oversight

Aviation Assistance: Information on Payments Made Under the Disaster Relief and Insurance Reimbursement Programs

Published by the Government Accountability Office on 2003-09-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548



          September 17, 2003

          Congressional Requesters

          Subject: Aviation Assistance: Information on Payments Made Under the Disaster
          Relief and Insurance Reimbursement Programs

          As a result of the September 11, 2001, terrorist attacks on the United States, the
          airline industry incurred significant losses resulting from the temporary shutdown of
          the nation’s airspace and passengers’ apprehensions about flying following the
          attacks. The Air Transportation Safety and System Stabilization Act1 (the Act)
          provided, among other things, $5 billion in emergency assistance to compensate air
          carriers for their direct and incremental losses stemming from the attacks. The Act
          also authorized the Department of Transportation (DOT) to reimburse air carriers for
          increases in their insurance premiums.

          On September 28, 2001, we completed and briefed you on the first phase of the work
          you requested, concluding that there was a reasonable basis to assume that the
          airlines’ financial losses related to September 11 would exceed the $5 billion made
          available in the Act.2 Since then and pursuant to the second part of your request, we
          monitored DOT’s progress in administering the disaster relief and insurance
          reimbursement programs and provided periodic status updates to your offices.

          On September 3, 2003, we provided our final briefing addressing the second aspect of
          your request. Specifically, for the $5 billion disaster relief program, we discussed the
          process DOT employed to help ensure that the payments it made were only for the
          direct and incremental losses stemming from the terrorist attacks. We also provided
          information about the losses claimed by the major air carriers and payments made by
          DOT to these carriers and others that applied for assistance. For the insurance
          reimbursement program, which was administered by the Federal Aviation
          Administration (FAA), we discussed the process FAA used to determine and
          reimburse air carriers for insurance premium increases resulting from the September
          11, 2001, disaster. We also provided information on the total payments made under
          the program. Finally, we discussed FAA’s expanded in-house aviation insurance
          program and the potential impact to the federal government. The briefing slides,
          which provide more detail on our analysis, are enclosed.


          1
           Pub. L. No. 107-42, 115 Stat. 230 (2001). 

          2
           The briefing slides and a summary of our analysis were included in our October 5, 2001, 

          correspondence to you. See GAO-02-133R Financial Management: Assessment of the Airline 

          Industry’s Estimated Losses Arising From the Events of September 11.



                                                        GAO-03-1156R Aviation Assistance Programs
Results in Brief

DOT designed and implemented a structured claim review process to help ensure
that the $5 billion in disaster relief funds were used only to compensate carriers for
their September 11 related losses. A team of DOT accountants, economists, and
aviation analysts with support from the department’s Offices of the General Counsel
and the Inspector General administered the disaster relief program, reviewed
carriers’ loss claims, and determined carriers’ allowable September 11 related losses.
As specified in the Act, each carrier was compensated the lesser of allowable actual
losses or the market share formula amount.3 The major air carriers claimed losses of
$5.6 billion related to the terrorist attacks. These carriers have been paid $4.1 billion
or 88 percent of the total $4.6 billion distributed. As of August 26, 2003, DOT
reported that most air carriers had received their final payments pursuant to this
program, although a small number of claims remained open due to unresolved issues.
All the major carriers except Federal Express have received their final payment.
Federal Express has an administrative appeal and a lawsuit pending with regard to its
payment.

Overall, the major carriers recovered approximately 73 percent of their claimed
losses, although 8 of the 14 major carriers had all their September 11 losses
compensated. The remaining 6 carriers’ losses were only partially compensated
because their allowable September 11 losses exceeded the amount determined by
applying the market share formulae prescribed in the Act. Industry wide, 355 of the
total 448 applicants receiving assistance were paid based on the formula. Because 93
carriers had actual losses less than their formula amount, DOT will not distribute the
entire $5 billion provided in the Act. DOT advised the Congress of this fact and in
February 2003 the Congress rescinded $90 million.4 DOT officials plan to return any
remaining unused funds to the Treasury upon the completion of the program.

With regard to the insurance reimbursement program, the FAA implemented a
systematic review process to determine the increases carriers experienced in their
war risk insurance premiums following the terrorist attacks and to reimburse the
carriers accordingly.5 FAA utilized insurance providers’ invoices to substantiate the
premiums being charged immediately before September 11 and to evidence premium
                                   6
increases following September 11. For each of the major air carriers, we verified
FAA’s reimbursement determinations by independently recalculating these amounts.
In total, 183 carriers were reimbursed $68 million for their increased insurance costs.
The major carriers received $58 million, or 85 percent, of this total.

Soon after the terrorist attacks, insurance providers generally cancelled carriers’ war
risk insurance coverage but then offered to reinstate the policies at a substantially

3
  The formula amount is calculated by dividing the carrier’s available seat miles (ASMs) or revenue ton 

miles (RTMs) by the universe of ASMs/RTMs (a reflection of market share) multiplied by available 

compensation. 

4
  Public Law 108-7, sec 333, 117 Stat. 414 (2003) 

5
  War risk insurance provides coverage to carriers for losses resulting from war, terrorism, or other 

hostile acts. These policies typically provide coverage for the aircraft and liability. 

6
  The Act specified insurance increases were to be measured against the rates in effect during the 

period September 4-10, 2001. 



Page 2                                           GAO-03-1156R Aviation Assistance Programs
higher cost and with reduced coverage limits. For the major carriers combined, the
total annual cost for war risk coverage jumped from approximately $12 million prior
to the attacks to more than $700 million immediately afterwards. This led to the
Secretary of Transportation’s determination that war risk insurance was not available
commercially on reasonable terms and conditions and thus FAA was authorized to
begin temporarily selling war risk coverage to air carriers operating domestic flights.
Under current legislation, FAA may continue to provide war risk coverage through
August 2004 with a possible extension through December 2004. In its 2003
Accountability Report, FAA reported that it had extended $113 billion in coverage to
71 carriers, thereby increasing the federal government’s risk exposure. Meanwhile,
air carriers have begun to explore other options including a risk retention group to
provide more affordable coverage in anticipation of FAA’s offering of war risk
insurance terminating in 2004.

Scope and Methodology

Our review primarily focused on the major air carriers. DOT defines a major carrier
as an air carrier whose annual operating revenue exceeds $1 billion. To achieve our
objectives we performed various procedures, which are described in detail in
Appendix I of the enclosed slides. We did not audit the major air carriers or the
underlying records supporting the claims for disaster relief payments. Also, we did
not assess the reasonableness of the pre- or post- September 11 premiums charged to
carriers for war risk insurance coverage. We conducted our review from September
2001 through August 2003 in accordance with generally accepted government
auditing standards.

Agency Comments

We requested comments on a draft of these briefing slides from the Secretary of
Transportation or his designee. On August 26, 2003, DOT provided us with oral
comments expressing the department’s general agreement with the facts presented.
DOT provided some technical comments, which we incorporated as appropriate.


As agreed with your offices, unless you publicly announce the contents of this report
earlier, we plan no further distribution until 30 days from its date. At that time, we
will send copies to the Secretary of Transportation, the Administrator, Federal
Aviation Administration, and interested congressional committees. We will also
provide copies to others on request. The report will also be available at no charge on
the GAO Web site at http://www.gao.gov.




Page 3                                   GAO-03-1156R Aviation Assistance Programs
If you have any questions about this report, please contact me at (202) 512-9508, or
Phillip McIntyre, Assistant Director, at (202) 512-4373. You may also reach us by e-
mail at calboml@gao.gov or mcintyrep@gao.gov. Other key contributors to this
assignment were Jeffrey Jacobson, Ruth Walk, and Doris Yanger.




Linda Calbom
Director, Financial Management
  and Assurance

Enclosure




Page 4                                   GAO-03-1156R Aviation Assistance Programs
List of Requesters

The Honorable Robert C. Byrd 

Ranking Minority Member 

Committee on Appropriations 

United States Senate 


The Honorable Ernest F. Hollings 

Ranking Minority Member 

Committee on Commerce, Science and Transportation 

United States Senate 


The Honorable John D. Rockefeller IV 

Ranking Minority Member 

Subcommittee on Aviation 

Committee on Commerce, Science and Transportation 

United States Senate 


The Honorable Ron Wyden 

United States Senate 


The Honorable Lloyd Doggett 

House of Representatives 





Page 5                               GAO-03-1156R Aviation Assistance Programs
      Enclosure




Air Transportation Safety and System
Stabilization Act: Aviation Assistance Programs

           Information on Payments Made Under

the Disaster Relief and Insurance Reimbursement Programs


               Briefing for Congressional Requesters

                         September 3, 2003





                                                                           1




      Page 6                        GAO-03-1156R Aviation Assistance Programs
      Enclosure


                                                             Contents



• Introduction
• Objectives
• Results in Brief
• Background
• Scope and Methodology
• Disaster Relief – DOT Claim Review Process
• Disaster Relief – Payments
• Insurance Reimbursement – FAA’s Claim Review Process
•	Insurance Reimbursement – Premium Increases and
  Payments
• FAA’s Aviation Insurance Program
• Appendix I – Detailed Scope and Methodology

                                                                      2




      Page 7                   GAO-03-1156R Aviation Assistance Programs
          Enclosure


                                                                       Introduction



•	   In the aftermath of the September 11 terrorist attacks, air passenger
     traffic sharply declined. This, coupled with the already slumping
     economy and reduced business travel, led aviation industry officials to
     predict significant financial losses for calendar year 2001.

•	   On September 22, 2001, the President signed into law the Air
     Transportation Safety and System Stabilization Act (act) which
     provided, among other things,

     1. $5 billion in disaster relief funds, and
     2.	 authority to reimburse air carriers for increases in their insurance
         premiums.




                                                                                   3




          Page 8                            GAO-03-1156R Aviation Assistance Programs
               Enclosure


                                                                                                         Introduction



•	 At your request in September 2001, we performed a preliminary,
   high-level assessment of the airlines’ projected losses between
   September 11 and December 31, 2001, and reported that as an
   industry, there was a reasonable basis to assume that those
   losses related to the attack would likely exceed the $5 billion
   made available under the act.1

•	 We have been monitoring the Department of Transportation’s
   (DOT) administration of the $5 billion disaster relief program and
   the disbursement of the insurance reimbursements.

•	 Now that DOT has substantially completed its claim evaluation
   and payment processes under the disaster relief program and
   finished making payments under the insurance reimbursement
   program, we are providing information about DOT’s process and
   payments made.


1 SeeU.S. General Accounting Office, Financial Management: Assessment of the Airline Industry's Estimated Losses Arising 4
From the Events of September 11, GAO-02-133R (Washington, DC: October 5, 2001).




               Page 9                                             GAO-03-1156R Aviation Assistance Programs
         Enclosure


                                                                      Objectives



•    Specifically, for the disaster relief program, we are discussing:
     1.	 the process DOT used to help ensure that the payments it made
         were only for the direct and incremental losses stemming from the
         September 11 terrorist attacks, and
     2.	 the major airlines’ reported September 11 related losses and the
         compensation payments they received for those losses.

•    For the insurance reimbursement program, we are discussing:
     1.	 the process employed by the Federal Aviation Administration
         (FAA) to determine how much of any insurance premium increases
         occurred as a result of September 11 and that the reimbursement
         payments made properly reflected those increases, and
     2.	 the amount of reimbursements made for increases in insurance
         premiums.

•	   We are also providing overall summary payment information for both
     the disaster relief and insurance reimbursement programs.


                                                                                5




         Page 10                         GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                                Objectives



•	 In addition, we are providing information about the current
   state of aviation insurance and the potential impact to the
   federal government.
•	 We provided DOT our views on its administration of the
   payment processes as they occurred and are not making
   any recommendations as the programs are substantially
   completed.




                                                                          6




       Page 11                     GAO-03-1156R Aviation Assistance Programs
              Enclosure


                                                                                                       Results in Brief


Disaster Relief Program
•	 The disaster relief program was administered by a team of DOT
   accountants, economists, and aviation analysts with support from the
   offices of the General Counsel and the Inspector General. DOT
   designed and implemented a structured claim review process to help
   ensure that only September 11 losses were compensated.
•	 The process was documented in publicly available program rules that
   provided guidance to the air carriers applying for assistance.
•	 DOT determined an air carrier’s allowable actual losses by analyzing its
   applications and supporting documentation and, where necessary,
   consulting with the air carrier. Certain losses, such as impairment
   losses, were generally disallowed.
•	 After applications were reviewed, carriers received the lesser of
   allowable actual losses related to the terrorist attacks or the market
   share formula amount2 as specified in the act.
•	 On average, it took over 3 1/2 months longer to determine the
   compensation amounts for carriers that were paid on the basis of
   allowable actual losses.
2The formula amount is calculated by dividing the carrier’s available seat miles (ASMs) or revenue ton miles (RTMs) by the   7
universe of ASMs/RTMs (a reflection of market share) multiplied by available compensation.




              Page 12                                               GAO-03-1156R Aviation Assistance Programs
        Enclosure


                                                                 Results in Brief


Disaster Relief Program
•	 Final payments for most carriers were issued by December 31, 2002.
   As of August 26, 2003, a small number of cases remained open due
   to unresolved issues.
•	 The 14 major air carriers claimed $5.6 billion in losses related to
   September 11. As of July 22, 2003, $4.1 billion in disaster relief
   funds had been distributed to the major air carriers.
•	 $363 million of the disaster relief funds were not distributed because
   93 carriers had actual allowable losses that were less than the
   formula amount. Of these funds, $90 million was rescinded by
   P.L. 108-7 and at the conclusion of the program DOT plans to return
   any unused funds to the Department of the Treasury.
•	 Determining actual losses added complexity and lengthened the
   payment process. Ultimately, many carriers were compensated less
   than their September 11 losses while some carriers recovered all of
   their September 11 losses.


                                                                                8




        Page 13                          GAO-03-1156R Aviation Assistance Programs
                  Enclosure


                                                                                                             Results in Brief


Insurance Reimbursement Program
•	 The FAA implemented a systematic review process including the review
   of invoices from the air carriers’ insurance providers to (1) determine
   rates in effect during September 4-10, 2001, and (2) evidence actual
   increases.
•	 FAA reimbursed carriers for 30 days of increased premiums using funds
   from the Aviation Insurance Revolving Fund.
                                                      3
•	 Estimated annual war risk insurance premiums for the 14 major air
   carriers increased from approximately $12 million to approximately $719
   million. Due to this increase, carriers are considering forming a risk
   retention group to obtain more affordable coverage.
• FAA reimbursed 183 carriers $68 million.
•	 In response to the lack of availability of third-party liability insurance,
   FAA expanded its in-house aviation insurance program from a standby
   basis to as much as $113 billion in coverage which increased the
   government’s risk exposure.
•	 The current balance in the Aviation Revolving Fund from which claims
   are paid may not be sufficient to pay a carrier’s claim in a timely manner.
3 This   estimate is calculated based on invoices air carriers received from commercial insurance carriers
                                                                                                                           9
immediately after September 11.




                  Page 14                                               GAO-03-1156R Aviation Assistance Programs
         Enclosure


                                                                    Background



•	 The act was intended to compensate air carriers for losses
   incurred as a result of the terrorist attacks. Title I created the
   Disaster Relief program and Title II authorized the Insurance
   Reimbursement program.

•	 Title I provided for the payment of $5 billion to air carriers for direct
   losses incurred as a result of the ground stop order issued on
   September 11th and incremental losses incurred by air carriers
   through December 31, 2001.
            • Title I allocated
               ¾	 $4.5 billion to passenger-only or combined passenger

                  and cargo carriers (passenger carriers) and
               ¾ $.5 billion to cargo-only carriers (cargo carriers).




                                                                               10




         Page 15                         GAO-03-1156R Aviation Assistance Programs
             Enclosure



                                                                                                         Background


          •	 Further, Title I directed that the maximum amount of
             compensation paid to each carrier may not exceed the lesser
             of
             ¾	 its allocated share of the passenger carrier or cargo carrier
                distributable amounts, $4.5 billion and $.5 billion,
                respectively (referred to in this briefing as the “formula
                amount”), or
             ¾	 the actual direct and incremental losses incurred by the
                carrier as a result of the September 11 terrorist attacks
                (referred to in this briefing as “allowable actual losses”4) as
                demonstrated to the satisfaction of the President.
          •	 The Aviation and Transportation Security Act (Public Law
             107-71) signed November 19, 2001, amended the act by
             providing that a portion of the $4.5 billion passenger carrier
             disaster relief funds could be set aside for smaller air carriers
             such as air ambulances and tour operators.
4Allowable actual losses were generally determined based on the difference between pre-September 11 forecasts
and actual financial results for the compensable period.                                                        11




             Page 16                                            GAO-03-1156R Aviation Assistance Programs
                  Enclosure


                                                                                                                                       Background



    •	 Title II of the act gave the Secretary of Transportation the
       authority5 to reimburse air carriers for the increase in the
       cost of insurance, with respect to a premium for coverage
       ending before October 1, 2002.
    •	 Cost increases were to be measured against the rates in
       effect September 4–10, 2001.
    •	 Following the attacks, war risk insurance6 was cancelled
       by air carrier insurers and reinstated with reduced
       coverage at higher prices.




5 TheSecretary delegated this authority to the FAA Administrator.
6War risk insurance provides coverage for flights to cover losses resulting from war, terrorism, or other hostile acts. Both hull and liability insurance
coverage are provided.                                                                                                                                      12




                  Page 17                                                            GAO-03-1156R Aviation Assistance Programs
                  Enclosure


                                                                                                                                Background



    •	 The higher premium included surcharges7 that were imposed for
       both:
         • hull war risk which covers loss of or damage to the aircraft, and
         •	 liability war risk which covers death or injury to passengers and
            third parties.
    •	 Prior to September 11, a separate premium was charged only for hull
       war risk and there were no surcharges.
    •	 The post-September 11 surcharges for hull and third-party liability
       war risk were:
         1. Hull war risk surcharge -- $.05 per $100 of the average fleet
            value.
         2. Liability war risk surcharge -- $1.25 per passenger per
            enplanement.

7Currently, insurance providers have incorporated the surcharges into the overall hull and comprehensive war risk premiums and are no longer   13
charging amounts separately.




                  Page 18                                                        GAO-03-1156R Aviation Assistance Programs
               Enclosure


                                                                                            Scope and Methodology



 • We focused our work on the major air carriers.
 •	 Major air carriers are air carriers whose annual operating revenue
    exceeds $1 billion.
 • The 14 major air carriers as of September 11, 2001, were:
                  ¾    Alaska Airlines8                           ¾   America West Airlines
                  ¾    American Airlines                          ¾   American Eagle Airlines
                  ¾    American Trans Air                         ¾   Continental Airlines
                  ¾    Delta Air Lines                            ¾   Federal Express9
                  ¾    Northwest Airlines8                        ¾   Southwest Airlines
                  ¾    Trans World Airlines10                     ¾   United Airlines
                  ¾    United Parcel Service9                     ¾   US Airways
 •	 See appendix I for additional discussion of our scope as well as the
    methodology used for this review.
8 Alaska Airlines and Northwest Airlines submitted separate applications for disaster relief compensation for their cargo

operations. The annual operating revenue for these cargo operations did not exceed $1 billion and therefore we only
reviewed the claims related to their passenger operations in our work.
9 Federal Express and United Parcel Service are cargo carriers.
10
   As of the quarter ended March 31, 2002, DOT no longer classifies TWA as a major air carrier.                             14




               Page 19                                                GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                        Disaster Relief
                                             DOT Claim Review Process


•	 The disaster relief program was administered by a team of
   DOT accountants, economists, and aviation analysts within
   the Office of the Secretary with support from the Office of
   the General Counsel and Office of the Inspector General.
•	 This review team designed and implemented a structured
   claim review process to help ensure that only September 11
   losses were compensated.
•	 A team of reviewers analyzed each of the major air carriers’
   final applications.
•	 The process was documented in publicly available program
   rules that provided instructions, forms, deadlines, and
   guidance to air carriers applying for assistance.


                                                                        15




       Page 20                    GAO-03-1156R Aviation Assistance Programs
                   Enclosure


                                                                                                Disaster Relief
                                                                                     DOT Claim Review Process

     • DOT structured the program into three payment rounds.
         •	 Because the amount of losses submitted by the air carriers in round
             1 were based upon early estimates, air carriers received 50 percent
             of estimated compensation amounts in this round.
         •	 In round 2 (where losses were based upon estimated and actual
             financial data), air carriers received additional compensation to
             equal a cumulative total of 85 percent.
         •	 In round 3, where losses were based upon actual financial data for
             the period September 11 through December 31, 2001, and were
             approved by DOT, most carriers received additional compensation
             to equal a cumulative total of 100 percent of allowable
             compensation.
         •	 As discussed later, final payments have not yet been made to
             several carriers, primarily those smaller carriers qualifying for the
             set-aside program.
     •	 DOT required agreed-upon procedures to be performed by independent
        public accountants on the information submitted in the round 3
        applications, which sought to verify that the amounts submitted by the
        air carriers either agreed with or were reconciled to the carriers’ financial
        systems and other supporting documentation.11
11   Small air carriers were required to submit simplified agreed-upon procedures.                            16




                   Page 21                                              GAO-03-1156R Aviation Assistance Programs
               Enclosure


                                                                                                Disaster Relief
                                                                                     DOT Claim Review Process


                    Figure 1: Losses Claimed by the Major Air Carriers under the
                    Disaster Relief Program

                                                                Losses claimed by the
                                                                  major air carriers
                                  Passenger carriers                  $5,343,782,846
                                  Cargo carriers                        $244,799,999
                                  Total                               $5,588,582,845

                    Source: Major air carriers' 3rd round applications.
                    Note: These amounts were the losses claimed on the major air carriers' 3rd round
                    applications. These losses generally exclude items such as impairment losses12 but may
                    not be adjusted in some cases for other losses DOT would have disallowed.



•	 In round 3, the DOT review team analyzed the applications and
   supporting documentation to determine the air carriers’
   allowable actual losses. DOT consulted with the carrier by
   phone and e-mail to clarify issues and make payment
   determination decisions.
12Impairment losses, which can also be referred to as devaluation, are the amounts by which the fair (market) value falls   17
below the book value of an asset, such as a carrier’s aircraft.




               Page 22                                               GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                          Disaster Relief
                                               DOT Claim Review Process


•	 Such decisions regarded the inclusion or exclusion of certain
   expense items based upon the item’s relation to the terrorist
   attacks. For example, DOT excluded approximately $2 billion
   in impairment losses because, in its judgment, air carriers
   could not show that impairment losses were fully attributable to
   the terrorist attacks nor fully realized in the compensation
   period.
•	 While the review team’s payment decisions were not always
   fully documented in the air carrier payment files, the review
   team was able in all cases to explain to us the basis for their
   payment decisions affecting the major air carriers.
•	 As part of its efforts to maintain consistency in payment
   determination decisions, the review team in some cases held
   discussions with and/or requested additional information from
   air carriers which were taken into consideration in settling and
   closing claims.

                                                                          18




       Page 23                      GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                      Disaster Relief
                                           DOT Claim Review Process


•	 Although a laborious task as described above, once the
   review team determined the air carrier’s allowable actual
   losses related to the September 11 terrorist attacks, DOT
   issued, in accordance with the act, compensation equal to
   the lesser of allowable actual losses or the carrier’s
   formula amount.




                                                                      19




       Page 24                  GAO-03-1156R Aviation Assistance Programs
        Enclosure


                                                             Disaster Relief
                                                  DOT Claim Review Process

•	 The length of time it took to issue final compensation payments to
   the air carriers varied.
•	 After the round 3 applications were received from the major air
   carriers, it took an average of
        •	 16 days (with a maximum of 26 days) to determine the
           compensation for the air carriers paid on the basis of the
           formula, and
        •	 128 days (with a maximum of 248 days) to determine the
           compensation for the air carriers paid on the basis of
           allowable actual losses.
•	 On average, it took over 3 1/2 months longer to determine the
   compensation amounts for carriers that were paid on the basis of
   allowable actual losses.
•	 Final compensation for most carriers (74 percent) was issued by
   December 31, 2002. However, as of August 26, 2003, a small
   number of cases were open due to remaining unresolved issues.
                                                                              20




        Page 25                         GAO-03-1156R Aviation Assistance Programs
                Enclosure


                                                                                                Disaster Relief
                                                                                     DOT Claim Review Process


•	 A few carriers have sued DOT challenging the department’s
   rule making. As of July 22, 2003, Federal Express (FedEx) was
   the only major air carrier suing DOT.
     •	 FedEx received approximately $101 million13 in
        compensation in round 1, which approximated 50 percent
        of the losses FedEx originally estimated.
      •	 In round 3, DOT determined FedEx’s actual losses to
         be only approximately $69 million after reviewing its
         application. FedEx has administratively appealed this
         determination.
      •	 DOT has sought repayment of approximately $32
         million13 from FedEx.
      •	 FedEx is claiming approximately $119 million13 in
         losses in round 3, and is seeking remedy in the U.S.
         Court of Appeals for the District of Columbia Circuit. A
         hearing has been set for October 2003.
13These   amounts were made publicly available in FedEx’s SEC filing for the fiscal year ended May 31, 2003.
                                                                                                               21




                Page 26                                              GAO-03-1156R Aviation Assistance Programs
                    Enclosure


                                                                                                                                                  Disaster Relief
                                                                                                                                                      Payments

•	      As specified in the Act, air carriers were compensated the lesser of
        their allowable actual losses or a market share formula.
•	      As of July 22, 2003, 79 percent of applicants receiving assistance were
        compensated using the market share formula and so received an
        amount that was less than their actual September 11 losses.
     F ig u re 2 : N u m b e r o f C a rrie rs C o m p e n s a te d o n th e B a s is o f th e F o rm u la A m o u n t V e rs u s
     A llo w a b le A c tu a l L o s s e s

                                                        P a s s e n g e r c a rrie rs                 C a rg o c a rrie rs                               T o ta l
     F o rm u la a m o u n t                                        278                                       77                                          355
     A llo w a b le a c tu a l lo s s e s                            62                                       31                                          93
     S o u rc e : D O T 's D is a s te r R e lie f P ro g ra m D a ta b a s e , J u ly 2 2 , 2 0 0 3 . 

     N o te : "P a s s e n g e r c a rrie rs " in c lu d e s c a rrie rs re c e ivin g a s s is ta n c e u n d e r th e s e t-a s id e p ro vis io n . A n a ir c a rrie r w h o

     a p p lie d fo r b o th p a s s e n g e r a n d c a rg o p a ym e n ts w a s c o n s id e re d to b e tw o a p p lic a n ts in th e c h a rt a b o ve . T w e n ty-n in e 

     a ir c a rrie rs a p p lie d fo r b o th P a s s e n g e r a n d C a rg o p a ym e n ts . F e d e ra l E xp re s s is c o n s id e re d to h a ve b e e n 

     c o m p e n s a te d o n th e b a s is o f a llo w a b le a c tu a l lo s s e s . 


•	      As illustrated above, 355 carriers, including 278 passenger carriers,
        were not fully compensated for their September 11 losses while 93
        carriers were fully compensated.
•	      Eight of the 14 major air carriers were compensated based on actual
        losses and therefore were compensated for all their September 11
        losses.
                                                                                                                                                                             22




                    Page 27                                                                    GAO-03-1156R Aviation Assistance Programs
              Enclosure


                                                                                         Disaster Relief
                                                                                             Payments

•	     As of July 22, 2003, $4.6 billion (93 percent of the $5 billion)
       was distributed under the program.
     Figure 3: Amounts and Timing of Payments Distributed under the Disaster Relief Program


                                               Total             Passenger carriers   Cargo carriers
     Amounts distributed as of
     September 30, 2001                     $2,328,126,342           $2,202,165,142       $125,961,200
     Amounts distributed as of
     December 31, 2001                      $3,846,963,999           $3,659,296,165       $187,667,834
     Amounts distributed as of
     December 31, 2002                      $4,603,108,649           $4,292,313,681       $310,794,968
     Amounts distributed as of
     July 22, 2003                          $4,636,891,322           $4,325,720,094       $311,171,228



     Undistributed funds                       $363,108,678            $174,279,906       $188,828,772
     Total available under the
     Disaster Relief program                 $5,000,000,000          $4,500,000,000       $500,000,000
     Source: DOT's Disaster Relief Database, July 22, 2003.
     Note: Distributed funds include refunds of overpayments.


                                                                                                         23




              Page 28                                           GAO-03-1156R Aviation Assistance Programs
           Enclosure


                                                                                                   Disaster Relief
                                                                                                       Payments


•	 Overall, the 14 major air carriers were compensated
   73 percent of their claimed losses under the Disaster
   Relief program.
  Figure 4: Major Air Carriers' Claimed Losses Related to the Terrorist Attacks Compared to
  Funds Distributed under the Disaster Relief Program


                                           Total               Passenger carriers            Cargo carriers
  Claimed losses                         $5,588,582,845            $5,343,782,846               $244,799,999
  Funds distributed                      $4,065,346,384            $3,883,442,976               $181,903,408
  Percent of claimed losses
  compensated                                73%                        73%                         74%
 Source: Major air carriers' 3rd round applications and DOT's Disaster Relief Program Database, July 22, 2003.
 Note: "Claimed Losses" were the losses claimed on the major air carriers' 3rd round applications. These losses
 generally exclude items such as impairment losses but may not be adjusted in some cases for other losses DOT would
 have disallowed. "Funds Distributed" includes the $101 million distributed to Federal Express.




                                                                                                                      24




           Page 29                                              GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                          Disaster Relief
                                                              Payments


• Of the $363 million in undistributed funds:
   •	 A small amount will be distributed to approximately 50
      smaller air carriers that have not yet been issued final
      payment.
   •	 DOT officials said that some funds have been set aside
      for a litigation reserve.
   •	 In February 2003, $90 million was rescinded by Public
      Law 108-7 because DOT assured the Congress that it
      would not need the full amount of the remaining funds to
      complete the program.
   •	 DOT plans to return any remaining undistributed funds to
      the Department of the Treasury at the conclusion of the
      program.


                                                                        25




       Page 30                    GAO-03-1156R Aviation Assistance Programs
                Enclosure


                                                                                           Insurance Reimbursement
                                                                                         FAA’s Claim Review Process


 •	      The act authorized the DOT Secretary to reimburse airlines for
         increases in insurance premiums following the terrorist attacks.
         The Secretary delegated this authority to the FAA Administrator.
 •	      The act also specified that the reimbursements be made from
         the Aviation Insurance Revolving Fund.14 However, no
         additional funds were provided, thus limiting the amounts FAA
         could reimburse carriers. As a result, insurance reimbursements
         were limited to 30 days.
 •	      FAA established a systematic process for verifying carriers’
         post-September 11 war risk premium increases, including
         obtaining and reviewing invoices from the carriers’ insurance
         providers to (1) determine rates in effect during September 4-10,
         2001, and to (2) evidence actual increases.


14 The Revolving Fund finances FAA’s Aviation Insurance Program that was established by the Congress in 1951 to provide
war risk coverage to carriers flying into hostile territories. In 1977, the Congress authorized the program to cover any risk, not 26
just war risk. To date, FAA has issued only war risk insurance.




                Page 31                                                 GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                              Insurance Reimbursement
                                            FAA’s Claim Review Process


•	 Due to limited staff, FAA hired contractors to assist in
   reviewing applications and invoices.
•	 For all carriers that received $100,000 or more under the
   Insurance Reimbursement program, including all the major
   air carriers, FAA instituted a process to reconcile what is
   commonly called the
       •	 deposit premium (the up-front premium paid by a
          carrier based upon the estimated value of its aircraft
          and the number of passengers expected to be flown)
          to the
       •	 earned premium (the end-of-period adjusted
          premium based on the actual value of the aircraft
          used during the period and number of passengers
          flown), and
       •	 adjusted the carriers’ reimbursement payments
          accordingly.
                                                                         27




       Page 32                     GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                               Insurance Reimbursement
                                   Premium Increases and FAA Payments


•	 Prior to September 11, total estimated annual insurance
   costs for war risk coverage for the 14 major air carriers were
   approximately $12 million.
•	 Post-September 11 total estimated annual insurance costs
   for war risk coverage for the 14 major air carriers increased
   to approximately $719 million.
•	 As of April 2003, FAA paid 183 carriers $68 million to
   reimburse those carriers for 30 days of increased premiums
   in the war risk component of their overall insurance costs.
•	 The 14 major air carriers received 85 percent ($58 million)
   of the total reimbursements made.



                                                                         28




       Page 33                     GAO-03-1156R Aviation Assistance Programs
                 Enclosure


                                                                               FAA’s Aviation Insurance Program



•	 After the post-September 11 increases in war risk insurance
   premiums, the Secretary of Transportation determined that
   third-party liability war risk insurance from commercial
   insurers was not available on reasonable terms and
   conditions.
•	 And in accordance with the Act, FAA’s in-house Aviation
   Insurance Program, which previously had covered only
   international flights into hostile territories, extended
   coverage to domestic flights in order to provide air carriers
   with an alternative to the commercial third-party war risk
   insurance.15
•	 The expansion of FAA’s Aviation Insurance Program has
   increased the government’s risk exposure from a standby
   basis to as much as $113 billion for 71 carriers (for the
   60-day period ending February 13, 2003) as reported by
   FAA.
15   Subsequent legislation required FAA’s Aviation Insurance Program to provide hull insurance as well as third-party liability. 29




                 Page 34                                                GAO-03-1156R Aviation Assistance Programs
              Enclosure


                                                                         FAA’s Aviation Insurance Program


•	 The Aviation Revolving Fund from which aviation insurance claims
   are paid may not have sufficient funds to pay a carrier claim in a
   timely manner.16
•	 According to FAA, the liability for a carrier claim ranges from $500
   million to $4 billion while the current balance in the Revolving Fund is
   approximately $194 million.17
•	 In regards to FAA’s Aviation Insurance Program, the 2003
   Emergency Wartime Supplemental Appropriations Act extended war
   risk insurance coverage to August 31, 2004. The act also authorized
   the Secretary of Transportation to extend the program to
   December 31, 2004.
•	 Because FAA’s offering of war risk insurance is intended to be
   temporary, with authority now expiring, unless further extended, in
   August 2004, carriers are considering forming a risk retention group
   to obtain more affordable coverage.
•	 According to an Air Transport Association official, as of July 22,
   2003, no risk retention group has been created.
16 See also U.S. General Accounting Office, Aviation Insurance: Issues Related to the Reauthorization of FAA's Aviation

Insurance Program, GAO/T-RCED-97-115 (Washington, DC: May 1, 1997).
17 Since the inception of the Aviation Insurance Program, only four claims ranging between $626 and $122,469 have         30
been paid.




              Page 35                                              GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                            Appendix I
                                                 Scope and Methodology

•	 Our work focused on the major air carriers because the 14
   major air carriers represent about 89 percent and 41
   percent of the passenger and cargo carrier industries
   (respectively) in terms of available seat miles and revenue
   ton miles.

In order to review the disaster relief program, we:
• Reviewed the act and relevant DOT policies and guidance.
•	 Advised on the content of agreed-upon procedures which
   were completed by the air carriers’ auditors.
•	 Reviewed DOT’s payment determination process,
   including the calculation of the ASM/RTM universe and the
   air carrier’s formula amount.

                                                                         31




       Page 36                     GAO-03-1156R Aviation Assistance Programs
        Enclosure


                                                                Appendix I
                                                     Scope and Methodology

In order to review the disaster relief program, we:
(continued)
•	 Reviewed all three rounds of the major air carriers’ applications
    including the agreed-upon procedures and compared financial
    information to SEC filings such as annual and quarterly reports,
    and aviation publications where possible.
•	 Reviewed adjustments to the major air carriers’ loss claims
    made by both the air carriers and DOT.
•	 Performed various analytical procedures on information
    submitted by the major air carriers.
•	 We did not, however, audit the underlying data submitted as
    part of the air carriers’ applications nor the information contained
    in the DOT Disaster Relief database.



                                                                             32




        Page 37                        GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                           Appendix I
                                                Scope and Methodology

In order to review the Insurance Reimbursement process, we:
•	 Obtained and reviewed FAA’s requirements for applying
    for war risk insurance premium reimbursements.
•	 Obtained an understanding of the effects of the events of
    September 11 on war risk insurance premium increases
    through meetings and phone interviews with FAA officials.
•	 Reviewed the reimbursement packages submitted by the
    major carriers to FAA.
•	 Independently recalculated and verified the reimbursement
    amount for the major air carriers using invoices and other
    correspondence from insurance providers.




                                                                        33




       Page 38                    GAO-03-1156R Aviation Assistance Programs
       Enclosure


                                                             Appendix I
                                                  Scope and Methodology

In order to review the Insurance Reimbursement process, we:
(continued)
•	 Compared actual enplanement and other data used to compute
    final insurance reimbursement amounts to data reported by the
    major carriers to DOT’s Bureau of Transportation Statistics to
    check for consistency.
•	 We did not, however, assess the reasonableness of the
    premium increases being charged by the insurance providers.
•	 On August 26, 2003, DOT provided oral comments on a draft of
    these briefing slides. DOT generally agreed with the facts
    presented. We incorporated DOT’s technical comments as
    appropriate.
•	 Our work on the Disaster Relief and Insurance Reimbursement
    Programs was performed from September 2001 through August
    2003 in accordance with generally accepted government
    auditing standards.
                                                                          34




       (190038) 



       Page 39                      GAO-03-1156R Aviation Assistance Programs
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