[Senate Hearing 109-231]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 109-231
 
        THE IMPACT OF HURRICANE KATRINA ON THE AVIATION INDUSTRY

=======================================================================

                                HEARING

                               before the

                        SUBCOMMITTEE ON AVIATION

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2005

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMint, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
                David Russell, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director
                                 ------                                

                        SUBCOMMITTEE ON AVIATION

                    CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska                  JOHN D. ROCKEFELLER IV, West 
JOHN McCAIN, Arizona                     Virginia, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine              BARBARA BOXER, California
GORDON H. SMITH, Oregon              MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada                  FRANK R. LAUTENBERG, New Jersey
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        E. BENJAMIN NELSON, Nebraska
JIM DeMint, South Carolina           MARK PRYOR, Arkansas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 14, 2005...............................     1
Statement of Senator Burns.......................................     1
Statement of Senator Lott........................................    29
Statement of Senator McCain......................................     2
Statement of Senator Stevens.....................................     2

                               Witnesses

Gruenspecht, Dr. Howard K., Deputy Administrator, U.S. Energy 
  Information Administration.....................................     3
    Prepared statement...........................................     5
May, James C., President and CEO, Air Transport Association of 
  America, Inc...................................................     7
    Prepared statement...........................................    10
McElroy, Deborah C., President, Regional Airline Association.....    19
    Prepared statement...........................................    21
Miller, Frank, Airport Director, Pensacola Regional Airport......    14
    Prepared statement...........................................    17

                                Appendix

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    35
Lautenberg, Hon. Frank R., U.S. Senator from New Jersey, prepared 
  statement......................................................    36


        THE IMPACT OF HURRICANE KATRINA ON THE AVIATION INDUSTRY

                              ----------                              


                     WEDNESDAY, SEPTEMBER 14, 2005

                               U.S. Senate,
                          Subcommittee on Aviation,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m. in 
room SD-562, Dirksen Senate Office Building, Hon. Conrad Burns, 
Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. I am going to call this Committee to order, 
and we have other Members coming. We also have an 11 o'clock 
vote. So we are going to hold your statements down as much as 
we can and get to hear from our panel this morning, and I want 
to thank the panel for joining us.
    We have a lot of ground to cover. Ever since Katrina 
decided to pay a visit to our southern shores, we have been in 
a situation where it is going to take some real work and 
working together to get us out of it. As you know, it is our 
responsibility as a Subcommittee to start evaluating ideas on 
how we can assist the region and the affected industries in the 
coming days ahead.
    I am hopeful that the panel today can provide suggestions 
on how their respective industries can be aided by cutting 
through some red tape using waivers or possible legislative 
proposals. I know at times like this we have a tendency to 
think legislation is necessary when sometimes it is not. It is 
just doing the things that we should be doing in order to 
assist those who have been impacted by this storm to recover.
    The greatest concern to the industry now is fuel prices and 
supplies. The Gulf Coast region accounts for about 23 percent 
of the U.S. jet fuel production. We witnessed a dramatic spike 
in fuel prices in the direct aftermath of the storm. 
Fortunately, they have started to come down now but, 
unfortunately, they are still at record levels, and we are only 
starting to see the onset of tropical storm season which could 
have increasingly dynamic effects on jet fuel prices for some 
time to come. So we have got some tough months ahead for this 
industry regardless of what Congress does or does not act upon.
    Both United and US Airways are in bankruptcy. And reports 
show that Delta and Northwest are heading into Chapter 11 also, 
and that may be closer than we think. If fuel prices maintain 
these levels, more will certainly follow.
    On a final note, I would like to commend those in the 
aviation industry for their response to Katrina and its 
victims. The airlift operations were tremendously helpful to 
the region, and our thanks goes out to the entire community: 
Commercial carriers, business aviation, airports, and general 
aviation alike. And I would like to thank this panel for coming 
today. We appreciate your time.
    Senator McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Well, thank you, Mr. Chairman, and thank 
you for the timeliness of this hearing. As we see and are 
greeted by this morning's headlines that two airlines are 
likely to go into bankruptcy and perhaps some of our witnesses, 
particularly, Mr. May, might describe to us what he feels is 
the future of the aviation industry with or without Hurricane 
Katrina, because the price of fuel had gone up dramatically 
prior to the hurricane, which is what has brought two 
additional airlines to the brink of, or actual, bankruptcy.
    I notice that Ms. McElroy has a proposal to declare a 
moratorium on various taxes and fees that are imposed on the 
airlines. I do not think we should ignore any option. I guess 
that when those fees are suspended we would have to make up for 
that shortfall, and I would be interested in ideas as to how we 
would do that.
    So, Mr. Chairman, I come here this morning with a lot more 
questions than answers, and I am sure that our witnesses share 
our deepening concern. I think that the airlines have been in 
crisis in the past, but I am not sure I have seen anything 
quite approaching this and so maybe we ought to try to get some 
different ideas.
    So, I thank you, Mr. Chairman. I thank the witnesses for 
being here today.
    Senator Burns. Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Mr. Chairman, if we are going to have a vote 
at 11 o'clock, I would like to get through all these things if 
we could. Thank you very much.
    Senator Burns. And, thank you, Senator.
    We will roll right along this morning and get into this 
discussion.
    I think the panel before us is a very important panel. We 
have Dr. Howard K. Gruenspecht, Deputy Administrator, U.S. 
Energy Information Administration; and Mr. James May, who is 
President and CEO of the Air Transport Association; and Frank 
Miller, Airport Director, Pensacola Regional Airport; and 
Deborah McElroy, President of the Regional Airline Association.
    By the way, I got an e-mail this morning from my regional 
airline in Montana. They send you their regards.
    If we could call on Dr. Howard Gruenspecht, this morning. 
He is the Administrator of the U.S. Energy Information 
Administration.

            STATEMENT OF DR. HOWARD K. GRUENSPECHT, 
         DEPUTY ADMINISTRATOR, U.S. ENERGY INFORMATION 
                         ADMINISTRATION

    Dr. Gruenspecht. Thank you, Mr. Chairman and Members of the 
Committee.
    I appreciate the opportunity to appear before you today to 
discuss recent developments in energy markets and the impacts 
of Hurricane Katrina on jet fuel supply and prices.
    The Energy Information Administration is the independent 
statistical and analytical agency within the Department of 
Energy. We do not promote, formulate or take positions on 
policy issues.
    As we all know, Hurricane Katrina has wrought incredible 
devastation on the central Gulf Coast, most importantly in 
terms of human suffering, but also in terms of economic impacts 
that have spread well beyond the stricken area. The oil and gas 
industry, with many facilities in the direct path of the 
hurricane, incurred significant losses in production and 
processing capacity, of which some were temporary, but others 
will continue to affect output for many months to come.
    As Senator McCain alluded to, even before Hurricane Katrina 
struck on August 29th, crude oil and petroleum prices were 
setting records. On August 26th, the near-month price of crude 
oil on the New York Mercantile Exchange closed at over $66.00 
per barrel, which was $23.00 per barrel or more than 50 percent 
higher than a year earlier.
    Over the same 1-year period, retail gasoline prices had 
risen 74 cents per gallon; retail diesel fuel prices 72 cents; 
and spot jet fuel prices between 69 and 77 cents per gallon. 
Oil prices worldwide have been rising steadily since 2002, due 
in large part to growth in global demand, which has used up 
much of the world's surplus production capacity. Refineries 
have been running at increasingly high levels of utilization in 
many parts of the world, including the United States.
    Hurricane Katrina shut down virtually all offshore oil 
production in the Gulf of Mexico, along with eight major and 
several smaller refineries, import facilities, including the 
Louisiana Offshore Oil Port, and several major crude oil and 
petroleum product pipelines. At its peak impact, over 25 
percent of U.S. crude oil production, 20 percent of crude oil 
imports, and 10 percent of domestic refinery capacity was shut 
down.
    Many of these facilities have since restarted, but about 
860,000 barrels per day of crude oil production remains 
offline, along with four major refineries with a total 
distillation capacity of 880,000 barrels per day. At their 
historical yield, these four refineries produce, approximately, 
120,000 barrels per day of jet fuel, accounting for 8 percent 
of total U.S. gas fuel production of about 1.6 million barrels 
per day. Jet fuel consumption, measured as product supplied, 
also averages about 1.6 million barrels per day. So there is a 
relatively close balance between production and consumption of 
jet fuel in the United States.
    With 42 gallons in a barrel, a 50-cent-per-gallon change in 
jet fuel prices translates into a change of more than $30 
million in daily jet fuel expenditures for the Nation as a 
whole, not including the ameliorative effects of hedging and 
long-term contracts. So, that is a pretty significant issue.
    In the immediate aftermath of Hurricane Katrina, crude oil 
prices rose briefly to over $70.00 per barrel, up more than 
$4.00 in less than 48 hours, but in less than a week had fallen 
below their pre-storm levels. The impact on crude oil prices 
was undoubtedly lessened by the relatively robust inventory 
levels before the storm, by quick assurance that refiners 
unable to obtain adequate crude would be able to borrow, by way 
of time exchanges, from the Strategic Petroleum Reserve, even 
before the coordinated release of stocks by the United States 
and other members of the International Energy Agency was 
announced on September 2nd.
    The more significant price impact, however, was on finished 
petroleum products. Spot prices, the level at which large 
volumes are sold by refiners, importers, and traders, for 
gasoline rose as much as $1.40 a gallon east of the Rockies 
within 3 days, while spot diesel fuel prices rose 35 to 40 
cents, and spot prices for jet fuel rose around 50 cents a 
gallon. The sudden increase in product prices was the primary 
driver of an increase in the so-called ``crack spread,'' 
defined as the difference between the petroleum product price 
and the underlying price of crude oil. Crude oil prices did not 
change nearly as much as product prices did.
    The seemingly disproportionate change in finished product 
prices reflects the severity and expected persistence of 
Katrina's impact on refining operations in the Gulf. 
Additionally, the shutdown of the Capline, a major crude oil 
pipeline from Louisiana to the Midwest, reduced crude supplies 
for refineries there, causing several to temporarily reduce 
operations. And there was also a temporary closure of Colonial 
and Plantation pipelines that halted the distribution of 
products from the Gulf Coast to the lower East Coast, as far 
north as Baltimore, in the aftermath of Katrina.
    While recent movements in crack spreads were heavily 
influenced by Hurricane Katrina, crack spreads were trending 
upwards well before the storm struck. This is true not just for 
jet fuel, but for other petroleum products. As U.S. refineries 
have operated increasingly close to full capacity, and product 
demand continues to rise, the balance of demand must 
increasingly be made up from imports. This, in turn, requires a 
price differential between the United States and other world 
markets to attract the needed imports. This does not increase 
the cost of refining products in the United States, but it does 
tend to increase the market value of finished petroleum 
products relative to crude oil.
    Wholesale petroleum product prices, like those of crude 
oil, have fallen back from their peak levels, and as of 
yesterday, were near their levels before Hurricane Katrina. 
Spot prices for jet fuel have dropped by 54 cents per gallon on 
the Gulf Coast and 44 per gallon in New York Harbor, and stand 
about 1 cent under and 6 cents over, respectively, their levels 
on August 26, before Katrina struck. Other petroleum product 
prices have shown similar trends; although gasoline prices have 
not receded as much as prices for distillate products.
    Availability was another issue of some concern in the wake 
of Katrina. While there were rumors, or while there were 
reported rumors, of imminent outages of jet fuel at certain 
airports--I think you will hear about Pensacola--to EIA's 
knowledge, no major airports actually ran out of jet fuel.
    Inventories are in reasonably good shape. They did decline 
in the week after Katrina. We are going to release more 
inventory data today after 10:30. So if the questioning goes 
on, I'll discuss it, but I cannot before then.
    The near-term outlook for oil markets depends on a number 
of factors, the rate at which refinery capacity affected by 
Katrina can be brought back online in the major factor 
affecting petroleum product markets. Although full damage 
assessments for the four refineries shut down have not yet been 
possible, early estimates indicate that several of them may be 
down for several months.
    Even if things are fully restored by December, prices for 
all petroleum products are likely to remain elevated. Last 
week, we released our monthly Short-Term Energy Outlook. We 
looked at several cases, fast recovery, slow recovery, and 
medium recovery. In the medium recovery scenario, we expect the 
average price for refinery sales of jet fuel to be about $2.25 
per gallon in September, which is 32 cents above the August 
level. We do expect it to decline by the end of the year to the 
neighborhood of $2.10. These prices are significantly above the 
year ago levels.
    Again, we expect some of this Gulf Coast refining capacity 
to remain offline well into the fourth quarter, and we probably 
will have a need for greater imports of jet fuel in the 
remainder of 2005.
    That concludes my statement, and I would be happy to answer 
your questions.
    [The prepared statement of Dr. Gruenspecht follows:]

Prepared Statement of Dr. Howard K. Gruenspecht, Deputy Administrator, 
                 U.S. Energy Information Administration

    Mr. Chairman and Members of the Committee:
    I appreciate the opportunity to appear before you today to discuss 
recent developments in energy markets and the impacts of Hurricane 
Katrina on jet fuel supply and prices.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency in the Department of Energy. We do 
not promote, formulate, or take positions on policy issues.
    Hurricane Katrina has wrought incredible devastation on the central 
Gulf Coast, most importantly in terms of human suffering, but also in 
economic impacts that have spread well beyond the stricken area. The 
oil and gas industry, with many facilities in the direct path of the 
hurricane, incurred significant losses in production and processing 
capacity, of which some were temporary, but others will continue to 
affect output for many months to come.
    Even before Hurricane Katrina struck on August 29th, crude oil and 
petroleum product prices were setting records. On August 26, the near-
month price of crude oil on the New York Mercantile Exchange closed at 
over $66 per barrel, which was $23 per barrel, or more than 50 percent, 
higher than a year earlier. Over the same one-year period, retail 
gasoline prices had risen 74 cents per gallon, retail diesel fuel 
prices 72 cents, and spot jet fuel prices between 69 and 77 cents per 
gallon. Oil prices worldwide had been rising steadily since 2002, due 
in large part to growth in global demand, which has used up much of the 
world's surplus production capacity. Refineries have been running at 
increasingly high levels of utilization in many parts of the world, 
including the United States.
    Hurricane Katrina shut down virtually all offshore oil production 
in the Gulf of Mexico, along with eight major and several smaller 
refineries, import facilities including the Louisiana Offshore Oil 
Port, and several major crude oil and petroleum product pipelines. At 
its peak impact, over 25 percent of U.S. crude oil production, 20 
percent of crude imports, and 10 percent of domestic refinery capacity 
was shut down.
    Many of these facilities have since restarted, but about 860 
thousand barrels per day of crude oil production remains offline, along 
with four major refineries with a total distillation capacity of 880 
thousand barrels per day. At their historical yields, these four 
refineries produce approximately 120 thousand barrels per day of jet 
fuel, accounting for 8 percent of total U.S. jet fuel production of 1.6 
million barrels per day. Jet fuel consumption, measured as product 
supplied, also averages about 1.6 million barrels per day, so there is 
a relatively close balance between production and consumption. With 42 
gallons in a barrel, a 50-cent-per-gallon change in jet fuel prices 
translates into a change of roughly $30 million in daily jet fuel 
expenditures for the nation as a whole, not considering the 
ameliorative effects of any hedges or long-term contract arrangements.
    In the immediate aftermath of Hurricane Katrina, with the extent of 
actual damage still largely unknown, crude oil prices rose briefly over 
$70 per barrel, up more than $4 in less than 48 hours, but in less than 
a week had fallen below their pre-storm levels. The impact on crude oil 
prices was undoubtedly lessened by the relatively robust inventory 
levels before the storm, and by quick assurance that refiners unable to 
obtain adequate crude oil supplies would be able to borrow by way of 
time exchanges from the Strategic Petroleum Reserve, even before the 
coordinated release of stocks by the United States and other members of 
the International Energy Agency was announced on Friday, September 2.
    The more significant price impact, however, was on finished 
petroleum products. Spot prices (the level at which large volumes are 
sold by refiners, importers, and traders) for gasoline rose as much as 
$1.40 per gallon east of the Rockies within 3 days, while spot diesel 
fuel prices rose 35 to 40 cents, and those for jet fuel around 50 
cents. Even prices on the West Coast were affected, though by lesser 
amounts. The sudden increase in product prices was the primary driver 
of an increase in the so-called ``crack spread,'' defined as the 
difference between a petroleum product price and the underlying price 
of crude oil.
    The seemingly disproportionate change in finished product prices 
reflects the severity and expected persistence of Hurricane Katrina's 
impact on refining operations in the Gulf. Additionally, the shutdown 
of the Capline, a major crude oil pipeline from Louisiana to the 
Midwest, reduced crude supplies to refineries there, causing several to 
temporarily reduce operations. Finally, the temporary closure of the 
Colonial and Plantation product pipelines virtually halted distribution 
of products from the Gulf Coast to the lower East Coast, as far north 
as Baltimore, in the aftermath of Katrina.
    While recent movements in crack spreads were heavily influenced by 
the effects of Hurricane Katrina, crack spreads were trending upwards 
well before the storm struck. As U.S. refineries have operated 
increasingly close to full capacity, and product demand continues to 
rise, the balance of demand must increasingly be made up from imports. 
This, in turn, requires a sufficient price differential between the 
United States and other world markets to attract the needed imports. 
Although this does not increase the cost of refining products in the 
United States, it does tend to increase the market value of finished 
petroleum products relative to crude oil.
    Wholesale petroleum product prices, like those of crude oil, have 
fallen back from their peak levels, and as of yesterday (September 13) 
were near their levels before Hurricane Katrina. Spot prices for jet 
fuel have dropped by 54 cents on the Gulf Coast and 44 cents in New 
York Harbor, and stand about 1 cent under and 6 cents over, 
respectively, their levels on August 26, before Hurricane Katrina. 
Other petroleum product prices have shown similar trends, although 
gasoline prices have not receded as much as prices for distillate 
products.
    Availability of fuels was another issue of some concern in the wake 
of Hurricane Katrina. While there were widely reported rumors of 
imminent outages of jet fuel at certain airports in the days following 
Katrina, to EIA's knowledge, no airports actually ran out of fuel.
    Jet fuel inventories, which were in relatively good shape before 
the storm, did decline, but have remained adequate in all regions so 
far. In the week ending September 2, U.S. total jet fuel inventories 
dropped by an estimated 1.6 million barrels, or slightly less than one 
day's demand. The East Coast, the region most affected due to the 
pipeline shutdowns and its reliance on supplies from Gulf Coast 
refineries, accounted for nearly 1.4 million barrels of the decline, 
equivalent to more than two days of demand in that region. It should be 
recognized that supplies of all petroleum products, including jet fuel, 
will remain tight in the coming weeks, and possibly months, although 
increased imports may make up some of the overall product shortfall.
    While the near-term outlook for oil markets depends on a number of 
factors, the rate at which refinery capacity affected by Katrina can be 
brought back on-line is the major factor affecting petroleum product 
markets. Although full damage assessments for the four refineries 
remaining shut down have not yet been possible, early estimates 
indicate that several of them may be down for months.
    Even if the energy system is fully or near fully restored by 
December, prices for all petroleum products are likely to remain 
elevated. Last Wednesday, we released our monthly Short-Term Energy 
Outlook. For this Outlook, we considered three cases based on the speed 
of recovery of the energy system from the effects of Hurricane 
Katrina--Slow, Medium, and Fast Recovery scenarios.
    In the Medium Recovery scenario, we project an average price for 
refiner sales of jet fuel of roughly $2.25 per gallon in September, up 
about 32 cents from the August level, which declines to about $2.10 per 
gallon by December. This September price would be about 94 cents per 
gallon higher than the same month a year ago, while that in December 
would represent a year-to-year increase of about 79 cents per gallon.
    In line with the impacts seen already in September, and a 
significant portion of Gulf Coast refinery capacity expected to remain 
offline well into the fourth quarter, EIA's Short-Term Energy Outlook 
also reflects our expectation for lower refinery production, lower 
inventories, and a need for greater imports of jet fuel in the 
remainder of 2005.
    This concludes my statement, and I will be happy to answer your 
questions.

    Senator Burns. Thank you very much.
    Now, we will hear from Mr. James May, President and CEO of 
Air Transport Association Incorporated. Thanks for coming this 
morning, Jim.

  STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO, AIR TRANSPORT 
                  ASSOCIATION OF AMERICA, INC.

    Mr. May. Thank you, Mr. Chairman.
    For the airlines, the most immediate impacts from Katrina 
were reduced fuel supplies as you have heard; some airport 
closures; and, of course, dramatically increased fuels prices. 
Having lost, roughly, 13 percent of refining capacity and the 
two major pipelines that serve the East Coast, we were forced 
to manage our way through potential shortages in order to avoid 
service interruptions. Again, this is something you have heard 
a little bit about already this morning.
    We, basically, tankered extra fuel where needed, and that 
is the process of loading greater amounts of fuel in the 
airports so that we would not be drawing down at those most 
supply restricted airports. We set up a daily conference call 
working with the pipeline folks, the refiners, all the 
carriers, and other suppliers to the process so that we could 
identify those areas where we had problems, move fuel in. And, 
I think the Federal Government did a good job of giving us some 
waivers on the Jones Act. IEA had an opportunity to do some 
releases.
    We moved some tankers around, and while supplies are tight 
at some of the airports, I think we are well past that 
immediate crisis. We, obviously, were impacted by airport 
closures, principally Gulfport/Biloxi, New Orleans. Service in 
the region has, largely, been restored with the exception of 
New Orleans, which has got commercial service that kicked in 
yesterday on a limited basis, and I think we will begin to ramp 
up for a period of time.
    The more lasting impact from Katrina, however, is the 
dramatic increase in the price of jet fuel, which has been 
talked about this morning. Unfortunately, it was already at 
record highs. Let me put it into perspective for you from the 
parochial side of the airlines industry. In January 2002, the 
price of jet fuel on the spot market averaged nearly 56 cents a 
gallon. Shortly before Katrina, that price stood at $1.87 a 
gallon, and today spot is about $1.92. That was yesterday's 
price. That is a 243-percent increase over 4 years.
    Driving the price of jet fuel is the cost of crude oil, now 
hovering in the mid-$60s a barrel, and of the additional 
premium that refiners charge to produce jet fuel, the so-called 
``crack spread.'' Now, this premium has grown dramatically in 
recent years and it exploded after Katrina.
    In 2002, it averaged $3.63 a barrel. Shortly after Katrina, 
it peaked at $30.00 a barrel.
    So, for all of 2005 we estimate that premium, that crack 
spread, will exceed $15.00, a 400-plus percent increase over 4 
years. Now, no business model at any airline can survive with 
sustained jet fuel prices in what amounts to a $90.00 to 
$100.00 per barrel range.
    The future is not bright. Our latest forecast shows that we 
are going to pay $9.2 billion more for fuel in 2005 than we did 
in 2004, and in 2005, we burned roughly 19 billion gallons of 
jet fuel and spent, roughly, $30.6 billion for that fuel. No 
wonder this industry is now projecting a nearly $10 billion 
loss for 2005 on top of the $32.3 billion we have already 
recorded over the last 3 years.
    Now, to cope with this unprecedented situation, this 
industry has not simply sat back. We have taken and continue to 
take aggressive measures to mitigate fuel consumption, just as 
we were doing before Katrina. From 2001 to 2004 alone, thanks 
to newer fleets, single-engine taxi, lower cruise speeds, 
onboard weight reduction, access to more direct ATC routings, 
and a host of other measures, our fuel efficiency jumped nearly 
20 percent, and it has tripled since 1971.
    We responded by sharply reducing or limiting control costs 
in our business; revising long-standing collective bargaining 
agreements; streamlining operations; refining and, in some 
cases, even reducing hub operations; improving employee 
productivity; and overall productivity has risen a little less 
than 20 percent since the year 2000, up almost 2.2 million 
available seat miles per full-time employee.
    We are parking less efficient airplanes. The big six 
passenger airlines reduced their operating fleets by over 500 
aircraft from December 2000 to present and, unfortunately, 
these efforts have resulted in the loss of some 135,000 jobs in 
this industry alone. Now, for the same group, capital 
expenditures fell by $10 billion over the last 4 years. 
Likewise, unit operating costs, excluding fuel, fell from 10.3 
cents per available seat mile to 9.2 cents, a 6-plus percent 
improvement. These efforts, truly, have been nothing short of 
astonishing, and it is clear that if not for the price we must 
pay for jet fuel, the airline industry would be profitable 
today. In fact, we remain at the mercy of oil markets and the 
Federal Government.
    Gary Chase of Lehman Brothers is one of the top analysts 
for this industry and he said, and I quote, ``The airline 
industry has moved aggressively to reduce costs in the face of 
unprecedented challenges. On a non-fuel basis, operating 
profitability is as good as it was in the late 1990s. Now, 
while these facts are exciting, they may also be moot. If oil 
prices do not return to historic normals, we see a materially 
greater chance for oil above $50.00 than below $40.00 for the 
next several years. Unfortunately, high fuel prices are 
consuming what would otherwise be an up cycle for this 
industry.''
    Now, it must also be recognized that at the end of the day, 
Katrina's impact is not limited to the airline industry. Every 
dollar increase in the price of a barrel of crude puts another 
5,500 airline jobs at risk. This industry drives almost $1 
trillion in economic activity here in the United States, 10 
million jobs. Now, unfortunately, the harm to this industry 
caused by Katrina and continuing high oil prices will work its 
way into the broader economy, and in that sense we are somewhat 
like the mine and the canary for the economy.
    What, if anything, can be done to respond? As I said in my 
written statement, we have a couple of suggestions. First, we 
hope that this Congress will move to grant a 1-year holiday 
from what was supposed to be a temporary gas tax imposed during 
the previous administration in 1993. That tax was intended to 
be dedicated to deficit reduction that was later moved to the 
Airport and Airways Trust Fund, and I would hope the Congress 
will favorably entertain suspending it for 1 year, while at the 
same time ensuring that the trust fund, the Aviation Trust 
Fund, remains whole.
    Second, I think we should find and produce more domestic 
oil in the United States, including reserves from the Arctic 
National Wildlife Refuge, and the outer continental shelf. 
Other environmentally concerned nations are tapping into their 
offshore oil and natural gas reserves. We must do the same if 
our aviation network, indeed our entire transportation system, 
is to remain sound and competitive in the face of worldwide 
demand.
    Third, we must add refining capacity in the United States. 
In the long term, if we do not build new refineries and grow 
overall refining capacity, we are fated to suffer even higher 
prices for refined product, including, home heating oil. The 
government should encourage the location and development of 
refineries across the United States, not just in the Gulf Coast 
region.
    And, finally, Congress and appropriate federal regulatory 
bodies should exercise their oversight responsibilities to 
ensure that markets are driven by consumer demand and market 
forces, not speculation. Even prior to the run up of oil prices 
after Katrina, there was call for the GAO to examine the 
Commodity Futures Trading Commission's oversight of domestic 
petroleum trading. Consideration should be given to whether or 
not the measures in place to limit the impact of speculative 
trading are adequate. Likewise, the dramatic growth in the 
premium charge for refining crude into jet fuel, the crack 
spread, merits review.
    Last, I would like to take a moment to touch on the 
industry's support of relief efforts after the hurricane 
struck. In the days immediately following, we moved into the 
New Orleans Airport with an operation dubbed ``Operation Air 
Care.'' We moved some 13,000 to 14,000 people over 130 flights, 
and what is important about that is this was a fully volunteer 
operation, the pilots, the crews. We even had to carry our own 
mechanics and ground crews in, and it was a terrific effort. We 
were delighted to be part of it.
    Mr. Chairman, Katrina serves as a reminder of the central 
role that this industry plays not only in our economy, but 
society at large. If our nation is to continue to grow and 
prosper, the importance of this potent capability that 
responded so well in a time of crisis must be recognized and 
served by rational policies that foster economic well-being in 
growth in the airline industry. This country needs a stable 
airline industry capable of providing diverse passenger and 
cargo services in good times and bad.
    Taxes and fees imposed on the industry should be brought 
under control, and the government must adopt an energy policy 
that expands this country's oil production and refining 
capacity while respecting environmental concerns.
    Thank you for your attention.
    Senator Burns. Thank you, Mr. May.
    [The prepared statement of Mr. May follows:]

 Prepared Statement of James C. May, President and CEO, Air Transport 
                      Association of America, Inc.

    Thank you, Mr. Chairman for inviting me to talk about the effects 
of Hurricane Katrina on U.S. air carriers and their employees. The Air 
Transport Association is the trade association for the leading U.S. 
airlines. ATA members transport more than 90 percent of all passenger 
and cargo traffic in the United States.
    Our nation has never experienced a natural disaster of the economic 
scope of Hurricane Katrina. Hurricane Camille in 1969, the San 
Francisco earthquake in 1989 and the terrorist attacks of four years 
ago have served as the unfortunate benchmarks of devastation in recent 
history . . . until Katrina. Beyond the human suffering and the loss of 
life and property, the common thread from each of these disasters is 
the ripple effects they send beyond the directly affected areas and 
into the national and international economies. While terrorists 
targeted their attacks on governmental and financial centers in an 
intentional effort to destroy our way of life, Hurricane Katrina, a 
random act of nature, will have a similarly disruptive effect on our 
economy, because it crippled a significant portion of our nation's 
energy infrastructure. Today we are much more dependent upon oil 
produced from the Gulf of Mexico and refined in Texas and Louisiana 
than we were in 1969 when Camille struck. And even small disturbances 
in the Gulf can have measurable impacts on the prices that consumers 
pay for gasoline and airlines pay for jet fuel.
    Long before the devastation of Katrina, the airline industry was 
struggling under the economic and societal consequences of the attacks 
of 9/11, the resultant growth in federal taxes and fees, and, of 
course, already record-high oil prices. Air carriers are always among 
the sectors of the economy most affected by the soaring price of oil. 
While our members and the manufacturers of their aircraft have made 
remarkable gains in energy efficiency, it has proven impossible for 
conservation measures and technology to outpace the growth in the price 
of a barrel of oil. Unlike many industries, we have no alternative fuel 
source.
    Anyone who follows the news knows that even before Katrina all U.S. 
airlines were facing an extremely challenging commercial and policy 
environment, with few signs of material improvement. Over the last four 
years, the industry--in total--has recorded over $32 billion in net 
losses (including federal reimbursements for the shutdown and a portion 
of our security costs). In this post-Katrina economic environment of 
higher fuel prices and lost revenue from Gulf Coast tourism we are 
projecting additional losses of at least $9 billion in 2005--up from 
earlier projections of $5 to $7 billion.
    These losses have led us to borrow huge sums to survive, with few 
assets left to pledge as collateral. For the nine largest airlines, 
including Southwest Airlines, net debt stood at $81.3 billion at the 
end of 2004, resulting in a staggering net debt-to-capital ratio of 
110.1 percent. Compare this to $64.2 billion and 71.7 percent at the 
end of 2000. Eleven of the 12 passenger airlines rated by Standard & 
Poor's are considered ``speculative'' investments, also known as ``junk 
bond'' quality. Only Southwest Airlines is considered investment grade.
    Meanwhile, fares are running at late 1980s levels--a fourth of all 
domestic passengers now pay $200 or less including taxes for a 
roundtrip ticket; two-thirds pay $300 or less. Airline passenger 
revenue has plummeted from its historical average of 0.95 percent to 
0.70 percent of U.S. GDP--a gap of $30 billion based on today's $11.7 
trillion economy.
    Long before Katrina, I learned that just when you think it can't 
get any worse it does, at least in the airline business. In January 
2001, the price of jet fuel on the spot markets averaged 85.8 cents per 
gallon. On August 17, as Katrina was building in the Gulf of Mexico, 
the price stood at $1.87. Today it is hovering around $2.05 per gallon, 
a 239 percent increase over four years. In 2004, the industry paid 
$21.4 billion for jet fuel. That tab would have been $5.5 billion lower 
at 2003 jet fuel prices and a whopping $8.0 billion lower at 2002 jet 
fuel prices.
    Moreover, the differential between what refiners pay for a barrel 
of oil and what they are able to sell the same amount of refined 
product has grown dramatically in recent years, and been driven higher 
since Katrina. In 2002 this refining premium, referred to as the 
``crack spread'' in the industry, stood at an average of $3.63. In 2003 
it rose to $5.90 and then to $9.24 in 2004. This year we estimate a 12 
month average in excess of $15.00, which represents a 414 percent 
increase over four years.
    It is not unreasonable to argue that without the doubling of oil 
prices over the past three years the industry would not be in the 
economic crisis we find ourselves. But the future doesn't look any 
brighter. Our forecast shows that we will pay $9.2 billion more for 
fuel in 2005 than in 2004. If these projections prove accurate, the 
industry will have faced a 103 percent increase in its fuel costs from 
2001 ($14.8 billion) to 2005 ($30.6 billion). When you understand that 
the industry has been hit with more than $30 billion in additional fuel 
costs and $15 billion in taxes, fees and unfunded mandates for security 
since 9/11, and compare those uncontrollable costs to the $32 billion 
the industry has lost over that period, it easy to see where the 
problems lie. No industry could improve its efficiency and cut its 
costs fast enough to keep up with this kind of growth in their 
uncontrollable costs.
    On Monday of this week, the 12-month forward curve of future prices 
stood at $66.19 a barrel for crude oil and $1.98 per gallon of jet fuel 
($83.16 per barrel). Now keep in mind that this industry consumed 18.6 
billions gallons of jet fuel last year. That means that every penny 
increase in the price of a gallon increases our annual operating 
expenses by $186 million. Viewed from an employee perspective, every $1 
increase in the price of a barrel of crude puts another 5,500 airline 
jobs at risk. Indeed, the airlines have shed 135,000 jobs from the 
payrolls since August 2001. That's a loss of one out of six employees 
and more cuts are likely.
    When people say to me, ``But every time I fly the plane is full.'' 
I respond, ``They're full, alright. Full of cheap fares and expensive 
fuel.'' At today's fares and jet fuel prices, the average breakeven 
load factor for the industry would need to approach 85 percent, 
including all the low-cost carriers. Compare that to 65 percent in the 
mid-90s. That means that every single flight on average must be at 
least 85 percent full of paying passengers to avoid losing money--not 
to make a fortune!
    So how are we coping? First, we obviously are taking all possible 
steps to reduce or mitigate fuel consumption, just as we were doing 
before Katrina. From 2001 to 2004 alone, thanks to newer fleets, 
single-engine taxi, lower cruise speeds, onboard weight reduction, 
access to more ATC lanes in the sky, and a host of other measures, our 
fuel efficiency jumped 18 percent to 45 passenger miles per gallon.
    For this same group, capital expenditures fell from $13.1 billion 
in 2000 to $3.1 billion in 2004 (up slightly from $2.7 billion in 
2003), while unit operating costs excluding fuel fell 6.2 percent from 
10.36 cents per available seat mile (ASM) in 2002 to 9.72 cents per ASM 
in 2004.
    I think that's pretty impressive. But you don't have to believe me. 
As Gary Chase of Lehman Brothers observed on March 15:

        ``The airline industry has moved aggressively to reduce costs 
        in the face of unprecedented challenges . . . On a non-fuel 
        basis, operating profitability . . . is as good as it was in 
        the late 1990s. While these facts are exciting . . . , they may 
        also be totally moot if oil prices do not return to [historical 
        norms] . . . [W]e see a materially greater chance for oil 
        prices above $50 than below $40 over the next several years. 
        Unfortunately, high fuel prices are consuming what would 
        otherwise be an upcycle for the industry.''

    Let me reiterate this point, were it not for fuel costs the 
industry would be profitable.
    I'm often asked, ``Why don't your members just raise fares and pass 
through high oil prices?'' Well, it's this simple--if we could, we 
would. To cover the costs of fuel increases from 2003 to 2004, 
passengers would have to pay, on average, an additional $28 per ticket. 
Yet fares during this period continued to fall because of the intensely 
competitive nature of the industry. Indeed, only recently have carriers 
had even modest successes in raising fares in certain markets. These 
fare increases are hardly enough to cover the cost of crude oil rising 
from $26 a barrel in 2002 to over $66 in 2005. And as Standard & Poor's 
Phil Baggaley testified before the House Aviation Subcommittee this 
last year:

        ``Fuel represents a roughly comparable proportion of expenses 
        for railroads and many trucking companies . . . , but they have 
        not been hurt by higher fuel prices to nearly the same degree . 
        . . Part of the difference is due to more active hedging 
        programs by these freight transportation companies, but most is 
        due to the fact that many of their contracts with corporate 
        customers allow them to pass through higher fuel costs in the 
        form of surcharges. Airlines have tried repeatedly to raise 
        fares in response to high fuel costs, but with little success. 
        [T]he problem comes back to a lack of pricing power in a very 
        competitive market.''

    The unfortunate truth for most airlines today is that the economic 
principles of supply and demand still apply. If we could raise prices 
to cover the soaring cost of jet fuel or the many new taxes and fees 
that have been placed on the industry in recent years we would. But 
what many of our customers discovered in the post-9/11 world is that 
they don't have to fly. Business travelers choose teleconferences or e-
mail instead of a face-to-face meeting if they aren't able to find a 
rock-bottom fare. Families will vacation near home as opposed to flying 
to Florida's beaches, Colorado's ski slopes or grandma's house. For 
short-haul flights, the addition of the TSA ``hassle factor'' has made 
taking the car a more viable option. It's important to remember, 
airlines don't just compete against each other. They compete against 
movie theaters, e-mail, video conferencing, automobiles, trains, 
corporate jets and even the local amusement park . . . anything that 
can substitute for a vacation or a face-to-face sales call. The loss of 
several popular vacation destinations along the Gulf Coast for the 
foreseeable future, including New Orleans, will only worsen this trend.
    So where does that leave U.S. air carriers? Frankly, we will remain 
at the mercy of oil markets and the Federal Government. If the price of 
oil stays high and our taxes along with it, I expect more jobs lost, 
more flights cut and more airlines in crisis. In the international 
arena, our global competitiveness will continue to suffer because our 
airlines are paying disproportionately more than their foreign flag 
competitors, due to the relative weakness of the dollar. My CEOs will 
continue to find ways to wring costs from those areas they can, and 
that includes further fuel conservation. But you can only be so 
efficient. As I said when I started, the airline industry is one of the 
most severely hurt by the soaring price of oil. Since we have no other 
options, airplanes will be burning refined oil long after other modes 
of transportation have moved beyond it. Not because we want to but 
because the principles of aircraft design rule out alternatives.
    So, will oil stay above $60? For business planning purposes it is 
prudent to assume that it will. And while there is nothing that can be 
done in the short term to reverse the continuing damage that high fuel 
prices are having on the industry, the government can take step to 
help--grant a one-year holiday from the 4.3 cents-per-gallon jet fuel 
tax. This tax, imposed in 1993 was intended to be temporary and 
dedicated to deficit reduction. It was later redirected into the 
Airport and Airway Trust Fund, but remains on the books to this day 
while similar taxes on other transportation have been repealed.
    For the medium and long term, the solution to the problem is to do 
more . . . more of everything. And by more I mean more conservation and 
more production--including here at home. I am proud of the efficiency 
gains that the aviation sector has made over the past 30 years. If 
other industries throughout the world had kept pace, we would not face 
nearly the crisis we face today. Yet conservation and efficiency are 
only part of the equation. We must find and produce more oil in the 
U.S. including from the Artic National Wildlife Refuge and the outer 
continental shelf. Other nations that many consider to be more 
environmentally conscious than the United States such as Norway, Great 
Britain and Japan are tapping into their off-shore oil and natural gas 
reserves for both national security and economic reasons. Yet in recent 
years, the United States has moved to expand restrictions on this kind 
of energy production, including in the recently passed ``Energy Policy 
Act of 2005.'' Our nation possesses the most advanced oil production 
technologies in the world and these areas can be produced in an 
environmentally safe manner. In fact Hurricane Katrina proved how 
environmentally safe they are, since there was little or no leakage 
from the hundreds of off-shore platforms that were in the path of the 
storm, including those that were knocked from their moorings and set 
adrift.
    Specifically, the administration should immediately begin the 
process of leasing for oil production in the remaining area of the 
eastern Gulf of Mexico known as Lease Sale 181. Furthermore, Congress 
should direct that revenues derived from these new leases be dedicated 
to Hurricane Katrina recovery and reconstruction efforts.
    As I alluded to earlier, the rapid economic expansion in countries 
like China and India will demand more and more oil and keep pushing 
prices higher. The ``more of everything'' approach can work there, too. 
The United States should encourage those nations to find and produce 
more of their own energy as well as help them use it more efficiently 
by providing them with technologies to reduce waste.
    More of everything also means that as a nation we must be willing 
to build new refineries. I know that this issue is outside of this 
Committee's jurisdiction, but our nation's stagnant refining capacity 
has created a bottleneck in the distribution chain that further 
increases prices, as noted above. Hurricane Katrina immediately knocked 
out 19 percent of U.S. oil refining capacity and 13 percent of our jet 
fuel refining. Had Katrina made landfall further west, the toll on the 
refiners would have been even greater and fuel prices would likely be 
even higher. While in the short term it is critical for our economy 
that these refineries be restored to full operational capacity as 
quickly as possible, in the longer term, if we do not begin to build 
new refineries and grow overall refining capacity I fear that we are 
fated to suffer even higher prices.
    New refineries, just like new oil production, should not be 
concentrated in one place, leaving them unnecessarily vulnerable to 
natural disasters and terrorist attacks. We now know the price we can 
pay for putting so many of our energy eggs into one basket--the Gulf 
Coast region.
    Also, I encourage Congress and the Administration to ensure that 
forces are not working within western energy markets to unnaturally 
inflate prices. There are simply too many unnatural influences in 
global oil markets to allow market speculators to contribute to the 
problem. I encourage Congress and the appropriate federal regulatory 
bodies to exercise their oversight responsibilities to ensure that 
markets are driven by consumer demand and not speculation. Even prior 
to the run up of oil prices after Katrina, there were calls for the 
Government Accountability Office (GAO) to examine the Commodity Futures 
Trading Commission's (CFTC) oversight of domestic petroleum trading. I 
believe this to be even more appropriate today.
    Some have attacked the airline industry for not being fast enough 
to adapt to market changes. I strongly disagree with this view and 
point the past three years of aggressive cost-saving moves taken by all 
airlines to stay competitive. I also point to the past 30 years of 
aggressive efforts by the industry to save fuel and improve efficiency. 
We have been and will continue to be leaders in each of these areas.
    In regard to the hurricane's impact on airport infrastructure and 
the National Airspace System, airports in areas affected by Hurricane 
Katrina have recovered relatively quickly from an operational 
perspective. There were varying degrees of damage to both airport 
facilities and Federal Aviation Administration (FAA) navigational aids, 
but in general, airports with commercial service are fully operational. 
New Orleans International Airport (MSY) in particular, suffered some 
significant damage to the airport roof and adjacent facilities, but 
temporary measures have enabled the restoration of commercial service 
on September 13. All other commercial airports in the region are fully 
operational.
    Since I have talked to you about the impacts of the hurricane on 
the airlines, I'd now like to tell you of the impact the industry has 
had on the relief and recovery operation. In the days immediately 
following the disaster, ATA and its member airlines conducted an 
airlift of Hurricane Katrina victims out of New Orleans to multiple 
evacuee sites around the nation. Known as ``Operation Air Care,'' ATA 
coordinated the scheduling of the aircraft and crews contributed to 
this vital effort. Over a six-day period beginning August 30, 
``Operation Air Care'' evacuated more than 13,000 people on more than 
130 flights to at least nine locations. I would like to make clear that 
this effort was industry-wide, including carriers that currently are 
operating in bankruptcy, and many flight crews that volunteered their 
time to help out. I have never been so proud of our industry and our 
employees.
    In addition to stepping up to help in the relief efforts in the 
days after Katrina hit, the airlines also were focused on ensuring that 
there was sufficient jet fuel available at all commercial service 
airports to allow for uninterrupted service. With 13 percent of jet 
fuel refining capacity shut down and the two major pipelines that serve 
the East Coast out of commission, swift action was required on the part 
of airlines and fuel suppliers. This allowed for the industry to 
quickly identify which airports faced potential jet fuel shortages and 
to take measures to prevent service interruptions, including 
disruptions to relief flights. The airlines, out of necessity, had to 
take the Draconian measure of ``tankering'' fuel, which simply means 
placing extra fuel on planes going into those airports identified as 
facing shortages. This Hobson's choice successfully prevented those 
``at risk'' airports from running out of fuel but resulted in those 
airplanes flying with greater onboard weight, which increased fuel 
consumption, i.e., burning more fuel to get fuel where fuel was needed. 
Of course, carrying this extra fuel displaced revenue generating 
payloads such as cargo and passengers, making this stop-gap measure 
extremely expensive.
    This effort also necessitated close monitoring of those airports 
from where we were drawing fuel, so as not to create shortages there. 
This was a first-stage crisis-control measure that allowed us to meet 
our schedules and keep our commitments to our customers. Unfortunately, 
with jet fuel prices hitting record highs at the same time, it came at 
an incredible cost. As we return to our normal operations, we continue 
to face jet fuel prices that were incomprehensible only a few months 
ago, and unexpected fuel bills for our efforts to keep the system 
running during the past two weeks.
    As I look back at ``Operation Air Care,'' I hope that it serves as 
a reminder of the central role that the airline industry plays--not 
only in our economy but within our society. Using the same people and 
machines that allow for our ``just-in-time'' economy to function, that 
bring buyers and sellers together, and that reunite grandparents with 
grandchildren, air carriers were able to bring much needed bottled 
water and relief workers in, and get evacuees out. This massively 
potent capability that served the devastated Gulf Coast areas so well 
serves an important role every day as the economic and transportation 
engine that quickly connects the expanses of our nation to each other 
and the rest of the world.
    To conclude, for the airlines the saying ``It is always darkest 
before the storm'' is reversed. We now face an even darker period than 
we did before Katrina brought her 160 mile-per-hour winds and flood 
waters to the Gulf Coast. Even higher fuel prices and the loss of 
tourism to the impacted areas were, not nor could have, been planned 
for. Let me be very clear about this. No business model at any airline 
can sustain such a rapid increase in fuel prices.
    So, in the immediate term, repeal of the 4.3 cents-per-gallon tax 
on commercial aviation fuel will help protect airline jobs, sustain 
service to smaller communities, foster competition that benefits 
consumers and allow for this industry, which is so critical to the 
health of our economy, to begin its recovery.
    In the longer term we must take the lessons learned from Katrina 
and diversify our nation's oil production and refining so that no 
single natural or man-made disaster can have such a broadreaching 
impact of our vital energy infrastructure. If we do not, prices are 
certain to continue to climb and the record-high gasoline and jet fuel 
prices we see today will be remembered fondly by consumers and airlines 
as the ``good old days,'' rather than the darkness after the storm.
    Thank you.

    Senator Burns. Now, we will hear from Mr. Frank Miller, 
Airport Director at Pensacola Regional Airport of which Senator 
McCain is, probably, pretty familiar.

STATEMENT OF FRANK MILLER, AIRPORT DIRECTOR, PENSACOLA REGIONAL 
                            AIRPORT

    Mr. Miller. Thank you, Mr. Chairman. Pensacola Regional 
Airport is a small hub airport with 1.6 million total 
passengers and with a staffing level of 50 employees. On 
September 16, 2004, we----
    Senator Burns. Is your microphone on? Push the button.
    Mr. Miller. I am sorry.
    Pensacola Airport is a small hub airport with 1.6 million 
total passengers and with a staffing level of 50 employees. On 
September 16, 2004, we were in the path of Hurricane Ivan, one 
of four hurricanes to strike the State of Florida in a 6-week 
period.
    Pensacola Regional Airport closed its airfield on 
Wednesday, September 15th, at 3:30 p.m. due to tropical force 
winds coming in advance of Hurricane Ivan, a Category III 
hurricane. The hurricane made landfall in the early morning 
hours of September 16, with 130 mile-per-hour sustained winds. 
As the hurricane force winds subsided in the midmorning hours 
of September 16th, airport personnel inspected the airfield 
operating environment, made repairs, and by 12:45 p.m. reopened 
the airfield for emergency relief aircraft only. Roads and 
highways leading into Escambia and Santa Rosa Counties were 
impassable due to fallen trees, debris, and damaged bridges. In 
response to this, Pensacola Regional Airport was designated as 
the primary staging area for disaster relief supplies, filling 
this role for the first 4 days of disaster relief operations.
    During these 4 days, a mixture of C-17 and C-130 military 
aircraft began major relief operations, and 24 various civilian 
and military helicopters conducted numerous missions from the 
airport on an around-the-clock basis. With temporary flight 
rules in place over the airport, Pensacola Regional Airport 
operations personnel assumed control of the airfield and issued 
219 aircraft landing authorizations.
    Consumable materials, such as unleaded and diesel fuels, 
were a critical component for recovery vehicles and equipment, 
but due to the airport's limited storage capacity at the fuel 
farm, the airport quickly became dependent on outside suppliers 
after exhausting its internal reserves. This put us in direct 
competition with all the other requesting agencies working 
through the local emergency operations center.
    Competing with these other agencies for a finite supply of 
fuel was challenging, given the continuous need for fuel to 
support electrical generators for the airfield and buildings, 
for tenant-operated aircraft servicing equipment, and personal 
vehicles for key personnel such as police officers, operations 
and maintenance personnel, and air traffic controllers to 
ensure their ability to get to and from the airport.
    Seven airports in the southeast United States sent 27 
airport-trained personnel to provide immediate assistance to 
Pensacola. The personnel were electricians, HVAC technicians, 
building maintenance technicians, airfield operations 
personnel, dispatchers, law enforcement officers, and fire 
fighters. The amount of time these personnel stayed in 
Pensacola varied, but one team stayed for a full 7 days.
    Hurricane Ivan disrupted commercial power and water to the 
airport for a total of 8 days. Nearby hotels that were open 
were filled up to capacity with displaced Pensacola residents. 
Immediately following the hurricane, there was an ongoing 
demand to provide a safe and sanitary off-duty environment for 
the response teams for sleeping, showering, and eating.
    The airport has an integral role in the recovery of a 
community, providing the airfield infrastructure to support 
airlift relief operations. Hurricane Ivan's toll on Pensacola 
Regional Airport made it apparent that airports affected by 
hurricanes would be dependent upon assistance from other 
airports for personnel, supplies, and building materials to 
recover and begin commercial operations. Community-wide 
disaster relief efforts made it difficult, if not impossible, 
to rely upon local assistance. Any local assistance would not 
be airport-knowledgeable and unable to work independently of 
local airport personnel.
    Initiated by the Savannah/Hilton Head International 
Airport, a mutual aid network is being established that 
recognizes the need for other airports to provide disaster 
relief to affected airports and thereby minimize the time to 
resume commercial operations. Pensacola's experience with 
Hurricane Ivan also highlighted the need for a single outside 
point of contact or a clearinghouse for assistance. This 
clearinghouse coordinates the assistance to the damaged airport 
and thereby relieves the affected airport personnel from taking 
numerous phone calls offering assistance, and to assure relief 
efforts were coordinated and controlled.
    Savannah/Hilton Head International Airport accepted the 
role as the clearinghouse, to receive requests for aid and to 
disseminate those requests to the airports in the mutual aid 
network.
    Although not fully established when Hurricane Katrina hit 
the Gulf Coast, the Southeast Airports Disaster Alliance Group 
initiated its relief efforts with Savannah/Hilton Head 
providing the agreed upon clearinghouse services. As the relief 
efforts evolved, Pensacola Regional Airport, as the closest 
fully operational airport to Gulfport/Biloxi, became the 
logistical hub for the airport response teams going into 
Mississippi. We provided final briefings for navigating 
anticipated road detours, topped off fuel tanks, procured and 
loaded additional supplies, and coordinated housing with local 
hotels for rotating teams. Similar activities were occurring in 
Houston for aid to the New Orleans Airport.
    The first lesson learned with Hurricane Katrina: One 
airport must serve as the clearinghouse to coordinate mutual 
aid assistance, while a second airport becomes the logistical 
hub for the response teams. During the first 2 weeks following 
Hurricane Katrina, the Airports Disaster Alliance Group has 
worked through a learning curve as it provides relief 
assistance to Gulfport/Biloxi.
    Lessons learned: The airport clearinghouse needs a direct 
FEMA point of contact. This point of contact must be identified 
72 hours prior to the forecasted landfall and be available 
immediately after the storm to work with the clearinghouse to 
provide mission numbers for each airport sending response teams 
into the affected area. Mission numbers are critical to ensure 
teams are able to access the affected area through any ground 
checkpoints that may be present, to ensure aircraft can transit 
the Temporary Flight Rule, TFR, area established over the 
airport, and to ensure reimbursement protocols are established 
for the costs incurred by the responding airports.
    During the Gulfport/Biloxi relief effort, airports were 
delayed while awaiting official calls for assistance. The 
Gulfport/Biloxi Airport Director was required to contact his 
state EOC to request support from a particular airport. His 
state EOC then called the responding airports' state EOC to 
officially initiate the request for assistance.
    FEMA can and should intervene to make direct requests to 
the airport clearinghouse, initiating specific relief requests 
without going through multiple state contacts, and providing 
the necessary mission numbers at the time of the request. 
Hurricane response equipment and supplies generic to any storm 
event should be purchased and stored in trucks at a location in 
the southeast U.S., ready and available to be dispatched 
immediately after a storm. These trucks should be dispatched 
and report to the nearest airport identified as the logistical 
support airport and which shall serve as the base for 
responding teams. An ongoing FEMA presence at this airport 
would serve as the facilitator for the airport relief efforts. 
Examples of supplies to be stored in these trucks would include 
emergency generators, water, MREs, satellite telephones, and 
building supplies. Temporary housing for the responding teams 
is needed to provide the safe and sanitary off-duty living 
environment. Response teams cannot rely on the availability of 
local housing. Trailers capable of housing five to seven people 
with an independent water supply should be stored at the same 
location as the relief supplies and trucks and be a part of the 
supplies and equipment sent into the area for airport relief 
efforts.
    As the Airports Disaster Alliance Group evolves, it is 
clear that we have the technical expertise to provide onsite 
and immediate relief that will help an airport recover and 
resume operations, but it is also clear that our efforts 
require Federal support to provide the necessary coordination 
with state and local relief efforts, and to provide the 
necessary supplies, equipment, and materials necessary to 
conduct disaster relief operations. Thank you for the 
opportunity to speak this morning.
    Senator Burns. Thank you.
    [The prepared statement of Mr. Miller follows:]

    Prepared Statement of Frank Miller, Airport Director, Pensacola 
                            Regional Airport

    Pensacola Regional Airport is a small hub airport with 1.6 million 
total passengers and with a staffing level of 50 employees. On 
September 16, 2004, we were in the path of Hurricane Ivan, one of 4 
hurricanes to strike the State of Florida in a six week period.
    Pensacola Regional Airport closed its airfield on Wednesday, 
September 15th, at 3:30 p.m. due to tropical force winds coming in 
advance of Hurricane Ivan, a Category III hurricane. The hurricane made 
landfall in the early morning hours of September 16, 2004 with 130 mph 
sustained winds. As the hurricane-force winds subsided in the mid-
morning hours of September 16th airport personnel inspected the 
airfield operating environment, made repairs, and by 12:45 p.m. re-
opened the airfield for emergency relief aircraft only. Roads and 
highways leading into Escambia and Santa Rosa counties were impassable 
due to fallen trees, debris and damaged bridges; in response to this 
Pensacola Regional Airport was designated as the primary staging area 
for disaster relief supplies, filling this role for the first 4 days of 
disaster relief operations.
    During these four days a mixture of C-17 and C-130 military 
aircraft began major relief operations, and 24 various civilian and 
military helicopters conducted numerous missions from the airport on an 
around-the-clock basis. With temporary flight rules in place over the 
airport, Pensacola Regional Airport operations personnel assumed 
control of the airfield and issued 219 aircraft landing authorizations.
    Consumable materials such as unleaded and diesel fuels were a 
critical component for recovery vehicles and equipment but due to the 
airport's limited storage capacity at the fuel farm, the airport 
quickly became dependent on outside suppliers after exhausting its 
internal reserves. This put us in direct competition with all the other 
requesting agencies working through the local emergency operations 
center.
    Competing with these other agencies for a finite supply of fuel was 
challenging given the continuous need for fuel to support electrical 
generators for the airfield and buildings, tenant-operated aircraft 
servicing equipment, and personal vehicles of key personnel such as 
police officers, operations and maintenance personnel, and air traffic 
controllers to ensure their ability to get to and from the airport.
    Seven airports in the southeast sent 27 airport-trained personnel 
to provide immediate assistance to Pensacola. The personnel were 
electricians, HVAC technicians, building maintenance technicians, 
airfield operations personnel, dispatchers, law enforcement officers 
and fire fighters. The amount of time these personnel stayed in 
Pensacola varied, but one team stayed in Pensacola for a full week. 
Hurricane Ivan disrupted commercial power and water to the airport for 
a total of 8 days; nearby hotels that were habitable were filled to 
capacity with displaced Pensacola residents. Immediately following the 
hurricane, there was an on-going demand to provide a safe and sanitary 
off-duty environment for the response teams for sleeping, showering and 
eating.
    The airport has an integral role in the recovery of a community, 
providing the airfield infrastructure to support airlift relief 
operations. Hurricane Ivan's toll on Pensacola Regional Airport made it 
apparent that airports affected by hurricanes would be dependent upon 
assistance from other airports for personnel, supplies and building 
materials to recover and begin commercial operations. Community-wide 
disaster relief efforts made it difficult, if not impossible, to rely 
upon local assistance. Any local assistance would not be airport-
knowledgeable and unable to work independently of local airport 
personnel.
    Initiated by the Savannah/Hilton International Airport, a mutual 
aid network is being established that recognizes the need for other 
airports to provide disaster relief to affected airports and thereby 
minimize the time to resume commercial operations. Pensacola's 
experience with Hurricane Ivan also highlighted the need for a single 
outside point of contact or a clearinghouse for assistance. This 
clearinghouse coordinates the assistance to the damaged airport and 
thereby relieves the affected airport personnel from taking numerous 
calls offering assistance and to assure relief efforts were coordinated 
and controlled.
    Savannah/Hilton Head International Airport accepted the role as the 
clearinghouse, to receive requests for aid and to disseminate those 
requests to the airports in the mutual aid network.
    Although not fully established when Hurricane Katrina hit the Gulf 
Coast, the Southeast Airports Disaster Alliance Group initiated its 
relief efforts with Savannah/Hilton Head providing the agreed upon 
clearinghouse services. As the relief efforts evolved Pensacola 
Regional Airport, as the closest fully operational airport to Gulfport/
Biloxi, became the logistical hub for the airport response teams going 
into Mississippi. We provided final briefings for navigating 
anticipated road detours, topped off fuel tanks, procured and loaded 
additional supplies, and coordinated housing with local hotels for 
rotating teams. Similar activities were occurring in Houston for aid to 
the New Orleans airport.
    The first lesson learned with Hurricane Katrina: One airport must 
serve as the clearinghouse to coordinate mutual aid assistance while a 
second airport becomes the logistical hub for the response teams.
    During the first two weeks following Hurricane Katrina the Airports 
Disaster Alliance Group has worked through a learning curve as it 
provides relief assistance to Gulfport/Biloxi. Lessons learned:

   The airport clearinghouse needs a direct FEMA point of 
        contact. This point of contact must be identified 72 hours 
        prior to the forecasted landfall and be available immediately 
        after the storm to work with the clearinghouse to provide 
        mission numbers for each airport sending response teams into 
        the affected area. Mission numbers are critical to ensure teams 
        are able to access the affected area through any ground 
        checkpoints that may be present, to ensure aircraft can transit 
        the Temporary Flight Rule (TFR) area established over the 
        airport, and to ensure reimbursement protocols are established 
        for the costs incurred by the responding airports.

   During the Gulfport/Biloxi relief effort airports were 
        delayed while awaiting the official calls for assistance. The 
        Gulfport/Biloxi Airport Director was required to contact his 
        state EOC to request support from a particular airport; his 
        state EOC then called the responding airport's state EOC to 
        officially initiate the request for assistance. FEMA can and 
        should intervene to make direct requests to the airport 
        clearinghouse, initiating specific relief requests without 
        going through multiple state contacts, and providing the 
        necessary mission numbers at the time of the request.

   Hurricane response equipment and supplies generic to any 
        storm event should be purchased and stored in trucks at a 
        location in the southeast U.S., ready and available to be 
        dispatched immediately after a storm. These trucks should be 
        dispatched and report to the nearest airport identified as the 
        logistical support airport and which shall serve as the base 
        for responding teams. An on-going FEMA presence at this airport 
        would serve as the facilitator for the airport relief efforts. 
        Examples of supplies to be stored in these trucks include 
        emergency generators, water, MREs, satellite telephones, and 
        building supplies.

   Temporary housing for the responding teams is needed to 
        provide the safe and sanitary off-duty living environment. 
        Response teams cannot rely on the availability of local 
        housing. Trailers capable of housing 5-7 people with an 
        independent water supply should be stored at the same location 
        as the relief supplies and trucks and be a part of the supplies 
        and equipment sent into the area for airport relief effort.

    As the Airports Disaster Alliance Group evolves it is clear that we 
have the technical expertise to provide on-site and immediate relief 
that will help an airport recover and resume operations; but it is also 
clear that our efforts require federal support to provide the necessary 
coordination with state and local relief efforts, and to provide the 
necessary supplies, equipment and materials necessary to conduct 
disaster relief operations.
    Thank you for the opportunity to speak this morning.

    Senator Burns. And now we will hear from Ms. Deborah 
McElroy, President, Regional Airline Association. Thank you for 
coming this morning.

 STATEMENT OF DEBORAH C. McELROY, PRESIDENT, REGIONAL AIRLINE 
                          ASSOCIATION

    Ms. McElroy. Thank you, Mr. Chairman, Members of the 
Committee. I will begin by briefly giving some information 
about the Regional Airline Industry. These carriers use 9 to 
108 seat airplanes, and last year they transported one out of 
every five domestic passengers. We serve 655 of the 664 
airports in the United States with scheduled commercial 
service. At 479 or 72 percent of these communities, regional 
airlines provide the only source of scheduled air 
transportation. Of those communities, 99 in the lower 48 
States, as well as 3 in Hawaii and 33 in Alaska, receive 
subsidized air service through the Essential Air Service 
Program, EAS. The majority of regional airline service is 
provided in partnership with the major carriers under co-
sharing agreements.
    In 2004, 99 percent of 135 million passengers transported 
by regional airlines traveled on co-sharing airlines. These 
partnership agreements, which provide benefits for passengers 
and the airlines, have two broad methods of revenue sharing. 
The first, prevalent among larger regional carriers operating 
regional jets, occurs when a major and a regional carrier enter 
into a fee for departure, or capacity buy agreement, where the 
major fully compensates the regional airline at a predetermined 
rate for flying a specific schedule.
    The second arrangement, common to smaller, turboprop 
operators, occurs when the major pays a portion of the 
passenger ticket revenue. This is referred to as ``pro-rate'' 
or ``shared revenue'' flying.
    While regional airlines with pro-rate agreements are most 
vulnerable to cost increases and the recent fuel cost crisis, 
it is important to note that the fee for departure carriers 
also suffer when fuel costs increase this dramatically. Even if 
the regional airline is fully compensated by the major carrier 
for fuel costs, the majors must take into account those 
increased costs and the markets profitability into 
consideration when route and capacity decisions are made.
    Major carriers have no choice but to eliminate small 
community routes that lose money for long periods, even if 
those routes contribute some connecting revenues to the 
mainline system.
    My colleague, Jim May, has provided excellent data on the 
increase in jet fuel costs, so I will not repeat this important 
information, but I would like to point out the regional 
carriers, like their major counterparts, have taken steps to 
minimize fuel burn by lowering cruise speeds, safely altering 
approach paths, and reducing onboard weight. We also have 
worked in cooperation with the Air Transport Association in 
tankering fuel to airports were supplies are limited. 
Nonetheless, fuel now ranks as the second highest cost for 
regional airlines just behind labor.
    Regional carriers with both types of compensation 
arrangements are clearly feeling the strain, but essential air 
service carriers, whose rates are set at 2-year levels by the 
Department of Transportation, are seeing major troubles as 
well. There were problems before Hurricane Katrina devastated 
the Gulf region, but that tragedy has made a bad situation even 
worse. As part of the EAS application process, carriers must 
project costs and profits over this 2-year time frame. It is no 
easy task in today's volatile cost environment.
    Historically, in cases of unexpected cost increases, 
essential air service carriers have had to enter into the 
unpalatable process of filing notice to terminate service in 90 
days to begin the process of working cooperatively with DOT to 
seek compensation rates that cover the increased costs. This 
inevitably caused ill will between an airline and the 
community, and the process also forced an airline to operate at 
a loss for 180 days while DOT reopened the competitive bidding 
process. This is true despite a cornerstone of the original EAS 
law which provides that no carrier should be forced to serve a 
community at a loss.
    Under the leadership of this Subcommittee, Section 402 of 
Vision 100 was enacted, providing DOT flexibility in its rate-
making process in instances where carriers experienced 
increased costs, defined as a 10 percent increase or more, 
consistent for two or more consecutive months. Unfortunately, 
DOT has declined to use this tool Congress afforded it to 
reconcile fuel cost increases and EAS subsidy rates, citing the 
need for a specific appropriation. As a result, carriers are 
losing money every day on EAS routes and this service is in 
jeopardy.
    RAA stands ready to help Congress further enact EAS program 
reforms as the next FAA Preauthorization takes place. We join 
our ATA colleagues in requesting that Congress provide 
appropriate relief from the 4.3 cent-a-gallon tax on jet fuel.
    But there is another issue unique to regional carriers that 
we would like Congress to consider. The jet fuel tax change 
included in the Highway Bill now requires airlines to pay 24.4 
cents up front for fuel purchases and file for a rebate from 
the IRS. This system which places the burden on airlines to 
apply and wait for a refund of the difference is causing a 
severe cash crunch for this nation's smallest airlines. These 
airlines, unlike the major carriers, do not have any ticket tax 
payment to offset the fuel tax payments, because in modern 
code-sharing relationships, we do not issue the tickets. We 
urge you to amend the law and, in the interim, to require IRS 
to refund the taxes on a monthly basis.
    Finally, we urge you to work with your colleagues on the 
Appropriations Committee to educate them on the need to 
appropriate the full, authorized amount of $127 million to 
prevent service loss at many communities across the nation.
    Thank you for the opportunity to testify and I will look 
forward to responding to your questions.
    Senator Burns. Thank you.
    [The prepared statement of Ms. McElroy follows:]

 Prepared Statement of Deborah C. McElroy, President, Regional Airline 
                              Association

Introduction and Background
    Good morning. Mr. Chairman and Members of the Subcommittee, on 
behalf of the 45 airline members of the Regional Airline Association, 
thank you for inviting me to appear before you today to discuss 
escalating fuel costs and impacts on regional airline operations and 
Essential Air Service in the wake of Hurricane Katrina.
    I am Deborah McElroy, President of the Regional Airline 
Association, or RAA. RAA represents regional airlines providing short 
and medium-haul scheduled airline service connecting smaller 
communities with larger cities and hub airports operating 9 to 68 seat 
turboprops and 30 to 108 seat regional jets. Of the 664 commercial 
airports in the nation, fully 479 are served exclusively by regional 
airlines. This means, at 72 percent of our nation's commercial 
airports, passengers rely on regional airlines for their only source of 
scheduled air transportation.
    Of those communities, 99 communities in the lower 48 states as well 
as three in Hawaii and 33 in Alaska receive subsidized air service by 
regional carriers through the Essential Air Service Program, or EAS, 
which was enacted as part of the Airline Deregulation Act of 1978. The 
EAS program was crafted to guarantee that small communities served by 
certificated air carriers before deregulation would maintain a minimum 
level of scheduled air service after deregulation.
    The program has been in effect each year since 1978 at various 
funding levels and through several eligibility criteria adjustments 
that take into account distance from nearby hub airports and other 
factors. Most recently, in Fiscal Year 2005, the EAS program was funded 
at $104 million. The House appropriation for FY06 was $105 million and 
the Senate Appropriation at present stands at $110 million. RAA 
estimates the program will need a full $127 million in order to 
function as enacted during FY06 and we remain committed to working with 
Congress to ensure that the larger EAS appropriation--critical for the 
program--is enacted.
    With your permission, I will return to this topic. First I would 
like to discuss some characteristics of regional airline service. Many 
of you already know that the majority of regional carriers operate in 
partnership with the major airlines under code-sharing agreements. In 
fact, in 2004 99 percent of the 135 million passengers transported by 
regional carriers traveled on code sharing airlines. Code sharing 
agreements, which provide benefits for passengers, regional and major 
airlines, have two broad methods of revenue sharing. The first, 
prevalent among larger regional carriers operating regional jets, 
occurs when a major and regional airline enter into a ``fee for 
departure'' or ``capacity buy'' agreement where the major compensates 
the regional airline a predetermined rate for flying a specific 
schedule. Within this arrangement are mandatory standards for customer 
service, on-time performance and baggage handling requirements and 
incentives rewarding excellent performance.
    A second arrangement, common to smaller, turboprop operators, 
occurs when major airlines pay regional airlines a portion of passenger 
ticket revenue. This is referred to as ``pro-rate'' or ``shared 
revenue'' flying.
    While regional airlines with pro-rate agreements are most 
vulnerable to cost increases and the recent fuel cost crisis, it is 
important to note that fee-for departure carriers also suffer when fuel 
costs increase this dramatically. Even if the regional airline is 
compensated by the major airline for fuel costs, the majors must take 
those increased costs and the market's profitability into consideration 
when route and capacity decisions are made. Major carriers have no 
choice but to eliminate regional routes that lose money for long 
periods, even if those routes contribute some connecting revenues to 
the mainline system. As you know, most of the major airlines are 
experiencing some of the most daunting challenges in the history of the 
industry. They cannot afford to continue unprofitable routes and when 
this service is discontinued, regional airlines and passengers in small 
communities suffer as well.
    With jet fuel costs expected to rise by more than $9 billion this 
year, regional airlines are being hit hard. In July 2005, jet fuel 
averaged $1.66 per gallon--52 cents more than in July 2004. According 
to one RAA member, this meant that the 592 gallons of fuel required for 
a 40 seat regional jet to fly approximately 600 miles cost $1,024 in 
July 2005 compared with $600 just one year before. The effect of 
Katrina has produced an even more dramatic jump in fuel costs so that 
even with load factors at an all-time high, the U.S. airline industry 
collectively is struggling financially due to the unprecedented jump in 
oil prices and an even more dramatic increase in the price of jet fuel.
    Regional airlines are providing critical service to smaller 
communities with airplanes that use much less fuel than larger 
aircraft. Turboprop aircraft are among the most fuel efficient aircraft 
for short-haul routes and RJs have some of the most modern, fuel 
efficient engines in the airline industry. Like our major airline 
counterparts, regional carriers have sought to minimize fuel burn by 
tankering fuel, lowering cruise speeds, safely altering approach plans 
and reducing onboard weight, making every effort to manage escalating 
fuel costs with an eye toward conservation. Nonetheless, fuel now ranks 
as the second highest cost for airlines, ranking just behind labor.
    Regional airlines with both types of compensation arrangements are 
certainly feeling the strain. But Essential Air Service carriers, whose 
rates are set at two-year levels by the Department of Transportation 
(DOT), are seeing major troubles as well. There were problems before 
Hurricane Katrina devastated the gulf coast on August 29, 2005, but 
that tragedy has made a bad situation even worse.

Hurricane Katrina
    Fuel costs were already devastatingly high for U.S. carriers before 
Hurricane Katrina crippled oil and gas operations in the Gulf Coast and 
shut down most of the output from the region. Because my colleague from 
the Air Transport Association went over these numbers in detail, I will 
focus on service impacts, except to underscore the fact that Katrina 
initially wiped out 19 percent of domestic refining capacity, including 
13 percent of the nation's daily jet fuel production. Further, oil 
imports are down 10 percent because of Katrina's extensive damage to 
Louisiana's major oil-import terminal.
    By September 1, jet fuel prices had risen 49 cents per gallon to 
$2.36, from $1.87 on August 17. While recovery efforts and action by 
various federal agencies have led to the price of jet fuel being $2.00 
per gallon today, this cost remains untenable for major and regional 
carriers alike.
    Some lawmakers have suggested that carriers pass along fuel 
increases to passengers. But competition has not become less intense 
just because fuel prices have skyrocketed. In fact, regional airlines 
compete not only carrier to carrier. In short-haul markets, we compete 
with the automobile. Data from the most recent DOT Inspector General's 
``Aviation Industry Performance'' report indicates that scheduled 
flights in markets of 249 miles or less declined 26 percent when you 
compare July 2005 to July 2000. For regional airlines, significant fare 
increases can mean significantly fewer passengers.
    Business passengers, who constitute more than 65 percent of 
regional airline travelers, have embraced advances in communications 
technology, making traveling more elective than ever and highly price-
sensitive. Airlines may be able to enact fuel surcharges, but these 
surcharges would still fail to recoup the losses incurred due to the 
recent spike in fuel costs. Further, given the numerous differences in 
pro-rate agreements for smaller regional airlines, it is likely that 
the increase in revenue from their pro-rata portion of the fuel 
surcharge would not fully compensate them for their increased fuel 
costs.

Essential Air Service
    The Essential Air Service program is administered by the Department 
of Transportation, where ``best and final'' competitive proposals are 
submitted by regional carriers. The Department selects carriers and 
establishes EAS subsidy rates based on that bidding process.
    If a carrier is the only airline serving an EAS eligible community 
and wishes to exit the market, DOT regulations require it to file a 90 
day service termination notice. DOT may hold that carrier in the market 
during this period, while a subsidy eligibility review or competitive 
bidding process is undertaken. Likewise, carriers operating EAS 
subsidized routes must also file a 90 day service termination--subject 
to even more onerous hold-in policies--in order to trigger a 
renegotiation of rates if costs increase significantly during the 
lifetime of the rate agreement.
    As part of the EAS application process, carriers negotiate in good 
faith with DOT on subsidy rates that remain in effect for two years. As 
part of the competitive bidding process, EAS carriers must project 
costs and profits over this two-year timeframe--no easy task in today's 
volatile cost environment. In cases of unexpected cost increases, EAS 
carriers have no tool to renegotiate rates and must instead enter into 
the unpalatable process of filing notice saying that the carrier 
intends to terminate its service in 90 days to begin the process for 
seeking compensation rates that cover their increased costs. This 
inevitably causes ill-will between an airline and community, in some 
cases fostering a sense of unreliability that ultimately undermines the 
use of the air service and further drives up subsidy rates (as fewer 
passengers traveling causes air fares to climb). And the process also 
forces carriers to operate at a loss for 180 days while DOT reopens the 
competitive bidding process. This is true despite a cornerstone of the 
original EAS law which provides that no carrier should ever be forced 
to serve any community at a loss.
    During deliberation of Vision 100, the most recent FAA 
Reauthorization bill, Congress noticed the destructive effects of 
rising fuel costs on the EAS program. Under the leadership of this 
Subcommittee, Section 402 of Vision 100 included a provision giving DOT 
flexibility in its rate-making process in those instances where 
carriers experienced ``significantly increased costs.'' With an eye to 
preventing deliberate cost underestimation, Congress included an index 
where ``significant increase'' is defined as a 10 percent increase in 
unit costs that persists for two or more consecutive months. 
Unfortunately, DOT has declined to use the tool Congress afforded it to 
reconcile fuel cost increases and EAS subsidy rates, citing the need 
for a specific appropriation. As a result, carriers are losing money on 
EAS routes in unprecedented numbers.
    As just one example, in July 2004, the fuel cost for a Beech 1900 
on a one-hour (block time) flight was $133.41. In July 2005, the fuel 
cost had increased to $202.12, nearly 52 percent higher. Only two 
months later, for the week ending September 2, fuel costs for that 
flight were $272.51, up 35 percent from July. These figures utilize jet 
fuel purchasing formulas commonly employed by regional airlines, based 
on cost data tracked in the Energy Information Administration's Weekly 
Petroleum Status Report. It is important to note that these figures 
calculate base fuel cost only--they do not include ``into plane fees'' 
and federal, state and local fuel taxes. The overall losses across all 
EAS carriers are staggering and the program, as we know it, is in 
jeopardy.
    In fact, we estimate that current fuel cost increases for all 
carriers in the program will drive up program costs significantly even 
if not one more community becomes eligible in the next fiscal year. 
Yet, according to the DOT website, there are currently 60 EAS-eligible, 
single-carrier markets which could come into the program. (While more 
than 60 communities are technically ``eligible'' I am referencing those 
that received service pre-deregulation and do not meet other 
disqualifying factors such as distance to nearby airports). Of those 60 
communities, anywhere from 15 to 30 could begin to require subsidy 
should the carriers file termination notices. Given the significant 
reductions in small community service and substantial cost increases 
affecting the airlines, it is reasonable and responsible to plan for 
more than half of all eligible communities to soon require subsidy. 
Under even the most optimistic scenario, therefore, the DOT will need 
at least $127 million in Fiscal Year 2006, to run the program. This 
Appropriation should also contain a line-item directing DOT to utilize 
the rate-adjustment tool afforded by Vision 100 to accommodate dramatic 
fuel cost increases.
    Early versions of a Senate appropriation sought to fix this problem 
by prohibiting newly eligible communities from collecting subsidy; yet 
such a prohibition runs counter to the original intent of the law, 
which guarantees air service to eligible communities.
    RAA stands ready to help Congress enact further EAS program reforms 
as the next FAA reauthorization takes place. We are eager to discuss a 
rewrite of the eligibility criteria, realizing that some rules set 
nearly three decades ago no longer apply. Nonetheless, the most 
important thing Congress could do right now to help passengers in EAS 
communities and the airlines is to release the full authorized amount 
of $127 million for the EAS program in FY06 and to require DOT's 
cooperation in making real-time rate adjustments for cost increases.
Request for Congressional Action

   Considering the staggering impact that increased fuel costs 
        have brought for U.S. regional and major airlines alike, RAA 
        requests, along with our colleagues at the Air Transport 
        Association, that Congress provide a tax holiday on the $4.3 
        cents-a-gallon tax on jet fuel. Further, we request that any 
        fuel surcharge charged by carriers be exempt from the existing 
        7.5 percent passenger ticket tax.

   We further request that Congress reconsider changes to the 
        jet fuel tax rate that were made as part of the American Jobs 
        Creation Act enacted last year and the additional proposed 
        change included in the Highway bill that would require airlines 
        to pay 24.4 cents up front for fuel purchases and file for a 
        rebate from the Internal Revenue Service (IRS). This system, 
        which places the burden on airlines to apply and wait for a 
        refund of the difference, with tax on jet fuel at $4.3 cents 
        per gallon, is causing a severe cash crunch for smaller 
        regional airlines. Changes already implemented by the American 
        Jobs Creation Act brought the upfront costs to 21.4 cents per 
        gallon with the highway bill poised raising the burden even 
        further. Regional airlines do not have any ticket tax payments 
        to offset the fuel tax payments because, in modern code sharing 
        relationships, we do not issue the tickets. We urge you to 
        amend the law and, in the interim, to require IRS to refund the 
        taxes on a monthly basis. This tax and refund procedure places 
        a tremendous burden on airlines and impacts cash flow at a time 
        when carriers are already struggling mightily from fuel costs.

   Finally, we urge you to work with your colleagues on the 
        Appropriations Committee to educate them on the need to 
        appropriate the full, authorized amount of $127 million dollars 
        to keep the important EAS program afloat during this period of 
        dramatic fuel cost increases. The fuel cost increases resulting 
        from Hurricane Katrina have further injured the financial state 
        of EAS carriers who, without rate adjustments and compensation 
        for increased fuel costs, cannot continue to sustain service at 
        a loss. Only a full appropriation of $127 million can prevent 
        service losses at multiple EAS points across the nation.

Conclusion
    Thank you for the opportunity to testify on this important issue 
today. I look forward to responding to your questions at the conclusion 
of the panel.

    Senator Burns. And I have one question that I want to ask 
of Mr. May and then I have some more follow-up questions. Mr. 
May, are your members right now paying higher fuel prices on 
their international flights and where they purchase fuel at 
foreign airports?
    Mr. May. Excuse me. Mr. Chairman, the $9 billion increase 
year-over-year from 2004 to 2005 is both domestic and 
international. So the answer is, yes, we are indeed.
    Senator Burns. Did we hit such a spike on our international 
airports as we did domestically?
    Mr. May. The answer is no, because of the weakness of the 
dollar. Fuel is more affordable, if you will, not as expensive 
in Europe as it is here in the United States.
    Senator Burns. Senator McCain.
    Senator McCain. Thank you, Mr. Chairman.
    Mr. May, you would like to see some relief from some of the 
taxation, is that correct?
    Mr. May. Yes, sir.
    Senator McCain. Then your first priority is the 4.3 cents 
jet fuel taxes, is that correct?
    Mr. May. Senator McCain, we think that tax was intended 
originally to be temporary, used for deficit reduction, but has 
remained on the books, albeit in favor of the Aviation Trust 
Fund, is the best candidate for short-term immediate relief 
with the understanding that it is equally important that we 
keep the trust fund whole. It scores at about $600 million, and 
I think we would hope that the Congress would entertain a one-
time supplemental to the trust fund to keep it whole.
    Senator Burns. Are you calling for a permanent or temporary 
suspension of the jet fuel tax.
    Mr. May. Mr. Chairman, we pay $15 billion a year in taxes 
and fees. I would like to reduce that level across the board. I 
think in the 2007 Reauthorization, the seven fees that we 
currently pay to the Trust Fund ought to be consolidated into 
one, and we ought to find a better way to do it. But for the 
immediate term, I think a temporary holiday, if you will, of a 
year would be the most appropriate course of action.
    Senator McCain. I would like for you to stop by the next 
time we have an Amtrak hearing and hear the Amtrak people 
complain about how much we subsidize the airlines as opposed to 
our much needed Sunset Limited.
    Let me ask you: Now we have got two airlines going into 
bankruptcy. When an airline is in bankruptcy, it no longer has 
to fulfill certain requirements, right?
    Mr. May. The airline has certain leverages that----
    Senator McCain. Or any organization that goes into 
bankruptcy----
    Mr. May.--it does not have outside of Chapter 11, right.
    Senator McCain. Among those are payments in the pension 
fund.
    Mr. May. That is correct.
    Senator McCain. So--and how many airlines do we have in 
bankruptcy now?
    Mr. May. Sir, we have got United Airlines, U.S. Airways, 
and ATA of my membership that are currently in bankruptcy. We 
have the prospect of two more today or within a short period of 
time, which would mean that some 47 percent of capacity in the 
United States is in Chapter 11.
    Senator McCain. And all of those airlines are no longer 
paying into their pension funds?
    Mr. May. Senator, I am not sure that is correct, but I am 
not the expert on the pension issues.
    Senator McCain. I think it has been reported in the media. 
I worry about that. Does that mean that you are--that the 
airline industry has taken a position on increasing retirement 
age of pilots?
    Mr. May. We have as ATA held a position that the retirement 
of 60 ought to be maintained.
    Senator McCain. That is remarkable. Just out of curiosity, 
on what basis? That these pilots, if they stay until the age 
62, are too old?
    Mr. May. No, I do not think it is based on age or 
incompetence at age 60. It has been a standard in the industry 
for some period of time.
    Senator McCain. So do not change it. It is interesting. I 
am sure other members of the Committee have the same 
experience; I am approached by pilots in the airports all the 
time, and I can tell by looking at them whether they are in 
favor of increasing retirement age or whether they are in favor 
of keeping it the same.
    Mr. May. Well, as the Senator points out----
    Senator McCain. The younger ones feel the same.
    Mr. May. There is a dispute among the pilot community as to 
which way to go.
    Senator McCain. Yes, that is what I tell them in response. 
Twenty percent--twenty-six percent of the total ticket price 
that is paid by a passenger now goes in some form to fees or 
taxes, is that correct?
    Mr. May. On an average $200 ticket, which is close to the 
average today, yes, sir.
    Senator McCain. If we do nothing--suppose the Congress and 
the Federal Government do nothing. What is going to happen in 
the airline industry? Consolidation; airlines going out of 
business; limp along and go in and out of bankruptcy as we have 
seen; further restructuring and, finally--well, go ahead and 
respond to that.
    Mr. May. Senator, I think that the industry has taken 
extraordinary steps for self-help over the past couple of years 
and, as I said in my testimony, were it not for fuel right now, 
I think this would be a profitable industry. At the same time, 
I think it is unrealistic to suggest that there is not going to 
be additional consolidation in this industry.
    Both domestically and if Congress changes the law, I think 
there will be international consolidation. We, live, work, fly 
in a world economy, if you will, but our hope is that this 
Congress will take a hard look at not only the overall tax and 
fee structure that we have but the impact of fuel, in 
particular, on the industry.
    Senator McCain. Well, I hope we do, Mr. May, because I, 
among others, rely on the board of experts who believe that the 
price of fuel is never going to go down significantly due to 
increased demand on the part of other nations. Would you submit 
to the Committee specific changes that you would like to see 
and, as far as any other relaxation--would just the jet fuel 
tax do it for you?
    Mr. May. No, sir. It is only a small step in the right 
direction. I think that Congress needs to revisit the entire 
tax and fee equation that applies not only to this industry, 
but that is tied inextricably to the appropriate growth and 
change necessary at FAA and the overall air traffic control 
system.
    Senator McCain. I would ask that you would submit to the 
Committee a detailed position as to what you would like, what 
kind of relief you would like to see----
    Mr. May. I would be happy to do that, sir.
    Senator McCain.--take place.
    I thank you, Mr. Chairman.
    Senator Burns. Senator Stevens--oh, Senator Lott has joined 
us. Do you have a statement, Senator Lott?
    Senator Lott. I will wait until after Senator Stevens.
    Senator Burns. OK. Thank you. Go ahead.
    The Chairman. Thank you very much, Mr. Chairman.
    Mr. May, one of the things we are doing on the Committee is 
reviewing all of the laws that apply that have come out of this 
Committee and determine whether there are roadblocks in them 
that prevent our making waivers and doing things which give us 
a chance to have some application of current revenues and 
current preparations to the recovery, and use current 
authorities without having massive new legislation.
    Have you examined any of the laws present about conditions 
or requirements under those laws that are currently preventing 
the airlines from taking steps that are necessary in view of 
the disaster and recovery from the disaster?
    Mr. May. Mr. Chairman, I have noted a couple things in my 
testimony and, certainly, relief on the 4.3-cent tax is one. We 
suggested to the Department of Transportation that we be 
permitted to impose fuel surcharges separate and apart from the 
actual ticket price. They took some action yesterday to put out 
for a notice of comment in rulemaking whether or not to 
eliminate those rules altogether, and we appreciate the 
direction that Secretary Mineta has taken on that point.
    I think there are a number of areas that Ms. McElroy has 
identified this morning that are specific to the regional side 
of this business, part of which is owned and operated by my 
carriers, part of which operates on a separate basis.
    We would be happy to reexamine some specific areas in the 
regulatory process that may be of some benefit and submit that 
to the Committee as Senator McCain has suggested.
    The Chairman. Now, for last year the airlines that 
altogether paid $15 billion into Federal taxes?
    Mr. May. Yes, sir.
    The Chairman. But they lost $10 billion overall. Have you 
looked, again, now, at these taxes? You have asked us to 
suspend the one.
    Mr. May. Yes, sir.
    The Chairman. The airlines are the only entity in the 
country that collect from their customers the costs, or at 
least partially the costs, of security.
    Mr. May. Yes, sir.
    The Chairman. Have you looked at that? Should we reduce 
that or in any way find some way to reduce the cost of the 
security program in order to free up more area for your 
increase in fares?
    Mr. May. Senator, we pay, as you have just noted, a little 
bit north of $15 billion a year in taxes and fees. That 
includes some $3 billion to $3.5 billion a year directly to 
DHS/TSA. I think we are one of the only industries that 
directly undertakes funding of TSA and DHS. We do it through 
five different taxes and fees. We have seven different taxes 
and fees that underwrite the lion's share of the Aviation and 
Airport and Airways Trust Fund.
    I think it would be fully appropriate for this Committee to 
take a long, hard look at that entire funding equation and make 
a determination as to what ought to remain, what ought to be 
jettisoned, and how we can help reduce the overall impact of 26 
percent on an average $200 ticket, which is far greater than 
any other industry in the United States pays in taxes and fees, 
greater even than alcoholic beverages and tobacco products 
where taxes are used as a disincentive to consumption.
    The Chairman. We have provided that some of the airports 
could take over their own security if they desire to do so. To 
my knowledge, only one did. Have you had any contact with the 
airports to see whether they could take over the security and 
reduce the costs?
    Mr. May. I think that the airports have had a long working 
relationship with TSA on that very issue. I think the Senator 
is correct that there was only one airport that took advantage 
of that opportunity to date. I am not sure, Senator, that there 
is a huge dollar difference if it is privatized or federalized. 
I think the dollar impact is roughly the same.
    The Chairman. Well, what about your costs--the airlines' 
costs of the modernization of airports for, say, the passenger 
portion? That is substantial, is it not?
    Mr. May. We find that the hassle factor, if you will, 
opposed by TSA is having a direct impact on our potential 
customers. A number of people are driving or using other modes 
of transportation as opposed to going through the hassle 
factor.
    At the same time, there are significant costs that get 
imposed on the carriers, sort of the end reimbursed costs from 
catering security to direct security at airports, to cost of 
inline EDS, et cetera. We have suggested for some time that we 
need to take a hard look at how TSA is funded and make a 
determination as to whether or not it ought to be through the 
carriers themselves, either through fees imposed in taxes or 
un-reimbursed expenses, or airport derived expenses, or through 
general tax revenues.
    The Chairman. It just seems to me there is a lot of chefs 
stirring this stew, and I wonder if we have to go into debt 
when the overall structural relationship of government to 
airlines, and part of it is in the tax base and that is hard to 
deal with, but I do think we ought to take a real long look. We 
do not have the time now during this disaster period, but I 
think we ought to take a long look at totally revamping the 
relationship of government to the airline system and deal with 
some of those taxes in a way of trying to find some way to 
reduce the redundancy and the management that comes from county 
and local and airport executives, and entities themselves, but 
the ownership concept. All of those things are leading to 
problems.
    I know I am taking a little bit more time. I would like to 
ask Mr. Miller about the problem.
    You said that one of the problems was, as I understand it, 
you had to go to too many entities to deal with disasters and 
you would like some way to go directly to the coordinator and 
you suggested, I think, that we should go into some concept of 
regional prepositioning of disaster equipment. Could you 
enlarge on that a little bit?
    Mr. Miller. Yes, Mr. Chairman. What we found out is that 
during the immediate times following that natural disaster, 
that there is a need for a lot of equipment, building 
materials, supplies, but that we have to work through multiple 
state agencies in order to get those supplies in there. The 
airports that are responding want to respond to that airport. 
They want to get there as quickly as they can, but there are 
protocols that have to be followed. As I stated, Bruce Fraylik 
was required to contact the Mississippi EOC, which would then 
contact either the State of Florida or Georgia or South 
Carolina to initiate a request for a specific airport.
    We feel that if we had one point-of-contact within FEMA, 
they could be making those contacts for us. They could be 
asking those airports to respond. They could be issuing the 
mission numbers that would allow those airports to respond as 
quickly as possible. The State Emergency Operations Centers are 
so involved in all the community-wide disaster relief that we 
do tend to get overrun. We do feel that to make it easier for 
them and for us, that a direct point of contact within FEMA 
would help to facilitate the response from the other airports.
    The Chairman. We will follow up on that.
    Last, Ms. McElroy, all of us are not--at least, I am not 
familiar with this 24-cent Highway Act provision you were 
talking about.
    Ms. McElroy. What I heard from the carriers, Senator, is 
that there was--thank you. What I have been informed from the 
carriers is, because of concerns about jet fuel which head the 
lower tax rate, concerns about that being fraudulently 
purchased by other consumers, the change was made to increase 
that tax rate, and then the airlines filed for a return of the 
overage that they paid, if you will, over the 4.3 cents.
    It is my understanding from talking to the major carriers, 
that they have been able to use ticket tax revenues owed to the 
government to offset those fuel payments and, as a result, it 
has not caused the cash crunch it has for some of the very 
smaller regional airlines. I would certainly be willing to 
provide you additional information specifics.
    The Chairman. That is good. Can you get us a one-pager?
    Ms. McElroy. Yes, sir.
    The Chairman. Or we can talk with the tax people at the 
Finance Committee and Ways and Means about that.
    Ms. McElroy. Yes, sir. We would very much appreciate that.
    The Chairman. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Burns. Senator Lott.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Thank you, Mr. Chairman, for having this 
hearing so quickly to address the problems and the needs of a 
very critical part of our economy, the aviation industry.
    I hope that you, as Chairman of the Subcommittee, and you, 
Mr. Chairman, will continue as you have been to identify 
specific things that, maybe, can be done very quickly to 
provide some relief and some help and, as in the case of my own 
state, and probably Pensacola has experienced this, too, there 
is not enough--the state is only eligible for, like, $5 million 
for repairs through AIP. Just some little modification in the 
existing law would allow us to get more like $35 or $40 
million, which is what we will need to do the repairs at our 
airports in the aftermath of Hurricane Katrina, and there are 
other areas where I think we can take some small actions or 
quick actions that would make a big difference.
    I want to thank the industry for the expeditious handling 
and management of the effort to get our airlines and our 
airports back up and operating. FAA, I think, should be 
commended for their efficiency in getting our Mississippi 
airports back up and running. Gulfport/Biloxi Regional is fully 
operational. Jackson International is only temporarily shut 
down. Even Stennis International Airport has been open.
    In all of this negativity and complaining, I do think that 
the effort that has been made by the Administration, by FAA, by 
the airports, and by the airlines deserve credit. We 
particularly appreciate, in my state, the fact that Delta and 
Northwest and Continental American, they are all back in there, 
and they are back very close to a full service. That is very, 
very important.
    Also, even though you are struggling financially as an 
industry, many of your companies have been generously involved 
in providing transportation, and supplies, and contributions. 
And we do, we recognize that, and we thank your industry. And I 
put a list of companies that have done that sort of thing 
beyond the call of duty in the Congressional Record when I 
first returned last week. And the list is there and it includes 
some of the airlines.
    Now, with regard to energy: Sir, are we still releasing oil 
from the SPRO in view of the disaster decline and supply, and 
the spike in price?
    Dr. Gruenspecht. I think the bids on the SPRO release were 
received last week and they are under evaluation in the 
Department, and I think you will hear from the Secretary of 
Energy in the very near future on that.
    Senator Lott. I would have hoped he would have moved 
quickly. It has been 2 weeks----
    Dr. Gruenspecht. Well, we already have----
    Senator Lott.--and the problem was there before the 
hurricane.
    Dr. Gruenspecht. Right. And we have a couple things. One, 
there have been loans of oil that have already taken place to 
the refiners. In terms of the release of SPRO, there is a 
process that has to be followed.
    Senator Lott. Cut the process in half, please, sir. Get rid 
of bureaucratic crap and rules and I mean we need supply. My 
hometown refinery, which has the capability of refining 365,000 
barrels a day, is shut down. We have got the channel open so we 
could bring in oil as soon as they are able to go back into 
being operational, but they also had the jet fuel and gasoline 
in their tanks which they immediately started distributing but 
they have about done all they can there.
    I can just--I want the Administration, the Energy 
Department, that people are emotionally very distraught by what 
they have seen from the hurricane. They do feel very tense 
about Iraq obviously, but the thing that is making the people 
the maddest has been when they go to the pump to fill up their 
tanks. Now, you can give me a lecture about freeing up, supply 
and demand, and all that other stuff. It is not good enough. We 
had better realize there is a problem with certain farmers, 
small businessmen and women----
    Dr. Gruenspecht. I understand----
    Senator Lott.--with children, and we, at least, need to 
improvise. Can we at least say, ``This is bad. We know it is 
bad'' and take a look, like we care and we are doing something 
about it? And I think the Energy Department needs to be a 
little bit more aggressive in jawboning the industry as a 
whole; and I do not know--I am not prepared to take irrational 
actions. But if we do not get some change in energy prices and 
supply and all of that, the American people are going to demand 
that we do something and it may not be good. So, pass that back 
to the Secretary and the Administration. Cut the baloney in 
half. Let us get some action, please, sir.
    You know, I have tried very hard to be helpful to the 
aviation industry, enjoyed being Chairman of the Subcommittee. 
We did pass some specific funding after we went into Iraq. Of 
course, we did have specific action after 9/11. We have passed 
a temporary pension change a year or so ago. We did quickly 
move a new, broad and, I think, good FAA reauthorization. So, 
we have made some real efforts, and yet the difficulties 
continue or get worse.
    And I know that you are in this situation because of bad 
laws on the books that we passed in terms of how you handle 
labor negotiations, bad management decisions over a period of 
years that have now come to roost with the current management 
team at the aviation industry. And I think you have some good 
people in place now, but decisions that were being made 5 to 10 
years ago are now just devastating to industry.
    I know that we have unaffordable labor contracts. I know we 
have unrealistic pension laws. I know that you have heavy fees 
and taxes that are a real drain, and now you have been hammered 
with the rising fuel costs and, to cap it all off, Katrina. It 
caused millions of dollars of loss by flights that were shut 
down and flights that are not flying yet. So, jiminy, it is a 
big problem.
    Now, I just got very concerned about everybody going into 
bankruptcy. I do not see how we can stand to let it happen. We 
need more common sense by the industry people, broadly; and we 
need to do more in Congress to deal and to have a realistic 
plan for the future of aviation.
    So, I am hoping that we will do three things: One, that the 
Chairman of the Subcommittee and the full Chairman will quickly 
pass some changes in the laws that could have quick effect on 
helping the industry, everything from the airports and regional 
airplanes and the industry as a whole. Two, what broader things 
can we do that will have a positive effect? And, three, what is 
the long-term plan?
    You know, in my own area, which is devastated, we are not 
just looking at this as recovery and reconstruction, but we 
want renaissance. We want this to be an example that will 
really make it a shining recovery and one that we can all 
benefit from and the country can learn from. I hope the 
industry will be thinking about that too, because we need the 
aviation industry.
    There are just so many things--I have so many problems with 
TSA. You know, I have so many problems with the indefensibility 
of your ticketing pricing arrangements. Being from a rural 
state and flying into Kentucky a lot, sometimes I do not 
understand why you can fly for $200 here and $1,100 somewhere 
else but we will get into that another day. I know all the 
answers.
    Senator Burns. You ought to live in Montana, Senator.
    [Laughter.]
    Senator Lott. I know the arguments, but now, here is the 
second part of that equation. What could we do that maybe would 
have a bigger impact? Not just little tweaks, but there are two 
things: One, you suggested, Mr. May, the 4.3-cents-a-gallon. 
Now, last year or the year before, right at the end of the 
session the year before, I guess, last year, we repealed the 
4.3-cent-a-gallon tax on railroads and barges.
    Mr. May. That is correct.
    Senator Lott. Are you the only people now that are still 
paying the old 4.3-cent-a-gallon tax we put in place for 
deficit reduction?
    Mr. May. I think there are variations of that tax that are 
still paid by other industries, but we are the only 
transportation-related business that----
    Senator Lott. Now, this one we put in place for deficit 
reduction back in the nineties----
    Mr. May. Yes, sir, 1993.
    Senator Lott. OK. That money though----
    Mr. May. It was supposed to be on a temporary basis.
    Senator Lott. Temporary. Well, temporary in the eyes of the 
Chinese could be hundreds of years, so----
    [Laughter.]
    Senator Lott. That money does go in the Trust Fund, though, 
right?
    Mr. May. Aviation Trust Fund, yes, sir.
    Senator Lott. Well, we need all the money we can get in 
that trust fund.
    Mr. May. Senator, I would encourage--I think we have seen a 
great deal of support on this Committee but as you, better than 
most, know, there are other Committees of the Congress, 
including the Finance Committee, who have jurisdictional 
priority on many of these taxes, and there has been some 
resistance on that front. We would encourage you to help 
communicate your views in that direction, as well.
    Senator Lott. What did you say the dollar amount is of the 
4.3? $600----
    Mr. May. $600 million on a 1-year basis, we are advised.
    Senator Lott. One other question: We have met very little 
discussion at all about the pension bill. Now, I know your 
members are, maybe, divided on this issue. We clearly need 
pension reform and we clearly need to correct some of the 
stupid things in the pension law where it is turned on its 
head, where if you are doing well, you pay less; if you are 
doing poorly, you pay more.
    The Chairman. Could you let me interrupt you?
    Senator Lott. Yes.
    The Chairman. You said it would be profitable without that 
tax, but you were not talking about the payments you would owe 
the pension fund. And can you quantify the pension fund 
obligation of the airlines?
    Mr. May. No, sir. I would be happy to collect it and 
provide that information to the Committee. We would be 
profitable were it not--this year we are already going to lose 
about $10 billion this year, between $9 billion and $10 
billion. The fuel--additional fuel costs impact is $9 billion 
of that $10 billion. And then there is a component in there for 
Katrina. Our operating results would be significantly better if 
it were not for fuel.
    Senator Lott. Do we need to find a way to pass this Pension 
Reform Bill that has been reported out of the Finance and Help 
Committee in the next week?
    Mr. May. Mr. Chairman, there are a number of companies that 
are in my membership that would love to have me say yes. I am 
not taking a position on the Pension Reform issue as you are 
well aware because I have got companies on both sides.
    Senator Lott. Yes. You sound very senatorial.
    [Laughter.]
    Senator Lott. You have friends on both sides and you are 
with your friends?
    Mr. May. That is exactly correct, sir.
    Senator Lott. Let me ask somebody else, then. Mr. Miller, 
do we need to pass this pension reform? Are you going to take 
the same position?
    Mr. Miller. I will take the same position, sir.
    Senator Lott. How about you?
    Ms. McElroy. Our Association has not taken a position 
either, predominately because the regional carriers have 401k 
programs.
    Senator Lott. Yes.
    Ms. McElroy. We are younger companies. So it is not an 
issue.
    Senator Lott. OK. Thank you very much.
    Senator Burns. To put a footnote to that, if none of you 
have taken positions on pensions, how come we are in such a big 
problem with pensions? Somebody has not been taking positions 
in the past, I would assume.
    Senator McCain. There is a difference in the way they were 
funded by company.
    Senator Burns. Yes, I know, and I think it behooves us, 
though, Senator, to pass that pension package and get it out 
there. I really do. When you get right down and talk it on the 
street, well, that is the way it is.
    Senator McCain. Yes.
    Senator Burns. I am not real sure there is a lot of 
legislation that we can pass, but I tell you that there are 
some things that we can do. We can cut through some red tape, 
and ask the DOT and the FAA and a lot of people who are 
involved in this thing to work with us and to make it work.
    Ms. McElroy, how many members have started filing the 90-
day termination? Are there any starting to file those 90-day 
termination notices with the regionals?
    Ms. McElroy. In the aftermath of Katrina?
    Senator Burns. Yes.
    Ms. McElroy. No one has filed yet, but there are several 
carriers that are looking at it because of the increase in fuel 
costs.
    Senator Burns. And, the other day we had a hearing in 
Energy Committee about gouging. Would the crack spread indicate 
some of that, Dr. Gruenspecht?
    Dr. Gruenspecht. Yes, I think the crack spread, mostly 
which has increased for all products and then has fallen back 
to the pre-Katrina type of situation, primarily indicates the 
supply and demand balance in the market.
    Senator Burns. Well, I am not real sure that--I am, sort 
of, hesitant to--I am kind of like Senator Lott, on this market 
driven and spread and this type of thing. I have a hard time 
understanding this, but I would imagine when I looked at this 
form right here as far as the crack spread is concerned, I 
mean, that is a drastic spike. That is an upturn like we have 
never seen before in the history of the refining or fuel 
business.
    The Chairman. Senator?
    Senator Burns. Yes, sir.
    The Chairman. Let me interrupt you. We have got to go vote. 
David Russell here is our general counsel. We are putting 
together a package now that goes to the leadership----
    Senator Burns. That is right.
    The Chairman.--assessment group, and that they are going to 
review and try to get joint clearance on both sides of these 
rifle shots that Senator Lott's talking about. Individual 
things that we can do within the jurisdiction of this Committee 
to make it easier for people to deal with this disaster and the 
recovery that we would like to see the airlines have, if you 
have any suggestions at all, get them to David Russell. Those 
will be discussed, now, next Monday, and it is going to be a 
package that moves pretty quickly, we hope. We do not know, 
yet, but we hope that we will get some support on it, but I 
urge you to let us know if you think there is anything we can 
do to help you get through this period.
    Senator Burns. My notes--and that is the reason we had this 
hearing today. I think we have gotten all the information that 
we need that is out there, private consultation with each one 
of you with regard to the legislation that is going to move and 
that will be a part of a larger package of a lot of things that 
has to happen and be done by Monday. If you would work with our 
staff, with our staff counsel and with our offices individually 
the next couple of days or so, we would certainly work on 
those.
    The Chairman. One last comment: The ANWR Bill was vetoed in 
1996. If we had that pipeline filled now, we would have at 
least 1.2 million barrels of oil today than we have. That is 
coming up now, again. I would urge the industries that are 
affected by this lack of supply to help us convince the 
Congress to go ahead and do what Congress said it would do in 
1980, and that is let us explore that one and a half million 
acres on the Arctic slope. At the time of the last major 
disaster, we had 2 million barrels a day in that pipeline. 
There is less than a million barrels a day right now. It is a 
national crime in my opinion.
    Mr. May. Mr. Chairman, you would note that we included ANWR 
in our testimony for the first time.
    Senator Burns. Yes, sir.
    Mr. May. And we will be happy to share our ideas with both 
you and Co-Chairman Inouye and his team.
    The Chairman. Thank you.
    Senator Burns. Thank you very much. And we will close this 
hearing. But also if you have extra comments or anything like 
that, make them known to the individual Members and to the 
Committee. Thank you very much. We are adjourned.
    [Whereupon the hearing adjourned.]

                            A P P E N D I X

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii

    The effects of Hurricane Katrina will impact our nation for a long 
time, and the decisions made by this Congress in the coming months will 
provide critical support to the country as we recover from this 
disaster.
    There is no question that our aviation system is critical to the 
success of the American economy and our capacity to compete in the 
global marketplace. However, this industry was struggling long before 
Katrina made landfall. The storm made a bad situation worse. Make no 
mistake, this Congress will not let our aviation system collapse. Our 
actions in recent years--from direct financial bailouts to generous 
loan guarantees--demonstrate our commitment to keep the planes flying. 
I have followed this issue closely, and given Hawaii's reliance on air 
service, I consider it one of my leading priorities.
    While I strongly support a thorough examination of Katrina's impact 
on the aviation industry, I hope this Committee will also consider the 
litany of pressing issues that this catastrophe has raised. Our 
citizens are hurting and their confidence in government is deeply 
damaged. They have many questions, and so do I.
    Why it is that our first responders still cannot communicate with 
one another? What are we doing to ensure that our cities can evacuate 
the tens of thousands of residents without transportation? How can we 
reign in gas prices and eliminate attempts to gouge consumers? What are 
we doing to address our growing, long-term dependence on oil? These 
questions get at the heart of national public policy and the very 
purpose of government, and all of the issues they raise are in our 
jurisdiction.
    This Committee needs to scrutinize these issues, because they 
directly impact the livelihood and physical security of every American:
    Gas prices and attempts to gouge customers: As of Monday, gas 
prices officially reached an all-time high, even as adjusted for 
inflation. There is no doubt that these astronomical prices are having 
a sustained, detrimental impact on our economy, not to mention the 
finances of every American household. We need to work with the Federal 
Trade Commission (FTC) to ensure that there is no price gouging 
involved--during this disaster or any other.
    Transportation assets for mass evacuation: Tens of thousands of New 
Orleans' most needy residents did not have resources to flee the city, 
and yet assets like trains and motor carriers were not dispatched in 
advance to aid the evacuation. We learned that Amtrak trains, which 
were poised to evacuate 600 people per trip, along with other assets 
marshaled by the Department of Transportation, sat idle, falling victim 
to the Federal Emergency Management Agency's (FEMA) disorganization.
    Communications interoperability: Four years after the September 11 
attacks on America, our first responders still cannot communicate with 
one another in a crisis. This is almost unfathomable. It is a problem 
that must be solved immediately if we are to effectively manage the 
chaos of either a large-scale terrorist attack or the next natural 
disaster.
    Coast Guard's exemplary, and independent, performance: The Coast 
Guard proved to be one of the few agencies that rose to the challenges 
Katrina presented, rescuing over 30,000 victims in the early stages of 
the aftermath. The Coast Guard maintains a level of independence that 
proved critical in its response efforts. In fact, Homeland Security 
Secretary Michael Chertoff appointed Coast Guard Vice Admiral Thad 
Allen to direct the Katrina recovery efforts. FEMA, which was an 
independent agency before being merged into the Homeland Security 
Department, is now 3 appointees removed from the President, despite its 
life-and-death, highly time-sensitive functions.
    Fuel-efficiency standards: Katrina has demonstrated, yet again, our 
economy's inherent dependence on oil, both foreign- and domestically-
produced. It may very well be our country's Achilles heel, but it 
should not be this way. One of the most immediate and effective things 
we can do to remedy this dependence is to increase the fuel efficiency 
standards of our automobiles in a meaningful way. The technology 
currently exists to double our oil efficiency, and employing this 
technology would not only reduce our national dependence, it would 
reduce fuel costs for every American. The time has come to make this 
happen for the sake of our long-term economic strength, not to mention 
our long-term foreign policy.
    Insurance coverage: As the President discovered first hand on 
Monday when he toured the Gulf region, insurers are not coming through 
for Katrina's victims. This industry, which is so quick to come to 
Congress for help when times are tough, is not doing the same for its 
premium-paying customers, who are in desperate need of assistance. We 
need to take a serious look at the way property and casualty insurers 
are living up to the agreements they make with their customers. This 
Committee has examined disaster insurance before, and we need to do so 
again.
    Given the gravity and long-term impact of Katrina's aftermath, our 
Committee must address these issues. Government's central purpose is to 
protect the physical and economic security of every American, yet 
Katrina has exposed numerous failures and vulnerabilities at all levels 
of government that need to be corrected immediately. We must do our 
part to resolve these problems before another catastrophic natural 
disaster or, even worse, a large-scale terrorist attack.
                                 ______
                                 
            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey

    Mr. Chairman, thank you for calling this hearing and giving us an 
opportunity to discuss this important issue. The cost of aviation fuel 
is soaring like a rocket. Airlines are being hit hard by high fuel 
costs, just as American families are getting slammed by the high price 
of gas.
    In 1993, aviation fuel cost twenty nine dollars ($29) per barrel. 
Last year, the cost more than doubled--and it is still rising. In the 
wake of Hurricane Katrina, jet fuel prices soared 22 percent in two 
days!
    Every time the cost of aviation fuel increases by one dollar a 
barrel, it costs the worldwide airline industry one billion dollars! 
Those costs are ultimately paid by travelers in the form of higher 
fares or service cuts, or by labor in the form of cuts in wages or 
pensions.
    U.S. airlines lost some nine billion dollars ($9 billion) last 
year. The outlook this year is just as bleak. We all understand that 
the price of oil is subject to fluctuations in supply and demand. And 
we all realize that events like Hurricane Katrina can disrupt the 
supply chain.
    But I am concerned that the current price of aviation fuel is not 
simply a reflection of free market forces. According to the 
International Air Transport Association, the refinery margins for 
aviation fuel have almost tripled in the past two years--from six 
dollars ($6) in 2003 to seventeen dollars ($17) today. We cannot allow 
the oil companies and refineries to take advantage of a natural 
disaster like Hurricane Katrina by gouging consumers.
    Another major factor behind rising fuel prices is the cost of crude 
oil, which is propped up by the OPEC cartel. The whole reason OPEC 
exists is to set quotas on the production and export of oil, which 
drive up the price by artificially limiting the supply. These quotas 
are a burden on airlines and everyday families.
    But they are prohibited by the rules of the World Trade 
Organization. In other words, the Administration is not helpless in the 
face of OPEC's cartel. There is something we can do about this. Six 
members of OPEC are already members of the WTO, and Saudi Arabia is 
seeking to join. I have called on the Administration to take immediate 
action to bust up the OPEC cartel by filing a complaint through the 
WTO.
    I have introduced a bill that would instruct the Administration to 
file a complaint against OPEC through the WTO. But President Bush 
doesn't have to wait for my bill to pass--he should act immediately to 
put pressure on OPEC.
    Finally, our national transportation system is especially 
vulnerable to disasters that disrupt the supply of oil because of our 
overwhelming reliance on automobiles and aviation, and under-
utilization of passenger rail.
    This is just one more reminder that we must develop a balanced 
national transportation system--and that includes passenger rail.
    I'm proud that the full Commerce Committee overwhelmingly approved 
an Amtrak bill before the recess that would help correct this 
imbalance. That is a step in the right direction.