oversight

Commercial Aviation: Issues Regarding Federal Assistance for Enhancing Air Service to Small Communities

Published by the Government Accountability Office on 2003-03-11.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Aviation,
                            Committee on Commerce, Science and
                            Transportation, U.S. Senate

For Release on Delivery
Expected at 9:30 a.m. EST
Tuesday, March 11, 2003     COMMERCIAL AVIATION
                            Issues Regarding Federal
                            Assistance for Enhancing
                            Air Service to Small
                            Communities
                            Statement of JayEtta Z. Hecker
                            Director, Physical Infrastructure Issues




GAO-03-540T
                                               March 2003

                                               COMMERCIAL AVIATION

                                               Issues Regarding Federal Assistance for
Highlights of GAO-03-540T, testimony
                                               Enhancing Air Service to Small
before the Aviation Subcommittee,
Senate Committee on Commerce,
                                               Communities
Science and Transportation




 Small communities have long                   Small communities have taken a variety of steps to try to obtain or improve air
 faced challenges in obtaining or              service, such as marketing to increase passengers’ demand for local service or
 retaining the commercial air                  offering financial incentives to airlines to attract new or enhanced service. At
 service they desire. These                    communities GAO studied in depth, financial incentives were most effective in
 challenges are increasing as many             attracting new service. However, the additional service often ceased when
 U.S. airlines try to stem
 unprecedented financial losses
                                               incentives ended.
 through numerous cost-cutting
 measures, including reducing or               The two key federal programs to help small communities with air service face
 eliminating service in some                   increasing budgetary pressures and questions about their effectiveness.
 markets, often small communities.             Demand for these programs is heavy and may increase as airlines reduce
 Congress will be considering                  service to communities. The Essential Air Service program subsidizes carriers
 whether to reauthorize its federal            that provide air service to eligible small communities. However, program
 assistance programs for small                 costs have tripled since 1995, and fewer passengers use the subsidized local
 communities. GAO was asked to                 service. Most choose to drive to their destination or to fly to and from another
 describe the kinds of efforts that            nearby airport with more service or lower fares. The Small Community Air
 states and local communities have             Service Development Pilot Program, in its first year of operation, provided $20
 taken to enhance air service at
 small communities; federal
                                               million in grants to help small communities enhance service. Most programs
 programs for enhancing air                    funded appear similar to those undertaken by communities and may not result
 service to small communities; and             in sustainable service enhancements.
 issues regarding the type and
 extent of federal assistance to               Questions about the efficacy of these programs highlight issues regarding the
 enhance air service to small                  type and extent of federal assistance for small community air service.
 communities.                                  Reauthorization provides an opportunity for the Congress to clarify the
                                               federal strategy for assisting small communities with air service.

                                               Proximity of Small Community Airports to Other Airports Either Served by a Low-fare Airline
                                               or Serving as a Major Airline’s Hub.




www.gao.gov/cgi-bin/getrpt?GAO-03-540T

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact JayEtta Z.
Hecker at (202) 512-2834 or
heckerj@gao.gov.
    Mr. Chairman and Members of the Subcommittee:

    Thank you for inviting us to testify today on the issue of air service at
    small communities. These communities have long faced challenges in
    obtaining or retaining the commercial air service they desire. These
    challenges are increasing as many U.S. airlines try to stem unprecedented
    financial losses through numerous cost-cutting measures, including
    reducing or eliminating service in some markets. Small communities feel
    such losses disproportionately because they may have service from only
    one or two airlines. For them, reductions can mean no air service at all.

    Over the past several years, we have issued a number of products
    examining air service provided to small communities. These reports have
    examined the use of regional jets, changes in the amount and type of
    service that small communities receive, options to enhance the long-term
    viability of the federal Essential Air Service (EAS) program, and efforts to
    improve air service at small communities.1 In light of continuing concerns
    about small community air service and upcoming opportunities for the
    Congress to reauthorize federal assistance programs for small
    communities, we would like to summarize some key elements of our
    recent work. Today, my testimony addresses three topics: (1) the kinds of
    efforts that states and local communities have taken to enhance air service
    at small communities; (2) federal programs for enhancing air service to
    small communities; and (3) issues regarding the type and extent of federal
    assistance to enhance air service to small communities.

    In summary:

•   In recent years, states and local communities have undertaken a variety of
    efforts to enhance their air service. Our analysis of these efforts at nearly
    100 small communities found that they comprise three main types: studies
    to evaluate potential markets, marketing efforts to increase consumer
    demand, and financial incentives to encourage airlines to either start or
    enhance air service. Financial incentives tended to offer the most promise
    for attracting new or additional air service. However, once the incentives
    ended, the additional service often ended as well. Longer-term
    sustainability of these air service improvements appears to depend on the
    community’s size and its ability to demonstrate a commitment to that air




    1
        See list of related GAO products attached to this statement.



    Page 1                                                    GAO-03-540T Commercial Aviation
    service, either by providing a profitable passenger base or through direct
    financial assistance.

•   The two key federal programs for helping small communities with air
    service face increasing budgetary pressures and questions about their
    effectiveness.
    • The EAS program, authorized under the Airline Deregulation Act of
        1978, guarantees that small communities served before deregulation
        continue to receive a certain level of scheduled air service. Its costs
        have more than tripled since fiscal year 1995, and indications are that
        without changes to the program, the demand for EAS subsidies will
        soon exceed its $113 million appropriation. At the same time, aggregate
        passenger levels at EAS-subsidized airports continue to fall. Often less
        than 10 percent of a community’s potential passengers use the
        subsidized local service; the rest choose to drive to their destination or
        drive to a larger airport that offers lower fares or more frequent service
        to more destinations. In 2000, the median number of passengers on
        each EAS-subsidized flight was just three.
    • The Small Community Air Service Development Pilot Program (“Pilot
        Program”), authorized as part of the Wendell H. Ford Aviation
        Investment and Reform Act for the 21st Century (AIR-21), P.L. 106-181,
        provides grants to communities to enhance local air service. In fiscal
        year 2002, 180 communities (or consortia of communities) requested
        over $142.5 million in air service development grants—more than seven
        times the $20 million appropriated. The program funded some
        innovative approaches, such as Mobile, Alabama’s, program to provide
        ground handling services to an airline, but the majority of the grants
        funded the same types of projects noted earlier—studies, marketing
        activities, and financial incentives. If these communities experience the
        same results as the other state and local efforts we identified, their
        efforts are unlikely to attract new or enhanced service, or if they do,
        the service will last only as long as these funds are available. However,
        it is too early to evaluate the long-term effectiveness of these efforts.

•   Questions about the efficacy of the two federal programs highlight issues
    regarding the type and extent of federal assistance for small community
    air service. The EAS program appears to be meeting its statutory
    objectives of ensuring air service to eligible communities, yet the program
    has not provided an effective transportation solution to most travelers to
    or from those communities. The Pilot Program also appears to have met
    its statutory objective of assisting communities in developing projects to
    enhance their access to the national air transportation system. Yet
    whether any of the projects funded will prove to be effective at developing
    sustainable air service is uncertain. Reauthorization provides an


    Page 2                                         GAO-03-540T Commercial Aviation
             opportunity for the Congress to clarify the federal strategy for assisting
             small communities with commercial air service.

             The nation’s small community airports, while large in number, serve only a
Background   small portion of the nation’s air travelers and face issues very different
             from those of larger airports. Airports that are served by commercial
             airlines in the United States are categorized into four main groups based
             on the annual number of passenger enplanements—large hubs, medium
             hubs, small hubs and nonhubs. In 2001, the 31 large hub airports and 36
             medium hub airports (representing about 13 percent of commercial
             service airports) enplaned the vast majority—89 percent—of the more
             than 660 million U.S. passengers. In contrast, those normally defined as
             small community airports2 —the 69 small hub airports and 400 nonhub
             airports—enplaned about 8 percent and 3 percent of U.S. passengers,
             respectively. There are significant differences in both the relative size and
             type of service among these communities, as shown in Figure 1.




             2
              The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21),
             P.L. 106-181, defines small communities as including both nonhub and small hub
             community airports.



             Page 3                                               GAO-03-540T Commercial Aviation
Figure 1: Differences Among Categories of Commercial Service Airports in 2001




                                        Officials from small communities served by small hub and nonhub airports
                                        reported that limited air service is a long-standing problem. This problem
                                        has been exacerbated by the economic downturn and events of September
                                        11. Fundamental economic principles help explain the situation small
                                        communities face. Essentially, these communities have a smaller
                                        population base from which to draw passengers, which in turn means they
                                        have limited potential to generate a profit for the airlines. Relatively
                                        limited passenger demand, coupled with the fact that air service is an
                                        inherently expensive service to provide, make it difficult for many such
                                        communities to attract and keep air service.

                                        The recent economic downturn and events of September 11 dealt a severe
                                        financial blow to many major airlines, and the results of these losses can


                                        Page 4                                       GAO-03-540T Commercial Aviation
be felt in even the smallest communities. United Airlines and US Airways
are in bankruptcy proceedings, and one Wall Street analyst is projecting
industry losses of $6.5 billion for 2003, the third straight year of multi-
billion dollar losses. While major airlines often do not serve small
communities directly, many have agreements with smaller regional airlines
to provide air service to small communities. This provides feeder traffic
into the larger network. Consequently, financial problems for major
airlines and their resulting cost-cutting efforts may ultimately affect the air
service a small community receives.

Complicating the financial situation for both major and regional airlines is
the growing presence of low-fare airlines, such as Southwest Airlines.
Low-fare airlines’ business model of serving major markets, not small
communities, has helped these airlines better weather the economic
downturn. Airport officials have reported that these airlines’ low fares
attract passengers from a large geographic area, and many small airports
face significant “leakage” of potential local passengers to airports served
by low-fare airlines. In a March 2002 report,3 we found that almost half of
the nonhub airports studied were within 100 miles of a major airline hub
or an airport served by a low-fare airline, as illustrated in Figure 2.
Further, over half of the 207 small community airport officials we surveyed
said they believed local residents drove to another airport for airline
service to a great or very great extent. Eighty-one percent of them
attributed the leakage to the availability of lower fares from a major airline
at the alternative airport.




3
 U.S. General Accounting Office, Air Service Trends at Small Communities Since October
2000, GAO-02-432 (Washington, D.C.: March, 29, 2002).



Page 5                                              GAO-03-540T Commercial Aviation
Figure 2: Proximity of Small Community Airports to Other Airports Either Served by a Low-fare Airline or Serving as a Major
Airline’s Hub




                                         Note: The figure shows a selected sample of 202 small communities served by nonhub airports in the
                                         continental United States. For more information, see GAO-02-432.


                                         Local, state, and federal governments all play roles in developing and
                                         maintaining air service for small communities. Air service is a local issue
                                         because commercial airports in the United States are publicly-owned
                                         facilities, serving both local and regional economies. Many state and local
                                         governments provide funding and other assistance to help communities
                                         develop or maintain local air service. The federal government has assisted
                                         in developing air service both through the EAS program, which subsidizes


                                         Page 6                                                     GAO-03-540T Commercial Aviation
                         air service to eligible communities and the Pilot Program, which provided
                         grants to foster effective approaches to improving air service to small
                         communities.4 The assumption underlying these efforts is that connecting
                         small communities to the national air transportation system is both
                         fundamental for local economic vitality and is in the national interest.

                         The Administration’s budget proposal for fiscal year 2004 substantially
                         reduces funding for small community air service. The budget would
                         reduce EAS funding from $113 million in 2003 to $50 million in 2004 and
                         would change the program’s structure by altering eligibility criteria and
                         requiring nonfederal matching funds. The 2004 budget proposal does not
                         include funds for the Pilot Program.


                         Our recent review of nearly 100 small community air service improvement
Local and State Air      efforts undertaken by states, local governments, or airports5 showed that
Service Improvement      communities attempted three main categories of efforts (see Table 1):
Efforts Fall Into    •   studies, like those used by communities in Texas and New Mexico, to
Three Main               determine the potential demand for new or enhanced air service;
                     •   marketing, like Paducah, Kentucky’s, “Buy Local, Fly Local” advertising
Categories, but          campaign, used to educate the public about the air service available or
Financial Assistance     Olympia, Washington’s, presentations to airlines to inform them about the
                         potential for new or expanded service opportunities; and
Has Proven Most      •   financial incentives, such as the “travel bank” program implemented by
Effective                Eugene, Oregon, in which local businesses pledged future travel funds to
                         encourage an airline to provide new or additional service.




                         4
                          Beyond these programs, the federal government has also played a key role in providing
                         funding critical to building and improving airport infrastructure through its Airport
                         Improvement Program. In fiscal year 2002 alone, this program provided $3.2 billion to
                         airports, over $1 billion of which went to small hub and nonhub airports.
                         5
                          To identify these airports, we reviewed all 180 applications for the Pilot Program, which
                         included information on previous efforts to improve air service. We also spoke with airline
                         industry officials and transportation officials from each of the 50 states and reviewed other
                         available data. We then interviewed airport or community officials from 98 small
                         communities that had undertaken some air service development efforts. For more
                         information, see U.S. General Accounting Office, Commercial Aviation: Factors Affecting
                         Efforts to Improve Air Service at Small Community Airports, GAO-03-330 (Washington,
                         D.C.: January 17, 2003).



                         Page 7                                                  GAO-03-540T Commercial Aviation
Table 1: Types of Air Service Development Efforts Undertaken by 98 Communities
With Small Hub or Nonhub Airports

                        Nonhub airports          Small hub airports          Combined total
                         (81 airports)             (17 airports)              (98 airports)
                                   Percent                 Percent                     Percent
 Type of effort         Number     of total      Number     of total        Number     of total
 Studies                     60        74%            15       88%               75       77%
 Marketing                   60        74%            16       94%               76       78%
 Financial
 incentives                   33        41%             11        65%              44           45%
 Other                        15        19%              0         0%              15           15%
Source: GAO analysis.

Notes: Columns will not add to total number of airports shown because some airports undertook
multiple efforts.


Studies by themselves have no direct effect on the demand for or supply of
air service, but they can help communities determine if there is adequate
potential passenger demand to support new or improved air service.
Marketing can have a more direct effect on demand for air service if it
convinces passengers to use the local air service rather than driving or
flying from another airport. While the specific effect is difficult to
ascertain, an airport official from Shenandoah Valley, Virginia, pointed out
that his airport’s annual enplanements more than doubled—from 8,000 to
20,000—after a marketing and public relations campaign. Marketing the
airport to airlines may also have a direct effect on the supply of air service
if the efforts succeed in attracting new airlines or more service from
existing airlines.

Financial incentives most directly affected the level of air service provided
in the communities we studied. Financial incentives mitigate some of the
airline’s risk by providing some assurance about the financial viability of
the service. The incentives take a number of different forms, as shown in
Table 2. Some programs provided subsidies to airlines willing to supply
service. Some provided revenue guarantees, under which the community
and airline established revenue targets and the airline received payments
only if actual revenues did not meet targets.




Page 8                                                       GAO-03-540T Commercial Aviation
Table 2: Major Types of Financial Incentive Programs

                                                                                                           Prevalence among small
                                                                         Prevalence among nonhub             hub airports studied
                                                                         airports studied (total = 81)            (total = 17)
 Type of financial                                                                          Percent of                     Percent of
 incentive              Description                                           Number               total       Number           total
 Reduced airport fees   Airport reduces fees charged to carriers—                   10             12%                7         41%
                        landing fees, lease rates, or fuel flowage
                        fees in exchange for air service. (This is
                        often only one element of an air service
                        improvement program.)
 Subsidies              Financial assistance to a carrier assists with              10             12%                1          6%
                        start-up, operating or other costs. Carrier
                        may receive a set amount per period or
                        reimbursement for expenses incurred,
                        sometimes up to a cap.
 Revenue guarantees     Community and carrier officials set revenue                  9             11%                3         18%
                        targets and communities pay carriers only if
                        revenue from operations does not meet
                        agreed-upon target. Payments are often
                        capped.
 Travel bank            Businesses or individuals pledge future                      4              5%                3         18%
                        travel funds to a carrier providing new or
                        expanded air service. Travel funds are
                        deposited in an account, administered by a
                        business entity (such as the Chamber of
                        Commerce) and pledging businesses draw
                        against these funds (often using credit card
                        supplied for this purpose) to purchase
                        tickets.
 Other                                                                               6              7%                3         18%
Source: GAO analysis.

                                            Financial incentives can attract new or enhanced air service to a
                                            community, but incentives do not guarantee that the service will be
                                            sustained when the incentives end. We studied the efforts of 12
                                            communities in detail, all but one of which used a financial incentive
                                            program. Of these, five had completed their program but only Eugene,
                                            Oregon, was able to sustain the new service after the incentive program
                                            ended. At the other four—all nonhub airports smaller than Eugene—the
                                            airline ceased service when the incentives ended.

                                            However, while a community’s size is important, it is largely beyond a
                                            community’s control. We identified two other factors, more directly within
                                            a community’s control, that were also important for success. The first, the
                                            presence of a catalyst for change, was particularly important in getting the
                                            program started. The catalyst was normally state, community, or airport
                                            officials who recognized the air service deficiencies and began a program
                                            for change. More important to the long-term sustainability, however, was a

                                            Page 9                                                 GAO-03-540T Commercial Aviation
                           community consensus that air service is a priority. This second factor
                           involves recognizing that enhanced air service is likely to come at a price
                           and developing a way in which the community agrees to participate. At
                           many of the communities we studied, there was not a clear demonstration
                           of community commitment to air service.


                           The two major federal efforts to help small communities attract or retain
Two Federal                air service are the EAS program and the Pilot Program. The Congress
Programs Which Aid         established EAS as part of the Airline Deregulation Act of 1978, due to
                           concern that air service to some small communities would suffer in a
Small Communities          deregulated environment. The act guaranteed that communities served by
Face Budgetary             airlines before deregulation would continue to receive a certain level of
                           scheduled air service. If an airline cannot provide service to an eligible
Pressures and              community without incurring a loss, then the Department of
Questions About            Transportation (DOT) can use EAS funds to award that airline, or another
Their Effectiveness        airline willing to provide service, a subsidy. Funding for EAS was $113
                           million for fiscal years 2002 and 2003. The other major program, the Pilot
                           Program, was authorized as part of the Wendell H. Ford Aviation
                           Investment and Reform Act for the 21st Century (AIR-21). The Pilot
                           Program’s mission is to assist communities in developing projects to
                           enhance their access to the national air transportation system. The Pilot
                           Program differs from EAS because communities, not airlines, receive the
                           funds and the communities develop the program that they believe will best
                           address their air service needs. The Congress appropriated $20 million in
                           both fiscal years 2002 and 2003 for this effort.


EAS Costs Are Increasing   The EAS program costs have increased dramatically since 1995, but the
but Passenger Usage Is     actual number of passengers using EAS-subsidized air service has
Not                        dropped. Total program funding increased from $37 million in 1995 to $113
                           million in 2002 (2002 constant dollars). Further, during this period of time,
                           the subsidy per community nearly doubled, from almost $424,000 to over
                           $828,000. However, the total passenger enplanements at EAS-subsidized
                           communities decreased about 20 percent (between 1995 and 2000) falling
                           from 592,000 to 477,000. As a result, the per passenger subsidy (for
                           continental U.S. communities) increased from $79 to an estimated $229 in
                           2002, a nearly 200-percent increase. Table 3 provides more information.




                           Page 10                                       GAO-03-540T Commercial Aviation
Table 3: EAS Service Changes as of July 1, 2002 (Continental United States)

                                                                                    Percent
    Service elements                             1995         1999 2002 (est.)      change
    Number of subsidized
    communities                                       75        68          79         5.3%
    Median daily passengers
    enplaned per community                        11              8         10        -9.1%
    Average subsidy per community           $423,803       $668,448   $828,474        95.5%
    Average subsidy per passenger                $79          $133       $229        189.9%
Source: GAO analysis of DOT and FAA data.

Note: Passenger estimates for 2002 are based on passenger enplanements for 2000.

Note: Subsidy figures are in 2002 constant dollars.




Two key factors will likely continue to increase EAS program costs in the
future. First, more communities may require subsidized service.6 As of
February 2003, the EAS program served 125 communities, up from the 114
served only 7 months earlier. Of these, 88 are in the continental United
States and 37 are in Alaska, Hawaii, and Puerto Rico. According to DOT
officials, more small communities will likely lose unsubsidized commercial
service in the future—especially those served by one airline. Some of these
communities could be eligible to receive an EAS subsidy. In October 2001,
there were 98 small communities being served by one carrier. Of the 98, 25
have smaller populations and lower levels of employment than the typical
EAS-subsidized community, 21 have lower levels of income per capita, and
35 have lower levels of manufacturing earnings. Second, EAS-subsidized
communities tend to generate limited passenger revenue because
surrounding populations are small and the few travelers generated in each
community tend to drive to their destinations or fly from other, larger




6
 Increases in program costs may be restrained as some communities lose their eligibility.
They may lose their eligibility because the combination of decreased passenger traffic and
increased subsidy levels means that some may exceed the statutory maximum of $200 per
passenger for communities within 210 miles of a medium or large hub airport. However,
DOT has not always dropped communities from the program because they no longer meet
eligibility requirements. We reported in 2000 that DOT considers extenuating
circumstances that may have caused a temporary decline in passenger traffic.



Page 11                                                      GAO-03-540T Commercial Aviation
                                airports for lower airfares and improved service options.7 EAS community
                                airports may serve less than 10 percent of the local passenger traffic; over
                                half of the subsidized communities in the continental U.S. are within 125
                                miles of a larger airport. This low demand and “passenger leakage” to
                                other airports depress the revenue carriers can make from EAS routes,
                                making the program less attractive to airlines and increasing subsidy
                                costs.

                                There are clear questions about the EAS program’s effectiveness. In a
                                recent report on the EAS program, we outlined a number of options that
                                the Congress could consider to enhance the long-term viability of the
                                program.8 For example, one option was to target subsidized service to
                                more remote communities with fewer other transportation options.
                                Another option was to restructure or replace subsidies to airlines with
                                local grants. This could enable communities to better match their
                                transportation needs with locally available options. Some of the options
                                discussed in our report were incorporated in the Administration’s fiscal
                                year 2004 budget proposal.


Demand Is Heavy for Pilot       In its first year of operation, small communities demonstrated an
Program Funds but It Is         extraordinary demand for air service development funds. DOT received
Too Early to Assess             180 applications requesting over $142.5 million—more than seven times
                                the funds available—from communities in 47 states. By December 2002,
Program Effectiveness           DOT had awarded nearly $20 million in grants to 40 small communities (or
                                consortia of communities). The grants ranged in amount from $44,000 to
                                over $1.5 million. Some of the grants are being used for such innovative
                                ideas as the following:

                            •   Mobile, Alabama, a small hub, received a grant of $457,000 to continue
                                providing ground handling service for one of its airlines. While this is a
                                common practice in Europe, a Mobile official told us that he is only aware



                                7
                                  It is important to note that EAS-subsidized airlines typically do not set the airfares
                                charged for the major markets for EAS travelers. Instead, fares are set by the major
                                network airlines with which EAS airlines usually have contractual agreements. Depending
                                upon the exact agreement, the EAS airline usually sets fares for travel only in “local”
                                markets (i.e., between the EAS community and the connecting hub), while the major airline
                                sets the fares for travel between the EAS community and the key destinations beyond the
                                connecting hub.
                                8
                                 U.S. General Accounting Office, Options to Enhance the Long-term Viability of the
                                Essential Air Service Program, GAO-02-997R (Washington, D.C.: August 30, 2002).



                                Page 12                                              GAO-03-540T Commercial Aviation
                        of one other airport in the United States that provides these services for an
                        airline.
                    •   Baker City, Oregon, received a grant of $300,000 to invest in an air taxi
                        franchise. Baker City has a small population and is in a fairly remote part
                        of Oregon that does not have scheduled airline service. The community
                        decided to pursue an alternative to scheduled service and purchased an air
                        taxi franchise from SkyTaxi, a company that provides on-demand air
                        service.
                    •   Casper, Wyoming, received a grant of $500,000 to purchase and lease back
                        an aircraft to an airline to ensure that the airline serves the community. It
                        is fairly unusual for a community to approach air service development by
                        purchasing an aircraft to help defray some of the airline’s costs and
                        mitigate some of the airline’s risk in providing the service.

                        However, the majority of these grants funded the same types of projects
                        discussed earlier—studies of a community’s potential market, marketing
                        activities to stimulate demand for service or to lure an airline, and
                        financial incentives such as subsidies to airlines for providing service. If
                        these communities experience the same results as the other state and local
                        efforts we identified, their efforts are unlikely to attract new or enhanced
                        service for the small communities using them, or if they do, the service
                        will only last as long as these funds are available.

                        Since final grant agreements were signed in December 2002, it is too early
                        to determine how effective the various types of initiatives might prove to
                        be. Additionally, some of the funded projects contain multiple components
                        and some are scheduled to be implemented over several years. Therefore,
                        it might be some time before DOT is able to evaluate the initial group of
                        projects to determine which have been effective in initiating or enhancing
                        small community air service over the long-term.


                        As air service to small communities becomes increasingly limited and as
Implications for        the national economy continues to struggle, questions about the efficacy
Future Federal          of those programs highlight issues regarding the type and extent of federal
                        assistance for small community air service.
Efforts to Assist
Small Communities       The EAS program appears to be meeting its statutory objectives of
                        ensuring air service to eligible communities, yet the program clearly has
                        not provided an effective transportation solution for most travelers to or
                        from those communities. Subsidies paid directly to carriers support
                        limited air service, but not the quality of service that passengers desire,
                        and not at fares that attract local passenger traffic. As a result, relatively


                        Page 13                                         GAO-03-540T Commercial Aviation
few people who travel to or from some of these communities use the
federally-subsidized air service. Many travelers’ decisions to use
alternatives—whether another larger airport or simply the highway
system—are economically and financially rational.

Several factors—including increasing carrier costs, limited passenger
revenue, and increasing number of eligible communities requiring
subsidized service—are likely to affect future demands on the EAS
program. The number of communities that are eligible for EAS-subsidized
service is likely to increase in the near term, creating a subsidy burden that
could exceed current appropriations. Should the EAS program be fully
funded so that no eligible community loses its direct connection to the
national air transportation network? Should the EAS program be
fundamentally changed in an attempt to create a more effective
transportation option for travelers? In August 2002, we identified various
options to revise the program to enhance its long-term viability, along with
some of the associated potential effect.

The Pilot Program also appears to have met its statutory objective of
extending federal assistance to 40 nonhub and small hub communities to
assist communities in developing projects to enhance their access to the
national air transportation system. Yet whether any of the projects funded
will prove to be effective at developing sustainable air service is uncertain.
Relatively few communities offered innovative approaches to developing
or enhancing air service. Most of the initiatives that received federal grants
resembled other state or local efforts that we had already identified.
Evidence from those efforts indicated that some communities could
develop sustainable air service—but likely only small hub communities
that have a relatively large population and economic base. Among smaller,
nonhub communities, direct financial assistance to carriers was most
effective at attracting air service, but only as long as the financing existed.
If the Pilot Program is extended, will it essentially become another subsidy
program?

Reauthorization provides an opportunity for the Congress to clarify the
federal strategy for assisting small communities with commercial air
service. We believe that there may be a number of questions that need to
be addressed, including the following: What amount of assistance would
be needed to maintain the current federal commitment to both small hub
and nonhub airports? Would federal assistance be better targeted at
nonhub or small hub communities, but not both? Rather than providing
subsidies directly to carriers, should federal assistance be directed to
states or local communities to allow them to determine the most effective

Page 14                                        GAO-03-540T Commercial Aviation
                 local strategy? What role should state and local governments play in
                 helping small communities secure air service?

                 Mr. Chairman and members of the Subcommittee, this concludes my
                 statement. I would be pleased to answer any questions you or other
                 members of the Subcommittee might have.


                 For further information on this testimony, please contact JayEtta Hecker
Contact and      at (202) 512-2834. Individuals making key contributions to this testimony
Acknowledgment   included Janet Frisch, Steve Martin, Stan Stenersen, and Pamela Vines.




                 Page 15                                      GAO-03-540T Commercial Aviation
Related GAO Products


             Commercial Aviation: Factors Affecting Efforts to Improve Air Service
             at Small Community Airports. GAO-03-330. Washington, D.C.: January 17,
             2003.

             Commercial Aviation: Financial Condition and Industry Responses
             Affect Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.

             Options to Enhance the Long-term Viability of the Essential Air Service
             Program. GAO-02-997R. Washington, D.C.: August 30, 2002.

             Commercial Aviation: Air Service Trends at Small Communities Since
             October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.

             “State of the U.S. Commercial Airlines Industry and Possible Issues for
             Congressional Consideration”, Speech by Comptroller General of the
             United States David Walker. The International Aviation Club of
             Washington: November 28, 2001.

             Financial Management: Assessment of the Airline Industry’s Estimated
             Losses Arising From the Events of September 11. GAO-02-133R.
             Washington, D.C.: October 5, 2001.

             Commercial Aviation: A Framework for Considering Federal Financial
             Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.

             Aviation Competition: Restricting Airline Ticketing Rules Unlikely to
             Help Consumers. GAO-01-832. Washington, D.C.: July 31, 2001.

             Aviation Competition: Challenges in Enhancing Competition in
             Dominated Markets. GAO-01-518T. Washington, D.C.: March 13, 2001.

             Aviation Competition: Regional Jet Service Yet to Reach Many Small
             Communities. GAO-01-344. Washington, D.C.: February 14, 2001.

             Airline Competition: Issues Raised by Consolidation Proposals. GAO-01-
             402T. Washington, D.C.: February 7, 2001.

             Aviation Competition: Issues Related to the Proposed United Airlines-US
             Airways Merger. GAO-01-212. Washington, D.C.: December 15, 2000.

             Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, and
             Passenger Traffic. GAO/RCED-00-34. Washington, D.C.: April 14, 2000.



             Page 16                                      GAO-03-540T Commercial Aviation
           Aviation Competition: Effects on Consumers From Domestic Airline
           Alliances Vary. GAO/RCED-99-37. Washington, D.C.: January 15, 1999.

           Airline Deregulation: Changes in Airfares, Service Quality, and
           Barriers to Entry. GAO/RCED-99-92. Washington, D.C.: March 4, 1999.




(544067)
           Page 17                                    GAO-03-540T Commercial Aviation