STATEMENT OF
MICHAEL W. REYNOLDS
ACTING ASSISTANT SECRETARY FOR
AVIATION and INTERNATIONAL AFFAIRS
U.S. DEPARTMENT OF TRANSPORTATION
before the
SENATE SUBCOMMITTEE ON AVIATION
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
on
Air Service to Small and Rural Communities
September 14, 2006
Mr. Chairman, thank you for inviting me to this hearing. I appreciate the opportunity to discuss with you air service to small communities, and the two programs administered by the Department of Transportation that deal specifically with such service, namely the Essential Air Service (EAS) program and the Small Community Air Service Development Program. I can assure you that the Department is committed to implementing its small community air service programs in the best and most efficient manner and thereby helping smaller communities meet the challenges that they face in obtaining and retaining air service.
It is clear that air service in this country has changed dramatically over the past several years. Many of these changes have been very positive. The growth of low-fare carriers, for example, has made affordable air transportation available to millions of people across the country. The number of air travelers has expanded dramatically, as hundreds of passengers have taken advantage of the low fares that have become more widely available. While this is a good development overall for consumers, we recognize that it can create new challenges for some small communities. With a greater number of service choices available, particularly those involving lower fares, many consumers are willing to drive to places with a broader array of air service options, making it more difficult for some individual airports to sustain their own traffic levels. There are, for example, some communities receiving EAS assistance within ready driving distance of two or three major airports. This “leakage” can result in a struggling community airport, but not necessarily consumers who lack access to the national air transportation system.
Another challenge is the change in aircraft used by carriers that serve small communities. Many commuter carriers have been replacing their 19-seat aircraft with 30-seat aircraft, due to the increased costs of operating the smaller planes and larger carriers’ reluctance to offer code sharing on 19-seaters. This trend began at least 10 years ago and has continued. There are now fewer and fewer 19-seat aircraft in operation as many carriers have up-gauged to 30-seat aircraft, and, in some cases, even regional jets. As a result, many small communities that cannot support this larger size of aircraft are being left without air service. Additionally, the rise in the cost of jet fuel has made all carriers more cost-conscious and more selective in initiating new service and maintaining service where yields are low. Finally, some changes have occurred in response to the terrorist attacks of September 11, 2001. Many consumers, leisure and business, have changed their travel patterns and carriers have altered the structure of their airline services. Generally, this has meant carriers abandoning the smaller markets, as evidenced by the fact that we have received notices to suspend service at more than 100 communities since September 11. In addition, the financial condition of the network carriers has added further uncertainty for their regional code-share partner service.
The challenge that we face is one of adjusting the programs to account for these changes in an efficient and effective manner, giving appropriate and balanced recognition to the reasonable needs of the communities, the carriers, the consumers, and the taxpaying public at large. Mr. Chairman, I do not use the word “challenge” lightly. All of us -- the Federal Government that manages programs affecting service at small communities, as well as the States and the communities themselves -- need to reexamine the way we approach small community air service.
We at the Department of Transportation have recognized for a while now that the way the Federal Government helps small communities address air service concerns has not kept pace with the changes in the industry and the way service is now provided in this country. For that reason, we have initiated some important reevaluations of the programs that we manage. I want to share with you today what we have done and are doing to address this issue.
As you know, the Department administers two programs dealing with air service at small communities. The EAS program provides compensation to air carriers to provide air service at certain statutorily mandated communities. The Small Community Air Service Development Program, which was established by Congress in 2000 under the AIR-21 legislation, provides federal grants-in-aid to help small communities address their air service and airfare issues. While initially established as a pilot program, it was reauthorized through FY 2008 in Vision 100.
Essential Air Service Program
Let me first address the EAS program. The laws governing our administration of the EAS program have not changed significantly since its inception 28 years ago, notwithstanding the dramatic changes that have taken place in the airline industry. As currently structured, the EAS program acts only as a safety net for small communities receiving subsidized air service by providing threshold levels of air service. While ensuring some service, this approach does little to help communities attract self-sustaining unsubsidized air service, as evidenced by the fact that once a community receives subsidized air service it is rare for an air carrier to come in offering to provide unsubsidized air service. The goal of our proposed changes to the EAS program is to end this dependency and to give communities the ability to obtain transportation services more tailored to the communities’ needs.
With this in mind, the Administration proposed very fundamental and substantial changes to the program in its last FAA reauthorization proposal, as well as in the last several budget requests. Those changes were based on our extensive experience dealing with the communities and the carriers involved with the program, recommendations from both of these constituencies, as well as studies by the Government Accountability Office (GAO) that were geared toward finding “the answer” to successful service at small communities. Two major themes came through repeatedly -- the need for greater participation by communities in addressing their air service issues, and the desire for greater flexibility in doing so.
The Administration’s proposed revisions to the EAS program would, for the first time since the program was established in 1978, require communities to be stakeholders in the air service they receive and thus have a vested interest in its success. With the proposed reforms, the Administration would also ensure that the small communities most in need would be able to maintain access to the national air transportation system.
Currently, a community’s eligibility for inclusion in the EAS program is based only on whether it was listed on a carrier's certificate on the date the program was enacted – October 24, 1978. Once subsidized service was established, there was little incentive for active community involvement to help ensure that the service being subsidized would ultimately be successful. I can tell you anecdotally that a number of EAS communities do not even display their subsidized EAS flights on their Internet homepages, but some in the past have shown the availability of air service at nearby hubs, especially if it is low-fare service. As a result of these and other factors, EAS-subsidized flights are frequently not well patronized and our funds are not being used as efficiently or effectively as possible.
Under the Administration’s proposal, communities are asked to become partners in the financing of their air services, but in exchange are given a much bigger role in determining the nature of that service. As a result, currently eligible communities would remain eligible, but would have an array of new transportation options available to them for access to the national air transportation system. In addition to the traditional EAS schedule of two or three round trips a day to a hub, the communities would have the alternatives of charter flights, air taxi service, or ground transportation links. Regionalized air service might also be possible, where several communities could be served through one airport, but with larger aircraft or more frequent flights.
Under the Administration’s proposals, community participation would be determined by the degree of its isolation from access to the national air transportation system. The most remote communities (those greater than 210 miles from the nearest large or medium hub airport) would be required to provide only 10 percent of the total EAS subsidy costs. Communities that are within a close drive of major airports would not qualify for subsidized air service, but could receive subsidies constituting 50 percent of the total costs for providing surface transportation links to that service. Specifically, communities within: (a) 100 driving miles of a large or medium hub airport, (b) 75 miles of a small hub, or (c) 50 miles of a non-hub with jet service would not qualify for subsidy for air service. All other EAS communities would have to cover 25 percent of the subsidy costs attributable to the provision of air service.
The proposed small-hub and non-hub criteria are important. Under current law, communities located within 70 miles of a large or medium hub are not eligible for subsidized air service because they have nearby, attractive alternatives. Given the growth of air services in this country since deregulation, our proposal simply recognizes that the same principle should apply for communities located near small hubs and non-hubs offering jet service.
We believe that this approach would allow the Department to provide the most isolated communities with air service that is tailored to their individual needs. Importantly, it provides communities in the program greater participation, control, and flexibility over how to meet their air service needs, and a far greater incentive to promote the success of those services.
Congress has also recognized the need for reform and made some changes in the reauthorization bill, Vision 100. One program is the Community Flexibility Pilot Program. It allows up to ten communities to receive a grant equal to two years’ worth of subsidy in exchange for their forgoing their EAS for ten years. The funds would have to be used for a project on the airport property or to improve the facilities for general aviation, but no communities have volunteered for that program. Another program is the Alternate Essential Air Service Program. The thrust of this program is that, instead of paying an air carrier to serve a community as we typically do under EAS, communities could apply to receive the funds directly -- provided that they have a plan as to exactly how they would use the funds to the benefit of the communities’ access to air service. The law gives great flexibility in that regard. For example, funds could be used for smaller aircraft but more frequent service, for on-demand air taxi service, for on-demand surface transportation, for regionalized service, or to purchase an aircraft to be used to serve the community. The Department issued an order establishing that program in the summer of 2004, but to date no communities have applied. I cannot tell you for sure why, but my guess is that part of it is that it is just human nature to resist change. More importantly, while there have been criticisms that the EAS program does not provide optimum service, I do think that the communities have gotten very comfortable in knowing that they are guaranteed their two or three round trips a day no matter what, i.e., EAS is viewed as an absolute entitlement whether the communities invest any time and effort in supporting the service or not.
With respect to the EAS program, it is important to note the continued growth in both the size and cost of the program to taxpayers over time. As a point of reference, before the terrorist attacks of September 11, the Department was paying subsidy for 75 communities (plus 32 in Alaska) and the budget had been flat at $50 million a year. We are now subsidizing service at 110 communities (plus 39 in Alaska) and our budget is $110 million for fiscal year 2006. Currently, there are approximately 70 communities that are eligible for EAS subsidy under the parameters of the existing statute that are served by one carrier without subsidy support. As most of these communities would be eligible for subsidy if the last carrier requested to stop service, this represents a significant potential liability. Moreover, should more eligible communities now served by multiple carriers get down to service by a single carrier, the number of communities on the verge of requiring subsidy support could increase further. That is why an approach along the lines proposed by the Administration is needed to more directly address small community air service issues and the Department is fully prepared to work with this committee in that effort.
Small Community Air Service Development Program
The Department is now in its fifth year of administering the Small Community Air Service Development Program. Under current law, the Department can make a maximum of 40 grants in each fiscal year to address air service and airfare issues, although no more than four grants each year can be in any one state. Until 2006, Congress provided $20 million in each year for this program. In 2006, the funding for the program is $10 million.
On January 20, the Department issued an order requesting that communities interested in receiving a grant under the Small Community Air Service Development Program for fiscal year 2006 file their applications by April 7. The Department received 75 applications seeking nearly $33 million. On August 10, the Department selected 25 communities for grant awards and we are currently working to complete the individual grant agreements with the selected communities.
Our experience to date with this program demonstrates the great interest and desire of communities to tackle their air service challenges head on and to contribute substantially to meeting those challenges. The Department has received as many as 180 applications for the opportunities available, although that level has dropped to approximately 100 applications per year as the number of grant recipients has increased. In each year, between 2002 and 2005, the Department has made at least 35 grant awards, and in fiscal year 2004, the Department made an additional six grant awards using unspent funds from prior years’ completed or terminated grants. This year the Department issued 25 grant awards.
Following statutorily mandated selection criteria, we have made many awards to communities throughout the country and authorized a wide variety of projects, seeking both to address the diverse types of problems presented and test communities’ different ideas about how to solve them. Some of these projects include a new business model to provide ground handling for carriers at the airport to reduce station costs, financial assistance for a new airline to provide regional service, expansion of low-fare services, a ground service transportation alternative for access to the Nation’s air transportation system, aggressive marketing and promotional campaigns to increase ridership at airports, and revenue guarantees, subsidies, and other financial incentives to reduce the risk to airlines for initiating or expanding service at a community. For the most part, these projects extend over a period of two to four years.
This program differs from the traditional EAS program in a number of respects. First, the funds go to the communities rather than directly to an airline serving the community. Second, the financial assistance is not limited to air carrier subsidy, but can be used for a number of other efforts to enhance a community’s service, including advertising and promotional activities, studies, and ground service initiatives. Third, communities design their own solutions to their air service and airfare problems and seek financial assistance under the program to help them implement their plans. Fourth, while not a requirement for participation, most communities provide a portion of the cost of the activity receiving financial assistance.
Over the past four years, the Department has made 150 grant awards. Communities have been very successful in implementing their authorized grant projects. Overall, more than 90% of the grant recipients have implemented their authorized projects and we expect that pattern to continue.
For example, new services have been inaugurated at many communities; others have received increased frequencies or services with larger aircraft. Several communities have begun targeted and comprehensive marketing campaigns to increase use of the services at the local airport and to attract additional air carrier services. We have been monitoring the progress of all of the communities as they proceed with the implementation of their projects. However, because the majority of the projects involve activities over a two-to-four-year period, only now are some of them at the point of completion.
One test of success will be if the improvements achieved are sustained when the grant projects have concluded. As more grant awards are completed, we will review the results of those grants to determine if they can offer greater insight into helping smaller communities with their air service challenges. An important goal of the Small Community Program is to find solutions to air service and airfare problems that could serve as models for other small communities.
As you know, the GAO recently concluded a review of the Small Community Program. They too have recognized that it is difficult to draw any firm conclusions as to the effectiveness of the Small Community Program in helping communities address their service issues because many grant projects are still in process. Of the grant projects that had been completed, the GAO concluded that the results were mixed because not all of the grants resulted in improvements that were achieved and sustained after the grant funding was exhausted.
The GAO noted that nearly 80 grants were scheduled to be completed by the end of this year and they recommended that the Department review the results of these grants before the program is considered for reauthorization beyond 2008. The Department concurred with GAO’s recommendation and indicated that it would conduct such a review before the reauthorization process. In conjunction with that analysis, we hope to learn not only from the projects that succeeded, but also from those that did not. Both will inform our review of the program and the guidance that we may be able to develop for the benefit of small communities overall from a larger group of completed grants under this relatively new program.
The Federal Government, however, is only one piece of the equation. States and communities will also need to review their air service in the context of the changed industry structure and service patterns to seek fresh, new solutions to maximize their air service potential, including regional and intermodal approaches and expansion of public/private partnerships to meet these challenges.
In closing, Mr. Chairman, let me reaffirm the Department’s commitment to implementing the DOT’s small community air service programs in the best and most efficient manner. We look forward to working with you and the members of this subcommittee and the full committee as we continue to work toward these objectives. Thank you again. This concludes my prepared statement. I will be happy to answer any of your questions.