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. 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.) 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. 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. 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. 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. 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. 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. 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. 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. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary:
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? 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.