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.