and efficiency and modernization that we want. How accurate are you that that $4.5 billion number is what we

need for the next 5 years? What is the delta between that amount

and what we would have coming in under the current system if

there were no changes at all that would be made to it?

Ms. BLAKEY. If I said $4.5 billion, I misspoke. It is $4.6 billion,

to be exactly precise, over 5 years. The confidence we have in that

figure is highly granular, because we know exactly what programs

we would be funding. We have begun the funding on a number of

them, so we, I think, can very accurately project what those costs

are going to be.

I would remind you that the FAA’s track record in recent years

has been excellent in terms of keeping its capital programs on

schedule and on budget. Over 90 percent have hit that. Last year,

it was 97 percent. So, I believe you can have confidence in the figure.

Senator SALAZAR. All right. So let us say that we are confident then in that figure of $4.6 billion based on your statement there.

I think Senator Roberts was asking the question about, someone

has said we have $1 billion more coming into the system than we

currently need. Without changing the current structure that we

have in place, is the money there to do the $4.5 billion needed for

NextGen without a change?

Ms. BLAKEY. The money is definitely there under the administration’s proposal because it is a cost to——

Senator SALAZAR. Not under the administration proposal. That is

not my question. Under the current system.

Ms. BLAKEY. It depends, again, on what the funding is during

those 5 years for a number of the line items and what the revenue

is. I might turn to Dr. Orszag here, because he has also looked at

that.

Dr. Orszag?

Senator SALAZAR. Dr. Orszag, please?

Dr. ORSZAG. I do not have a direct answer to your question, but

what I will say is, anyone who is taking our baseline and using

that as a justification for saying that money will be there needs to

very much realize that that baseline assumes a level of spending

that is based on baseline assumptions and the methodology for

that, which means that the spending does not keep pace with economic activity, for example, nor with the number of flights and passengers. So that is not a sound basis for evaluating—it is not a prediction of the future.

It is simply an extrapolation or a system used for baseline purposes and should not be used to evaluate whether ‘‘money’’ will be

there or not, because future spending may well diverge from the

set of assumptions that underlie the baseline.

Senator SALAZAR. Thank you.

The CHAIRMAN. Thank you.

Senator Schumer?

Senator SCHUMER. Well, thank you, Mr. Chairman. I thank you

for holding the hearing.

I know we are talking about financing, but obviously how interested you are in the financing depends on where the money is

30

going. As you know, Madam Administrator, my real problem is

with the FAA’s job in New York, and that is what I want to talk

about and ask some questions about.

There are growing congestion delays and technical problems in

New York. It is reaching a crisis point. I am a regular traveler out

of New York. I spend a lot of time studying the statistics and the

numbers: weather problems stay about the same, traffic stays

about the same in certain airports, and yet delays are greater than

ever and at times you would never expect, even when there are no

weather problems.

So the people of New York who fly know it. They call my office

all the time. Yet, the FAA seems to be in denial about this, saying

everything is hunky-dory, everything seems to be good, everything

is on track. It is unacceptable to me that, with all the technology

we have, that a thunderstorm hundreds of miles out of the flight

path, brings our airports to a standstill.

Dozens of routine flights now are delayed almost on a daily basis.

The airports—LaGuardia, JFK, Newark—the economic artery of

my State, depend on the aviation network, and it is completely

clogged. Delays end up being through the roof. Near misses are on

the rise. Total airport shutdowns have become common.

I say this not just by looking at the numbers, but by being a

traveler. I have flown back and forth between Washington and

New York, which is my home and where my family has lived for,

now, 27 years. It has never been worse than it has been this spring

and summer. Never been worse.

So the bottom line is, how could the FAA let this happen? How

can the FAA say that it is the guardian of our skies when things

have deteriorated so dramatically and you want an increase in the

fees? I would like to see that things are going to get better.

Now, specifically, I have a few questions about this. First, in

May, the last month where we have statistics, there were five near

misses in the air space above New York City. That is unacceptable.

Aircraft are required to stay at least three miles apart. Some were

found to be as close as 500 feet apart, and that could be a disaster

waiting to happen. So I, first, want to know, what is the FAA doing

to ensure the safety of air passengers to prevent near misses?

I am going to ask a second question and let you answer both of

them. The second involves the air traffic controllers and the impasse that you and they have had for the last 2 years. Rather than

take sides on that impasse, I want to see results.

The number of men and women in the towers is fewer than it

should be. In LaGuardia, it should be 36; there are now 26. In JFK

it should be 36; there are 29. In Newark it should be 40; there are

29. Large numbers of them are planning retirement. We need more

controllers in the towers in New York. We need them quickly.

What is being done to solve that impasse? Those are my two first

questions.

Ms. BLAKEY. Senator Schumer, I think this discussion illustrates

the fact that we need to be in closer touch, and I certainly look forward to briefing you in detail because, with regard to your broad

point, the FAA is certainly not in denial. It is the subject of this

hearing.

31

I have, over, and over, and over again said that the air traffic

system in this country is over-taxed. It is 1960s technology. There

are only so many things that we can do to continue to try to patch

and make what is very old technology continue to work.

We also, as you may be aware, are seeking to redesign air space.

We have a major endeavor that has been taking place over 10

years in the New York, New Jersey and Philadelphia area that we

are seeking to complete that can reduce delays by as much as 20

percent. We have major initiatives on at JFK.

But there is no question about the fact that you are flying in

some of the most congested air space we have, with airports that

at this point do not have an adequate air traffic control system

until we go to the NextGen, and we will do everything in the meantime to scale up.

With regard to the question about near misses, what you are referring to is a system where anyone may contact us and say they

believe that there was a loss of separation: pilots, whether they are

general aviation, whether they are commercial, et cetera. I would

make the point that ‘‘near misses,’’ operational errors, are, in fact,

down. Our controllers do a wonderful job, so the trend is absolutely

in the other direction.

But we are investigating anything that is reported over that system. What we have found so far preliminarily on the ones that you

have mentioned, is that in each case where the aircraft was under

FAA control, the pilots were notified of another aircraft being nearby or their alert system also came on, and there was not in any

case any extreme action required. So, I think you should feel that

the system does work, and it has worked.

Senator SCHUMER. Five hundred feet is pretty close. That is a

matter of seconds.

Ms. BLAKEY. Again, we will look at all these in specific. If there

are changes that we need to make, believe me, we will make them.

Let me just also mention again, I think this illustrates the fact

that we need to be providing you more briefings and more information, because the figures that you were using for our facilities—you

mentioned 29 for JFK; there, in fact, are 35 there. On LaGuardia,

you mentioned 26; there are, again, 35 there.

Senator SCHUMER. How about Newark?

Ms. BLAKEY. I will have to get you a Newark figure. Here is my

table of all of the facilities.

Senator SCHUMER. Right.

Ms. BLAKEY. So watch me while I search a moment here.

Senator SCHUMER. We spoke to the controllers in the tower, and

they give us these numbers.

Ms. BLAKEY. I am sorry. They are inaccurate. But I would be

happy to show you the personnel records to make sure we are on

the same page here. Newark. Let me see if I can find Newark

quickly.

The CHAIRMAN. Well, thank you, Senator. I think we are going

to have to move on. Thank you.

Senator SCHUMER. I will just ask you to send it to me in writing,

please.

Ms. BLAKEY. Not a problem.

Senator SCHUMER. Thank you, Mr. Chairman.

32

The CHAIRMAN. I would be interested in that result myself,

frankly. Thank you very much.

Senator SCHUMER. Thank you, Mr. Chairman.

[The information appears in the appendix on p. 61.]

The CHAIRMAN. Senator Bingaman?

Senator BINGAMAN. Thank you very much. I am sorry I was not

here for all of the earlier testimony. I am just trying to understand

all the different policy objectives that we are trying to accomplish

in this area. One, obviously, is to raise the revenue needed to modernize the system. That is obvious.

Second, we obviously want to encourage increased air transport

in under-served parts of our country. I think everyone would agree

with that. We want to avoid increased congestion in the urban

areas. That is what Senator Schumer was just talking about.

In light of those three policy objectives, why would it make any

sense to eliminate the fuel tax on commercial airlines?

Ms. BLAKEY. Well, the administration’s proposal does not do that.

Senator BINGAMAN. Does not propose that. Right.

Ms. BLAKEY. So I would point that out. I think, again, the consideration for your committee is going to be, what does the entire financing system and package look like together, because there are

interacting points here.

Senator BINGAMAN. Right. Right.

Ms. BLAKEY. What I do think, though, is important to take into

account is what has been discussed a good bit here today, and that

is the fact that the system is inequitable as it is right now.

Senator BINGAMAN. And I understand that.

Ms. BLAKEY. Airlines are paying much more than their fair

share.

Senator BINGAMAN. You believe strongly we should have a costbased structure. I am not disagreeing with that, but I still do not

understand. You can have a cost-based structure, as you have proposed, without eliminating the fuel tax for commercial airlines.

Ms. BLAKEY. I would agree with you. I think various elements of

financing have to come together to create an equitable allocation of

the costs. Certainly there can be—and as I say, the administration

did propose—that there continue to be a fuel tax that the commercial airlines would pay.

Senator BINGAMAN. If you are also going to raise some of the revenue from some type of fee per flight or surcharge per flight, which

is what the Commerce Committee, I guess, has suggested, it would

seem to me to make a lot of sense, in order to pursue these kinds

of objectives that I have outlined, to make a distinction between

congested hub airports and the rest of the country.

I can understand Senator Schumer’s concerns, and I share them,

about flying in and out of LaGuardia and in and out of JFK. In my

State, what I am trying to do is to ensure that we do not do anything to discourage flights in and out of Silver City, and Espan ̃ ola,

and Reserve, NM and places like that, where really their only way

to get to and from major urban areas is by aircraft sometimes.

So it would seem to me, if we are going to have any kind of a

fee—I do not know that that makes sense to do—but if we were

going to enact a fee we should certainly not apply it to small, nonVerDate 11-MAY-2000 15:00 May 13, 2008 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 42111.000 SFIN1 PsN: SFIN1
33

congested airports or flights in and out of those. Would any of you

have a thought on that?

Dr. ORSZAG. I guess people are turning to me. I will take a crack

at it. I think congestion pricing can have a significant effect on

leaning towards a more efficient outcome, so your general intuition

is correct.

The key there is, there would be some differential between the

congested and the non-congested areas. Whether there should be

any fee imposed on the non-congested areas comes back to what

additional costs are imposed from flights in and out of those areas.

They still have some air traffic costs associated with them.

Senator BINGAMAN. All right.

Ms. BLAKEY. In terms of the cost allocation that we did, we did

take into account the costs that are imposed at major hubs. They

are very different from less-congested airports and air space that

is much less congested. We tried to make sure that we were allocating the costs correctly from that standpoint.

Senator BINGAMAN. But the administration did not recommend

any kind of surcharge or fee per flight, as I understand it. Am I

misunderstanding that?

Ms. BLAKEY. We did not. What we did was a cost-based system

of fees based on the actual cost of using those various components

of the system. We also talked in terms of a fee for certain very

highly used airports that everyone would be paying.

Senator BINGAMAN. These 30 top large hub airports.

Ms. BLAKEY. The 30 top. Right. Correct.

Senator BINGAMAN. And you do think a fee would be appropriate

with regard to people flying in and out of those large hub airports?

Ms. BLAKEY. That was the way we looked at this, yes. But we

certainly tried to make sure that we were allocating accurately between the congested terminals and the ones that are not.

Senator BINGAMAN. All right.

I will stop with that, Mr. Chairman. Thank you very much.

The CHAIRMAN. Thank you, Senator, very much.

I have a question for Mr. Barthold; that is, basically the current

tax structure that general aviation works or does not work with,

and the degree to which they work with it.

Generally, as you know better than anybody here, commercial

airlines have a 7-year depreciation on their planes, whereas general aviation, business aviation, is 5 years. On top of that, there

are lots of different techniques that can be used to lower the costs

to the owners of private planes.

I will read a quote here. This is a fellow from New York who has

a plane. He said, ‘‘Not only did ATC’’—that is a tax consultant—

‘‘help me realize the income tax savings available on the ownership

of my aircraft, but I was also able to purchase it without paying

any sales tax on the purchase price.’’

So I guess I am basically asking, from a tax fairness and a tax

equity perspective, your suggestion of what this committee might

look at in terms of the code as it applies to not only commercial,

but also in this case, especially, private aviation.

Mr. BARTHOLD. Senator, you are correct that the depreciation recovery period for commercial aircraft is 7 years, and that for busiVerDate 11-MAY-2000 15:00 May 13, 2008 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 42111.000 SFIN1 PsN: SFIN1
34

ness use of aircraft, other than contract-carrying passengers or

cargo, is 5 years.

Naturally, one might ask the question, why the difference? I

think the real question for the committee to think about is, what

is the economic depreciation? These are different sorts of assets, so

it is possible that the economic depreciation might well be different

for the two types of assets.

I might remind the committee that, in fact, you asked the Treasury Department for a study relating to updating depreciation lives

in a number of different uses a couple of years ago, and the Treasury Department responded that they thought that there was, indeed, some need to update lives, but did not give any specific recommendations at that time. So, this might be an area that the

committee might want to seek further information on in terms of

what really is the economic depreciation of these different assets.

As you are aware, for example, the commercial airlines spend a

substantial amount of money in terms of maintaining their aircraft,

updating the airframes, putting on new wings to give them a very

long life and use, and that can, of course, affect their economic

value and resale. That could be an argument for why there could

be different depreciation lives, but it would seem that it would warrant further investigation.

The other point that you raised in your question seems to go to

general concerns that some people have expressed about nonbusiness use of aircraft by businesses. I did note in the one

quotation that you cited that the individual essentially said that he

had avoided paying sales tax.

It seemed to suggest that he might have been purchasing his aircraft primarily as a pleasure craft, but had the aircraft purchased

by a business that he owned. Many States, under their State sales

taxes, provide exemption for business purchase of capital equipment.

So if you were able to either factually, or perhaps aggressively,

label the purchase of his aircraft as a business asset, he may have

avoided paying the State sales tax. That, of course, is not a Federal

tax issue. Others have raised different questions in terms of nonbusiness use of aircraft purchases purchased by businesses for

other business purposes.

I might remind the committee that in 2004 legislation, the committee did address some of these concerns. It was referred to in

committee as the Sutherland Lumber case, and it relates to when

there is an income inclusion to an employee for transportation provided on a business aircraft for other than a business purpose, such

as flying you out to play a round of golf, or the like, and when and

what the business may properly deduct as a business expense in

those situations. So, the committee did act somewhat in that area.

In terms of a recommendation, as you are aware, the Joint Committee staff has recommended that there be an equalization in the

treatment of all employees, what the Congress enacted as part of

the American Jobs Creation Act in 2004.

It gave one rule for deduction of expenses related to aircraft use

when the non-business travel was provided to owners or top officers of the business, and there is a separate rule for employees who

are below that senior level.

35

So, both on grounds of simplicity and in terms of really sort of

properly measuring income and cost to the business, the Joint

Committee staff has suggested that it would be appropriate to have

the same rule apply to all employees.

The CHAIRMAN. Well, thank you very much. Those are good comments. I think it is an area that the committee is going to look

into, namely as we work out the general questions that have been

raised here today.

I also, at the same time, want to look at the taxation and depreciation in similar provisions with respect to both general aviation,

as well as commercial aviation. It is an opportunity to try to get

some fairness here.

I am going to turn the whole hearing over to the Senator from

New York, because I have to leave at this moment.

Senator SCHUMER. Thank you. I only have about 5 minutes more

of questions.

The CHAIRMAN. I am sorry. But I want everybody to know that

this committee takes this issue very seriously. We like to pride ourselves on solving problems. This is a big one. There is a lot of controversy on how much we should pay.

This committee will undertake this challenge very vigorously to

try to find a good, fair, equitable solution here. I suspect we will

probably be consulting with many of you here as witnesses, as well

as some others, as we try to fashion that result. But we will, in this

committee, find a solution.

I have high expectations that it is going to be one that not everybody is going to love, but the hope is that it is one that everybody

will recognize as, hey, that is within the bounds of reasonableness,

it is basically fair, and that is what we will attempt to do. Thank

you very much.

The Senator from New York.

Senator SCHUMER. Thank you, Mr. Chairman.

I just would like to resume my questioning of Administrator

Blakey.

The numbers you gave me, I am told, include administrators, supervisors, and people who are trainees. The numbers we are talking about are numbers of people who are supposed to be watching

the screens; those three categories do not. Is that incorrect? Are the

numbers you gave me, 35, all people watching the screens?

Ms. BLAKEY. They are people watching the screens. They do include people in training. As you probably know, the way we work

with our developmentals, as they are called, is they do, once they

have gone through full academic training, begin working certain

sectors. They qualify on a sector, then they take on another sector

in the air space. So they are eyes on the screens. They are eyes on

the aircraft coming in. But at the same time, they are learning additions to their jobs.

Senator SCHUMER. Right.

Ms. BLAKEY. But the figures I gave you do not include supervisors and managers.

Senator SCHUMER. All right. But the people who are trainees do

not watch a screen alone, they are with somebody else. They are

not an extra set, an additional set of eyes.

36

Ms. BLAKEY. You have people who are looking over their shoulders. Again, that is why you have operational supervisors and managers in those facilities helping with that.

Senator SCHUMER. I am told that the numbers that I have given

are the numbers of eyes on the screen as opposed to eyes supposed

to be, but we will debate that later. I have limited time.

Ms. BLAKEY. I would be happy to come up and talk with you in

detail about it.

Senator SCHUMER. Here is my next question. In March,

LaGuardia, a very crowded airport, had 3 percent less traffic than

in the previous year. This is March of 2007, March of 2006. You

compared weather patterns, and every meteorologist would agree

that the weather was actually better in March of 2007 than 2006

for flying. Yet, the delays were up a significant percentage. Why is

that?

Ms. BLAKEY. Because everything is not a function of the airport

and the airport surface. You have three major airports, plus

Teterboro, all interacting during that same time. It is a function

not only of what the airport itself can accommodate, but what is

going on in the air space. It is also in the end route air space.

If you are having problems with either weather or congestion

that can go out as far as Chicago, we can have ground holds and

ground stops at LaGuardia, which certainly will slow up the traffic.

I am sorry, I do not have the exact scenario for March right now

in front of me. I would be happy to look at it.

Senator SCHUMER. I would ask you to give me an explanation as

to why March was——

Ms. BLAKEY. But it has to do with en route, it has to do with

the complex in that area, as well as the specific airport.

Senator SCHUMER. All right. Next question. You said that all of

your technological changes are on schedule, or 90 percent of them,

I think you said.

Ms. BLAKEY. Ninety percent is accurate.

Senator SCHUMER. Here is the problem. In my judgment—and

this may not be your doing—the administration has so starved the

FAA for the funding it needs, given the increase in travel, that the

schedules are stretched out in slow walk. For instance, radar systems, which are vital. It is going to cost $916 million, as I understand it, and it is not going to be deployed until 2013.

The experts tell me, if they wanted to spend more money per

year, they could deploy it a lot quicker. It would not take 6 years

from now—and this is a few years back from when they started—

to do it.

But my question is, do you ever go to OMB and argue for more

funding for things like this? Do they tell you no? Then what do you

do about it? It is not acceptable to say that this important system,

which could really help us fly better, quicker, and avoid the delays,

will not come on board until 2013.

Ms. BLAKEY. I am not clear, frankly, what group of equipment you are putting into the $916 million, but I would be happy to look

at that figure and see what that might be about. I can tell you that

we always sit down in the course of developing a budget for the following year, in a 5-year projection of budget costs, and look at what

the most critical needs are in the system.

37

Senator SCHUMER. Let me just say, it is the ARS–11 system.

Ms. BLAKEY. All right. I will be happy to take a look at ARS–

11. I know that that deployment actually is proceeding on schedule,

so I do not think there are issues there, but I would be happy to

see.

Senator SCHUMER. No, no. What I am saying here is, the schedule itself is very stretched out because, as with many agencies, not

yours alone, this administration is sort of starving government

agencies if you are not in the right two or three.

I think a good part of your job is to fight for more funds and not

say that this very important system will not take effect until 2013.

You can come here and say it is on schedule, but it is the schedule

that is the problem. It is not good to be on schedule when it is

going to finish by 2013.

Ms. BLAKEY. Well, certainly we do not feel starved for funds, so

I will tell you that, in terms of the administration’s position on

funding capital programs, we have a very strong track record.

The issue of ASR–11s, they obviously interact with other technology. You have a planned development for every airport and for

the facilities that those radar are supporting. Different forms of

technologies all come into play because they interact with each

other. ASR–11s, for example, are a part of the STARS system, the

modernized TRACON system. You again deploy as it makes good

sense, and you can bring those in together.

Could you speed things up? You could always speed things up.

But Senator, one thing I would caution about is, we are also trying

to move to the NextGen. That is a satellite-based, very, very different system. So what we are trying to do is put in place the funding that goes to that.

Senator SCHUMER. Now, again, you talk to people who work in

the control towers, they talk about leaks, they talk about poor

equipment. They say—they say—that it is very hard to get money

out of the FAA to do normal things, that they are capitally starved.

So, again, we will have to continue this discussion. I do not want

to hold the panel up.

But my reading is that things could be a lot better if we adequately funded the agency, and that we are not. This agency is

where safety ought to come first and the passenger convenience

ought to come second. To this administration, the bottom line for

them is more important certainly than the second factor, and

maybe even sometimes than the first.

So we will have to continue this discussion and debate. But I

cannot tell you how disappointed my constituents are in how things

are going this summer in terms of flights and their on-times, their

delays, their cancellations, and everything else.

With that, I thank you for listening. I want to thank the entire

panel for being here, and look forward to continuing the discussion.

I guess—and this is the first time I have been Chairman of this

committee—we are adjourned.

[Whereupon, at 12:12 p.m., the hearing was concluded.]

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