Federal Aviation Administration: Challenges for Transforming Into a High-Performing Organization
Published: 2004-05-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Over the last two decades, FAA has experienced difficulties meeting the demands of the aviation industry while also attempting to operate efficiently and effectively. Now, as air traffic returns to pre- 9/11 levels, concerns have again arisen as to how prepared FAA may be to meet increasing demands for capacity, safety, and efficiency. FAA's air traffic control (ATC) modernization efforts are designed to enhance the national airspace system through the acquisition of a vast network of radar, navigation, and communication systems. Nine years have passed since Congress provided FAA with personnel and acquisition reforms. However, projects continue to experience cost, schedule and performance problems. FAA's Air Traffic Organization (ATO) is its most current reform effort. Expectations are that the ATO will bring a performance management approach to ATC modernization. This statement focuses on three main questions: (1) What are some of the major challenges and demands that confront FAA? (2) What is the status of FAA's implementation of reforms and/or procedural relief that Congress provided? and (3) What are some of the critical success factors that will enable FAA to become a highperforming organization?
section_title: What GAO Found
paragraphs: A forecasted increase in air traffic coupled with budgetary constraints will challenge FAA's ability to meet current and evolving operational needs. The commercial aviation industry is still recovering from financial losses exceeding $20 billion over the past 3 years. Many airlines cut their operating expenses, but FAA's budget continued to rise. However, transportation tax receipts into the Airport and Airways Trust Fund, from which FAA draws the majority of its budget, have fallen by $2.0 billion (nearly 20 percent) since 1999 (in constant 2002 dollars). Cost-cutting and cost-control will need to be watchwords for FAA from this point forward. FAA has implemented many of the reforms authorized by Congress 9 years ago, but achieved mixed results. Despite personnel and acquisition reforms the agency contended were critical to modernizing the nation's air traffic control (ATC) system, systemic management issues continue to contribute to the cost overruns, schedule delays, and performance shortfalls. FAA's most current reform effort, the Air Traffic Organization (ATO) -- a new performance-based organization mandated by AIR-21 that is operating the ATC system is just now being put in place. To meet its new challenges, FAA must fundamentally transform itself into a high-performing organization. The key characteristics and capabilities of high-performing organizations fall into four themes: (1) a clear, well articulated, and compelling mission; (2) strategic use of partnerships; (3) focus on the needs of clients and customers; and (4) strategic management of people. FAA has taken some promising steps through its new ATO to restructure itself like high-performing organizations, but still faces significant and longstanding systemic management challenges. Even modest organizational and operational changes at FAA can be difficult and time consuming.

section_title: Letter
paragraphs: We appreciate the opportunity to participate in today’s hearing to discuss  the challenges that FAA faces both in the immediate environment and over  the next decade. We all recall that in the summer of 2000, the air traffic  control system lacked the capacity to handle demand efficiently, and flight  delays produced near-gridlock conditions at several U.S. airports. A  combination of factors — the downturn in travel caused by the general  economic slowdown, SARS, and of course the crises instigated by the  events of 9/11 – reduced traffic significantly and reduced pressure on the  air traffic control system.
Passenger traffic and airline operations are slowly returning to previous  levels, making this an appropriate time to re-examine the status of nation’s  aviation leadership and infrastructure and its preparations for the future of  air transport over the next decade. FAA’s budget request for 2005 provides  a starting point from which to review the agency’s direction.
My statement today focuses on three main questions: (1) What are some of  the major challenges and demands that confront FAA? (2) What is the  status of FAA’s implementation of reforms and/or procedural relief that  Congress provided? And (3) What are some of the critical success factors  that will enable FAA to become a high-performing organization? Our  statement is based on our past reports on ATC modernization and airline  competition work—updated to reflect important milestones and recent  interviews with key stakeholders in the aviation community, including  several current and former FAA officials. We performed our work in  accordance with generally accepted government auditing standards.
Significant external and internal demands will challenge FAA’s ability to  meet current operational needs and require it to adapt to meet the  evolving needs of the aviation industry. The commercial aviation industry  is still recovering from financial losses exceeding $20 billion over the past  3 years. The downturn in travel has affected the Airport and Airways Trust  Fund, from which FAA draws the majority of its budget. Transportation  tax receipts into the Trust Fund fell by a total of $2.0 billion (19.6 percent)  between 1999 and 2003. The overall condition of the Federal budget adds  more pressure on FAA’s budget. Taken together, cost-cutting and cost- control need to be watchwords for FAA from this point forward. To meet  the demands of the aviation industry for safe, secure, and efficient  operations and for additional capacity to meet forecasted growth, FAA will  need to continue to improve its management controls. Traditionally, FAA’s  ability to operate efficiently and effectively – particularly regarding its air  traffic control modernization projects — have been hampered by  inadequate management of information technology and financial  management controls.
Nine years have passed since Congress provided FAA with the personnel  and acquisition reforms the agency contended were critical to successfully  modernizing the nation’s air traffic control (ATC) system. Despite these  reforms, systemic management issues, including inadequate management  controls and human capital issues continue to contribute to the cost  overruns, schedule delays, and performance shortfalls that FAA’s major  ATC projects have consistently experienced in the past.
Personnel reforms addressed three broad areas: (1) compensation and  performance management, (2) workforce management, and (3) labor and  employee relations. FAA has taken steps to implement a number of  reforms in each of the three areas. For example, in the area of labor and  employee relations, FAA implemented initiatives establishing new  partnership forums for union and nonunion employees and a new model  work environment program. However, in February 2003, we found that  the agency had not fully incorporated elements that are important to  effective human capital management, including data collection and  analysis, performance goals and measures, and establishing links between  reform goals and program goals.
As part of its procurement reforms, FAA introduced a new acquisition  management system in 1996 to reduce the time and cost to deploy new  products and services. To FAA’s credit, our work has shown  improvements in the agency’s oversight of investment risk, tracking key  information from the investment selection process in a management  information system, and implementation of guidance for validating costs,  benefits, and risks. However, in estimating the costs of new projects, FAA  has not yet incorporated actual costs from developing related systems.  Moreover, the agency has not yet implemented processes for evaluating  projects after implementation in order to identify lessons learned and  improve the investment management process. These weaknesses have  impeded FAA’s ability to manage its investments effectively and make  sound decisions about continuing, modifying, or canceling projects.
FAA’s Air Traffic Organization (ATO) is one of its most current reform  effort. Under the leadership of a Chief Operating Officer, the ATO is a new  performance-based organization that is operating the ATC system. While  the ATO holds promise for laying the foundation for much needed and  overdue organizational change, progress has been slow, and the office still  faces significant challenges to implementing reform To meet the challenges of the 21st century, FAA must fundamentally  transform itself to become a high-performing organization. Our work has  shown that high-performing organizations have adopted management  controls, processes, practices, and systems that are consistent with  prevailing best practices and contribute to concrete organizational results.  Specifically, the key characteristics and capabilities of high-performing  organizations fall into four themes (1) a clear, well articulated, and  compelling mission; (2) strategic use of partnerships; (3) focus on the  needs of clients and customers; and (4) strategic management of people.  To facilitate the transformation of federal agencies to high performing  organizations, we have also recommended that agencies apply the Chief  Operating Officer concept to provide long-term attention and focus on  management issues and transformational change. FAA has begun  implementing this concept. While FAA has taken some promising steps  through its new ATO to restructure itself in a manner consistent with high- performing organizations, the agency still faces significant and  longstanding systemic management challenges  which must be overcome  if it is to meet the demands and match the pace of ongoing changes in the  aviation industry and transform itself into a world-class organization. Our  work for more than two decades has shown that even modest  organizational and operational changes at FAA can be difficult and time  consuming, which underscores the difficult road ahead for FAA’s  leadership.
subsections: section_title: Significant External and Internal Demands Will Challenge FAA’s Current and Evolving Operations
paragraphs: FAA faces significant demands that will challenge its ability to operate  both in the current environment and in what it expects to encounter in the  coming decade. With the industry still attempting to recover from the most  tumultuous period in its history, FAA’s funding is constrained by lowered  Airports and Airways Trust Fund receipts and increased pressure on the  contribution from the General Fund. To meet its current and future  operational challenges, FAA is facing demands for greater efficiency and  accountability. And it goes without saying that FAA must continue to meet  demands for maintaining safety standards.
subsections: section_title: The U.S. Commercial Aviation Industry Is Still Recovering From Unprecedented Financial Chaos
paragraphs: Since 2001, the U.S. airline industry has confronted financial losses of  previously unseen proportions. Between 2001 and 2003, the airline  industry reported losses in excess of $20 billion. A number of factors –  including the economic slowdown, a shift in business travel buying  behavior, and the aftermath of the September 11, 2001 terrorist attacks— contributed to these losses by reducing passenger and cargo volumes and  depressing fares. The industry has reported smaller losses since 2001, but  still may not generate net profits for 2004.
To improve their financial position, many airlines cut costs by various  means, notably by reducing labor expenditures and by decreasing capacity  through cutting flight frequencies, using smaller aircraft, or eliminating  service to some communities. According to data from the Bureau of  Transportation Statistics, large U.S. air carriers cut their operating  expenses by $7.8 billion from 2000 through 2002. The drop in total large air  carrier operating expenses stands in sharp contrast to increases in FAA’s  budget. (See Figure 1.)
section_title: Budgetary Pressure on FAA Will Increase Over Time
paragraphs: FAA’s budget – which has increased from $9 billion in 1998 to $14 billion  in 2004 — will be under pressure for the foreseeable future. Over the past  10 years, FAA has received on average approximately 80 percent of its  annual funding from the Airports and Airways Trust Fund (Trust Fund),  which derives its receipts from taxes and fees levied on airlines and  passengers. The downturn in passenger travel, accompanied by decreases  in average yields, has resulted in lowered receipts into the Trust Fund. On  average, domestic yields have fallen since 2000, and are at their lowest  levels since 1987. As a result, the total amount of transportation taxes that  were remitted to the Trust Fund declined by $2.0 billion (19.6 percent)  between fiscal years 1999 and 2003 (in 2002 dollars).
Contributions from the General Fund have averaged about 20 percent of  FAA’s budget since 1994, but total Federal spending is under increasing  stress because of growing budget deficits. According to the March 2004  analysis from the Congressional Budget Office, the Federal deficit under  the President’s fiscal 2005 budget will be $358 billion.
Clearly, a major challenge for FAA both now and into the future will be  cost-cutting and cost control.
Operating costs represent over half of FAA’s budget. For 2005, the  Administration has requested $7.8 billion for Operations. Because salaries  and benefits make up 73 percent of that total, restraining the growth in  operations spending will be extremely difficult, even with improvements  in workforce productivity.
Capital expenses (i.e., the Facilities and Equipment account) represent  less than 20 percent of FAA’s budget, but virtually none of the projects  requested for funding for 2005 is expected to generate any savings in the  Operations account.
Funds for airports’ capital development have more than doubled since  1998, rising from $1.6 billion (18.3 percent of the total) to a requested $3.5  billion (25.1 percent of the total) in 2005. Current funding levels are  sufficient to cover much of the estimated cost of planned capital  development. However, building new runways is not always a practicable  way to increase capacity. FAA must decide how to increase capacity and  service, as well as improve system efficiency and safety.
section_title: Financial Pressure Adds Premium to Improving Management Controls
paragraphs: FAA’s ability to operate efficiently and effectively – particularly regarding  its air traffic control modernization projects — have been hampered over  time by inadequate management of information technology and financial  management controls. FAA’s ATC modernization projects have  consistently experienced cost, schedule, and performance problems that  we and others have attributed to systemic management issues.
The effect has been extraordinary cost growth and a persistent failure to  deploy systems. FAA initially estimated that its ATC modernization efforts  could be completed over 10 years at a cost of $12 billion. Two decades and  $35 billion later, FAA still has not completed key projects, and expects to  need another $16 billion thru 2007, for a total cost of $51 billion. GAO has  kept major FAA modernization systems on the watch list of high-risk  federal programs since 1995.
We believe that, in the current budget environment, cost growth and  schedule problems with ongoing modernization efforts can have serious  negative consequences: postponed benefits, costly interim systems, other  systems not being funded, or a reduction in the number of units  purchased.
section_title: Forecasts of Future Aviation Activity Add Further Demands for Immediate Improvements in FAA Operations
paragraphs: FAA recognizes that future U.S. air transport activity will likely place  significant demands on its ability to keep the system operating. FAA’s  most recent forecasts project significant increases in overall system  activity by 2015. Along with increased movements of aircraft and  passengers comes an increased workload for FAA, as well as demands for  more efficient operations and/or an expansion of capacity. (See Table 1).
Evidence of FAA’s inability to meet system capacity demands already  exists from the experience at Chicago O’Hare earlier this year. To reduce  flight delays, FAA asked American Airlines and United Airlines to reduce  their peak scheduled operations by 7.5 percent by June 10. As Secretary  Mineta has already recognized, unless system capacity expands, the nation  will face “…more and more O’Hares as  economy continues to grow,  and as new technology and competition bring even greater demand.” It  seems clear, however, that FAA’s Operational Evolution Plan, a few  additional runways, and updating more controller workstations with the  Standard Terminal Automation Replacement System (STARS) are not the  answer to the system’s need for capacity. We cannot pave our way to the  year 2025.
section_title: Despite Personnel and Acquisition Reforms, Systematic Management Issues Continue to Impede ATC Modernization
paragraphs: Over the years, systematic management issues, including inadequate  management controls and human capital issues have contributed to the  cost overruns, schedule delays, and performance shortfalls that FAA has  consistently experienced in acquiring its major ATC modernization  systems. Historically, some of the major factors impeding ATC  acquisitions included an ineffective budget process and an inability to  provide good cost and schedule estimates. A number of cultural problems  including widely diffused responsibility and accountability, inadequate  coordination, and poor contract management/oversight also slowed the  progress of individual projects. Problems within FAA’s acquisition and  procurement processes included an inability to obligate and spend  appropriate funds in a timely manner, a complicated procurement and  acquisition cycle, failure to field systems in a timely fashion, and an  inability to field current technology systems. FAA lacked a means to  strategically analyze and control requirements, and good cost and  schedule estimates were often not effectively developed and integrated  into acquisition plans. To address many of these issues, Congress passed  legislation in 1995 exempting FAA from many of the existing Federal  personnel and procurement laws and regulations and directed the agency  to develop and implement new acquisition and personnel systems. More  recently, in 2000, the Congress and the administration together provided  for a new oversight and management structure and a new air traffic  organization to bring the benefits of performance management to ATC  modernization.
subsections: section_title: FAA Has Taken Steps to Implement Human Capital Strategies, but Further Efforts are Needed
paragraphs: According to FAA, burdensome government-wide human capital rules  impeded its ability to hire, train, and deploy personnel and thereby  hampered its capacity to manage ATC modernization projects efficiently.  In response to these concerns, Congress granted FAA broad exemptions  from federal personnel laws and directed the agency to develop and  implement a new personnel management system.
Human capital reforms: Following the human capital exemptions granted  by Congress in 1995, FAA initiated reforms in three primary areas:  compensation and performance management, workforce management,  and labor and employee relations. In the area of compensation and  performance management, FAA introduced two initiatives—a new, more  flexible pay system in which compensation levels are set within broad  ranges, called pay bands, and a new performance management system  intended to improve employees’ performance through more frequent  feedback with no summary rating. Both new systems required an  exemption from laws governing federal civilian personnel management  found in title 5 of the United States Code. In the area of workforce  management, FAA implemented a number of initiatives in 1996 through  the establishment of agency-wide flexibilities for hiring and training  employees. In the area of labor and employee relations, FAA established  partnership forums for union and nonunion employees and a new model  work environment program. Other human capital initiatives have included  restructuring FAA’s organizational culture and implementing means to  provide sustained leadership.
Organizational culture: FAA issued an organizational culture framework  in 1997 that attempted to address some of the vertical “stovepipes” that  conflicted with the horizontal structure of ATC acquisition team  operations. A key piece of this framework included the establishment of  integrated product teams in an attempt to improve collaboration among  technical experts and users. Moreover, integrated teams have not worked  as intended. For example, competing priorities between two key  organizations that were part of the Wide Area Augmentation System’s  integrated team ultimately negated its effectiveness and undermined its  ability to meet the agency’s goals for the system.
Sustained leadership: Until former Administrator Garvey completed her 5- year term in 2002, FAA had been hampered by a lack of sustained  leadership at FAA was also problematic. During the first 10 years of the  ATC modernization effort, the agency had seven different Administrators  and Acting Administrators, whose average tenure was less than 2 years.  Such frequent turnover at the top contributed to an agency culture that  focused on short-term initiatives, avoided accountability, and resisted  fundamental improvements to the acquisition process. .
Nine years have passed since the agency received broad exemptions from  laws governing federal civilian personnel management. While FAA has  taken a number of steps since personnel reforms were implemented, it is  not clear whether and to what extent these flexibilities have helped FAA  to more effectively manage its workforce and achieve its mission. The  agency did not initially define clear links between reform goals and  program goals, making it difficult to fully assess the impacts of personnel  reform. FAA has not yet fully implemented all of its human capital  initiatives and continues to face a number of key challenges with regard to  personnel issues. In our February 2003 report, we found that the agency  had not fully incorporated elements that are important to effective human  capital management into its overall reform effort, including data collection  and analysis and establishing concrete performance goals and measures.  Currently, the agency is still working to implement tools to keep accurate  cost and workforce data. The new Air Traffic Organization has announced  plans for establishing cost accounting and labor distribution systems, but  they are not yet in place. More comprehensive cost accounting systems  and improved labor distribution systems are necessary to maximize  workforce productivity and to plan for anticipated controller retirements.  More broadly, taking a more strategic approach to reform will allow the  agency to better evaluate the effects of human capital initiatives, which it  sees as essential to its ATC modernization effort.
section_title: ATC Projects Continue to Experience Cost, Schedule, and Performance Problems
paragraphs: FAA established its current acquisition management system (AMS) in 1996  following acquisition reform. The agency has reported taking steps to  overseeing investment risk and capturing key information from the  investment selection process in a management information system. It has  also implemented guidance for validating costs, benefits, and risks.
FAA has also taken steps to improve the management of its ATC  modernization efforts. For example, it implemented an incremental, “build  a little, test a little” approach that improved its management by providing  for mid-course corrections and thus helping FAA to avoid costly late-stage  changes. In the area of management controls, FAA has (1) developed a  blueprint for modernization (systems architecture) to manage the  development of ATC systems; (2) established processes for selecting and  controlling information technology investments, (3) introduced an  integrated framework for improving software and system acquisition  processes, and (4) improved its cost-estimating and cost-accounting  practices. Nonetheless, ATC modernization efforts continue to experience  cost, schedule, and performance problems.
FAA is not yet incorporating actual costs from related system development  efforts in its processes for estimating the costs of new projects. Further,  the agency has not yet fully implemented processes for evaluating projects  after implementation in order to identify lessons learned and improve the  investment management process. Reliable cost and schedule estimates are  essential to addressing some of the ongoing problems with ATC  acquisitions.
In addition to controlling cost and schedule overruns, FAA needs to take  concrete steps to identify and eliminate redundancies in the National  Airspace System (NAS). FAA must review its long-term ATC  modernization priorities to assess their relative importance and feasibility  in light of current economic constraints, security requirements, and other  issues. The ongoing challenges facing air traffic control modernization  efforts led Congress and the administration to create a new oversight and  management structure through the new Air Traffic Organization (ATO) in  order to bring the benefits of performance management to ATC  modernization.
section_title: Progress in Establishing the New Air Traffic Organization Has Been Slow
paragraphs: The ATO was created by an executive order in 2000 to operate the air  traffic control system. In the same year, Congress enacted legislation  establishing the Air Traffic Services Subcommittee, a five-member board  to oversee the ATO and a chief operating officer to manage the  organization. The ATO was designed to bring a performance management  approach to ATC modernization efforts.
The Air Traffic Services Subcommittee has made some initial efforts with  regard to the establishment of the ATO. They have taken steps to focus on  the structure of the ATC system, including reviewing and approving  performance metrics for the ATO, establishing a budget, and approving  three large procurements that FAA initiated.
However, progress in establishing the organization has been slow, given  that FAA received the mandate to establish the ATO nearly four years ago.  FAA encountered difficulties finding a qualified candidate to take the  position of chief operating officer, and did not fill the vacancy until June  2003. The final executive positions for the organization including the Vice- Presidents of Safety and Communications were just filled last month.
Key tasks for the ATO will include organizational restructuring,  implementing effective financial management and cost-accounting  systems, evaluating day-to-day business practices, and fostering growth  with efficiency. Rapidly changing technology, limited financial resources,  and the critical importance of meeting client needs will present significant  challenges in order for the ATO to truly evolve into a high performing  organization.
section_title: FAA’s Future Success Hinges on Several Critical Success Factors
paragraphs: To successfully meet the challenges of the 21st century, FAA must  fundamentally transform its people, processes, technology, and  environment to build a high-performing organization. Our work has shown  that high-performing organizations have adopted management controls,  processes, practices, and systems that are consistent with prevailing best  practices and contribute to concrete organizational results. Specifically,  the key characteristics and capabilities of high-performing organizations  fall into four themes as follows:    A clear, well-articulated, and compelling mission. High-performing  organizations have a clear, well-articulated, and compelling mission,  strategic goals to achieve it and a performance management system that  aligns with these goals to show employees how their performance can  contribute to overall organizational results. FAA has taken its first steps  toward creating a performance management system by aligning its goals  and budgetary resources through its Flight Plan—blueprint for action for  fiscal year 2004 through 2008—and its fiscal year 2005 budget submission.  In addition, the new ATO has published both its vision and mission  statement.
Our past work has found that FAA’s ability to acquire new ATC  modernization systems has been hampered by its organizational culture,  including employee behaviors that did not reflect a strong commitment to  mission focus. Given the central role that FAA’s employees will play in  achieving these performance goals and overall agency results, it is critical  for them to both embrace and implement the agency’s mission in the  course of their daily work. In addition, our work has found regularly  communicating a clear and consistent message about the importance of  fulfilling the organization’s mission helps engage employees, clients,  customers, partners, and other stakeholders in achieving higher  performance.
Strategic use of partnerships. Since the federal government is  increasingly reliant on partners to achieve its outcomes, becoming a high- performing organization requires that federal agencies effectively manage  relationships with other organizations outside of their direct control. FAA  is currently working to forge strategic partnerships with its external  customers in a number of ways. For example, the agency recently  announced a program to create “express lanes in the sky” to reduce air  traffic delays this spring and summer and is in the early stages of working  with selected federal partners to develop a long-term plan for the national  aerospace system (2025) and to leverage federal research funds to conduct  mutually beneficial research. In addition, FAA has ongoing partnerships  with the aviation community to assess and address flight safety issues  (e.g., development of technology to prevent fuel tank explosions and to  reduce the potential for aircraft wiring problems through development of a  “smart circuit breaker”).
However, our past work has shown that forging strategic partnerships  with organizations outside of FAA can be difficult and time-consuming.  For example, FAA’s efforts to establish voluntary data sharing agreements  with airlines—Flight Operational Quality Assurance Program (FOQA)— spanned more than a decade, due in part, to tremendous resistance from  aviation community stakeholders who formed a rare alliance to oppose  several of FAA’s proposals. In addition, when attempting to increase  airport capacity (e.g., new runways), FAA and airport operators have  frequently faced opposition from the residents of surrounding  communities and environmental groups. Residents are often concerned  about the potential for increases in airport noise, air pollutant emissions,  and traffic congestion.
Focus on needs of clients and customers. Serving the needs of clients  and customers involves identifying their needs, striving to meet them,  measuring performance, and publicly reporting on progress to help assure  appropriate transparency and accountability. To better serve the needs of  its clients and customers, FAA published Flight Plan, which provides a  vehicle for identifying needs, measuring performance, and publicly  reporting progress. Flight Plan includes performance goals in the areas of  safety, greater capacity, international leadership, and organizational  excellence, which are linked to the agency’s budget and progress  monitored through a Web-based tracking system.
However, over the years, FAA’s efforts to meet client and customer needs  have not always been successful, and some have had a long lasting  negative impact. FAA has had particular difficulty fielding new ATC  modernization systems within cost, schedule and performance goals to  meet the needs of the aviation community. Agency promises to deliver  new capabilities to airlines via improvements to the ATC system led some  airlines to install expensive equipment in their aircraft to position  themselves to benefit from expected FAA services; however, when the  agency failed to deliver on those promises, participating air carriers were  left with equipment that they could not use—no return on their  investment. In addition, shifting agency priorities have made it difficult for  the aviation industry to anticipate future requirements and plan for them  in a cost-effective manner (e.g., providing air carriers with adequate lead  time to purchase new equipment and airframe manufacturers with lead  time to incorporate changes into new commercial airplane designs).  Furthermore, the absence of a full-functioning cost-accounting system  makes it difficult for FAA to assess the actual cost of providing services to  users of the National Airspace System.
Strategic management of people. Most high-performing organizations  have strong, charismatic, visionary, and sustained leadership, the  capability to identify what skills and competencies the employees and the  organization need, and other key characteristics including effective  recruiting, comprehensive training and development, retention of high- performing employees, and a streamlined hiring process. Toward this end,  FAA has hired a Chief Operating Officer (COO) to stand up its new ATO.  Our work on high-performing organizations has recommended use of the  COO concept to facilitate transformational change in federal agencies and  to provide long-term attention and focus on management issues.  Furthermore, FAA has placed 78 percent of its workforce under a pay-for- performance system and implemented a training approach for its  acquisition workforce which reflects four of the six elements used by  leading organizations to deliver training effectively. However, it is too  soon to know the extent to which these elements of effective training will  be incorporated into the new ATO. Finally, FAA is currently conducting an  Activity Value Analysis, a bottoms-up effort to establish a baseline of ATO  headquarters activities and their value to stakeholders. The results of this  analysis are intended to help FAA’s leadership target cost-cutting and cost  savings efforts.
Despite FAA’s efforts to date, our past work has found the agency’s  strategic management of human capital lacking. For example,  organizational culture issues at FAA (e.g., its vertical, stovepiped  structure) have discouraged collaboration among technical experts and  users of the ATC system and contributed to the agency’s inability to  deliver new ATC systems within cost, schedule and performance goals.  One of the most significant early challenges facing the ATO will be  negotiating a new contract with air traffic controllers, which is due to  expire in September 2005. The DOT IG has repeatedly noted that despite  the importance of controllers’ jobs, that FAA simply cannot sustain the  continued salary cost growth for this workforce, which rose from an  average salary of $72,000 in 1998 to $106,000 in 2003. Given the  inextricable link between FAA’s operating costs and its controller  workforce, striking an acceptable balance between controllers’ contract  demands and controlling spiraling operating costs will be a strong  determinant of the ATO’s credibility both within FAA and across the  aviation industry.
While FAA has taken some promising steps through its new ATO to  restructure itself in a manner consistent with high-performing  organizations, the agency still faces significant and longstanding systemic  management challenges. These challenges must be overcome if FAA is to  keep pace with ongoing changes in the aviation industry and transform  itself into a world-class organization. Our work for more than two decades  has shown that even modest organizational, operational, and technological  changes at FAA can be difficult and time consuming, all of which  underscores the difficult road ahead for FAA and its new ATO.
This concludes my statement. I would be pleased to respond to any  questions that you or other Members of the Subcommittee may have at  this time.
For further information on this testimony, please contact JayEtta Hecker  at (202) 512-2834 or by e-mail at heckerj@gao.gov. Individuals making key  contributions to this testimony include Samantha Goodman, Steven  Martin, Beverly Norwood, and Alwynne Wilbur.
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