50. -- =) negotiation, had it not’ been subject to the exemption. "So the question was what to do about it. And.finally, we made a volun-_ tary repayment against part of the profit on that contract to the Air Force." As noted previously, the commercial airline aspect of the operation was not making a profit and in fact operated mostly at a loss. Indeed, there were periods of time when the C-46's and C-47's cargo carriers were very busy on either CIA contracts, the Korean War, Diem Bien Phu, and other paramilitary aspects. There would be periods in between these activities when there was - nothing for the airlines to do. Nonetheless, the airline was still. saddled with expenses such as crews' salaries and maintenance of the aircraft which sat on the ground. cy So George posed, and we finally organized, the stand- by contract, which was an apparent military entity on Okinawa. It was our entity, but it had a military designation. TI can't remember the name for it. And that entity contracted with Air America for so many hours of cargo stand-by to be available any time on all, and that they would pay so much for that capa- bility being maintained. . . so that is. how we kept the subsidy going to maintain them during periods when there was not profitable flying. Another area of concern was the question of the relationship with the Internal Revenue Service. From the very start, the company management was informed that they would.be required to pay the appropriate U. S&S. taxes, and while there were the usual business arguments about whether certain items were appropriate for taxation and whether certain deductions should have been granted, the rela- HW 50955 Docld: 32423532 Page 152
rs cN S/ - ee - tionship maintained with the IRS was basically a normal one. Houston recalled that in the mid-50's the company, Air America, ‘received a notice that they were going to be audited by the IRS. Company officials came to the Agency and indicated that this might pose a problem in terms of security. The Agency went to the Com- missioner of the Internal Revenue Service and indicated that they would like to have the Commission conduct the audit and have the audit done by a team on an unwitting basis to see what they could find out. "We thought it would be a good test of the secur- ity of our arrangements.” They put a very bright young fellow on and he went in- to it. They came up with discrepancies and things that would be settled in the normal tax argument, corporate- IRS argument, and all of these were worked eventually, and then we went to this fellow and said, Now, this was owned and backed by the CIA, the U. S. Government. What was your guess as to what was happening? And he said, Well, I knew there was something there, and I thought, what a wonderful asset it would be for the Russians to have, but:I came to the conclusion that it was Rockefeller money. Thereafter, the IRS would be notified if it began to conduct an audit on an Agency proprietary, and the audit would be discontinued. As the operations of Air America developed the problem of large cargo carriers arose. In the. early days of its operation the airline was using C-54's, which had an extremely limited range but were able to perform notwithstanding under demanding circumstances. Discussions proceeded during that period about modernizing the equipment and the Agency, through the proprietary, bought DC-6AB's, a conversion of the DC-6, which had large cargo doors installed in it. They, HW 50955 Docld:32473532 Page 153 ~
Ca however, did not maintain any jet equipment at that point. This cargo system which they developed was getting heavily into a mil- itary air transport contract system. The system was first known as MATS, and then it became MAC. They got MATS contracts, and Air America got these, and these were very good to keep a constant utiliza- tion at a good rate, the MATS rates were usually good, because the policy was not to do competitive bidding for the lowest bidder because then you got the poorest service, but give good rates to the carriers, and then require the carrier belong to the Civil Reserve Air Fleet. In 1956 MATS changed its policy and required that bidders on the contracts to be certificated. Of course, there was no. real way. . that Air America could become certificated and so the Agency decid-- ed to purchase Southern Air Transport. While it was technically o>. a separate entity, not involved in the Air America complex, it was actually an integral part from the management point of view, in that all management decisions were centered again in George Doole and. the advisory team in the Agency. MAC eventually also decided to require that bidders not only have to be certificated, but had to have equipment qualified for the Civil Reserve Air Fleet. and this. meant jet equipment. . As a result. the Agency went into the acquisition of Boeing 727's. Mr. Doole eventually convinced Boeing that they should modify the 727 to enlarge the ventral exist, which was already in the plane, so that the plane would then have a large airdrop capability. Boeing did so modify the plane and it proved entirely useful for these purposes. "So the theory was that the —_, HY 50955 DBocld: 32423532 Page 154
53 - ee - — 727's would be used on MAC contracts to be available on an over- riding basis if needed for some major national security operation. They were used, usually when they had spare time. | To my recollection, they were only called off once, off the actual contract time, and this was for a possible use which didn't go through. But the White House asked if we had the capability to move some- thing from here to there, I think from the Philippines to somewhere in Southeast Asia, I don't recall, and so they sent word to management that they wanted a plane available at the earliest opportunity at Clark Field. . They pulled one of them off the MAC contract and had it available, I think ready to go, in twelve hours, all set for the operation. And the operation was never called. But it showed what the capability was... And what they had to do was get substitute service for the MAC contract. During the late 1960's several Chinese airline enterprises started, both of them on quite a small basis, but one of them which became CAL had official backing. This occurred while the CIA's proprie- tary was still flying under the flag of China. With the establish- ment of these indigenous Chinese nationalist airlines which would . fly these routes, the Agency began to plan reducing its inter- national carriage work. It decided it would keep the MAC contracts because this did not bother the Chinese. There was in fact no com- petition in this area. But plans were started to reduce the inter- national common carriage. This Agency proprietary, Civil Air Trans- port Company, Ltd., which had been organized in 1954, had the right 7 in international air auditing. to negotiate for air routes. That was the entity that therefore did the common carriage. Thereafter, Air America did the American contracting followed on then by Southern Air Transport, due to its certification. Southern was ‘2. HW 50955 Docld: 32423532 Page 155
ms brought on to perform the MAC and MATS contracts with planes | leased from Air America, which included 727's. Southern Air Transport actually owned one 727 and leased two from Air America. Houston noted that it was at this time that an internal de- cision was made "we probably couldn't justify this major airlift with the big jets, and so we started giving rid of them. See, they © had no utilization to speak of down in Southeast Asia. A couple of supply flights went into India, and I think we used prop planes for that, to my recollection." So the Agency began to phase out the 727's. This, of course, led to the decision to divest the Agency of Southern Air Transport and eventually of Air America. Internal management problems were assisted in 1963 by the establishment of an executive committee of the board of directors of the Pacific Company, Air America and Air Asia. The overt board of directors in New York City passed a resolution organizing an executive committee, which included Mr. Doole and two’ other directors. Covertly, the Agency put with that executive committee some of its representatives. This. resulted in management and the Agency being represented on the executive committee of the Board, and permitted the viewpoints of management, Agency and the operators to meet in this executive committee to consider policies and make actual deter- minations and give guidance to the company. Houston indicated that this mechanism was extremely effective in controlling the company. HW 50955 Docld:324239532 Page 156