[Senate Hearing 110-1137]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1137
CHALLENGES FACING
HAWAII'S AIR SERVICE MARKET
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 10, 2008
__________
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 TENTH CONGRESS
SECOND SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California GORDON H. SMITH, Oregon
BILL NELSON, Florida JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey JIM DeMINT, South Carolina
MARK PRYOR, Arkansas DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Paul Nagle, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on April 10, 2008................................... 1
Statement of Senator Inouye...................................... 1
Prepared statement of Hon. Neil Abercrombie, U.S.
Representative from Hawaii................................. 6
Prepared statement of Hon. Daniel K. Akaka, U.S. Senator from
Hawaii..................................................... 5
Statement of Senator Smith....................................... 8
Witnesses
Banmiller, David A., President and CEO, Aloha Airlines........... 20
Prepared statement........................................... 25
Fukunaga, Barry, Chief of Staff; Office of Governor Linda Lingle,
State of Hawaii................................................ 34
Hirono, Hon. Mazie K., U.S. Representative from Hawaii........... 3
May, James C., President and CEO, Air Transport Association of
America, Inc................................................... 30
Prepared statement........................................... 32
Reynolds, Michael W., Acting Assistant Secretary for Aviation and
International Affairs, U.S. DOT................................ 9
Prepared statement........................................... 10
Snowbarger, Hon. Vincent K., Deputy Director for Operations,
Pension Benefit Guaranty Corporation........................... 17
Prepared statement........................................... 18
Willis IV, Charles F., Owner and Chairman of the Board, Island
Air, Honolulu, Hawaii; accompanied by Lesley Kaneshiro, Chief
Financial Officer, Island Air.................................. 28
Prepared statement........................................... 30
Appendix
Response to written questions submitted by Hon. Daniel K. Inouye
to Michael W. Reynolds......................................... 49
Stevens, Hon. Ted, U.S. Senator from Alaska, prepared statement.. 49
CHALLENGES FACING
HAWAII'S AIR SERVICE MARKET
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THURSDAY, APRIL 10, 2008
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 3:45 p.m., in
room SR-253, Russell Senate Office Building, Hon. Daniel K.
Inouye, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
The Chairman. First, my apologies for being late. As you
may be aware, we have had five consecutive votes that held us
up.
As an island state, Hawaii is uniquely dependent on
commercial aviation. Our state's economy requires a vibrant air
service to connect us within the State, to the rest of the
Nation, and to the world. Not only do our air carriers allow us
to move passengers and goods in an efficient and timely manner,
they help to unite us as a community and as a people. Simply
put, aviation is vital to our lives and our citizens.
Unfortunately, the industry, and Hawaii's air carriers in
particular, are facing substantial financial challenges. Oil
prices have risen to record levels and ruthless competition in
Hawaii's air service market has taken its toll. Last week
alone, Hawaii's own Aloha Airlines, along with ATA, Skybus, and
Champion, declared bankruptcy and ended commercial passenger
service. Two of these airlines, Aloha and ATA, provided a
substantial share of Hawaii's air service.
Despite these challenges, we must ensure that the air
transportation system continues to serve our state effectively.
At the same time, we must understand the impact airline
instability has on our local communities and the economy.
Aloha Airlines, for example, has been an important
institution in Hawaii for more than 60 years. Aloha provided
transportation for nearly 4 million passengers annually in our
State, with about 100 inter-island flights daily. Aloha also
has served as one of Hawaii's largest employers, with more than
3,500 workers and an annual payroll exceeding $100 million.
Nearly everyone who lives in Hawaii has flown Aloha's
inter-island flights for business or to visit friends or
family. Many of us know people who work for Aloha. As a matter
of fact, I worked for TransPacific Airlines for a time early in
my career before it became Aloha Airlines. The Aloha workforce
has served all the citizens of Hawaii in a very dedicated
fashion for a very long time. Now many of these employees face
uncertain futures, and naturally I am deeply saddened by this
unfortunate turn of events.
At this time it is critical we take action to support these
loyal Aloha employees. In particular, it is my hope that local
lending and financial institutions will recognize the difficult
position in which the employees find themselves. I call on
these institutions to consider the unique circumstances of what
may well be the largest layoff in Hawaii's history and to
provide whatever flexibility they can to customers in good
standing. Providing temporary relief from penalties or late
fees is just one way that former Aloha workers may be helped
through this difficult time.
Aggressively looking at the possibility of hiring segments
of a well-trained workforce is another option I hope many
businesses in Hawaii will seriously consider.
On the Federal level, we have been working to ensure that
the modernization of the Nation's air traffic control system
results in efficiencies that will increase safety and
effectiveness to benefit both the industry and citizens who
depend upon that system. However, this is clearly a long-term
solution to some of the problems that impact not only Hawaii,
but also our Nation's air carriers.
In the near term, this Congress must determine what we can
do at the Federal level to help the airline industry make it
through what has become an increasingly difficult period.
Unfortunately, some solutions that have been put forward may
provide only temporary relief, as our weakening national
economy and high fuel prices threaten to overwhelm any Federal
initiatives.
We must also recognize that deregulation has dramatically
altered the playing field for our Nation's air carriers. While
deregulation has created substantial benefits for a number of
communities, others have been less fortunate and do not have
the same air transportation opportunities that were once
provided. In Hawaii, these challenges are amplified as we have
numerous small communities in a market that is geographically
isolated.
Finally, I would note that new entrants into Hawaii's
markets have made survival impossible for some. Aloha is the
most obvious example of the impact of overly aggressive pricing
in the marketplace. Congress must deliver on the promise of
providing affordable, secure, and quality air service to all
Americans regardless of geographic location. This is the
promise of deregulation and we must find a way to deliver on
past commitments.
This afternoon we have a panel of experts that should help
tell us why we came across this problem. On this panel we have
the Acting Assistant Secretary of Transportation for Aviation
and International Affairs, Michael Reynolds; the Deputy
Director for Operations, Pension Benefit Guaranty Corporation,
the Honorable Vince K. Snowbarger; the Chief Executive Officer
of Aloha Airlines, Mr. David Banmiller; the Owner and Chairman,
Island Air, Mr. Charles Willis; accompanied by Ms. Lesley
Kaneshiro, Chief Financial Officer of Island Air; the President
and Chief Executive Officer of Air Transport Association, Mr.
James C. May; and the Chief of Staff of Governor Linda Lingle
of Hawaii, Mr. Barry Fukunaga.
May I first call upon our illustrious and distinguished
Member of the House, the Honorable Mazie Hirono.
STATEMENT OF HON. MAZIE K. HIRONO,
U.S. REPRESENTATIVE FROM HAWAII
Representative Hirono. Thank you, Mr. Chairman. It is
always good to see you. Senator Smith. Thank you for holding
this important hearing on air service in Hawaii and for this
opportunity for me to express my concerns.
Like so many others in Hawaii, I was shocked to learn that
Aloha Airlines was ending passenger operations after 61 years
serving our public. Aloha had sought bankruptcy protections in
the past, as have many other airlines over the years, but to
completely shut down its passenger service with no resurrection
on the horizon brought home the precariousness of Hawaii's
situation and her reliance on stable air service.
My immediate concern, as is yours, is of course for the
2,050 employees who have lost their jobs, as well as for the
travelers who have been adversely affected. I know that we will
work together to provide all available assistance to these
workers and their families.
While intrastate air travel is important throughout the
United States, Hawaii with seven inhabited islands, all of my
district, does face some unique challenges. Residents of and
visitors to Hawaii cannot simply drive or take a train to
another island. Hawaii's economy, which is powered in large
part by our visitor industry, with over 7 million visitors
yearly, depends on reliable air passenger service between all
our islands. Our residents, meanwhile, are worried about being
able to get inter-island flights for business needs and to
visit family members on other islands. With Aloha gone from the
scene, this is both an availability and affordability issue for
our residents.
The State of Hawaii's Department of Business, Economic
Development, and Tourism has estimated recently that the Aloha-
related job losses could push the state's unemployment rate up
almost a full percentage point to 3.8 percent compared to 3.0
percent in February of 2008.
We have heard a number of reasons for the failure of Aloha,
including predatory pricing by a new competitor, high and
rapidly increasing fuel costs, and the ups and downs of the
local, national, and international economy.
Airlines throughout the country are struggling to deal with
rapidly rising fuel costs. My staff recently met with
representatives of United Airlines who reported that each
increase of $1 in the price of oil translates into an increase
of $60 million in expenses on an annual basis for that airline.
United paid an average of $72 a barrel for oil in 2007. Today
the price is around $105 per barrel which translates to another
$1.98 billion in additional fuel costs.
More than 20 U.S. airlines have filed for Chapter 11
protection between 2001 and 2006, including four of the six
largest network carriers. How will the industry deal with these
higher fuel costs as well as with all of the other challenges
facing this industry?
One factor that played an important role in driving Aloha
Airlines again into bankruptcy was the fare war generated by
the entry of Go Airlines into the Hawaii market. Go offered air
fares as low as $1, and its standard one-way inter-island
airfare was about half that charged by Aloha and Hawaiian
Airlines. Aloha and Hawaiian felt compelled to match the lower
fares. Aloha lost $81 million in 2007 and $11 million in
January 2008. Go Airlines lost $20 million in its first 16
months of operations in Hawaii.
I understand that the Department of Transportation has
jurisdiction over competition in the airline industry and has
the authority to require that carriers refrain from unfair
pricing practices. I would be very interested in Assistant
Secretary Reynolds' views on what role he feels the DOT should
play in preventing predatory pricing, ruinous competition, or
pricing below the cost of service in this industry.
Does the DOT monitor airline prices and investigate in
cases where prices appear to be designed to drive a competitor
out of business, or does it only react if there is a specific
complaint?
I would be very interested in seeing a survey of pricing
practices in the airline industry and wonder if DOT currently
monitors and evaluates these practices.
There is currently a proposal in the Hawaii State
legislature to establish a regulatory scheme for the regulation
of Hawaii inter-island air carriers. While this bill raises
significant legal and Constitutional issues, I certainly
understand the desire to exercise control over what has been a
very unstable situation in Hawaii's airline industry.
In the context of the ongoing turmoil in the aviation
industry and 25 years of deregulation, one wonders whether
increased regulation at the national level is now warranted.
The Airline Deregulation Act of 1978 made substantial changes
to the economic regulatory environment of the U.S. commercial
aviation industry. The Civil Aeronautics Board, CAB, awarded a
certificate of public convenience and necessity before an
airline could begin regular commercial service. Airlines could
not add or abandon any route without CAB approval. The CAB set
fares to prevent carriers from engaging in damaging price
competition. In making fare decisions, they determined what
would be fair for the industry. Competition among airlines was
based on the number of flights offered on the various routes,
as well as amenities offered, such as free drinks and the
quality of meals. Those days are long gone.
After deregulation, airlines have to compete in a
completely different environment. Fares went down on many of
the popular routes, but often went up for routes serving
smaller communities. The primary form of competition seems to
have settled on fare wars, which places pressure on the
airlines to reduce costs wherever possible.
In a hearing held in the House Transportation and
Infrastructure Committee last week, we heard of some disturbing
failures in safety protocols by both the airlines and the
Federal Aviation Administration. I worry about to what extent
these safety violations were inspired, at least in part, by
cost-cutting considerations. We also know that a good deal of
airline maintenance work is being done in facilities outside of
the country.
Hawaii's remaining major inter-island carrier, Hawaiian
Airlines, has moved its reservations operations offshore.
Outsourcing of jobs is a concern not only in the airline
industry, of course, but affects many other industries in this
global economy.
Faced with the loss of jobs caused by Aloha's passenger
operations, the danger this closure brings to our state's
economy, and the precarious financial situation faced by
virtually all of our Nation's airlines, I am frustrated by the
lack of apparent solutions. I know that some will say that the
market will correct the situation, but how can we expect
businesses to plan for the tremendous increases in fuel costs
we have faced in the past year? How can we make sure that there
is fair competition? What can we do to protect the thousands of
consumers who are affected when an airline like Aloha or ATA
abruptly stops flying, not to mention the recent groundings of
flights for safety inspections, including today the grounding
of 900 American Airlines flights?
The very complex nature of the industry and the high
standards of safety expected and required lead me to question
the wisdom of leaving so much in the airline industry to the
vagaries of the free market system. I am hopeful that this
hearing, as well as others to follow, will provide Congress
with the critical information necessary to take appropriate
action to protect the public and ensure air service in a
volatile global market.
Thank you very much, Mr. Chairman.
The Chairman. I thank you very much, Congresslady. Your
statement is a painful one, but very necessary. I appreciate
your participation. And I am sorry we had to make you wait this
long.
Representative Hirono. Not at all. It was a pleasure to be
able to speak to you.
The Chairman. The Committee has received two testimonies
from Senator Akaka and Congressman Abercrombie. Without
objection, they will be made part of the record.
[The prepared statements of Senator Akaka and
Representative Abercrombie follow:]
Prepared Statement of Hon. Daniel K. Akaka, U.S. Senator from Hawaii
Thank you, Mr. Chairman. I appreciate your conducting this hearing
today. The termination of Aloha Airlines' passenger service and the
subsequent layoffs of employees deeply saddens me. Aloha Airlines
provided essential transportation services and employment opportunities
in Hawaii for more than 61 years. We must all work together to assist
employees who have lost their jobs and to try to preserve vital
passenger services.
As you know, Mr. Chairman, the people of Hawaii are dependent on
inter-island air travel, which provides residents and visitors with
access to commercial opportunities, medical care, and allows them to
see their families. Tourism remains a vital component of Hawaii's
economy and inter-island flights continue to be important in helping
visitors enjoy the unique experiences found on each of the islands.
The loss of 88,000 seats per week for inter-island flights presents
a great difficulty for island residents. Although the other airlines
will add approximately 56,000 seats a week, there will still be reduced
capacity for inter-island travel. For our residents, this could present
additional barriers to health care, educational opportunities, and
economic activity.
For Aloha pilots and other pilots whose pensions have been
terminated, my bill, S. 1270, the Pension Benefit Guaranty Corporation
(PBGC) Pilots Equitable Treatment Act, could help provide some
financial relief. Mr. Chairman, I have greatly appreciated your
tremendous support of this legislation. S. 1270 will lower the age
requirement to receive the maximum pension benefits allowed by the PBGC
to age 60 for pilots, who were mandated by the Federal Aviation
Administration to retire before age 65. Retired pilots whose pensions
are administered by the PBGC do not receive the maximum pension
guaranty because they were forced to retire at age 60. My legislation
ensures that pilots are able to obtain the maximum PBGC benefit without
being unfairly penalized for having retired at 60, before the age limit
was raised to age 65. I will continue to work with you, the Health,
Education, Labor, and Pensions Committee, and other members to bring
about enactment of this important legislation.
Thank you again for conducting this hearing, Mr. Chairman. I look
forward to continuing to work with you on this vital issue. Mahalo
again for your tremendous leadership on this issue and for all of your
efforts to improve the lives of people in Hawaii.
Prepared Statement of Hon. Neil Abercrombie,
U.S. Representative from Hawaii
Chairman Inouye and Vice Chairman Ted Stevens, thank you for the
opportunity to provide testimony before you today. As a member of
Hawaii's Congressional delegation, I am exceptionally concerned with
the effects of Aloha Airlines ceasing operations in our small island
state and the continuing reverberations that will be felt for months,
and most likely years, to come.
In the days leading up to Aloha's announcement, I spoke with many
employees and officials for Aloha. One thing that particularly struck
me was that although the airline was struggling in an inter-island
market with two major competitors, it was sharply increased fuel costs
that finally drove the airline to decide it had to cease operations.
Similar explanations have been given by ATA which also ceased
operations the same week as Aloha.
Smaller airlines such as Aloha, which tend to serve geographically
isolated areas like Hawaii, are the ones that will feel the squeeze
from increased fuel costs first. The larger airlines can cut costs by
reducing or eliminating partnerships with smaller airlines. Larger
airlines can more easily absorb fuel costs by grounding planes and
adding fuel surcharges, which would be smaller per person for larger
aircraft. This leaves smaller airlines with higher ticket prices
because of higher fuel surcharges and they cannot afford to ground
planes.
As a result, I have written to the President, (please see attached
letter) to request a temporary release of crude oil from the Strategic
Petroleum Reserve for the airline and cargo shipping industries.
Although this would be a short term solution, I believe that the
industry needs the relief now, because the airlines are in an emergency
situation. The bankruptcy of Aloha, ATA and Skybus, almost in the same
week, have shown the dire state that these small carriers are in.
In the long term, our country must look toward the future of
sustainable domestic energy production to ensure we are not fleeced by
skyrocketing imports. Environmentally sustainable exploration must
occur to ensure our domestic supplies remain stable and as unaffected
as possible by market speculation and international market forces for
crude oil.
I regret that these efforts occur too late to assist Aloha
Airlines. But I hope they will assist other small airlines,
particularly those still operating in Hawaii and other isolated areas
where profit margins are thin and passengers can't afford to pay more
for Essential Air Service. In Hawaii, the only way for people who live
on the neighbor islands to get to hospitals, VA hospitals or specialty
clinics in Honolulu is by air. This vital and life saving
transportation truly is essential service for the people of Hawaii.
The closure of Aloha Airlines not only limits transportation
options among the main islands and to the U.S. mainland, it is
affecting our people in Hawaii in their daily lives. Former Aloha
Airlines employees call my office, not knowing how they are going to
make their payments on their bills. Financial institutions, have, so
far, been unwilling to work with them. That is why I have written a
letter (attached) to the financial institutions, asking them to try to
work with the now unemployed workers to structure payment plans so that
they can afford to keep up with their bills.
It is my hope that this hearing will provide more ideas for
assisting the people and businesses directly and indirectly affected by
the closure of one of the oldest airline carriers in Hawaii. These
efforts will not only assist Hawaii but hopefully forestall future
closures by other airlines and ensure options for all people who fly.
Thank you, Chairman Inouye and Vice Chairman Stevens, for examining
this situation and accepting my testimony today.
______
Congress of the United States, House of Representatives
Washington, DC, April 9, 2008
Mr. John Stumpf,
CEO,
Wells Fargo,
San Francisco, CA.
Dear Mr. Stumpf,
I am certain that you aware of the financial crises that have
forced Aloha and ATA Airlines into bankruptcy, and shattered the lives
of thousands of their employees in Hawaii. Their job loss came very
suddenly, and most face the prospect of losing, not only their
livelihoods, but their health benefits, after years with their
employers. Many of these laid-off employees have contacted my office,
some in tears, asking for help and not knowing what they were going to
do. Many have contacted their financial institutions to ask for payment
extensions or some other way of working out payment of their bills.
But, so far, they report being denied any opportunity to restructure
payments and remain current.
While I understand that their financial obligations are voluntary
contracts between a company and an individual, I am writing to inquire
about any flexibility that might be offered to these people, who are
suddenly unemployed and struggling to make ends meet.
As our community faces continued economic uncertainties, many
families in Hawaii find themselves in difficult straits. I believe that
such times should bring out the best in all of us--individuals and
businesses. It is important that we all take the time to show each
other the understanding and aloha needed to keep our families and
communities together and out of financial ruin.
I hope you share my belief, and my commitment to our ohana; to our
community. I would love to hear from very soon about any assistance you
might be able to offer.
Aloha,
Neil Abercrombie,
Member of Congress.
______
Congress of the United States, House of Representatives
Washington, DC, March 31, 2008
Hon. George W. Bush,
President of the United States,
Washington, DC.
Dear Mr. President:
Right now--today--our nation is reeling from the impact of an
energy crisis on a U.S. economy already in or on the verge of
recession. Retail sales are down. Unemployment is up. Home sales are
down. Mortgage foreclosures are at an historic high, and the Federal
Reserve intervened last week to keep Wall Street giant Bear Stearns
front potential catastrophe.
Add to this the highest fuel prices in history, now more than $110
a barrel for crude oil and an average price at the pump of more than
$3.30 a gallon for regular gas, and the impact on a petroleum-fueled
economy is devastating.
I met last weekend with officials of Aloha Airlines in Honolulu,
trying to find a way for one of Hawaii's leading corporate citizens,
with 3,400 employees, to buy time to restructure debt and stay in
business. Tragically, Aloha decided late Sunday to halt 61 years of air
passenger service for the people of Hawaii. After attempting to fight
off unregulated predatory pricing for 2 years, a $71 million increase
in the cost of jet fuel pushed them over the edge. One thousand nine
hundred people just lost their jobs today.
Aloha is not alone in being battered by this energy crisis. Other
airlines are being forced to raise ticket prices or add as much as a
$50 surcharge for fuel. According to the Air Transport Association
(ATA), every penny increase in the price of a gallon of jet fuel means
$190 million in annual fuel costs for U.S. Airlines--20 to 30 percent
of their total operating expense. As you may be aware, ATA has today
called on Secretary of Energy Samuel Bodman to authorize releases from
the Nation's home heating oil reserves to help increase the supply of
jet fuel.
The emergency, however, extends far beyond the airline industry.
The effects of soaring fuel costs are rippling out through the economy.
Oil and refined products fuel almost 97 percent of our Nation's
transportation: automobiles, trucks, trains, and ships, as well as
aircraft. This is how our Nation moves people and goods.
Fuel cost represents as much as 25 percent of total operating
expenses for the Nation's motor carriers, second only to drivers'
wages. Transport companies and independent truckers across the country
are facing the prospect of parking their trucks because they simply
cannot afford to buy diesel fuel. One operator reported costs of nearly
$900 to fill up his rig. The impact of rising fuel costs on transport
obviously means increasing costs for consumer goods. We are already
seeing this in food prices and retail prices.
Organizations like the United States Postal Service and private
sector delivery companies have no choice but to keep buying fuel for
their delivery vehicles, no matter the cost. And that cost will be
passed along to businesses, and ultimately, to consumers. Even as an
independent government agency, the Postal Service cannot sustain such
devastating cost increases for long without increasing rates.
Oil and natural gas are raw materials in more than 95 percent of
manufacturing: plastics, medicines, machinery and all kinds of consumer
goods. Energy is the third largest manufacturing cost for the forest
and paper industry.
Mr. President, the instability of oil prices will continue to
ripple through our economy. We are, quite clearly, in the midst of an
energy emergency.
I am therefore requesting that you authorize a temporary release of
crude oil from the Strategic Petroleum Reserve for the airline and
cargo shipping industries. The average cost of crude in the reserve is
approximately $27 per barrel. If a quantity of this oil can be released
to the market and refined at lower cost than the current market-priced
crude, it could generate a temporary supply of lower priced gasoline,
diesel fuel and jet fuel for those industries that are totally
dependent on fuel, and on which the U.S. economy is totally dependent.
Under the Energy Policy and Conservation Act of 1975, draw-downs
from the Reserve are authorized if the President determines that there
is a ``severe energy supply interruption;'' if that interruption has
caused a severe increase in the price of petroleum products; and if
such prices are likely to cause a major adverse impact on the national
economy.
This step offers the prospect of temporary relief, and should not
be seen by anyone as a long-term solution to the national energy
emergency. But it may serve as an alarm to the American public that
substantial and serious measures must be taken immediately to prevent
further, even permanent, damage to the U.S. economy. It should also be
the first substantive action by the Government of the United States to
address the energy and economic crisis.
Mr. President, I believe those conditions which allow for a release
from the Strategic Petroleum Reserve now exist, and I urgently request
prompt action.
Aloha,
Neil Abercrombie,
Member of Congress.
The Chairman. I must apologize. I did not notice the
presence of Senator Smith here. If I had known that, I would
have called on you earlier. Please forgive me, sir. I am now
privileged to introduce Senator Smith of Oregon.
STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Mr. Chairman, I am here with no agenda other
than an affection for Hawaii. I have been a regular user of
Aloha, and every time I travel the 6 hours to Oregon, I think
of my colleague, the Chairman, who has another 6 hours to go.
I regard Hawaii as a very treasured place and I am anxious
to learn what has happened because I am anxious to find ways
that I, who often advocate for routes to Oregon--how we can
improve this system and make sure that Essential Air Service is
there.
I am old enough to remember that when I used to get on an
airplane, there used to be a lot of empty seats. I am mindful
that there are many planes that are now grounded simply to make
sure that every seat is filled in order to afford the fuel
costs. If there was a silver bullet on fuel costs, we would
shoot it. We would fire it. We would fix it. There is not.
In the meantime, we have got to make sure that remote
places--and I come from a remote part of Oregon--have the
ability to access essential infrastructure like airlines.
Obviously, the Hawaiian Islands--you either get there by slow
boat or by Aloha, Hawaii, or Go. ATA I guess has gone out as
well.
And I am anxious to be here just to learn, to offer
constructive insights, and to ask some questions. So thank you,
Mr. Chairman.
The Chairman. If I may, on behalf of the people of Hawaii,
I thank you for your presence here. It is most comforting.
Thank you.
And it is now my pleasure to call upon the Assistant
Secretary of Transportation for Aviation and International
Affairs, the Honorable Michael Reynolds.
Will the others take their places?
STATEMENT OF MICHAEL W. REYNOLDS, ACTING ASSISTANT SECRETARY
FOR AVIATION AND INTERNATIONAL AFFAIRS, U.S. DOT
Mr. Reynolds. Chairman Inouye, Senator Smith, with your
permission, I would like to summarize my written statement
which I ask be made part of the record.
The Chairman. Your full statement will be made part of the
record.
Mr. Reynolds. Thank you for the opportunity to appear today
to discuss challenges facing Hawaii's air service market. I can
assure you that the Department is keenly aware of the unique
role that air transportation plays in the State of Hawaii and
that air transportation to and within Hawaii continues to be an
important issue, particularly in light of the recent cessation
of passenger services by Aloha Airlines and ATA Airlines.
Nonetheless, many of the challenges faced by the airline
industry in Hawaii are similar to those facing all our
airlines. In that regard, the outlook for the U.S. airline
industry as a whole is hazy, despite a return to profitability
in the last 2 years. Many carriers have cut costs and become
more efficient in recent years only to see those gains offset
by record fuel prices.
The industry faces major challenges in 2008: the high fuel
prices that we are all well aware of, a potentially weaker
economy, and labor cost pressures. These factors can severely
affect airlines and the demand for air travel, particularly in
discretionary markets such as Hawaii, which I now turn to.
As you know well, the six major islands depend heavily on
air service. Aloha and Hawaiian Airlines have traditionally
provided the bulk of the inter-island air service. In May 2006,
Mesa's Go commenced service, and from that time until very
recently, there were three high frequency jet operators in the
market. Of course, smaller carriers such as Island Air and
Pacific Wings also provide service and make up approximately 8
percent of the inter-island capacity.
The entry of Go came at a time when other structural
economic developments exerted downward pressure on the demand
for inter-island travel. For example, as the other islands have
become more economically developed, the need for local
residents to travel to Honolulu from the other islands for
goods and services has decreased. In addition, since 2000,
airlines have tripled their service from the mainland directly
to the Big Island, Maui, and Kauai, which means fewer travelers
require inter-island connections.
Also, Hawaii's critical international and domestic tourism
market segments have been stagnant or declining over the past
few years. In 2007, 7.4 million visitors arrived by air, which
was a 1 percent decrease from 2006.
Clearly, sustaining three carriers in the main inter-island
routes proved difficult. But even before Go entered the market,
Hawaiian and Aloha had been in bankruptcy in the last few
years.
Now, let me briefly discuss the recent airline shutdowns.
While the loss of Aloha and ATA Airlines has reduced
capacity between Hawaii and the mainland by about 14 percent,
it is important to note that there are still eight airlines
providing various levels of service, including United,
Hawaiian, American, Delta, Northwest, US Airways, Continental,
and Alaska, most of which have added capacity to the market
since Aloha and ATA ceased services.
In addition, Hawaiian and Go are adding aircraft capacity
to the inter-island market, and several carriers have been
offering special deals for passengers affected by the
shutdowns.
Nonetheless, based on our internal analysis, as many as
9,000 Hawaii passengers have had travel plans disrupted by the
sudden termination of air service by both Aloha and ATA.
On the positive side, most of these passengers are expected
to be accommodated. Clearly, some passengers encountered more
serious inconvenience and delays, especially in markets without
alternate nonstop service. Because more than 90 percent of
these passengers used credit cards to purchase their air
travel, they should be able to recover from the credit card
companies payments for any air transportation services that
were not provided.
Finally, I want to touch on the issue of service to more
remote points in Hawaii. The Department's Essential Air Service
Program provides a safety net to ensure that eligible
communities receive continuous, uninterrupted air service.
After several years of receiving subsidized air service, last
April the communities of Hana, Kalaupapa, and Kamuela began
receiving air service without subsidy. I wish to point out that
even though the communities no longer receive subsidized EAS,
they are all still protected against losing service under the
program.
That concludes my oral statement. I would be happy to
answer any questions you may have.
[The prepared statement of Mr. Reynolds follows:]
Prepared Statement of Michael W. Reynolds, Acting Assistant Secretary
for Aviation and International Affairs, U.S. DOT
Chairman Inouye and Members of the Committee:
Introduction
Thank you for the opportunity to appear before you to discuss
``Challenges Facing Hawaii's Air Service Market.'' While there
certainly are unique needs and characteristics in the Hawaii market,
many of the challenges faced by the airline industry in Hawaii are
similar to those facing our airlines in all markets, domestic and
foreign.
State of the Airline Industry
Let me begin with the state of the airline industry. The U.S.
airline industry has been emerging from a major restructuring
precipitated by a fundamental change in passenger demand that began in
the first half of this decade. Some large carriers have successfully
restructured and adapted their business models, while other carriers
have been slower to do so. Record fuel prices have offset the benefits
that some carriers gained through cost reductions and other
efficiencies achieved in restructuring, in and out of bankruptcy.
Despite fuel price increases, the industry as a whole was
profitable for 2007, with net income of $3.8 billion in 2007 versus
$1.7 billion in 2006. Going forward however, the outlook for airlines
is hazy. The industry faces major challenges in 2008: high fuel prices,
a potentially weaker economy, and labor cost pressures. These factors
can severely affect demand for travel, particularly in discretionary
markets, such as Hawaii.
Clearly the major challenge remains record high fuel prices, with
crude oil hovering around $100 per barrel. Fuel cost is now the largest
single cost center for the airlines. A one cent per gallon increase in
the price of jet fuel costs the U.S. airline industry an additional $16
million per month more for fuel on a system basis. This may not seem
like much, but when you consider the drastic change in the price of
crude oil and its distillate, jet kerosene, over the last 3 years, the
cost to the airlines becomes much more palpable. Between 2004 and 2007,
jet fuel rose from an average of 86 cents per gallon to an average of
$2.12 per gallon in 2007, non-inflation adjusted. This is a 248 percent
increase in the cost per gallon of jet fuel. According to JPMorgan's
analysis, every $10 increase in a barrel of oil requires $18 in
additional air fare on average just to maintain a steady state. While
the industry posted an operating loss of approximately $87 million in
the fourth quarter 2007, it would have posted an operating profit of
$1.35 billion in that quarter of 2007 had fuel prices remained at
fourth quarter 2006 levels. Soaring fuel prices have masked the
tremendous progress legacy carriers have made in reducing their costs
to levels more competitive with low-cost/low-fare carriers and eclipsed
gains that could have been used to fund essential long-term capital
expenditures. Future fuel price uncertainty will continue to motivate
industry-wide cost and capacity discipline.
There are other challenges facing the industry, including labor
cost pressures and pressures from institutional investors to ``unlock''
shareholder value. As these other challenges are beyond the scope of
this hearing, I will not elaborate on them today.
Nature of the Hawaiian Aviation Market
Next, I would like to summarize briefly the nature of the Hawaiian
air service market.
Hawaii, of course, has six major islands that depend heavily on air
service, and inter-island markets have been extremely competitive.
While Aloha and Hawaiian Airlines have traditionally provided the bulk
of inter-island air service, over the years there have been many
smaller players that have entered and exited the market. In May 2006,
Mesa's Go service commenced, and from that time until very recently,
the inter-island market has been served by three high-frequency jet
operators. Other smaller carriers like Island Air and Pacific Wings
also provide service and make up approximately 8 percent of the inter-
island capacity. There are also a number of air taxis that compete for
traffic in these markets.
Historically, average fares for local travel in the inter-island
markets have been quite low, averaging less than $50 in the 3-year
period 2000 through 2002 for each inter-island city-pair market.
Beginning in 2001, average fares began a gradual increase in all inter-
island markets, and more so in the smaller ones, until the Department
granted Aloha and Hawaiian antitrust immunity for a capacity
cooperation agreement that was permitted under a special provision in
the 2001 Aviation and Transportation Security Act. Shortly after the
carriers implemented their capacity coordination agreement in 2002-
2003, they discontinued the coupon distribution system for inter-island
travel and implemented different pricing structures. Fares for both
carriers rose significantly during the period in which capacity
cooperation agreement was in effect. In 2005, Hawaiian's inter-island
fares were about 7 percent higher across the board than Aloha's. In
2007, however, average fares for both carriers were about equal.
In general, average fares in the inter-island markets have been
lower than average fares in markets of comparable distance and density
(the number of people traveling in the market) in the continental
United States, including markets served by low-fare carriers such as
Southwest, JetBlue, and AirTran. For example, the Honolulu-Kona market
at a distance of 163 miles had an average fare at the end of third
quarter 2007 of $50. By comparison, Southwest's fare in comparable
markets ranged between $80 and $111. In the Kona-Lihue market, the
average fare was $81, whereas average fares for Southwest in markets of
comparable distance ranged from $91 to $116.
Prior to Go's entry in the market in 2006, the number of flights
and capacity offered in the inter-island markets had been slightly
declining. A large decrease in service occurred right after September
11, 2001 and did not start to rebound until the third quarter of 2004.
After Go's entry into Hawaii and before Aloha's cessation of
service, inter-island fares fell 27 percent to levels not seen since
2000, a time when fuel was one-quarter the price and inter-island
passenger traffic was nearly 14 percent greater (capacity was 29
percent higher). Load factors on inter-island services have averaged
between 65 percent and 70 percent prior to Aloha's shutdown.
The entry of Go into the inter-island markets came at a time when
other structural economic developments exerted downward pressure on the
demand for inter-island travel. First, as the other islands became more
economically developed, the need for local residents to travel to
Honolulu (Oahu) from the other islands for goods and services
decreased. In addition, since 2000, carriers have tripled their service
from the mainland directly to the Big Island, Maui, and Kauai, which
means fewer travelers require inter-island connections. For example,
the nearly two million visitors to Hawaii from California now have
direct links from their state to Kahului, Kona, Hilo, and Lihue.
Second, Hawaii's critical international and domestic tourism market
segments have been stagnant or declining over the past few years. In
2007, 7.4 million visitors arrived by air--a 1 percent decrease from
2006. The biggest decline was a 5-percent decrease by non-U.S. visitors
to Hawaii. Approximately 70 percent of non-U.S. visitors come from
Japan, a country whose economy continues to stagnate. Also, emerging
tourist markets in Asia have exacerbated the situation as many Japanese
are vacationing closer to home. In the future, tourists from China
could replace those from Japan as rising incomes and a booming economy
enable more Chinese citizens to travel. The Department has been
aggressively seeking to liberalize the restrictive Chinese bilateral
air services agreement to increase the numbers of flights permitted
between the U.S. and China. One bright spot is Canada. While Canada
accounts for just 4 percent of all visitors to Hawaii, the number of
Canadian visitors to Hawaii rose over 5 percent between 2006 and 2007.
Meanwhile, the number of U.S. visitors to Hawaii has remained flat.
Importantly, however, the figure for visitors from California, who make
up 25 percent of Hawaii's tourist market, fell more than 3 percent in
2007. This is partially explained by the downturn in the housing
market, which has hit California particularly hard. In short, fewer
tourists mean fewer inter-island trips.
As indicated above, unlike the inter-island markets, many other
airlines offer service between the West Coast and one or more of the
Hawaiian Islands. While the loss of Aloha and ATA Airlines has reduced
capacity between Hawaii and the mainland (including Alaska) by about 14
percent, there are still eight airlines providing various levels of
service including United, Hawaiian, American, Delta, Northwest, US
Airways, Continental, and Alaska.
This market overview clearly shows that the large, inter-island
markets have been highly competitive and the most negatively impacted
by structural changes in tourist and traffic flows. Record high fuel
prices have exacerbated the situation. From time to time, there has
been entry by a third carrier focusing on inter-island traffic (Mid-
Pacific and Discovery in the 1980s, Mahalo Air in the 1990s, and Go in
this decade) in Hawaii. Sustaining three major carriers operating
service on the main inter-island trunk routes has proven difficult.
According to press reports, Go has lost as much as $20 million since it
began service on these routes 2 years ago.
In part as a result of the substantial structural changes in the
aviation markets to/from and within Hawaii over the past decade, both
Aloha and Hawaiian have experienced financial difficulties. In the past
few years, the carriers have held merger discussions, but the two
management teams and their various owners have never been able to agree
on how to blend the two airlines. Furthermore, Hawaiian was in
bankruptcy from 2003 to 2005, and Aloha was in bankruptcy from 2004 to
2006 prior to going in again last month.
Role of Government
Having outlined the challenges facing the airline industry in
general and the Hawaiian markets in particular, I would like to discuss
the appropriate role of government in the industry's ongoing
restructuring. By deregulating the airline industry in 1978, Congress
set the Department permanently on the path away from intervention in
the air transportation marketplace. Many, including the Department of
Transportation, have a long-held view that deregulation has been a
success, producing an abundance of service with low fares--at the same
time the industry has achieved a spectacular safety record. Indeed, the
fundamental restructuring that we have observed over the last 6 years
is largely the result of market forces that were set in motion prior to
the September 11th terrorist attacks. The architects of airline
deregulation predicted that new, innovative airlines would enter the
marketplace, establish a significant and sustained market share, and
exert competitive discipline on incumbent firms and ensure that savings
from efficiencies were passed along to consumers. That is precisely
what happened; though it happened differently and somewhat later than
expected. With respect to aviation, deregulation has become the default
policy around the world.
Airline Industry Restructuring
Since the passage of the Airline Deregulation Act in 1978, which
opened our domestic air services to the free market, Congress
recognized that the risk of airline failures was possible. Deregulation
stimulated air travel, lowered air fares, and created a highly
competitive, efficient, and viable air transportation system in the
United States. Yet, it is an industry fraught with risks--an industry
sensitive to an unstable economic environment, jet fuel prices, and
cyclic swings in the economy. The public has benefited from competition
provided by new entrant carriers who acquired the aircraft of bankrupt
airlines and implemented a new business model with low fares to attract
customers. In fact, over the past 30 years, we have seen many air
carrier failures. In an uncertain economic environment and with record
jet fuel prices, it is not shocking that air carriers--which depend so
heavily on fuel--are having difficulty surviving in today's price
competitive aviation environment.
The Government Accountability Office in a September 2005 Report to
Congress said that bankruptcy ``is endemic to the airline industry
owing to long-standing structural challenges and weak financial
performance in the industry.'' Indeed, bankruptcies in the airline
industry are not uncommon. Since airline deregulation 30 years ago,
there have been more than 170 airline bankruptcies, averaging almost
six a year.
During the last 2 weeks, three airlines have filed or expect to
file for bankruptcy protection. Aloha Airlines, ATA Airlines, and
Skybus Airlines have shut down and stopped passenger air services. They
attributed their business failure to rising fuel costs and a slowing
economy. These carriers could not make a business case to attract more
capital in the current economic environment.
In this context, let me briefly outline the recent situations at
Aloha Airlines and ATA Airlines.
Immediate Impact of Aloha's and ATA's Cessation of Scheduled Passenger
Service
In order to assess the ability of other carriers to assist stranded
Aloha and ATA passengers based on existing schedules, we reviewed
available services of U.S. and foreign carriers that compete with Aloha
and/or ATA on their inter-island routes and between Hawaii and the U.S.
mainland. During April, we estimate that just over 90,000 passengers
will travel to/from Hawaii or about 3,000 per day. There is competitive
service on many of the Aloha and ATA routes between the Mainland and
Hawaii. Based on our internal analysis, as many as 9,000 Hawaii
passengers were inconvenienced by the sudden termination of air service
by both Aloha and ATA. This figure does not take into account the
additional seat capacity that was added to the Hawaii market by
competing carriers in response to the Aloha and ATA shutdowns.
Despite the high load factors experienced by competing carriers in
these markets, most Aloha and ATA passengers were expected to be
accommodated, perhaps some taking circuitous and multi-stop routings.
Clearly, some passengers encountered more serious inconvenience and
delays, especially in the three markets without alternate nonstop
service, namely Oakland-Lihue; Las Vegas-Maui; and Oakland-Hilo.
Aloha informed the Department that, on the day it stopped service,
about 700 Aloha strandees would need transportation to or from the
mainland, and steadily decreasing numbers of such passengers would need
to be accommodated each day through April 12.
American, United, Delta, Continental, US Airways, Hawaiian, and Go
added aircraft capacity to the market, to help minimize the impact on
Aloha's stranded passengers. Hawaiian and Go carried Aloha's inter-
island passengers on a standby basis for free for the first 4 days
after Aloha's shutdown and on a confirmed basis for $49 through April
7.
Alaska Airlines recently announced plans for new daily service to
Hawaii from Seattle and seasonal service from Anchorage.
Federal Government's Efforts To Address the Situation in Hawaii
There are no requirements for other airlines to accept the tickets
of an air carrier that ceases operations. However, when an airline
shuts down the Department moves immediately to contact other carriers
providing service on those routes to ascertain their policies with
respect to carriage of the passengers of the failed airline, to make it
clear that consumer harm should be minimized, and to make information
about the airline policies readily available to consumers. We then
distribute information to affected consumers about their options. This
is accomplished via our website and in responses to telephone and other
inquiries.
When the Department learned of the Aloha and ATA shutdowns, my
office and the Department's aviation consumer office gathered
information from these two carriers via teleconferences and e-mail. The
aviation consumer office then contacted other airlines serving the
affected markets and posted information and advice on its website for
affected consumers. In general, this involves information about
alternate transportation, claiming a refund from the consumer's credit
card company under the Fair Credit Billing Act, and filing a claim for
a cash refund or baggage claim settlement in any bankruptcy proceeding
that may take place.
Other carriers appear to recognize that voluntarily providing
affected passengers reasonable options for alternate transportation is
in their interest. Carriers are motivated to do this as a competitive
initiative, in part as a market-development strategy to attract
business travelers and frequent flyers. For example, in connection with
the recent shutdown of ATA Airlines, most major carriers are or were
offering affected passengers standby transportation for $100 per non-
stop segment and/or waiving their own advance purchase requirements on
discount fares. In the case of Aloha Airlines, Hawaiian Airlines and Go
were offering free standby seats to Aloha passengers for the first 4
days after the Aloha shutdown (i.e., through April 3). Through April 7,
Hawaiian was offering a special $49 fare for inter-island flights.
Hawaiian also immediately added 6,000 seats per day to its schedule.
United Airlines is offering special discounts to Aloha's Hawaii-
mainland passengers, on a confirmed basis, through April 30.
In the case of both ATA and Aloha, as required by contract and by
DOT policy, their codeshare partners are honoring tickets issued in
that partner's name by providing transportation on a confirmed basis
with no additional fare collection where possible. Where that is not
possible, those codeshare partners are providing a full refund.
Both carriers indicated that well over 90 percent of their
passengers used credit cards to purchase air travel. Those passengers
should be able to recover from the credit card companies payments for
any air transportation services that were not provided.
Essential Air Service Implications
We have also examined Aloha's shutdown in the context of the
Essential Air Service program and find that there are no issues. All
five communities that Aloha served--Hilo, Kona, Kauai, Kahului, and
Honolulu--are served by at least two other carriers, Hawaiian and Go.
No market will be without service. The smallest market in terms of
service (Hilo-Honolulu) has at least 13 non-stop round trips per day.
Also in the context of EAS, the Department is fully aware of
Hawaii's dependence on air service, and the EAS program provides a
safety net to ensure that eligible communities receive continuous,
uninterrupted air service. Up until April 1, 2007, the communities of
Hana, Kalaupapa and Kamuela had received subsidized service under the
EAS program for about 6 years. As the end of the then-current EAS
contract was nearing, the incumbent carrier, Pacific Wings, announced
that it would continue to serve all three communities, but without the
need for further Federal subsidy. I wish to point out that, even though
the communities no longer receive subsidized EAS, they are all still
protected against losing service. That is, even if the incumbent
carrier wanted to suspend service, it would first have to file a notice
of intent to suspend service and we would hold the carrier's service in
place while we sought and procured replacement service.
Thank you, and I would be pleased to take any questions.
Attachment: 5 Charts
The Chairman. I thank you very much, Mr. Reynolds.
Now may I call upon the Deputy Director of Operations of
the Pension Benefit Guaranty Corporation, the Honorable Vincent
Snowbarger?
STATEMENT OF HON. VINCENT K. SNOWBARGER, DEPUTY
DIRECTOR FOR OPERATIONS, PENSION BENEFIT GUARANTY CORPORATION
Mr. Snowbarger. Thank you, Chairman Inouye and Senator
Smith. My name is Vince Snowbarger, and I am the Deputy
Director of Operations at the Pension Benefit Guaranty
Corporation, otherwise known as PBGC.
ERISA, the Employee Retirement Income Security Act of 1974,
created PBGC to guarantee pensions when underfunded defined
pension plans like Aloha's are terminated.
We want to thank you for the opportunity to appear today
before the Committee to discuss the challenges facing Hawaii's
air service market. My remarks will focus on matters impacting
the participants and beneficiaries in the four defined benefit
pension plans sponsored by Aloha Airlines. Aloha employees may
have other retirement plans that PBGC does not insure.
In December 2004, Aloha filed for bankruptcy. As a part of
the settlement reached in February of 2006, PBGC assumed
responsibility for the pensions of nearly 4,000 workers and
retirees who were participants in three of the four defined
benefit plans at Aloha. It was the plan for non-unionized
employees, the plan for employees represented by International
Association of Machinists, and the pilots' plan. In that
agreement, Aloha agreed to maintain a fourth plan for its
dispatchers.
In the three plans that were terminated, we estimate that
the plans had $177 million in assets to cover $346 million in
promised benefits. That means the plans were only 51 percent
funded with $169 million in total underfunding. PBGC will be
able to guaranty about $119 million of that underfunding, but
participants will lose about $50 million in promised benefits
that PBGC cannot pay under Federal law.
My written testimony provides more information on each of
these plans.
PBGC is currently paying estimated benefits to these Aloha
retirees. We are in the process of making final benefit
determinations for the Aloha plans. It is a complex process
that takes about 3 years normally. PBGC expects to send final
benefit determinations to Aloha participants next year.
On March 20, Aloha again filed for bankruptcy. The airline
has one plan remaining subject to PBGC jurisdiction. The plan
for Aloha's dispatchers covers about 50 participants. It is
underfunded by about $1 million. As the current bankruptcy case
develops, we will continue to work with Aloha, its creditors,
and the court to protect the benefits of those participants.
As I mentioned earlier, there are other benefits that PBGC
does not insure, including health benefits. However,
participants who are aged 55 or older and who receive PBGC
benefits may be eligible for the Health Coverage Tax Credit. I
have provided information in my written testimony for the HCTC
customer contact center. It is a program operated in
conjunction with the IRS.
PBGC is always available to help participants. We let them
know when they are eligible to apply for benefits, and we
provide them with any help they need in completing
applications. They can also access our website at www.pbgc.gov,
and there they can request an estimate of benefits, apply for
benefits, set up or change Federal tax withholding, and so
forth. There are also pages on the website for each of Aloha's
terminated plans. We keep participants updated through
newsletters and our website, and they can also call our
customer contact center at 1-800-400-7242.
PBGC is committed to paying all workers and retirees the
benefits they are entitled to under law, and we try to make our
benefit determination process as efficient and customer-
friendly as possible. I want to assure you that we will
continue to carry out our mission to pay benefits to
participants, including the Aloha workers.
And I want to thank you again for the opportunity to appear
today, and I would be pleased to answer any questions.
[The prepared statement of Mr. Snowbarger follows:]
Prepared Statement of Hon. Vincent K. Snowbarger, Deputy Director for
Operations, Pension Benefit Guaranty Corporation
Chairman Inouye, Vice Chairman Stevens, Members of the Committee,
my name is Vince Snowbarger and I am the Deputy Director for Operations
at the Pension Benefit Guaranty Corporation (``PBGC'' or ``the
Corporation'').
Thank you for the opportunity to appear before the Committee today
to discuss the challenges facing Hawaii's air service market. My
testimony will focus on matters impacting the 4,000 participants and
beneficiaries in the three defined benefit pension plans sponsored by
Aloha Airlines that were assumed by PBGC in April 2006 following the
carrier's emergence from an earlier bankruptcy. A fourth plan sponsored
by Aloha for its dispatchers, covering about 50 participants, remained
ongoing after the bankruptcy.
Pension Benefit Administration
PBGC was created by the Employee Retirement Income Security Act of
1974 (``ERISA'') to guarantee pensions when an underfunded defined
benefit plan is terminated. When PBGC assumes an underfunded plan, the
Corporation pays benefits up to ERISA guarantee limits. For insured
plans that terminated in 2005 such as Aloha's, the maximum guaranteed
benefit is $45,613 per year ($3,801 monthly) for PBGC payments
beginning at age 65. The maximum is actuarially adjusted for benefits
beginning earlier or later, or if a benefit will be payable to a
surviving beneficiary.
When PBGC becomes trustee of a plan, retirees initially receive the
same monthly benefit amounts that the plan was paying. Once PBGC
obtains plan data and makes a preliminary analysis, benefit payments
are reduced if necessary to an estimate of the amount payable under
Federal law. We also inform participants that any overpayments will be
subject to recoupment (the process by which participants return any
overpayments).
In order to make final benefit determinations, PBGC applies various
statutory provisions that include:
calculating the benefit under the specific plan provisions;
applying the statutory maximum guarantee;
phasing in the guarantee of benefit increases within 5 years
of plan termination; and
allocating plan assets and recoveries from employers
available to pay non-guaranteed benefits.
Because plan provisions and the statutory rules noted above are
complex, it takes about 3 years to complete final benefit
determinations. When this process is finished, PBGC sends a letter to
each participant explaining the calculations and the changes, if any,
in their estimated benefit amount. Participants have 45 days to appeal
this final determination.
At every step in the process, the Corporation is available to
answer participants' questions and to help them apply for benefits. For
larger plans, PBGC holds participant meetings to provide both general
and plan-specific information about the termination process. We also
send an annual newsletter to participants receiving benefits and
semiannual newsletters to those not yet retired. Participants can get
additional information about PBGC and the pension insurance program at
www.pbgc.gov or by calling PBGC's Customer Contact Center at 1-800-400-
7242.
Airline Pensions
Airline plans have accounted for more than $14 billion in claims
since 1974--approximately 40 percent of all claims from failed
companies. Since 2001, PBGC has assumed responsibility for the pension
plans of TWA, US Airways, United Airlines, and the pilots of Delta Air
Lines. In addition, as of the end of calendar year 2006, there was
another $12.6 billion in unfunded pension liabilities in ongoing
defined benefit plans in the airline industry.
Aloha Airlines
On December 30, 2004, Aloha Airlines filed for bankruptcy. PBGC
tried to compel Aloha to keep its plans ongoing. However, as part of
the bankruptcy settlement reached in February 2006, the Corporation was
appointed trustee for the pensions of nearly 4,000 workers and retirees
who were participants in three of Aloha's defined benefit plans: the
Pension Plan for Non-Represented Employees, the Pension Plan for
Employees Represented by the International Association of Machinists
(IAM), and the Pilots' Fixed Retirement Plan. A fourth plan, the
Pension Plan for Dispatchers, survived the bankruptcy.
The termination date for the three trusteed plans was December 14,
2005. PBGC's most recent estimate is that the three plans on an
aggregate basis were 51 percent funded with $177 million in assets to
cover $346 million in promised benefits. Of the $169 million in total
underfunding, about $119 million was guaranteed. Plan participants thus
will lose about $50 million in unfunded, non-guaranteed benefits that
cannot be paid under Federal law.
PBGC has sent estimated benefit statements to participants in the
three trusteed plans. As specified below, more than 90 percent of
participants in the Non-Represented Employees Plan and the IAM
Employees Plan continue to receive their full benefit payment; the
remaining participants in these two plans are now receiving reduced
benefits as determined by statutory limits. In the Pilots' Fixed
Retirement Plan, about 58 percent of participants are now receiving
reduced benefits, primarily due to the previously-noted maximum
guaranteed benefit under ERISA ($45,613 for plans that terminated in
2005). Participants in all three plans should expect to receive final
benefit determination letters in 2009.
Non-Represented Employees Plan
The plan for non-represented employees covers about 900
participants. The plan was 39 percent funded, with $21 million in
assets to cover $54 million in liabilities. However, about 840 of those
participants (93 percent) are receiving their full benefits and are not
affected by ERISA guarantee limits. The remaining 60 participants (7
percent) have had their benefits reduced by an average of about $170
per month (a 21 percent reduction). These reductions were required
because salary concessions reduced the wages on which benefits are
based.
IAM Employees Plan
The Aloha IAM plan covers about 2,600 participants. The plan was 58
percent funded, with $87 million in assets to cover $151 million in
liabilities. However, like the non-represented employees, about 2,350
IAM participants (90 percent) are receiving their full plan benefits.
The remaining 250 participants (10 percent) have had small reductions
in their benefits averaging about $33 per month (a 3 percent
reduction). These reductions were primarily the result of the phase-in
limit on recent benefit increases under ERISA; generally, this five-
year formula guarantees benefit increases at 20 percent for each year
in effect.
Pilots' Fixed Retirement Plan
The pilots' plan covers about 450 participants. The plan was 49
percent funded, with $69 million in assets to cover $141 million in
liabilities. About 190 participants (42 percent) are receiving their
full plan benefits. The remaining 260 participants (58 percent) have
had their benefits reduced primarily due to the maximum guaranteed
benefit under ERISA that imposes an annual dollar cap (again, $45,613
for 2005 plan terminations). The average benefit reduction for these
participants is about $1,050 per month (a 42 percent reduction).
However, based on the most recent information available, the assets in
the plan will be sufficient so that those Aloha pilots who were retired
(or were eligible to retire 3 years prior to plan termination) are
expected to receive about 60 percent of their promised benefits.
Dispatchers' Plan
As noted, Aloha currently sponsors one ongoing defined benefit plan
for dispatchers covering about 50 participants, and which PBGC
estimates as being underfunded by about $1 million. As Aloha's current
bankruptcy plan develops, PBGC will take appropriate steps to ensure
that none of the plan's participants is put at risk.
Health Care
An issue that often arises in conjunction with business failures is
the loss of employer-provided health care coverage for workers and
retirees. By law, PBGC guarantees do not cover health insurance.
However, certain PBGC benefit recipients who are age 55 or older and
are covered by qualified health insurance are eligible for the Health
Coverage Tax Credit (HCTC). For more information, participants can call
the HCTC Customer Contact Center at 1-866-628-HCTC (4282).
Conclusion
PBGC is committed to paying all workers and retirees the full
benefit amounts they are entitled to under law, and we are making every
effort to make the benefit determination process as efficient and
customer-service oriented as possible. I want to assure you and the
participants in all defined benefit plans insured by PBGC that the
Corporation stands ready to carry out its mission to pay benefits to
participants, as it is now doing for Aloha participants and as it has
done since the enactment of ERISA. Thank you for the opportunity to
appear here today, and I would be pleased to answer any questions you
may have.
The Chairman. I thank you very much, Mr. Director.
And now may I call upon the Chief Executive Officer of the
Aloha Airlines, David Banmiller? Mr. Banmiller?
STATEMENT OF DAVID A. BANMILLER, PRESIDENT AND CEO, ALOHA
AIRLINES
Mr. Banmiller. Thank you, Mr. Chairman, Senator Smith. Good
afternoon and aloha.
Today is a very sad time for Aloha Airlines, for the State
of Hawaii, and indeed, the entire airline industry.
See, what we do touches everyone's lives in this country.
Airlines drive local economies. They provide employment
directly and indirectly, and they speed travelers on their way
to make business deals, go on holiday, attend weddings, and
enjoy the benefits of an open economy.
How things have changed in our industry.
My humble beginnings in commercial aviation came as a
management trainee with one of the great airlines of U.S.
aviation history, TWA. About 40 years ago, I was on the front
lines as a ticket agent. Thanks to TWA I learned a lot about
customer service from the ground up, writing tickets and
handling baggage. The ticket counters next to me belonged to
another giant of the industry that seemed equally invincible at
the time, Eastern Air Lines. They are both long gone, along
with Pan Am and other pioneering airlines.
Today America's airlines are more challenged than they have
ever been. When it comes to airlines, change is constant. Or as
the authors of Over the Hedge put it, ``The more things change,
the more they remain insane.''
What once was a proud industry that lured lifetime
employment of dedicated workers who strived to exude
exceptional customer service and focused on taking care of
their traveling patrons has now become an industry filled with
chaos and uncertainty.
The Airline Deregulation Act of 1978 opened the playing
field for competition. At the outset, deregulation was supposed
to yield positive outcomes, especially for the large hub
markets. But for the smaller regional markets like Hawaii,
deregulation has proved to be potentially harmful in achieving
stability in air transportation service.
For example, since the Deregulation Act, Hawaii has
witnessed the collapse of a number of airlines, including Mid
Pacific, Mahalo, and Discovery, as well as two bankruptcy
filings for Hawaiian Airlines and Aloha Airlines.
Why? Because deregulation only opened up the revenue side
of the business. It did not touch the cost side. And despite
deregulation some 30 years ago, the industry continues to be
one of the most heavily taxed and regulated of industries in
this country.
Today I will focus on the unfortunate situation of Aloha, a
mainstay of Hawaii's tourism-dependent economy for more than 60
years. I plan to share with you the challenges we faced and the
cause of our passenger service shutdown.
The two main factors that caused the company to cease its
historic passenger business were unfair competition and the
soaring cost of jet fuel. The latter continues to pose a real
threat to the air transportation industry, both in the United
States and around the world.
I also want to touch upon a few global trends that continue
to threaten Hawaii because of its geographic isolation and its
dependence on air transportation more than any other State in
this Nation.
What you are seeing today with the recent collapse of
Aloha's passenger business, along with the shutdown of ATA,
Skybus, Champion, and MAXjet before that, is just the tip of
the iceberg. Industry observers are asking who is next.
The cost of fuel continues to rise with wild abandon,
unchecked by government even as oil companies reap enormous
profits. When I was at TWA in the 1960s, fuel represented 5
percent of an airline's costs. Today it is 45 percent and
currently surpasses labor as the number one expense for most
airlines.
Throughout the 1990s, the average cost of a barrel of crude
was under $20. By 2004, it was $40. Now it is $111 a barrel.
Inconceivable even a year ago, and every $1 costs about $400
million to our industry in this country.
Aloha shares with our industry colleagues in calling for
swift Federal action on a 21st century air traffic control
system upgrade to make air transportation more efficient by
eliminating the archaic ground-tracking systems which makes for
longer than necessary routing and landing patterns. We strongly
believe that if our air traffic control system were upgraded to
satellite tracking, we could be saving a lot of fuel.
Our fear is that without major strides toward modernizing
ATC and spreading the cost burden to all the users, states like
Hawaii that are solely dependent on air transportation stand to
lose more vital air service. And keep in mind, the average
American suffers as a consequence of what happens to airlines.
Now, the public has become accustomed to think that it is
normal for airlines to go into and out of bankruptcy. But it
does not always work out that way. In our first bankruptcy,
cutting costs was job number one. With our self-help program,
we involved the dedicated employees of our company and cut
across the board, including 20 percent salary cuts. Working 24/
7, we were able to put that complicated process together,
frankly with the support and cooperation of the fine employees
of our company and their labor leaders. We also paid back the
Federal ATSB loan in full.
At the same time, we forestalled demands from aircraft
lessors to take our airplanes and we skated around onerous
covenants and found permanent financing. I thought it was hard
to find investors back then. Little did I know then what I know
now.
Emerging from our first bankruptcy, we were optimistic that
we had a viable plan, one that could bring profit, even in the
tough inter-island market. In September 2005, we signed an
agreement with the Yucaipa Companies, a well-respected private
equity firm, for a substantial equity infusion, $98 million,
including $63 million in equity and $35 million in debt
financing.
On the very day that Aloha signed the new investment
agreement came the announcement that Mesa Air group, an Arizona
company, planned to compete in the inter-island market with its
own low-cost carrier. We believe this improper because Mesa had
come to Aloha as a potential investor and Mesa had also looked
at Hawaiian's books while they were in bankruptcy. It is pretty
clear to us that the timing of Mesa's announcement was intended
to scare off investment in Aloha, something it did not do.
Mesa launched Go Airlines in June 2006 with an advertised
introductory fare of $39. In its first 18 months of operation,
those fares went from $39 to $29, $19, $9, and $1.
A study done for Aloha by Sabre Airline Solutions soon
after they entered the market indicated that with a 62 percent
load factor, which was roughly what Go was operating at, they
needed $67 a ticket minimum--now with fuel it is over $70--
versus $50 a ticket to break even for Aloha and $55 for
Hawaiian. We at Aloha Airlines were, in fact, the low-cost per-
seat operator in the islands.
So we began asking people in government, business, and the
media, just about anyone that would listen to us these
questions. Why would Mesa charge less for a seat than it costs
to produce it? Why would Go start at $39 and go all the way
down to $9 and $1 when it cost $70 to fly a seat? Why would any
manufacturer or provider of services do such a thing for 2
years?
Now, everybody loves a bargain, particularly in air fares,
but even so, Mesa's strategy of below-cost pricing raised
eyebrows. Even bargain lovers began to ask, why is somebody not
doing something about this?
Well, you know, we did not sit by idly. We spoke to elected
Federal, State, and county officials and every editorial board
that would listen to us. We came to Washington to ask the
Department of Transportation and the Department of Justice to
look into Mesa's predatory practices in Hawaii and to do
something about it. We spoke to various lawmakers on the Hill.
Everyone told me that predatory pricing is hard to prove. I
believe that if there is ever textbook definition of predatory
pricing, this is it.
Not one, but both of Hawaii's legacy inter-island carriers
have sued Mesa.
In February, Hawaiian filed a lawsuit asserting claims
against Mesa for breach of a nondisclosure agreement that Mesa
had executed.
In January 2007, Aloha filed suit against Mesa alleging
misuse of confidential information and deliberately sought to
drive Aloha out of business in violation of Federal antitrust
laws. In fact, court documents show that Mesa's chief financial
officer stated in an e-mail that rather than wait for Aloha to
die, Mesa should enter the inter-island market and give Aloha
the last push.
Due to this pending litigation, I prefer not to go into any
further detail on that matter.
Now, in spite of the legal challenges, Mesa continues to
operate in Hawaii at $49 inter-island fares.
For the year 2007, Aloha lost $81 million on revenues of
$407 million, and in January 2008 alone, we lost $10.6 million
on $34 million in revenue.
In March of this year, after 2 years of escalating fuel
prices and cutthroat competition, Aloha's lead investor opted
to stop funding Aloha Airlines after they had put in another
$100 million. This came on the day that we noted fuel prices at
$111 a barrel.
Faced with that reality, we worked round-the-clock in
search of a new investor, including other airlines. We felt
that a strategic investor, an airline, might be interested, but
we found out they have their own problems, as you know. And
with fuel rising the way it was and an inter-island fare war,
there was no one there.
Our senior management, our owners, and the board anguished
over that decision to terminate passenger service and did so
only after our lenders could not provide any further funding
and after all other alternatives were exhausted.
No one wanted to believe that a passenger airline with a
62-year history of serving Hawaii could disappear or that 2,000
of our people who supported passenger operations could lose
their jobs overnight. Without any further financing, we had to
make the hard decision.
We are continuing round-the-clock efforts to save our cargo
and contract services operation in order to preserve more than
1,000 remaining jobs. We also hold out hope that investors will
look at resurrecting Aloha's entire passenger operation in the
future.
What impact does this have on Hawaii? Aloha Airlines was
the state's 10th largest private employer. We offered frequent,
reliable passenger service, 100 inter-island flights a day,
linking Hawaii's four counties and key cities. We flew 4
million passengers a year, including 1 million visitors and
residents between Hawaii and the West Coast. We served the
largest tourism markets in southern California and had the most
non-stops from the West Coast to Maui.
We supported hundreds of nonprofit organizations throughout
the State. For example, in 2006, we spearheaded the annual
fund-raiser for the March of Dimes and raised over $500,000.
Cargo and contract services continue to operate, pending
the sale of those business units, and they remain a vital part
of the air transport system in Hawaii.
Aloha also holds the majority of U.S. contracts with Hawaii
for the mail and carries about 85 percent of perishable,
sensitive consumer goods.
We also continue to provide passenger and maintenance
service for a number of other carriers in the market.
Following the shutdown of Aloha's service to five Hawaiian
and six Mainland destinations, ATA shut down. At this point in
time, there is no daily nonstop service out of Orange County or
Oakland to any of the cities in Hawaii. And 20 aircraft have
been pulled out of Hawaiian service on the West Coast, and we
were offering about 15 percent of the traffic at that time
between the two carriers.
State tourism officials are expressing concern that Hawaii
does not have enough seats in key visitor markets and that the
loss of airlift could cost the state up to half a million
visitors a year. Analysts say the average fare from the
mainland to Hawaii could rise by $200 round trip, and inter-
island fares, I can assure you, will go up to pre-Mesa levels,
if not higher.
To date, we have terminated more than 2,000 employees and
estimate the cost to the State of Hawaii in unemployment of
over $50 million.
This company was started in 1946 and the men and women of
our company were involved in many community affairs and
supported so much beyond just air travel itself. Aloha's
employees were not just good people like you will find
throughout the airline industry. They were warm, wonderful
people who shared a unique spirit of compassion and care for
customers and coworkers. We call it the Aloha Spirit.
I could say more about them, but let me show you this.
[Video shown.]
Mr. Banmiller. As a testament to these fine people, let me
share with you the DOT's most recent air travel consumer
report, which just came out. Since it began monthly reporting
last April, Aloha has consistently been one of the Nation's
best airlines in punctuality, baggage delivery, fewest
cancellations, and fewest customer complaints. Last week's DOT
report placed Aloha as the number one carrier in on-time
performance and fewest passenger complaints.
There may be other airlines serving Hawaii, but there will
never be another like Aloha Airlines.
Thank you, sir.
[The prepared statement of Mr. Banmiller follows:]
Prepared Statement of David A. Banmiller,
President and CEO, Aloha Airlines
Mr. Chairman, Vice Chairman, Members:
Good afternoon and aloha!
This is a very sad time for Aloha Airlines and indeed the entire
airline industry.
What we do touches everyone's lives in this country. Airlines drive
local economies, they provide employment directly and indirectly; and
they speed travelers on their way to make business deals, go on
holiday, attend weddings and enjoy the benefits of an open economy.
How things have changed in our industry!
My humble beginnings in commercial aviation came as a management
trainee with one of the great airlines of U.S. aviation history: TWA.
About 40 years ago, I was on the front lines as a ticket agent.
Thanks to TWA, I learned a lot about customer service from the ground
up, writing tickets by hand, and handling baggage.
By the way, the next ticket counters over from ours belonged to
another giant of the airline industry that seemed equally invincible at
the time--Eastern Air Lines. They're both long-gone, along with Pan-Am
and other pioneering airlines.
Today America's airlines are more challenged than they have ever
been. When it comes to airlines, change is the constant. Or as the
authors of ``Over the Hedge'' put it: ``the more things change, the
more they remain insane.''
What once was a proud industry that lured lifetime employment of
dedicated workers, who strived to exude exceptional customer service,
and focused on taking care of their traveling patrons, has now become
an industry filled with chaos and uncertainty.
The Airline Deregulation Act of 1978 opened the playing field of
competition. At the outset, deregulation was supposed to yield positive
outcomes especially for the large hub markets. But for smaller regional
markets, like Hawaii, deregulation has proved to be potentially harmful
in achieving stable air transportation service.
For example, since the Deregulation Act, Hawaii has witnessed the
collapse of a number of airlines including Mid Pacific, Mahalo and
Discovery, as well as two bankruptcy filings by Hawaiian Airlines and
two bankruptcy filings by Aloha Airlines.
Why? Because deregulation only regulated the revenue side of the
business, not the cost side. And despite deregulation 30 years ago, the
airline industry continues to be one of the most heavily regulated and
taxed businesses in America.
Today I will focus on the unfortunate situation at Aloha Airlines,
a mainstay of Hawaii's tourism-dependent economy for more than 60
years.
I plan to share with you the challenges we faced and the cause of
our passenger-service shutdown.
The two main factors that caused the company to cease its historic
passenger business were unfair competition and the soaring cost of jet
fuel. The latter continues to pose a real threat to the air
transportation industry, both in the United States and around the
world.
I also want to touch upon a few global trends that continue to
threaten Hawaii because of its geographic isolation and its dependence
on air transportation more than any other state in the Nation.
What you're seeing today with the recent closure of Aloha's
passenger business--along with the shutdown of ATA Airlines, Skybus,
Champion, and MAXjet airways before that--is just the tip of the
iceberg. Industry observers are asking, who's next?
Fuel Costs
The cost of fuel continues to rise with wild abandon, unchecked by
government even as oil companies reap enormous profits.
When I was at TWA in the Sixties, fuel represented 5 percent of an
airline's costs. Today it's 45 percent and currently surpasses labor as
the number one expense for most airlines.
Throughout the 1990s, the average cost of a barrel of crude was
under $20. In the year 2004, it rose to $40. Earlier this year, oil
sold for $111 a barrel, a price that was inconceivable even a year ago.
For every $1 increase in the price of crude, the cost of jet fuel to
the airline industry is in excess of $400 million a year. And,
unfortunately, there is no such thing as a hybrid jet.
Aloha has joined our industry colleagues in the Air Transport
Association in calling for swift Federal action on a 21st century air
traffic control system upgrade to make air transportation more
efficient by eliminating America's archaic ground-tracking system,
which makes for longer than necessary routing and landing patterns.
We strongly believe that if our air traffic control system were
upgraded to satellite-tracking, we could be saving a lot more fuel.
Our fear is that without major strides toward modernizing ATC and
spreading the cost burden to all users of the system, states like
Hawaii that are solely dependent on air transportation, stand to lose
more vital air service. And keep in mind, the average American suffers
as a consequence of what happens to airlines.
Bankruptcy
The public has become accustomed to think that it is normal for
airlines to go into and out of bankruptcy. But it doesn't always work
out that way.
In our first bankruptcy, cutting costs was job number one. Our
self-help program involved a lot of dedicated people, especially
Aloha's employees across the board--who wound up taking a 20-percent
pay cut.
Working 24/7 and across six time zones, we brought Aloha out of a
complicated bankruptcy in a little more than 1 year. In order to
succeed, we worked hard to win the confidence and support of Aloha's
unionized labor groups and saved thousands of jobs while maintaining
the company's reputation for exceptional customer service.
We also paid our Federal ATSB loan in full and on time.
At the same time, we forestalled demands from aircraft lessors who
threatened to pull back Aloha's aircraft. We secured interim DIP
financing at a cost, and we skated around onerous covenants while
seeking permanent financing to take the company forward. I thought it
was hard to find investors back then. Little did I know then what I
know now.
Emerging from our first bankruptcy, we were optimistic that we had
a viable business plan, one that could bring profits even in the
traditionally low-fare inter-island market.
Mesa Air Group
Back on September 22, 2005, we had signed an agreement with the
Yucaipa Companies, a well-respected private equity fund, for a
substantial equity investment in Aloha. The $98 million agreement
included $63 million in equity and $35 million in debt financing.
However, on the very same day that Aloha signed the new investment
agreement came the announcement that Mesa Air group, an Arizona,
company, planned to compete in the inter-island market with its own
low-cost carrier.
We believe this improper because Mesa had come to Aloha as a
potential investor and Mesa had also looked at Hawaiian's books when
they were in bankruptcy. It was pretty clear to us that the timing of
Mesa's announcement was intended to scare off investment in Aloha,
something it did not do.
Mesa launched its inter-island carrier go! Airlines on June 9,
2006, with an advertised introductory fare of $39 one-way. In its first
18 months of operation, go! lowered fares to $29, $19, $9 and on down
to $1.
A study done for Aloha by Sabre Airline Solutions soon after go!
entered the market, indicated that with a 62 percent load factor, which
was the average load reported then by go!, Aloha needed $50 a ticket to
break even, Hawaiian needed $55 a ticket to break even, and go! needed
about $67 a ticket to pay for the basic costs of its operation.
We began asking people in government, business, and media, and just
about anyone who would listen, these questions:
Why would Mesa charge less for a seat than it costs to produce
it?
Why was go! charging $39, $29, $19 or $1 for a seat that cost
them as much as $70 to fly?
Why would any manufacturer or provider of services offer their
product for less than what it cost to produce it, for almost 2
years?
Now everyone loves a bargain, particularly in air fares, but
even so, Mesa's strategy of below-cost pricing raised some
eyebrows. Even bargain-lovers began to ask, ``Why doesn't
somebody do something about it?''
We did not sit idle. We spoke to elected Federal, state and county
officials and newspaper editorial boards.
We came to Washington to ask the United States Department of
Transportation and the United States Department of Justice to look into
Mesa's predatory pricing practices in Hawaii, and do something about
it. We spoke to various lawmakers on the Hill.
Everyone told me that predatory pricing is hard to prove. I believe
that if there is a textbook definition of predatory pricing, this is
it.
Lawsuits
Not one but both of Hawaii's legacy inter-island carriers sued
Mesa.
On February 13, 2006, Hawaiian Airlines filed a lawsuit asserting
claims against Mesa for breach of a non-disclosure agreement that Mesa
had executed in April 2004, during Hawaiian's bankruptcy proceedings.
On January 9, 2007, Aloha Airlines filed suit against Mesa alleging
that Mesa had misused Aloha's confidential information and deliberately
sought to drive Aloha out of business in violation of Federal anti-
trust laws.
In fact, court documents show that Mesa's chief financial officer
stated in an e-mail that, rather than wait for Aloha to die, Mesa
should enter the inter-island market and give Aloha ``the last push.''
Due to this pending litigation, we will not go into further detail.
In spite of the legal challenges, Mesa continues to operate in
Hawaii with $49 inter-island fares.
Second Bankruptcy
For the year 2007, Aloha lost $81 million on revenues of $407
million. In January 2008, we lost $10.6 million on $34 million of
revenue.
In March of this year, after nearly 2 years of escalating fuel
prices and cutthroat competition, Aloha's lead investor opted to stop
funding Aloha Airlines, after a further infusion of approximately $100
million. This came on the day that fuel prices hit $111 a barrel.
Faced with that reality, we worked round-the-clock in search of new
investment for all or part of Aloha Airlines. We approached numerous
airlines that we felt would have a strategic interest in Aloha. But we
couldn't find one willing to take us on, with fuel prices what they
are, and the fare war still raging.
None agreed to finance Aloha's passenger business, leading to its
shutdown on March 31, 2008.
Our senior management and owners anguished over that decision to
terminate passenger service and did so only after our lenders would not
provide further financing and after all alternative sources of funding
were exhausted.
No one wanted to believe that a passenger airline with a 62-year
history of serving Hawaii could disappear. Or that 2,000 of our people
who supported passenger operations could lose their jobs overnight. But
without further financing, it had to happen.
We are continuing round-the-clock efforts to save Aloha's air cargo
and contract aviation services operations in order to preserve more
than 1,000 jobs.
We still hold out hope that investors would look at resurrecting
Aloha's entire passenger operation in the future.
Impact on Hawaii
What impact does our situation have on Hawaii?
Aloha Airlines was the state's 10th largest private employer.
We offered frequent, reliable passenger service--100 inter-island
flights a day--linking Hawaii's four counties and major population
centers.
We flew nearly 4 million passengers a year, including 1 million
visitors and residents between Hawaii and the West Coast. Aloha served
Hawaii's largest tourism market in Southern California and had the most
non-stop flights from the West Coast to Maui.
In support of Hawaii's statewide airports system, Aloha ranked 2nd
overall in airline revenue-landing weights, and 3rd in paying state
airport-revenue charges.
We supported hundreds of nonprofit organizations throughout the
state. For example, in 2006, Aloha spearheaded the annual fund-raising
event for the Hawaii Chapter of the March of Dimes and helped them
raise a record $500,000.
Cargo and contract services continue to operate, pending the sale
of those business units. They remain a vital part of air transportation
in Hawaii.
Aloha holds the majority of U.S. mail contracts in Hawaii, and
carries more than 85 percent of the state's non-mail air cargo,
including time-sensitive consumer goods, fresh produce and baked goods,
agricultural exports, and emergency medical supplies;
And we provide ticketing, baggage and ground-handling services for
multiple domestic and international carriers as their agent.
Following the shutdown of Aloha's service to five Hawaii, and six
Mainland destinations, ATA Airlines abruptly shut down its Mainland-to-
Hawaii routes. As a result, Oakland, California, and Orange County,
California, have no non-stops to Hawaii.
In total, 20 aircraft have been pulled out of Hawaii service from
the West Coast. Together, Aloha and ATA carried 15 percent of visitor
traffic to Hawaii from the West Coast.
State tourism officials are expressing concern that Hawaii doesn't
have enough seats in key visitor markets and that the loss of airlift
could cost the state up to half a million visitors this year.
Analysts say the average fare from the mainland to Hawaii could
rise by $200 a round-trip; and inter-island fares will certainly
escalate to pre-Mesa levels.
To date, we have terminated more than 2,000 employees. It's been
estimated that the State of Hawaii will have to pay out as much as $50
million in unemployment claims. Even so, the full impact of Aloha's
situation has not yet been felt and the ripples continue to flow
throughout the state.
Aloha Airlines was begun in 1946. Since then, the men and women of
Aloha Airlines have been totally involved in the community,
volunteering their time for hundreds of community events each year, and
the company itself gave generously.
Aloha's employees weren't just good people like those you find
throughout the airline industry. They were warm, wonderful people who
shared a unique spirit of compassion and caring for customers and co-
workers. We call it the Aloha Spirit. I could say more about them but
let me show you.
As a testament to these fine people, let me share with you the U.S.
Department of Transportation's most recent air travel consumer report,
which came out just last week.
Since it began monthly reports in April 2006, Aloha Airlines has
consistently been one of the Nation's best airlines for punctuality,
baggage delivery, fewest cancellations and fewest customer complaints.
Last week's DOT report placed Aloha in the Number One position for on-
time performance and Number One for fewest customer complaints.
There may be other airlines serving Hawaii but there will never be
another like Aloha Airlines.
Thank you for your kind attention.
The Chairman. I thank you very much, Mr. Banmiller. I
realize it was not easy testimony, but I thank you for the
record.
Our next witness is Mr. Charles Willis, Chairman of the
Board of Island Air.
STATEMENT OF CHARLES F. WILLIS IV, OWNER AND
CHAIRMAN OF THE BOARD, ISLAND AIR, ACCOMPANIED BY
LESLEY KANESHIRO, CFO, ISLAND AIR
Mr. Willis. Mr. Chairman, thank you very much, and also
Members of the Committee. I appreciate the opportunity to have
Ms. Kaneshiro and myself address you.
I would like to begin by saying that I echo Mr. Banmiller's
sentiments emphatically. I certainly have known the gentleman
for many, many years. I have been around the airline business
my whole life.
I just want to give you a brief, sort of where we were,
where we are, and where we are going.
Island Air is a regional airline that has provided service
within the State of Hawaii for 27 years. Between 2004 and the
first half of 2006, the company expanded significantly by
adding eight nonstop routes and over 150 employees. We
complemented the jet service and did not compete directly with
either Aloha or Hawaiian, and we carried roughly 14 percent of
the market.
In early 2006, we brought in the modern and fuel-efficient
Bombardier Q400 aircraft, which we still believe is the right
aircraft for the market.
Go Airlines started service and initiated a fare war on the
Islands at $1, $9, $19, and $29, and even free tickets. No
airline or aircraft type makes money or breaks even at those
prices.
Where we are currently: Since 2006, we have reduced our
workforce by over 150 employees statewide. That is 40 percent.
To date, we have lost approximately $5 million. We have ceased
nonstop service in eight neighbor Island markets and have been
unable to reinstate lost service. We reduced total scheduled
flights by 38 percent. We have closed freight service to and
from Lihue, Kona, Maui, and Hilo. We have realized a 30 percent
reduction in our revenues and experienced an 80 percent
increase in fuel cost per gallon.
We are being squeezed on the bottom by the FAR 135 single-
engine airplane carriers who are semi-regulated and not subject
to the same regulatory requirements and airport fees as we are.
We are also squeezed on the top by the mammoth airlines,
Hawaiian, who operate trans-Pacific flights and, thus, can
absorb and transfer those costs over a larger system.
Implications of the Aloha bankruptcy: You could possibly
end up with one strong airline in the marketplace, Go with
their viability in question right now in a press release that
was just issued yesterday. A consolidation of carriers has
resulted in massive job cuts, fewer choices, with resulting
economics, as well as a reduction or cessation of service to
many communities.
Without assistance Island Air will be marginalized with a
potential reduction or elimination of service to small
communities and point-to-point markets.
The plan going forward: Our intent is to hire laid-off
Island Air and Aloha employees and reinstate lost service to
the eight market pairs that we previously serviced and
subsequently deserted due to the fare wars. We are further
interested in adding more point-to-point routes as scheduled
service, for example, Kamuela, Barbers Point, Hana, and
Kalaupapa.
We are presently negotiating with aircraft manufacturers to
bring in up to three Dash-8-400s before the summer and bring
back the Bombardier Q400s by mid to late summer or earlier if
support is provided and demand is warranted. We want to
complement and provide service where demand for jets is not
cost effective.
How you can assist is to show immediate support of the loan
guaranty bill, HB-509, and the aviation fuel tax exemption from
GE [General Excise] tax, HB-2860, in the Hawaii State
Legislature. I believe it passed the Senate 2 days ago and is
off to the House. Time is of the essence.
We need an inter-island cooperation agreement between
ourselves and the existing incumbents to stabilize and to be
able to reinstate service, rehire employees, as well as reclaim
a modern and safe aircraft.
Understand the seriousness of the air travel plight in
Hawaii: The increase in unemployment, lack of service to rural
communities within the State, potential of future reduction in
air carriers in Hawaii.
Mr. Chairman, we need your support now. This is not an
Aloha type situation. But if it is not rectified, we certainly
will face greater challenges in the future.
Thank you, Mr. Chairman, and I will be more than happy to
answer any questions at this point.
[The prepared statement of Mr. Willis follows:]
Prepared Statement of Charles F. Willis IV, Owner, Hawaii Island Air,
Inc.
Dear Senator Inouye and Honorable Committee Members:
My name is Charles Willis IV, and I am the Owner of Hawaii Island
Air, Inc. dba Island Air. We are a regional airline that operates
within the State of Hawaii.
In today's market of rising prices all airlines are faced with the
challenge of covering costs and meeting customers expectations. The
recent inter-island fare wars, the conduct of which is currently
subject to litigation has resulted in a dramatic and severe loss of
revenues to inter-island carriers. This is coupled with increasing fuel
costs has resulted in significant losses by all the inter-island
carriers.
The results of the fare wars and increase in costs have caused
great hardship to Island Air and to those employees who were the
casualty of workforce reduction, and a terrible disservice to all of
Hawaii's residents and visitors. Since the fare wars began in 2006,
Island Air has:
Ceased non-stop services in eight neighbor Island markets
and have been unable to reinstate service to those markets.
Reduced total scheduled flights by 38 percent.
Closed freight service to and from Lihue, Kona, Maui and
Hilo.
Reduced its workforce by over 150 employees statewide (40
percent).
Realized a 30 percent reduction of revenues.
Experienced an 80 percent increase in fuel cost per gallon.
These factors have caused financial instabilities in the
marketplace resulting in the reduction of services that Island Air can
offer.
The unfortunate closure of Aloha Airlines provides Island Air with
the opportunity to position itself in the marketplace to expand routes
and service where demand exists.
Thank you for allowing Island Air to present this testimony.
The Chairman. I thank you very much, Mr. Willis.
Ms. Kaneshiro, do you have anything to add?
Ms. Kaneshiro. No.
The Chairman. Thank you very much.
And now may I call on the President and CEO of the Air
Transport Association, Mr. May?
STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO,
AIR TRANSPORT ASSOCIATION OF AMERICA, INC.
Mr. May. Thank you, Mr. Chairman. It is always an honor to
be before you, and Senator Smith, it is a delight to be with
you as well today.
I do not think that I can add a great deal to what has
already been said this morning, and given the lateness of the
hour, I will forgo a formal statement. I would like to
emphasize a few points and suggest to you a couple of at least
lead bullets, if not silver bullets, to the circumstances we
face as an industry.
I have great affection for Dave Banmiller. He has been a
loyal board member of ours and a good personal friend. I have
huge affection for the islands of Hawaii. I have been traveling
there for 30 years on vacation every year.
And I think what has happened there, while it is
terrifically unfortunate is also a precursor to what the whole
industry faces, as has been suggested here already this
morning. This industry is beset by an $18 billion a year tax
bill, principally to the FAA and to the TSA. We are beset by
$55 billion a year in fuel costs projected for 2008. That is
about $14 billion more per year than we paid a year ago. That
is the equivalent of 330 new fuel-efficient aircraft. That is
the equivalent of 440,000 employees.
And we are taking as an industry all of the dramatic
actions that you have heard David and Mr. Willis talk about
already this morning. We are laying off employees,
unfortunately. We are offering early retirement to large
numbers of employees. We are eliminating some destinations
altogether, and those are principally smaller destinations. We
are cutting frequencies. We are doing everything we can to
recoup additional revenue. It has been well publicized. Some of
the revenue measures that the carriers are pursuing for
additional fees for bags and so on and so forth. And the
unfortunate reality is that we have cut, through previous
bankruptcies and the loss of some $35 billion as an industry
early on in this century, most of that low-hanging fruit, if
you will, and there is very little room or fat to cut in the
operations.
And the principal factor for that, as I said a minute ago,
is fuel. It is overwhelmingly our number one cost center today.
Yesterday New York Harbor crude, which is a good benchmark of
what we have to do in this industry, hit $150 a barrel--1-5-0.
And we were paying just a few short years ago $20-$25 a barrel.
It is outrageous and it is extraordinary.
I would suggest to you there are three or four things that
this Committee can pursue that would be of short-term or
immediate benefit to the circumstances we find ourselves in.
First and foremost, I would urge you to ask the
Administration not to continue to fill the Strategic Petroleum
Reserve when prices are as high as they are. We have a more
than adequate reserve in play today. I think the number is 70
billion barrels of fuel in that reserve today. And yet we
continue to fill that at today's prices which are outrageously
high. It makes no economic sense or security sense whatsoever.
The second thing I would recommend that this committee
consider urging the Administration to do is to release about 10
million barrels from that SPR. That all by itself is not going
to have a huge impact on oil prices, but I think it sends a
signal to the speculators that they are likely to get short and
that this administration will take action to try and drive
prices down. And I think it will have some kind of meaningful
effect.
At the same time, there is a New England Heating Oil
Reserve that is about 2 million barrels. The crisis time for
heating in New England has passed for this calendar year, and I
think they could release that into the market to make a very
real difference in supply.
The next thing--and it is not a new subject to this
Committee by any circumstances--but do no harm. Try and make
sure that the TSA and the CBP and others do not continue to add
additional burdens onto this industry which are terribly
burdensome and are, quite frankly, the responsibility of the
Federal Government to begin with.
The third thing is pass meaningful FAA reform, and by
meaningful FAA reform, I would encourage this Committee not to
do--you have done well in drafting that legislation and passing
that legislation out of Committee thus far, but we need to make
sure that before it goes further, it has a good, clear, clean,
balanced, and fair funding formula. The vast majority of that
$18 billion a year that we spend in taxes as an industry and
that our passengers are charged is a direct result of the fees
that we pay to the FAA, and those need to be rebalanced. That
in turn, I think, will yield a much more modern and positive
air traffic control system that allows us, as Mr. Banmiller
said, to fly more efficiently and productively, cutting our
fuel costs to the extent that we can.
Mr. Chairman, we have a long history of working with this
Committee under your leadership and that of Co-Chairman
Stevens, and we look forward to continuing to work with you. We
will be happy to answer any questions you may have.
[The prepared statement of Mr. May follows:]
Prepared Statement of James C. May, President and CEO,
Air Transport Association of America, Inc.
Good afternoon, Mr. Chairman and Members of the Committee.
I appreciate your urgent concerns about the future of air service
in Hawaii. Air transportation is essential to the economic health and
social fabric of the state and of all Hawaiians. Without a question,
the shutdown of passenger service and auction of its air cargo business
by Aloha Airlines is painful, not only for its employees and their
families, but also for the overall ease of travel and shipping
throughout the islands. People depend on air travel to meet their needs
and support the state's vibrant tourism industry in a fundamental,
unique way.
Truth be told, my affinity for Hawaii goes back some 25 years. My
wife and I visit Hawaii every year and have traveled extensively among
the islands. It is hard for me personally to imagine a more idyllic
paradise, so I am keenly interested in the state's well-being.
Although I would like to reassure you that the recent service
disruption is nothing more than a passing anomaly in an otherwise
stable airline industry, nothing could be further from the truth. Some
analysts view Hawaii as just the beginning of a sea change in the
Nation's air transportation network.
And change will come because U.S. airlines are facing overwhelming
odds: U.S. airlines' significant increases in taxes, fees, security
burdens and environmental costs; ongoing labor concerns; staggering
capital costs for new aircraft and infrastructure improvements; and
unprecedented fuel prices. From 2001 to 2006, the industry lost $35
billion and more than 20 carriers filed for bankruptcy (including four
of the six large network carriers), employee benefits and numbers were
cut; planes were parked; and the industry scrimped to cut costs.
In 2007, the future looked somewhat brighter. With a modest profit,
the airlines seemed to have turned the corner. But in 2008, our shaky
recovery hit a brick wall: the economy deteriorated and jet fuel prices
went through the roof. Today the forecast is grim.
Record-high fuel prices were the breaking point for some airlines.
This year the industry likely will pay $55 billion for fuel--$14
billion more than last year--a staggering 35 percent increase. That's
the equivalent of employing 440,000 airline workers full-time or
purchasing 330 new wide-body airplanes. Last week, jet fuel averaged
$135 per barrel--a 30 percent-plus increase since January. In Hawaii,
some pay a premium for jet fuel that increases the financial hit.
Mr. Chairman, yesterday brought even more discouraging news. The
price of home heating oil in the New York Harbor a well-accepted price
marker for jet fuel--jumped to over $150 per barrel. That's a record
that shocked even the most seasoned analysts.
With the brutal jet fuel costs and elimination of the low-hanging,
``cost-saving'' fruit gone, airlines large and small again are forced
to take painful steps that have painful consequences for their
customers, employees and shareholders. Airlines are literally fighting
for survival as they:
File for Bankruptcy: Three carriers filed in the past 2
weeks--Aloha Airlines, ATA Airlines and Skybus. Champion Air, a
charter operator, will stop service at the end of May. After 61
years and facing severe financial difficulties, Aloha shut down
passenger service--laying off some 2,000 employees and
terminating aircraft and ground-support leases. The impact on
Hawaii's economy, its passengers and shippers, is abrupt and
widespread.
Cut Employees: Delta offered early retirement to 30,000
employees--half of its workforce--to eventually reduce
headcount by 2,000; American and Northwest announced hiring
freezes.
Charge for Amenities: Carriers are imposing additional fees
for extra and over-size bags; telephone reservations, onboard
meals; unaccompanied minor service; and pet transport. Some
carriers also have added fuel surcharges, particularly on
international routes.
Cut Unprofitable Service: United, Delta, Northwest and
others are parking planes; carriers are reducing service on
marginal routes and eliminating service on unprofitable routes.
Delta will end service to several small communities and US
Airways cut 30 percent of its overnight flights into Las Vegas.
If demand softens as the economy weakens, more unprofitable
routes may be cut.
None of these changes are popular with our passengers. As airlines
try to pass on their increased operating costs, the number and volume
of complaints will jump even higher.
In short, we're doing everything we can to get ourselves out of
this tailspin. But there is a limit to how much more we can cut costs
and increase revenue.
The Nation's economy depends on a vibrant national air
transportation network with secure access to a stable, rationally
priced fuel supply. That is not what we have today. The only solution
is for the Federal Government to develop a national energy policy and a
forward-looking aviation policy. As these policies takes shape, we've
asked the administration to do what it can now to alleviate the
pressure on fuel prices. We've asked the Department of Energy to stop
filling the Strategic Petroleum Reserve that takes fuel out of the
marketplace and increases costs, and for a release from the Home
Heating Oil Reserve to remove the premium for jet fuel.
In closing, record-high fuel costs touch passengers and shippers in
ways they do not like--the people of Hawaii will feel the demise of
Aloha as their everyday lives are impacted. One key component of the
national air transportation system has been hit hard. The Federal
Government must take some bold steps very soon, or the entire system
will suffer.
Thank you.
The Chairman. I thank you very much, Mr. May. Your
suggestions, as they relate to the reserve system, I think are
deserving of further inquiry. If I may, I would have my staff
call upon your staff to see if hearings are justified.
Mr. May. Mr. Chairman, we would be happy to participate. We
would be happy to suggest some experts in the area of fuel. It
is not, as Senator Smith suggested, a pure silver bullet, but
it is certainly something that will have an impact.
When we are averaging $135 a barrel in this industry--and
that is because the so-called crack spread, the refining
premium, Jet A, is so terribly, terribly high. It has gone up
just as much on a percentage basis as the cost of the raw
product to begin with. And it is those middle distillates in
that barrel that are so terribly expensive. Diesel fuel here,
if you happen to drive a diesel car--and the truckers I am sure
you are hearing from--it is just amazing.
And anything that can be done is a marginal benefit because
we have lost five carriers. We are going to lose more. Small
communities are going to lose service. 50-seat RJ's are the
least efficient planes in the fleet. So Bend, Oregon and other
places are going to be very much at risk. And we cannot help it
with fuel being as expensive as it is today.
The Chairman. Thank you very much, Mr. May.
Our final member of the panel is Mr. Fukunaga. Do you have
anything to add here?
STATEMENT OF BARRY FUKUNAGA, CHIEF OF STAFF, OFFICE OF GOVERNOR
LINDA LINGLE, STATE OF HAWAII
Mr. Fukunaga. Thank you, Chair Inouye and Senator Smith. I
do realize that we were a late addition to the panel, and I do
not have written testimony as a result. But I do appreciate the
opportunity to join this august body and to appear before you.
My prior experience was I was a director at the Hawaii
State Department of Transportation before my current position.
In my earlier life, I did 25 years at the international
airport, 15 of which I was the manager there.
The situation that we see today is certainly profound. It
is not like anything that I have ever experienced in my time at
the airport. And I certainly sympathize with the plight that is
faced by the air carriers.
When all of this came about, we certainly had a real
concern about the impact that the shutdown of a carrier like
Aloha would have on our State, simply as an island economy. We
are so dependent on connectivity by air. As a result, we
quickly rode to help the employees and certainly the stranded
passengers, and I think the industry as a whole in Hawaii, our
travel partners, made that possible for us to do that.
But looking forward, we do not see the ability to really
entice or encourage a significant amount of increase, and that
is an area of concern for us.
Nevertheless, I think we really need to work closely with
the carriers that do service our islands so that we can
continue to embrace and embody travel opportunities for those
not only who reside in our state, but also those that come to
visit us.
The Administration has certainly been concerned about the
reliance on air alone. So we introduced the support of Hawaii's
Superferry, and hopefully we will be able to offer at least
options and alternatives, if they can be successful in
providing their trade.
The Airports Division has taken on an airport modernization
program in collaboration with the air carriers that operate in
Hawaii. It is a $2.3 billion effort. Certainly it is intended
to not only upgrade and improve our facilities, but to make it
easier so that the carriers and operators and the users of our
facilities find themselves able to do so more efficiently and
thereby reduce some of their operating costs.
It is important that we continue to recognize that our
system is unique in terms of airports. We operate all of our
major airports throughout the State. We are unique in that
respect and, as a result, have been able to provide service to
our neighbor islands over and beyond what they would otherwise
be able to do if they were left only to themselves and the
traffic that they generate.
As a result, we continue to retain a differential in our
fees and charges to our inter-island air carriers such that
they can be able to operate at a lower cost than what would
otherwise be the norm because we can subsidize these operations
through the activity that is conducted through Honolulu
International Airport.
We provide a preferential hold room price. It is about 64
percent of what the others would be charged using that same
facility for inter-island carriers, and the same thing with a
joint facility utilization charge. These things, I think,
certainly help and encourage that.
And yet, we see the reduction in inter-island airlift
primarily because, as was mentioned earlier, of the direct
flight by overseas carriers to our neighbor islands. Yet, we
still need to maintain that connectivity between our islands
for our residents and for the visitors that have the
opportunity to move between our islands. And we certainly would
like to see more support in that area, and it is certainly
something that we would be involved with.
It was mentioned that the EAS service does benefit three of
our smaller communities, but what we experienced with the EAS
program is that the company that was awarded the bid
essentially indicated that they no longer needed the subsidy.
That action alone resulted in their raising rates, and we saw
some drop-off in service. There have been numerous complaints
about that activity, the fact that they did not provide the
kind of frequency that was anticipated or expected. And that
creates a problem.
The fact that they are providing service means that the DOT
will not open up a bid opportunity again. And we feel that it
was important to do that. We need to provide service to these
communities that would otherwise be held hostage without it.
It was mentioned early in a news release that the cost to
go to Hana was equivalent to the same travel between Hawaii and
the West Coast. Now, that certainly cannot be, and that is a
problem. Communities like Hana, which only have a roadway to
connect them, and a long one at that, depend on it. The hotel
there provides employment to a remote community that helps
sustain that particular economy. So it is important that we try
to get that kind of service. As small as it may be, it talks
about the problems that we face and the challenges that we
encounter in trying to maintain and provide for our communities
throughout our State.
So going forward, I think it was mentioned about the
pending legislation. We are coming down to a crunch where it is
going into committees, and we need to see these bits of
legislation passed. We had mentioned to the State legislature
that the loan agreement would need some adjustments. There is
no provision in our current administrative budget to provide
the kind of funding that would be needed to underwrite these
loans. We need about 25 percent of what the loan would be
offering. The legislature will have to make that adjustment to
the state's budget so that we can do that.
Second, the fuel surcharge that would be levied on our
inter-island carriers--we are supportive of that measure as
well.
So the Governor has always made it known that she is
interested and open to exploring any possibility that is out
there in terms of programs, but we would do so judiciously and
in concert and discussion with our operating partners to make
sure that what we do put into play does not adversely or
inadvertently create a problem bigger than the solution that it
seems to want to offer.
So with that, I certainly appreciate the opportunity again
for being here and having the chance to join this group.
Certainly I am available for questions. Thank you.
The Chairman. I thank you very much, Mr. Fukunaga.
Now, if I may, I would like to ask Mr. Banmiller a few
questions.
Mr. Banmiller. Yes, Mr. Chairman.
The Chairman. Is Aloha Airlines doing anything to assist
employees in transitioning to other employment?
Mr. Banmiller. Yes, Mr. Chairman. I discussed this issue
last week with the CEO of First Hawaiian Bank and the mayor.
And there was a job fair that was held yesterday at the
Blaisdell Center. And I am pleased to report that there were
almost 200 employer groups set up there to interview our
employees, I think, in part a testament to the quality of our
employee population. And 50 businesses were actually turned
down because they ran out of space, and last reports were 1,600
people were in there interviewing and talking about employment.
We had separately set up resume services in that same
facility to assist people in developing their resumes.
We have separately been in touch with the State Department
of Labor and have set up separate groups to work directly with
our employees to educate them on things like health care,
COBRA, and there is a separate website that has grown out of
the job fair to assist employees in linking them up with
employers.
So we feel, even under these difficult circumstances, Mr.
Chairman, that there is a lot of very positive activity going
on in terms of the employment of these fine people.
The Chairman. So are you confident that most, if not all,
of your employees will have new employment?
Mr. Banmiller. Sir, that word ``confidence'' I used to have
more of until I got into the past couple years in this
business, but I think the answer is yes. Between some
requirements that Hawaiian Airlines is going to have, coupled
with a fairly low unemployment level, particularly in certain
of the locations, our people will be mostly absorbed. And it is
our job to facilitate that.
The Chairman. In your statement, you indicated that cargo
operations are continuing.
Mr. Banmiller. Yes, sir.
The Chairman. Is your intention to continue or to sell
this?
Mr. Banmiller. In the current process, all of the assets of
Aloha Airlines are up for sale through the Chapter 11 process.
When you look at the four divisions that we operated, cargo was
the most profitable, in part because we were able to manage our
own fuel situation and our customers. The second was contract
services where we service other carriers. That is modestly
breakeven and employs about 1,000 people.
The passenger service inter-island and the ones on the
mainland were both most vulnerable to fuel and Mesa's activity
inter-island. As a result, when we ran out of money, we found
nobody that was willing to support the passenger end of the
business.
We did, however, in terms of our responsibilities to the
lenders, who now have a focus on the assets of the company, see
what we needed to do to sell the various assets of the company.
If someone were to come in during this process, which is going
on over the next several weeks, supervised by the bankruptcy
court, and wishes to buy the entire operation, including the
name, that is certainly a possibility. I do not see that
indication, but it is a possibility.
There are many people interested in the cargo operation. We
have maybe 40 interested entities of which I would characterize
five as extremely serious. And their view would be to step in
and take over the cargo operation as we run it today.
The Chairman. Are you considering any prospects for future
passenger operations?
Mr. Banmiller. We are, Chairman. The problem is with the
conditions in the marketplace and the subprime problem, the
access to money, the investor that we found several years ago
we do not believe is out there. We could be surprised. We still
are having talks with several people, but I am not optimistic.
The other was strategic opportunity with other airlines,
and frankly, in those discussions the airline executives have
said to us, in addition to the fare war inter-island, the cost
of fuel is such a problem for the industry in general that
where several years ago joining forces with us might have been
an opportunity, it really is not today. So we hold out some
hope, Chairman, but we see no active participants on the
passenger side at this point.
The Chairman. You have heard Mr. May in his opening remarks
about the Reserve.
Mr. Banmiller. Yes, sir.
The Chairman. Do you agree with him?
Mr. Banmiller. Yes, I do, and especially at the price point
that we are looking at today, those of us in the industry going
through the daily problems of keeping the ship afloat and
having to furlough people, combine operations, and faced with
all of our daily challenges, to put it frankly, look at an
administration that does not seem as sensitive to our current
plight and to hear not just the woes of Aloha Airlines, but
within the industry, and look the other way, I personally do
not understand it. And I support Jim May in his observations
and I suspect every airline CEO would say the same.
The Chairman. I have further questions, but I will yield
now to Senator Smith.
Senator Smith. Thank you, Mr. Chairman.
Mr. Banmiller, I want to make sure as a preface to my
questions you do not take this as any criticism of you or your
airline, but I am going to be asking these based on my own
desire to learn more about the problem of deregulation.
You made the comment that you started with TWA. You shared
counters with Eastern and Pan Am. These were great marquees of
my boyhood memory, and they are gone. Are they gone because of
deregulation?
Mr. Banmiller. I think if you were carrier-specific, it
would be better to isolate the dilemmas. As an example, you can
put the blame on certain carriers on management, ownership
changes, aggressive behavior, and mergers. You need to almost
go by carrier. Eastern was a combination of all kinds of things
that I would not necessarily lay on deregulation.
Senator Smith. But are you arguing for us to re-regulate?
Mr. Banmiller. I would argue a revisit of the regulation
process. Total re-regulation I do not endorse. I do not think
that toothpaste, as they say, can be put back in the tube. I
think for the State of Hawaii, it was a problem because I do
not think it was geographically considered. I think there is an
answer between regulation and deregulation.
When I said we deregulated revenue, the markets were open.
You could go anywhere and it was crazy in 1978-1979. But nobody
looked at the expense columns. What is it going to cost? What
are the labor agreements? What are the agreements and
responsibilities with the pensions? And as a result, we all
focused on opening up markets and not the expense side, and
some of the carriers that lost were foolhardy in those early
days.
Senator Smith. Well, to that point, Jim May, I am from
Pendleton, Oregon. We used to have United Airlines fly in there
and fly empty planes in and out of there, and we loved having
United Airlines there.
Mr. May. They are missing one of the great rodeos in
America.
Senator Smith. And it still is. It has been filled by
another carrier and occasionally a second one, and so we have
air service still.
But I have wondered in my own mind. I am not a re-
regulator. I will state that right up front. I have made a list
of your suggestions. I think that they are excellent. But you
also said no new burdens. Re-regulation would represent, I
think, a significant additional burden.
Mr. May. Senator Smith, I would beg to differ ever so
slightly with my good friend, Mr. Banmiller, in that I would
argue that airlines remain one of the most highly regulated
businesses in the world today. We have had prices deregulated.
We have had routes deregulated, but I think it stops right
about there. I can go down the list of the amount of regulation
that we have with the FAA and the DOT and the TSA and the CBP
and the Department of Homeland Security and the State
Department, and we can go right on down the line. There are
very few things that happen at an airline that do not require
some governmental supervision or responsibility. So I do not
think that simply re-regulating is the answer.
I would suggest that a pretty good case could be made for
further deregulating this industry and get us out of the
business of some of the responsibilities in the areas of
security, for example, rebalance the equation on FAA funding,
things of that sort, and I think that would go more to reducing
the economic burden.
Senator Smith. Well, how about as it relates to--you know,
we give slots at airports. We give airspace and we do that
federally. How about getting a flight to Hana that keeps Hana
in business and Pendleton, Oregon in business? In exchange,
should there be some sort of re-regulation in that sense for
the rural folks in the Hawaiian islands to continue to have
some measure of protection in terms of passenger
transportation?
Mr. May. We have always supported the EAS program, and I
think this committee needs to continue to take a hard look at
it and see how it can be improved because it is always going to
be a very tough economic put, if you will, for a lot of
particularly small communities. I love Hana. It is one of the
garden spots of this world.
Senator Smith. I spent my honeymoon there. I think the same
thing.
Mr. May. So we both share that affection. But it is going
to be a difficult place to maintain economically viable service
on a regular basis without some form of government assistance
or subsidy.
Mr. Banmiller. Senator Smith, may I just add one comment?
Senator Smith. Yes.
Mr. Banmiller. When I said deregulation versus regulation,
I agree with Jim May. My point was how do you, in our
situation, address everybody I could talk to about the
predatory pricing activity and everybody said we cannot do
anything about it. So somewhere between the Department of
Justice, the Department of Transportation, all the regulators,
there must be an answer in here somewhere other than we cannot
do anything about it. And now I sit here before you.
Senator Smith. Mr. Chairman, if I could ask one more
question.
The Chairman. Please.
Senator Smith. Let me just say up front, again so you do
not take this in any way personally. I am not trying to insult
Aloha Airlines. I have used it many times and have affection
for it as well.
But I wonder if you could go back now, go back to 1978, are
there things that Aloha should have been doing to get ready for
a Mesa Airlines and Go? I mean, the mix of airplanes? Were
there contracts that were agreed to that just simply were
unsustainable in a deregulated environment?
Mr. Banmiller. Senator, I will be honest and say I wish I
had that answer. I am sure, between 1978 and now, the company
could have done some things differently like any company.
Senator Smith. Well, no company, in defense of Aloha, can
deal with these kinds of fuel increases. As far as I am
concerned, you are off the hook on that basis alone.
But as you look back at it--it just seems to me that we are
in a world now where oil is just going to get shorter and
shorter and shorter because we have these huge emerging middle
classes of the biggest populated nations on Earth, and they are
buying cars and they are buying planes and they are joining the
industrialized world. And it is a resource that, at least in
our country, we do not believe in tapping anymore.
Mr. Banmiller. I think what happened in 1978 with
deregulation, there was something called the Public Utilities
Commission. We had it in California. I think perhaps the
company, if they had, should have been more vociferous in
saying we do not have roads. We do not have rail. And when you
are in the continental United States, you view transportation
differently.
When I went to Hawaii, I had a different view of
transportation than I do now because the only way to get to
each one of those islands really is to fly. The ferry does not
really work comfortably and it does not promote commerce.
Having the ability perhaps for Hawaii not to have jumped into
deregulation in the way that it did, that probably should have
been visited a bit differently.
Senator Smith. Is Go Airlines making money?
Mr. Banmiller. No, sir.
Senator Smith. Have you got a case? It sounds to me like
you have a case in terms of predatory pricing, I mean, if you
are giving a seat away for 9 bucks and fuel costs being what
they are. Are they filling their seats?
Mr. Banmiller. On advice of counsel, I am going to give you
a modified remark. A 50-seat airplane does not work in the
islands because of the high cycles. We fly 20-30 minute trips.
That is not the airplane that works. So in addition to that, we
estimated--and they have now admitted to losses, $20 million-
$25 million a year. That is on four airplanes.
Senator Smith. Have they added seats, flights since you
have left the market?
Mr. Banmiller. They have added some flights. Yes.
Senator Smith. Have their prices gone up?
Mr. Banmiller. They still have $49 fares, although I
believe their inventory of $49 is probably going down. And I
suspect within the next 6 months, the fares in the State of
Hawaii, the average fares, are going to be up substantially.
Senator Smith. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Can I ask a few questions, Mr. Fukunaga? Listening to your
comments, am I correct to assume that Governor Lingle will
support and sign into law the airline loan guaranty program and
the tax exemption for jet fuel?
Mr. Fukunaga. On the tax exemption, she would. We supported
that piece of legislation. We recognize the application to our
inter-island operators is certainly advantageous.
On the loan guaranty, we asked the legislature to make some
adjustments so that such a bill could be made viable. In other
words, there is no funding that was provided for it. Certainly
it is not in our administrative budget. And so they would have
to provide that for us so that we can have a mechanism that
would be capable of supporting loans. Again, your comments
earlier about lenders recognizing the plight of our carriers to
make those loans available certainly would be the other half of
the dimension there. But she certainly is supportive.
The Chairman. In your testimony, you spoke of EAS
communities having reduced service and receiving a lot of
complaints. Have you transmitted these complaints to DOT?
Mr. Fukunaga. We are not allowed to do that, but we did
mention to Representative Hirono and had her put her staff in
contact with the source of the complaints so that they could
work that directly because it is an issue that is outside of
our jurisdiction.
The Chairman. Did you say that the Governor cannot
communicate with DOT?
Mr. Fukunaga. On the issue of asking them to get involved.
That is my understanding, and that is the reason why we took
this other alternative approach.
The Chairman. You mean the law prohibits our Governor from
communicating with DOT?
Mr. Fukunaga. I believe that we cannot get involved in the
EAS process. It is not one that the State is involved in. And
so we have to just put the parties together to make sure they
understand the impact of the situation that we are
experiencing.
Essentially the request was to allow the USDOT to reopen
the bidding opportunity even though there is service being
provided, and I think because that service is being provided,
the requirement is being met in terms of having service. The
question is not so much the service but the quality of the
service and the type of service. I think that is the thing that
is creating some difficulty.
Hana is one example. Kalaupapa is maybe even more
difficult. Obviously, the patients and the residents who are
there depend on a lot greater reliability and reasonable cost
in terms of being serviced. So we would certainly like to see
that issue be addressed.
The Chairman. Secretary Reynolds, is the Governor of the
State of Hawaii prohibited from communicating with you on
matters of EAS complaints?
Mr. Reynolds. I am not familiar with any restriction from
our end. We routinely seek the views of local officials,
including State officials in many cases, whenever we are
involved in a particular Essential Air Service case.
We are aware of some of the issues at Hana. Congresswoman
Hirono has brought those to our attention. And we have been
working a little bit with the carrier there. Of course, as Mr.
Fukunaga indicated, the carrier is providing subsidy-free
service at this time, but we are working with the carrier on
some of the issues associated with some of the complaints that
we have heard.
But to your point, I am not familiar with any restrictions
on contacting us. I do not believe there are any such
restrictions, at least on our end.
The Chairman. Mr. Secretary, does your Department monitor
predatory practices in the aviation business?
Mr. Reynolds. We do not actively monitor predatory pricing
in the airline industry. In the past, airlines have come to us
and brought us what they feel--allegations of predatory pricing
in the past. But we do not actively monitor fares at this
point.
The Chairman. Now, when they do submit a complaint, what do
you do about it?
Mr. Reynolds. It depends on the particular type of
complaint. Usually an air carrier will provide its allegations
and then provide evidence and other information to support it.
Depending on what is happening, we will look into it and we
will speak with the other carriers involved if there is an
actual investigation going on.
I will note that, of course, when it comes to predatory
pricing, we share jurisdiction over anticompetitive behavior
with the Justice Department. And when it comes to taking formal
actions, the Justice Department has tended to be the point
agency in these cases.
The Chairman. Mr. Banmiller, did you share your concerns
about predatory pricing with the DOT?
Mr. Banmiller. Yes, I did, Chairman. I met with both
Secretaries of Transportation on this issue over the past two
and a half years, and I met with lawyers from the Department of
Justice.
The Chairman. What was the reaction or response?
Mr. Banmiller. We will look into it, and that is all I
heard. We followed up on several occasions through various
legislators, and the comment back continued to be, including
people from the DOT, well, predatory pricing is very hard to
define and our interests are for the consumer and low fares. So
I did not get very far.
The Chairman. Mr. Secretary, I do not know if you can
respond to this, but did you consider the report submitted by
Aloha Airlines worthy of your consideration?
Mr. Reynolds. We were familiar with the allegations, as Mr.
Banmiller indicated. He met with officials on several
occasions. Further information or evidence I am not aware was
ever provided to the Department. I was not in the conversations
that he had, so I cannot speak to what went on exactly.
In this particular case, there is litigation going on,
obviously, of the nature of the claim that Aloha is pursuing on
their own. So I do not want to get into too many details.
On its face, this is an issue that is very different from
any other predatory pricing claim that we have ever seen before
because in other cases, wherever there were investigations, it
was a new entrant coming in and then complaining about an
incumbent carrier lowering prices and dumping capacity and
trying to drive the new carrier out, where in this case, it is
the incumbent that has the issue. And routinely when air
carriers go into new markets, they offer discounted fares in
order to attract business. So at least initially, it did not
have a look of the traditional cases that we have seen in the
past.
The Chairman. Because one of the reasons for bankruptcy, as
cited by Mr. Banmiller, was predatory pricing, it is a serious
matter. Mr. Secretary, can your Department provide this
Committee with a report on the complaint submitted by Mr.
Banmiller and your response to it?
Mr. Reynolds. Yes, I can, Senator.
The Chairman. I thank you very much.
In the years I have been on this Committee, I have been led
to believe that most of the airlines on this globe are either
fully or partially owned by the host governments. The ownership
interest may be 5 percent or it may be 100 percent, as in Saudi
Arabia.
What is the situation with the United States? Does the
Government of the United States have any ownership interest in
any airlines other than the military?
Mr. Reynolds. I do not believe so except perhaps for
interests that the PBGC might actually have in a few carriers.
I know they have had interests in the assets of various
carriers. But the Federal Government, other than when there
were the loan guarantees following September 11, there were
some warrants and other interests held in U.S. carriers which
eventually were redeemed after the loans were repaid. So I am
not aware of any active investment or interest on behalf of the
Federal Government unless there is residual interest in
something, for example, at the PBGC.
The Chairman. If that is the situation, is there a level
playing field between international airlines and U.S. airlines?
Mr. Reynolds. I think, for the most part, there are level
playing fields in the most active markets. We always have the
opportunity to go after foreign air carriers if we feel that
there are unfair competitive practices, and if there is
improper government involvement in a particular air carrier
that is affecting service, our carriers are not shy about
bringing those sorts of issues to our attention. And we will
usually go to the home governments of any of these carriers and
try to deal with these situations. I am not familiar with any
in the recent past having a major issue there, at least dealing
with areas where the U.S. carrier is competing with the foreign
carrier.
A lot of the heaviest competition is over the Atlantic.
Most of those carriers are privately held, for the most part,
and even the EC has been taking steps against state investment
and involvement in the carriers to reduce that as they compete
amongst themselves.
The Chairman. Would you consider that the load placed upon
the operations costs by the Government of the United States is
proportionately higher than what other governments place upon
their airlines?
Mr. Reynolds. I do not know offhand the comparative burdens
of different governments. I imagine it probably varies widely.
I do not know if Mr. May might even have any insight on that,
but offhand I do not know. We would have to look into that.
The Chairman. Mr. May, do you think we have got a level
playing field here?
Mr. May. No, sir, I do not.
I think we could even things out, but a lot of it is
competitive in its marketplace. One of the areas where the
European carriers have a distinct advantage, probably as much
as 30 percent right now, is on fuel because they are paying for
it in Euros. We are paying in dollars, and the dollar is
significantly devalued. So they have got a real advantage
there.
I think that we are happy to compete internationally and
will do well internationally in most areas. I acknowledge that
there are foreign government investments in some carriers
around the world, some very extensive. But we are happy to
compete trans-Atlantic, trans-Pacific here in the United
States.
I think there is a lower burden imposed by governments in
terms of taxes in many countries than there are here. I think
ours are probably as great as anywhere you will find on the
globe in terms of what carriers are paying.
The Chairman. I thank you very much.
What role does the Department have in enforcement when you
come across predatory pricing?
Mr. Reynolds. As I mentioned earlier, we will take
complaints frequently--or not frequently. In the past, we have
had complaints from carriers, and we have looked into the
matter, as I mentioned. We will take the information, evidence
that is provided by the carrier that feels it has been affected
by the behavior. We will then frequently talk to the carrier
that is accused of predation. And frequently our involvement
has had an effect in the past.
Again, we have not actually had a formal predation claim in
the last decade, and even informally on predation, the
allegations of Aloha are the only ones we have had in the last
10 years. So it is not really a common occurrence at this time.
I cannot speak to who may have complained to Justice about
behavior, but just in terms of what we do.
Again, we share enforcement responsibilities with the
Department of Justice, and we will work with them as they move
forward on cases. In fact, they have only brought one action,
and that was about 10 years ago. Maybe it was begun a little
bit more than that against an airline. The Justice Department--
a lot of people thought they had a very strong case--was not
able to prevail in court against the carrier in the one case in
the last decade and a half on predation.
The Chairman. I realize that you have not been made fully
aware of the Aloha Airlines situation, but from what you have
heard at this hearing, would you consider the allegations
worthy of study or investigation? Predatory pricing, that is.
Mr. Reynolds. Well, we can look into it further. Again, I
do not have all the information, and since there is a pending
lawsuit, I too do not want to speculate on evidence that is
not, frankly, before me or the Department at this point. So,
again, I just would resist opining on something I do not really
have full information on.
Again, we will provide a response to you about the
allegations that were brought to us by Aloha and can talk
further on that.
The Chairman. Mr. Willis, do you agree with Mr. Banmiller
that there was predatory pricing in Hawaii?
Mr. Willis. There is absolutely no question. I can give you
or your staff numerous examples of it. I mean, we lost almost
half of our traffic through what Mesa and Go had done. What
they did is they diluted and diverted our traffic. In fact,
their percentage of the marketplace actually came mostly from
our traffic. It was a combination of our traffic and Hawaiian
and Aloha's.
One thing I just wanted to mention, if I may. Senator Smith
had mentioned his concern about re-regulation. One thing that
might be worthy of your consideration to provide some sort of a
level playing field in the stabilization in the marketplace
would be something similar to what Aloha and Hawaiian did post-
9/11, which was the inter-island cooperation agreement. Right
now, we need stabilization in those markets. Otherwise, you are
just going to see a monopoly condition present itself. That is
number one.
The second thing is what you had mentioned to Mr. Fukunaga
about SB-509 because I got the impression that they may not be
able to support that bill. Right now, lending to airlines is
closed. That is why that bill is very, very important for the
existing carriers in Hawaii to have access to the capital
markets.
I apologize for getting off subject, but it is kind of
important to address that.
The Chairman. And 30 years ago, when this committee
considered airline deregulation, after long and lengthy
hearings and debates, we took a vote. It was almost unanimous.
One vote against. I was the one against. When the vote was
announced, you can imagine the controversy. You know, I felt
like an outsider all by myself.
But my concern was that the change was too sudden in
deregulation of scheduling and costs, and I suggested to some
of my friends in other states that if this ever goes through,
you may be losing business in your state. I recall a little
city called Charlestown in West Virginia that at one time was
receiving nine flights a day, and suddenly almost overnight,
they got none.
I cannot tell you whether I did right or wrong, but I think
something has to be done, not to re-regulate but maybe we
should revisit that.
Mr. May, you were speaking of a couple of things that we
can do. Can you just reemphasize it again?
Mr. May. Yes, sir, Mr. Chairman. I think the idea of
filling the Strategic Petroleum Reserve at today's prices
borders on criminal infringement of the rules of economics.
The Chairman. Has your organization formally indicated your
concern to the Government of the United States?
Mr. May. We have not recently done that. I did it during
the last dust-up over fuel prices, and we asked for both the
release and to stop filling at current prices then, which were
probably about 70 bucks a barrel. And we were rejected.
Within the last 3 weeks to 4 weeks, I sent a letter to
Secretary Bodman asking for a release from the Northeast Home
Heating Oil Reserve, and I have not received a response from
him on that.
But we got together with our energy committee within the
last few days, kicked around a series of ideas, some of which
are not quite ready for prime time, but I would be happy to
provide them to the Committee. One of the ideas that we came up
with is our concern that there is a premium involved in the
price of a barrel of oil today as a result of speculation.
There are a lot of exchanges operating out there, ISE down in
Atlanta and elsewhere. A lot of people making a whole lot of
money on the price of oil right now. If the U.S. Government
would exercise a whip hand and release from the SPR, increasing
supply, arguably driving prices, they would not be able to act
with such impunity thinking that nobody is going to have any
impact on pricing.
So we think a 10 million barrel release would have a
dramatic effect and would send a signal. We would not want it
announced in advance. We would like it just to happen. Every
now and again, if you release some of that oil, that will keep
everybody on their toes, and I think we would have a more
meaningful marketplace reflection on price. So those are two
ideas.
The third idea is a balanced funding formula and FAA
reauthorization, not a new subject to this Committee.
And the final idea was to try and encourage that we get the
next generation air traffic control systems in place as quickly
as we can. 2025 is not going to do it. We have adopted the
phrase suggested by others. The ``now generation'' as opposed
to next generation is what we need because the more efficiently
we can fly point-to-point, the more efficiently we can route
our aircraft into crowded airports and out of crowded airspace,
the less fuel we are going to be able to burn and the more
efficiently we can conduct our operations.
So those were the four things that I recommended to the
Committee.
The Chairman. From what I gather, you consider these
matters to be urgent and should be acted upon right away.
Mr. May. Mr. Chairman, I think without question. We have
had five carriers, including Aloha, go bankrupt since
Christmas. I think there are others that are very much on the
edge. There is no sign whatsoever that fuel prices are coming
down anytime soon. Most of the business plans for our carriers
were built on a projection of probably $85 oil, maybe $90 oil
in some instances, and when you look at the impact of the crack
spread on top of the price of a barrel, 135 bucks on average is
what we are paying right now. And that is just unsustainable.
The Chairman. Thank you.
Mr. Snowbarger, your agency is an important one for
employees. You speak of pension guarantees. In making plans for
the future, do you anticipate more bankruptcies, layoffs, and
pension guarantee problems? Is there going to be an increase or
decrease?
Mr. Snowbarger. There will be an increase in bankruptcies.
We have seen a number in industry, for instance, that have gone
through bankruptcy once that may very well come back like Aloha
for a second bankruptcy, and maybe they were able to keep their
pension plans the first time through, maybe not the second time
through. I think with the credit markets the way they are, with
the economy the way it is at this point, I think we are going
to see an increase over the next few years.
We are sort of a lagging indicator of the economy. We
normally have an up-tick in the number of plans that we take on
maybe 2 or 3 years after the worst of the economic cycle. So
that may not hit us this year or next year, but maybe late next
year, a couple years down the road.
And it also depends on sort of the cycles within each
industry. Again, we probably will not take over many more steel
plans because there are not many more steel plans left. We have
taken over a considerable number of the pension plans in the
airline industry, although there are still more out there that
do cause us some concern.
I think that is the reason Congress provided for extended
payment of their contributions in the Pension Protection Act
that was passed in 2006. But I think anytime you see a troubled
industry, it is very possible that we will be taking over
plans.
The Chairman. When you speak of increases in bankruptcies,
does that apply to the airline industry also?
Mr. Snowbarger. Well, I think it is difficult for me to
predict exactly what is going to happen in the industry. I
think these gentlemen have given you pretty dire forecasts
about what they are facing. I am not an expert on what they are
facing, but fuel costs alone--I understand that. I am paying
more at the pump, and I can imagine if that is 45 percent of
their costs and the prices are not going down, that it will be
difficult. I cannot tell you how they might react to that. It
is possible that through combinations of airlines or something
of that nature, there are economies that would allow them to
continue in business. Like I say, I do not know that I am
expert enough to predict what might happen.
But there are airline companies out there that have sizable
pension plans. The pension plans that we have taken over in the
last few years, particularly from United, to a lesser extent
Delta Airlines in their pilots' plan, are some of the largest
claims that have ever come to the agency.
The Chairman. Thank you, sir.
Mr. Secretary, do you agree that this matter of
deregulation should be revisited?
Mr. Reynolds. I think the Administration supports the
current deregulated environment. We know that there have been
communities have have fared better than others under
deregulation in the airline industry, but as Mr. Banmiller
said, I do not think you could put the toothpaste back in the
tube even if you wanted to. And I do not know that the
Administration would support any form of economic re-regulation
of the industry at this point.
The Chairman. This has been a long day, gentlemen, and I
thank you for your patience. But as you can imagine, this is a
very important matter for the people of Hawaii. And I thank you
for your presence here and your testimony. It has been very
helpful.
If you do have amendments that you would like to submit,
changes in your testimony, or if you have any added words you
would like to place in the record, please feel free to do so.
The record will be kept open for 3 weeks.
So thank you very much. The hearing is adjourned.
[Whereupon, at 5:34 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
I am pleased to join my good friend from Hawaii at this hearing
today to look at the aviation challenges his state faces. Our states
are very similar since they are so heavily dependent on aviation.
When Aloha went out of business, it was not like Independence Air
going out of business. In our states, airlines are the backbone of our
economies. The effect on Hawaii of Aloha going out of business is a lot
more like the Metro system shutting down in Washington D.C., than it is
of just an airline going bust.
Aloha provided 80,000 seats of service a week. That's 80,000 people
who now can't go to their doctors, visit their family, get to their
jobs, or conduct business. There really is no other practical or
economical way of moving between the islands other than through the
air.
In addition to Aloha shutting down, ATA airlines ceased operations.
ATA carried 15 percent of visitors to Hawaii. Without ATA in the
market, it is likely that there will be fewer visitors and prices will
rise. This will no doubt have a serious impact on Hawaii's economy
which is so dependent on tourism.
The Committee is very interested to hear more about this situation
and what we can do to prevent it from happening in the future. As we
all know, the airline industry is facing some really tough financial
times because of the price of oil. We have already seen five airlines--
Aloha, MAXjet, Skybus, ATA and Champion shut down.
We need to figure out how best to help Hawaii and how to ensure
that we don't have even more bankruptcies. We are especially interested
to hear from the U.S. Department of Transportation witness about what
the Department can do in this area.
Finally, I think we need to carefully watch how high fuel costs
will affect other transportation sectors such as the trucking and
railroad industries--and even the fishing industry which is an intense
user of fuel.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Michael W. Reynolds
Question 1. Does the DOT monitor the U.S. aviation market for
potential cases of predatory pricing?
Question 2. Can you tell me how many examples of predatory pricing
have been uncovered over the past decade?
Question 3. What role does the DOT have in the enforcement of such
predatory pricing cases?
Question 4. Can you provide us any insight into the
Administration's views on the allegations of predatory pricing in the
Hawaii market?
Question 5. Do the Hawaii communities who are eligible for the EAS
program, but do not receive EAS funding, have air service comparable to
what they would receive under the EAS program in terms of the number of
flights per day and destinations?
Question 6. If the air service now provided to Kalaupapa is not
comparable to the service provided under the EAS program, is it
possible for the community to return to the EAS program? If it is not,
why not?
Question 7. What steps can Kalaupapa take to be placed in the EAS
program?
Answer 1-4. During my recent testimony before the Senate Committee
on Commerce, Science, and Transportation on the subject of Hawaiian air
service, you requested that I provide a report on the Department of
Transportation's handling of allegations that go!, which is operated by
Mesa Airlines (Mesa), might be engaging in predatory pricing.
While the Department was aware that go! had entered the inter-
island markets with very low fares, this strategy on the part of a new
entrant carrier seeking to develop an initial market presence is not
uncommon. Aloha's President and Chief Executive Officer, David A.
Banmiller, had also expressed concerns to Department officials that
go!'s pricing policies were largely meant to drive established carriers
like Aloha from the inter-island markets. However, the Department was
never presented with a factual basis to support allegations that go!'s
activities constituted predatory conduct. Also, neither Aloha nor any
other carrier has filed a formal enforcement complaint seeking an
investigation. As was discussed at the hearing, both Aloha and Hawaiian
Airlines have chosen to undertake private rights of action in the
courts alleging misuse by go! of proprietary information, as well as,
in the case of Aloha Airlines, engaging in predatory pricing. We
understand that Hawaiian recently settled its case against Mesa for
$52.5 million.
Normally the Department of Justice's (DOJ's) Antitrust Division
takes the lead role in prosecuting cases of alleged predation in the
airline industry, and when the Department of Transportation is
presented with evidence that a carrier's pricing policies might
constitute predatory behavior, we share that information with the
Antitrust Division. However, as I am sure you are aware, predation
claims have proven particularly difficult to sustain in the courts in
recent years. Moreover, virtually all predation concerns that carriers
brought to the Department in the past concerned the impact of large
incumbent airlines' pricing on new entrants. A successful challenge by
the Federal Government against the pricing activity of a new entrant
such as go!, based on its potential harm to a long-established
incumbent in the Hawaiian inter-island markets, would clearly require
extensive supporting documentary evidence that in large measure the
carriers alleging the competitive harm would have to provide.
It is important to keep the allegations in this case in the proper
context. As I testified, the Department has not received any formal
complaints of predatory pricing over the past decade. We did, however,
receive several informal complaints about predatory conduct in the mid-
1990s. In each instance, a new entrant carrier contacted DOT and
provided substantial evidence in support of its allegations.
The characteristics of the Aloha-go! situation, as far as we have
been made aware, are unique. First, it was the incumbent carrier,
Aloha, which operated larger aircraft and more capacity in the market,
alleging that a new entrant engaged in predatory pricing. Second, Aloha
has alleged that Mesa obtained confidential, competitively sensitive
information as a prospective investor and subsequently used this
information in launching go!.
Furthermore, DOJ has had difficulty in proving predatory pricing
under the antitrust laws. Low prices, which new entrants typically
offer when they enter a market, are not in and of themselves evidence
of predatory behavior. Several years ago, DOJ brought suit against
American Airlines for alleged predatory pricing and lost. The unique
characteristics of the situation in Hawaii suggest that an important,
and possibly differentiating, component is whether confidentially
obtained proprietary information was used illegally or improperly to
launch go!'s inter-island operations. Adjudicating such allegations is
better left to private actions brought by the parties that believe they
have been harmed.
DOT's statutory policies encourage us to oversee the airline
industry in such a way as to encourage competition and low fares.
Airline deregulation proves that new business models, especially low-
cost carriers, are critical to ensuring that the benefits of
deregulation are passed through to consumers in all sectors of the
economy dependent on efficient air transportation. The usual challenge
for government is to exercise economic oversight of the industry to
promote vigorous competition. Therefore, in the past, our focus has
been on structural economic issues that were largely unanticipated at
the time of deregulation.
Nonetheless, based upon the testimony that was provided to the
Aviation Subcommittee, we will ensure that our colleagues in the
Antitrust Division are aware of the concerns that have been expressed
by Mr. Banmiller and others with go!'s inter-island market pricing
policies.
I can assure you that we are keenly aware of the unique role that
air transportation plays in the State of Hawaii and that the status of
air transportation both to and within Hawaii continues to be an
important issue to the Department of Transportation, particularly in
light of the recent cessation of passenger service by Aloha Airlines.
The Department will continue to monitor air services in Hawaii, and
will maintain its efforts to promote and sustain competition in Hawaii
and throughout the United States.
If I can provide further information or assistance, please feel
free to call me.