The Airport and Airway Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to finance FAA’s investments in the airport and airway system, such as construction and safety improvements at airports and technological upgrades to the air traffic control system. Historically, about 87 percent of the tax revenues for the Trust Fund have come from a tax on domestic airline tickets. The remainder of the Trust Fund is financed by a $6 per passenger charge on flights departing the United States for international destinations, a 6.25-percent charge on the amount paid to transport domestic cargo by air, a 15-cents-per-gallon charge on purchases of noncommercial aviation gasoline, and a 17.5-cents-per-gallon charge on purchases of noncommercial jet fuel. FAA is responsible for a wide range of functions, which range from certifying new aircraft; to inspecting the existing fleet; to providing air traffic services, such as controlling takeoffs and landings and managing the flow of aircraft between airports. Over the past decade, the growth of domestic and international air travel has greatly increased the demand for FAA’s services. At the same time, FAA must operate in an environment of increasingly tight federal resources. In this context, we have generally supported FAA’s consideration of charging commercial users for the agency’s services. In particular, we have previously suggested that FAA examine the feasibility of charging fees to new airlines for the agency’s certification activities and to foreign airlines for flights that pass through our nation’s airspace. Similarly, we have reported our view that the various commercial users of the nation’s airspace and airports should pay their fair share of the costs that they impose on the system. In addition, to ensure full cost recovery, we have suggested that FAA consider raising the fees that it charges for the certification and surveillance of foreign repair stations. Because the various taxes that make up the Trust Fund are not based on factors that directly relate to the system’s costs, the extent to which the current financing system charges users according to their demand on the system is open to question. For example, two airlines flying the same number of passengers on the same type of aircraft from Minneapolis, Minnesota, to Des Moines, Iowa, at the same time of day will impose the same costs on the airport and air traffic control system. However, because the ticket tax is based on the fares paid, the airline that charges the lower fares in this example will pay less for the system’s use, even though both airlines had the same number of takeoffs and landings and flew the same number of passengers, the same type of aircraft, and the same distance. Motivated by their belief that the current system unfairly subsidizes their low-fare competitors, the nation’s seven largest airlines have proposed that the ticket tax be replaced by user fees on domestic operations. Under the proposal, airlines would pay fees for domestic operations according to the following three-part formula: (1) $4.50 per originating passenger, (2) $2 per seat on jet aircraft with 71 or more seats and $1 per seat on jets and turboprop aircraft with 70 or fewer seats, and (3) $0.005 per nonstop passenger mile. By using two factors in particular—originating passengers and nonstop passenger miles—the formula tends to favor the larger airlines, which operate hub-and-spoke systems, at the expense of the low-fare and small airlines, which tend to operate point-to-point systems. This relationship can best be shown by example. Consider the two possible routings between St. Louis, Missouri, and Orlando, Florida, shown in figure 1. The “hubbing” airline first takes the passenger to a hub, such as Chicago’s O’Hare Airport, to connect to another flight to Orlando. The point-to-point carrier takes the St. Louis passenger nonstop to Orlando. The airline that lands at O’Hare to transfer the passenger to another flight to Orlando has twice as many takeoffs and landings as the airline that flies nonstop between St. Louis and Orlando. As a result, the costs imposed by the hubbing airline on the air traffic control system are greater. However, by charging $4.50 per “originating” passenger, the airline that flies the passenger from St. Louis to Orlando via O’Hare would pay the same amount as the airline that flies the passenger nonstop between St. Louis and Orlando, even though the hubbing carrier puts a greater burden on the system. In addition, by charging $0.005 per “nonstop passenger mile”—or the straight-line distance between the points of origin and destination—the formula does not charge the hubbing airlines for the circuitous routings that are common to their hub-and-spoke operations. As a result, the airline transporting a passenger 297 miles from St. Louis to O’Hare and then flying that passenger 1,157 miles to Orlando would be charged the same as an airline flying a passenger nonstop from St. Louis to Orlando, even though the hubbing carrier placed a greater burden on the air traffic control system. Because the seven largest airlines operate hub-and-spoke systems and most low-fare and small airlines operate point-to-point systems, the proposed fee system would shift the financial burden away from the larger airlines and onto their competitors. For example, as figure 2 shows, on the basis of FAA’s traffic forecasts for fiscal year 1997, if the ticket tax were replaced by this proposal, the cost to the nation’s seven largest airlines would decrease by nearly $600 million, while the cost to Southwest Airlines, America West, and other low-fare and small airlines would increase by nearly $550 million. In addition, the coalition’s proposal would charge commuter carriers $1 per seat while charging airlines $2 per seat. Most major commuter carriers are owned by or affiliated with one of the coalition airlines; Continental Express, for example, is a wholly-owned subsidiary of Continental Airlines. As a result, by charging commuter carriers less per seat, the proposal would provide the coalition airlines with an additional benefit. Implementing a proposal that would shift nearly $600 million in costs from one segment of the industry to another could have substantial competitive impacts and needs to be studied first. While the ticket tax might provide low-fare airlines with a competitive advantage, other public policies favor some large carriers. For example, a few large airlines control nearly all the takeoff and landing slots at the four “slot-controlled” airports, which give them an advantage over their competitors. Simply eliminating the potential “subsidy” to low-fare airlines created by the ticket tax, while leaving the other policies in place that provide some large airlines with a competitive advantage, might result in higher fares and a reduction in service options for consumers. In addition, the proposal as written could have a dramatic shift in costs that could affect regions differently. On the one hand, consumers in regions such as the West and Southwest that have benefitted from the entry of low-fare airlines could pay more than they do under the ticket tax. On the other hand, consumers in the East and Upper Midwest, who have not experienced the entry of low-fare airlines to the same extent, could pay relatively less. Nevertheless, under any fee system that incorporated common measures of the system’s usage, such as departures and aircraft miles flown, it is likely that the relative share paid by low-fare airlines would increase compared with what they pay now under the ticket tax. In 1995, for example, Southwest accounted for 6.3 percent of the airlines’ payments under the ticket tax. In that year, Southwest accounted for 10 percent of the industry’s departures and 7 percent of the aircraft miles flown. However, if only these two measures were considered, Southwest’s share would not increase to the same extent as under the large airlines’ proposal. Under the coalition’s proposal, Southwest’s share of the industry’s contribution to the Trust Fund would increase to 10.3 percent. A more precise fee system, however, would account for those costs incurred by FAA in managing the airport and airway system, which vary greatly by the amount, type, and timing of various airline operations. For example, the air traffic control costs imposed by a flight arriving at 5 p.m. at New York’s congested LaGuardia Airport—regardless if that flight involves a large jet or commuter aircraft—are much greater than those imposed by a flight arriving at noon at the noncongested airport in Des Moines. Likewise, hubbing operations at the nation’s largest airports increase the peak service demands on the airway system and increase FAA’s operating and staffing costs. Neither the 10-percent ticket tax nor the largest airlines’ proposal accounts for these factors. Determining how best to finance FAA involves complex issues, requiring careful examination. In addition, an evaluation of alternative financing for FAA would need to involve the Department of Transportation’s (DOT) Office of Aviation and International Affairs. This office is responsible for evaluating the potential competitive implications of any changes to our aviation system. By changing what each airline pays, any new funding mechanism will have ramifications for airline competition that DOT would be better positioned to examine for the Congress than FAA. Likewise, DOT may also be better positioned than FAA to determine the extent to which a new financing mechanism might otherwise affect the aviation system. Recognizing the complexities associated with determining how best to finance FAA, the Congress recently directed that the issues involved be studied further. Specifically, the Federal Aviation Reauthorization Act (P.L. 104-264), enacted in October 1996, requires FAA to contract with an independent firm to assess the agency’s funding needs and the costs occasioned by each segment of the aviation industry on the airport and airway system.