Commercial Aviation
Financial Condition and Industry Responses Affect Competition Gao ID: GAO-03-171T October 2, 2002This testimony discusses the economic state of the airline industry. Many, but not all, major U.S. passenger airlines are experiencing their second consecutive year of record financial losses. In 2001, the U.S. commercial passenger airline industry reported losses in excess of $6 billion. For 2002, some Wall Street analysts recently projected that U.S. airline industry losses will approach $7 billion, and noted that the prospects for recovery during 2003 are diminishing. Carriers have taken many actions to lower their costs and restructure their operations. Since September 2001, carriers have furloughed 100,000 staff, renegotiated labor contracts, and streamlined their fleets by retiring older, costlier aircraft. Carriers have reduced capacity by operating fewer flights or smaller aircraft. In some cases, carriers eliminated all service to communities. As the aviation industry continues its attempts to recover, Congress will be confronted with a need for increased oversight of a number of public policy issues. First, airlines' reactions to financial pressures will affect the domestic industry's competitive landscape. Second, airlines' reductions in service will likely place additional pressure on federal programs supporting air service to small communities, where travel options are already limited. Finally, although domestic travel has been the focus of recent concern, there are numerous international developments--especially regarding the European Union (EU)--that may affect established international "open skies" agreements between the United States and EU member states.
GAO-03-171T, Commercial Aviation: Financial Condition and Industry Responses Affect Competition
This is the accessible text file for GAO report number GAO-03-171T
entitled 'Commercial Aviation: Financial Condition and Industry
Responses Affect Competition' which was released on October 2, 2002.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
United States General Accounting Office:
GAO:
Testimony:
Before the Committee on Commerce, Science, and Transportation, U.S.
Senate:
For Release on Delivery:
Expected at 9:30 a.m. EST:
Wednesday, October 2, 2002:
Commercial Aviation:
Financial Condition and Industry Responses Affect Competition:
Statement of JayEtta Hecker:
Director, Physical Infrastructure Issues:
GAO-03-171T:
Mr. Chairman and Members of the Committee:
Thank you for inviting us to testify today on the economic state of the
airline industry. Just over a year ago, we testified before this
Committee on guidelines for providing financial assistance to the
industry. [Foonote 1] The Congress has long recognized that the
continuation of a strong, vibrant, and competitive commercial airline
industry is in the national interest. A financially strong air
transport system is critical not only for the basic movement of people
and goods, but also because of the broader effects this sector exerts
throughout the economy. In response to the industry‘s financial crisis
generated by the events of last September, the Congress passed the Air
Transportation Safety and System Stabilization Act. [Footnote 2] Thus,
it is fitting that we now return to this Committee to review the state
of the industry‘s financial health and competitiveness.
Over the past several years, we have issued a number of reports that
focus on changes within the airline industry. They include analyses of
the potential impacts on consumers of airline mergers and alliances,
carriers‘ use of regional jets, and changes in service to the nation‘s
smaller communities. [Footnote 3] Our statement today builds on that
body of work and provides a current overview of (1) the financial
condition of major U.S. commercial passenger airlines; (2) steps taken
by airlines to improve their financial condition; and (3) some public
policy issues related to current conditions and changes in the aviation
industry‘s competitive landscape.
In summary:
* Many, but not all, major U.S. passenger airlines are experiencing
their second consecutive year of record financial losses. In 2001, the
U.S. commercial passenger airline industry reported losses in excess of
$6 billion. For 2002, some Wall Street analysts recently projected that
U.S. airline industry losses will approach $7 billion, and noted that
the prospects for recovery during 2003 are diminishing. Such projections
could worsen dramatically in the event of additional armed conflict, if
travel demand drops and fuel prices rise. Several carriers have entered
Chapter 11 bankruptcy proceedings. Yet Southwest Airlines, JetBlue, and
AirTran continue to generate positive net income. These low-fare
carriers have fundamentally different business structures than most
major U.S. airlines, including different route structures and lower
operating costs. However, federal security requirements have altered
the cost of doing business for all carriers.
* Carriers have taken many actions to lower their costs and restructure
their operations. Since September 2001, carriers have furloughed an
estimated 100,000 staff, renegotiated labor contracts, and streamlined
their fleets by retiring older, costlier aircraft. Carriers have
reduced capacity by operating fewer flights or smaller aircraft, such
as substituting ’regional jets“ for large ’mainline“ jet aircraft. In
some cases, carriers eliminated all service to communities. For
example, since September 2001, carriers have notified the Department of
Transportation (DOT) that they intend to discontinue service to 30
small communities. At least two carriers are modifying their hub
operations to use resources more efficiently by spreading flights out
more evenly throughout the day. Finally, to increase revenues, some
carriers have proposed creating marketing alliances under which the
carriers would operate as code-sharing partners. [Footnote 4] United
Airlines and US Airways announced plans to form such an alliance on July
24, 2002, as did Continental Airlines, Delta Air Lines, and Northwest
Airlines one month later.
* As the aviation industry continues its attempts to recover, the
Congress will be confronted with a need for increased oversight of a
number of public policy issues. First, airlines‘ reactions to financial
pressures will affect the domestic industry‘s competitive landscape.
Some changes, such as extending airline networks to new markets through
code sharing alliances, may increase competition and benefit consumers.
Others, such as carriers‘ discontinuing service to smaller communities,
may decrease competition and reduce consumers‘ options, particularly
over the long term. Second, airlines‘ reductions in service will likely
place additional pressure on federal programs supporting air service to
small communities, where travel options are already limited. Finally,
while domestic travel has been the focus of our concern today, there
are numerous international developments”especially regarding the
European Union (EU)”that may affect established international ’open
skies“ agreements between the United States and EU member states.
Various studies have illustrated the benefits to both consumers and
carriers that flow from liberalizing aviation trade through such
agreements. As international alliances are key components of major
domestic airlines‘ networks, international aviation issues will affect
the overall condition of the industry.
Background:
The Airline Deregulation Act of 1978 has led to lower fares and better
service for most air travelers, largely because of increased
competition. The experiences of millions of Americans underscore the
benefits that have flowed to most consumers from the deregulation of
the airline industry, benefits that include dramatic reductions in
fares and expansion of service. These benefits are largely attributable
to increased competition, which has been spurred by the entry of new
airlines into the industry and established airlines into new markets.
At the same time, however, airline deregulation has not benefited
everyone; some communities have suffered from relatively high airfares
and a loss of service.
The airline industry is a complex one that has experienced years of
sizable profits and great losses. The industry‘s difficulties since
September 11, 2001, do not represent the first time that airlines have
faced a significant financial downturn. In the early 1990s, a
combination of factors (e.g., high jet fuel prices due to Iraq‘s
invasion of Kuwait and the global recession) placed the industry in
turmoil. Between 1990 and 1992, U.S. airlines reported losses of about
$10 billion. All major U.S. airlines [Footnote 5] except Southwest
reported losses during those years. In addition, several airlines”most
notably Braniff, Eastern, and Pan Am”went out of business, and Trans
World Airlines, Northwest Airlines, and Continental Airlines entered
bankruptcy proceedings. By the start of 1993, the industry had turned
the corner and entered a period during which nearly all major U.S.
airlines were profitable. The industry rebounded without massive
federal financial assistance. The events of September 11th accelerated
and aggravated negative financial trends that had begun earlier in
2001. Congress responded quickly to address potential instability in
the airline industry by enacting the Air Transportation Safety and
System Stabilization Act. Among other things, that act authorized
payments of $5 billion in direct compensation (grants) to reimburse air
carriers for losses sustained as a direct result of government actions
beginning on September 11, 2001, and for incremental losses incurred
between September 11 and December 31, 2001 as a direct result of the
terrorist attacks. The act provided $10 billion in loan guarantees to
provide airlines with emergency access to capital and established the
Air Transportation Stabilization Board (the Board) to administer the
loan program. [Footnote 6] The Board is tasked not only with providing
financial assistance to airlines but also with protecting the interests
of the federal government and American taxpayer. The act requires the
Board to ensure that airlines are compensating the government for the
financial risk in assuming guarantees. This requirement defines the
loan guarantee as a mechanism for supporting airlines with reasonable
assurances of financial recovery. In addition to the grants and loan
guarantees, the federal government has also established other ways to
ease the airlines‘ financial condition. [Footnote 7]
Many Carriers Face Deep Financial Losses:
Many major U.S. passenger airlines are experiencing their second
consecutive year of record financial losses. In 2001, the industry
reported a net loss of over $6 billion, even after having received $4.6
billion from the federal government in response to September 11th.
[Footnote 8] For 2002, some Wall Street analysts have projected that
U.S. airline industry losses will total about $7 billion, but this
projection may worsen in the event of additional armed conflict,
particularly if this results in decreasing travel demand and rising
fuel prices. According to industry data, airlines‘ revenues have
declined 24 percent since 2000, while costs have remained relatively
constant. US Airways and Vanguard Airlines filed for Chapter 11
bankruptcy during this summer. United Airlines officials stated that
they are preparing for a potential Chapter 11 bankruptcy filing this
fall.
Furthermore, some Wall Street analysts predict that it will likely take
until 2005 for the industry to return to profitability. Attachment I
summarizes the financial condition of major network and low-fare
carriers. [Footnote 9] Major airline carriers‘ revenues have fallen
because of a combination of a decline in passenger enplanements
[Footnote 10] and a significant decrease in average fares. As figure 1
shows, major carriers‘ enplanements increased for every quarter of 2000
compared to the same quarter of the previous year, but flattened in the
first quarter of 2001 and then dropped, with the steepest drop
occurring in the quarter following September 11, 2001.
Figure 1: Major Airlines‘ Passenger Enplanements (quarterly) -
Percentage Change from Prior Year:
[See PDF for image]
This figure is a vertical bar graph illustrating the major airlines‘
passenger enplanements (quarterly) - percentage change from prior year.
The vertical axis of the graph represents percent from -20 to +10. The
horizontal axis of the graph represents fiscal year quarters. The
following data is depicted:
Major Airlines‘ Passenger Enplanements - Percentage Change from Prior
Year:
January - March 2000: 4.4%;
April - June 2000: 6.1%;
July - September 2000: 2.7%;
October - December 2000: 0.7%;
January - March 2001: 0.1%;
April - June 2001: -1.4%;
July - September 2001: -9.0%;
October - December 2001:-18.5%;
January - March 2002: -11.6%;
April - June 2002: -11.2%;
Source: GAO analysis of data from the Air Transport Association.
[End of figure]
Over the same period, major airlines have also received lower average
fares. Data from the Air Transport Association indicate that the average
fare for a 1,000-mile trip dropped from $145 in June 2000 to $118 in
June 2002, a decrease of about 19 percent (see fig. 2). Average fares
started dropping noticeably in mid-2001 and have not risen
significantly since. Industry data suggest that the decline is due to
the changing mix of business and leisure passenger traffic, and
particularly to the drop in highfare business passengers.
Figure 2: Average Domestic Airfares for Major Network Carriers, January
2000 Through June 2002:
[See PDF for image]
This figure is a bar graph illustrating the average domestic airfares
for major network carriers, January 2000 through June 2002. The
vertical axis of the graph represents amount in dollars from $40 to
$160. The horizontal axis of the graph represents months. There are
separate vertical bars for each month in groups of three (representing
the same month for each year, 2000-2002.
Note: Data are in nominal dollars for 1,000-mile trips on U.S. major
airlines (excluding Southwest).
Source: GAO presentation of data from the Air Transport Association.
[End of figure]
Through June 2002, all major network carriers generated negative net
income, while low-fare carriers Southwest Airlines, JetBlue, and AirTran
returned positive net income. Like the major carriers, these low-fare
carriers‘ passenger enplanements dropped in the months immediately
following September 2001. Attachment II summarizes passenger
enplanements for individual major and low-fare carriers for 2000, 2001,
and the first 5 months of 2002.
Why have some low-fare carriers been able to earn positive net income in
current market conditions, while network carriers have not? The answer
seems to rest at least in part with their fundamentally different
business models. Low-fare carriers and major network carriers generally
have different route and cost structures. In general, low-fare carriers
fly ’point-to-point“ to and from airports in or near major metropolitan
areas, such as Los Angeles, Chicago, and Baltimore-Washington. In
comparison, major network carriers use the ’hub and spoke“ model, which
allows them to serve a large number of destinations, including not just
large cities, but small communities and international destinations as
well. American Airlines, for example, can carry a passenger from
Dubuque, Iowa, through Chicago, to Paris, France.
Low-fare carriers have also been able to keep costs lower than those of
major airline carriers. For example, 2002 data reported by the carriers
to DOT indicate that Southwest‘s costs per available seat mile (a common
measure of industry unit costs) for one type of Boeing 737 is 3.79
cents. For the same aircraft type, United Airlines reported a cost of
8.39 cents” more than twice the cost at Southwest.
All airlines are now entering an environment in which some of the costs
of doing business have increased. The federal Transportation Security
Administration has taken over responsibility for many security functions
for which airlines previously had been responsible. The Air Transport
Association (ATA) estimated that the airline industry spent about $1
billion for security in 2000. [Footnote 11] Despite the shift in
functional responsibilities, airlines have stated that they continue to
bear the costs of other new federal security requirements. In August
2002, Delta Air Lines estimated the cost of new federal security
requirements that it must bear to be about $205 million for 2002. This
includes the cost of reinforcing cockpit doors, lost revenues from
postal and cargo restrictions, and lost revenues from carrying federal
air marshals.
Airlines Have Taken Numerous Actions to Address Changing Market
Conditions:
To address mounting financial losses and changing market conditions,
carriers have begun taking a multitude of actions to cut costs and boost
revenues. First, many carriers have trimmed costs through staff
furloughs. According to the Congressional Research Service, carriers
have reduced their workforces by at least 100,000 employees since last
September. Further, some carriers, including United Airlines and US
Airways, have taken steps to renegotiate contracts in order to decrease
labor and other costs. A US Airways official stated that its
renegotiated labor agreements would save an estimated $840 million
annually.
Carriers have also grounded unneeded aircraft and accelerated the
retirement of older aircraft to streamline fleets and improve the
efficiency of maintenance, crew training, and scheduling. Carriers
accelerated the retirement of both turboprops and a variety of larger
aircraft, including Boeing 737s and 727s. For example, United and US
Airways retired the Boeing 737s used by United‘s Shuttle service and US
Airways‘ MetroJet system, and the carriers discontinued those
divisions‘ operations. Industry data indicate that the airlines have
parked over 1,400 aircraft in storage, with more than 600 having been
parked since September 2001.
Although carriers had begun reducing capacity earlier in 2001, those
reductions accelerated after the terrorist attacks. Between August 2001
and August 2002, major carriers reduced capacity by 10 percent. Carriers
can decrease capacity by reducing the number of flights or by using
smaller aircraft, such as replacing mainline service with regional jets,
which are often operated by the network carrier‘s regional affiliate and
normally have lower operating costs. For example, American Airlines
serves the markets between Boston, New York (LaGuardia), and
Washington, D.C. (Reagan National) only with regional jet service
provided by its affiliate, American Eagle. Another way carriers have
reduced capacity is to discontinue service to some markets, primarily
those less profitable, often smaller communities. Our previous work
showed that the number of small communities that were served by only
one airline increased from 83 in October 2000 to 95 by October 2001.
Between September 2001 and August 2002, carriers had notified DOT
[Footnote 12] that they intend to discontinue service to 30 additional
communities, at least 15 of which were served by only one carrier and
are now receiving federallysubsidized service under the Essential Air
Service (EAS) program. [Footnote 13]
Some carriers are modifying their ’hub and spoke“ systems. American is
spreading flights out more evenly throughout the day instead operating
many flights during peak periods. American began this effort in Chicago
and has announced that it would expand its ’de-peaking“ efforts to its
largest hub at Dallas/Fort Worth beginning November 2002. American
officials stated that these changes would increase the productivity of
labor and improve the efficiency of gate and aircraft use. Delta
officials said they are also taking steps to spread flights more evenly
throughout the day.
Beyond the steps individual carriers are taking to restructure and cut
costs, some carriers are proposing to join forces through marketing and
codesharing alliances in order to increase revenues. Under these
proposed alliances, carriers would sell seats on each other‘s flights,
and passengers would accrue frequent flyer miles. Company officials
stated that the carriers would remain independent competitors with
separate schedules, pricing, and sales functions. On July 24, 2002,
United and US Airways announced a proposed codesharing alliance to
broaden the scope of their networks and potentially stimulate demand
for travel. United and US Airways estimated that the alliance would
provide more than $200 million in annual revenue for each carrier. One
month later, Northwest announced that it had signed a similar agreement
with Continental and Delta. According to Northwest, this agreement
builds on the alliance between Northwest and Continental that had been
in existence since January 1999. These alliances would expand both
their domestic and international networks. The Department of
Transportation is currently reviewing these proposals. [Footnote 14]
Critical Public Policy Issues Are Associated With the Industry‘s
Changing Competitive Landscape:
Because a financially healthy and competitive aviation industry is in
the national interest, and because carriers‘ and the federal
government‘s efforts to address the current situation may affect
consumers both positively and negatively, Congress will be confronted
with several major public policy issues. These policy issues underscore
the difficulties this industry will encounter as it adapts to a new
market environment. We are highlighting three of these issues: the
effect of airlines‘ current financial situation, including new business
costs, on industry health and competition; the impact of reductions in
service on federal programs designed to protect service to small
communities, and international developments that may further affect the
domestic industry.
* How will the carriers‘ reactions to current financial pressures
affect the industry‘s competitive landscape? There is a new aviation
business reality that has increased the airlines‘ financial pressures
and which ultimately will be felt by U.S. consumers. Increased federal
security requirements, which are part of this new reality, are adding
to the cost of competing in the industry. The cost of these policies
will most likely be borne both by industry, through higher operational
costs, and the consumer, through higher fares. In the current pricing
environment, carriers may not be able to pass on these costs to
consumers, and thus may be bearing their full impact during the short
run. On the other hand, these same security requirements may be helping
the airlines maintain some of its passenger revenue; some portion of
the airlines‘ current passengers may be flying only as a result of
knowing that these heightened security requirements are in place. Thus,
the question arises about the net impact of the new market environment
and new security requirements on the carriers and their passengers
while the industry restructures. While understandable from the
perspective of an individual airline‘s bottom line, the restructuring
activities of individual carriers will significantly change the
competitive landscape. When carriers decrease available capacity in a
market by reducing the number of flights, decreasing the size of
aircraft used to meet reduced demand, or dropping markets altogether,
the net result is that consumers have fewer options. In doing so,
airlines reduce the amount of competition in those markets. As has been
shown repeatedly, less competition generally leads to higher fares in
the long run.
A related issue concerns the industry‘s consolidation, whether through
marketing alliances among or mergers between carriers. Because of the
potential that consolidation presents for competition, federal
oversight has been critical. As we have noted before, while alliances
may offer potential consumer benefits associated with expanded route
networks, more frequency options, improved connections, and frequent
flyer benefits, consolidation within the industry raises a number of
critical public policy issues. [Footnote 15] These include increasing
potential barriers to market entry, the loss of competition in key
markets, and a greater risk of travel disruptions as a result of labor
disputes. [Footnote 16] Since these alliances and mergers have a
direct impact on the level of competition within the airline industry
and would therefore influence the affordability of air travel to many
consumers, these issues are still relevant.
* How will the federal government‘s support of small community air
service be affected? The Congress has long recognized that many small
communities have difficulty attracting and maintaining scheduled air
service. Now, as airlines continue to reduce capacity, small communities
will potentially see even further reductions in service. This will
increase the pressure on the federal government to preserve and enhance
air service to these communities. There are two main programs that
provide federal assistance to small communities: the Essential Air
Service (EAS) program, which provides subsidies to commercial air
carriers to serve the nation‘s smallest communities, and the Small
Community Air Service Development Pilot Program, which provides grants
to small communities to enhance their air service. [Footnote 17]
As we reported in August, the number of communities that qualify for
EAS-subsidized service has grown over the last year, and there are clear
indications that that number will continue to grow. Federal awards under
the program have increased from just over $40 million in 1999 to an
estimated $97 million in fiscal year 2002. [Footnote 18] As carriers
continue to drop service in some markets, more communities will become
eligible for subsidized EAS service.
In 2002, nearly 180 communities requested over $142.5 million in grants
under the Small Community Air Service Development Pilot Program. DOT
awarded the total $20 million available to 40 communities in 38 states
to assist them in developing or enhancing their air service. The grants
will be used for a variety of programs, including financial incentives
to carriers to encourage either new or expanded air service, marketing
campaigns to educate travelers about local air service, and support of
alternative transportation. We are currently studying efforts to
enhance air service in small communities, and expect to report on these
programs early next year.
* How will future international developments affect established
agreements between the US and EU member states? There are a number of
international issues that will influence the domestic aviation
industry‘s attempts to recover from financial losses. The European Court
of Justice is expected to reach a decision in the near future on the
authority of individual European Union nations to negotiate bilateral
agreements. This could raise uncertainties over the status of ’open
skies“ agreements [Footnote 19] that the United States has signed with
individual European Union nations. This is especially critical with
regard to negotiating an open skies agreement with the United Kingdom,
our largest aviation trading partner overseas. Because almost all of
the major US carriers partner with European airlines in worldwide
alliances, this decision could potentially impact the status of
antitrust immunity for these alliances, which could in turn affect
alliances established with airlines serving the Pacific Rim or Latin
America. These alliances are key components of several major airlines‘
networks and as such significantly affect their overall financial
status. Various studies have illustrated the benefits to both consumers
and carriers that flow from liberalizing aviation trade through ’open
skies“ agreements between the United States and other countries.
This concludes my statement. I would be pleased to answer any questions
you or other members of the Committee might have.
Contact and Acknowledgement:
For further information on this testimony, please contract JayEtta
Hecker at (202) 512-2834. Individuals making key contributions to this
testimony included Triana Bash, Carmen Donohue, Janet Frisch, Patty
Hsieh, Steve Martin, Tim Schindler, Sharon Silas, Pamela Vines, and
Alwynne Wilbur.
[End of section]
Appendix I: Summary of Network and Lowfare Airlines‘ Financial
Condition, 2000 – June 2002:
Network carriers: Alaska;
Net income (loss) 2000: ($70,300,000);
Net income (loss) 2001: ($39,500,000);
Net income (loss) 2002:2Q: ($4,500,000)[A].
Network carriers: America West;
Net income (loss) 2000: $7,679,000;
Net income (loss) 2001: ($147,871,000);
Net income (loss) 2002:2Q: ($366,759,000)[B].
Network carriers: American;
Net income (loss) 2000: $813,000,000;
Net income (loss) 2001: ($1,762,000,000);
Net income (loss) 2002:2Q: ($1,070,000,000)[C].
Network carriers: Continental;
Net income (loss) 2000: $342,000,000;
Net income (loss) 2001: ($95,000,000);
Net income (loss) 2002:2Q: ($305,000,000).
Network carriers: Delta;
Net income (loss) 2000: $897,000,000;
Net income (loss) 2001: ($1,027,000,000);
Net income (loss) 2002:2Q: ($583,000,000).
Network carriers: Northwest;
Net income (loss) 2000: $256,000,000;
Net income (loss) 2001: ($423,000,000);
Net income (loss) 2002:2Q: ($264,000,000).
Network carriers: United;
Net income (loss) 2000: $50,000,000;
Net income (loss) 2001: ($2,145,000,000);
Net income (loss) 2002:2Q: ($850,000,000)[D].
Network carriers: US Airways;
Net income (loss) 2000: ($269,000,000);
Net income (loss) 2001: ($2,117,000,000);
Net income (loss) 2002:2Q: ($517,000,000)[E].
Network carriers: Total;
Net income (loss) 2000: $2,026,379,000;
Net income (loss) 2001: ($7,756,371,000);
Net income (loss) 2002:2Q: ($3,960,259,000).
Low-fare carriers: AirTran;
Net income (loss) 2000: $47,436,000;
Net income (loss) 2001: ($2,757,000);
Net income (loss) 2002:2Q: $2,027,000[F].
Low-fare carriers: American Trans Air;
Net income (loss) 2000: ($15,699,000);
Net income (loss) 2001: ($81,885,000);
Net income (loss) 2002:2Q: ($53,518,000)[G].
Low-fare carriers: Frontier(8);
Net income (loss) 2000: $54,868,000;
Net income (loss) 2001: $16,550,000;
Net income (loss) 2002:2Q: ($2,935,572).
Low-fare carriers: JetBlue;
Net income (loss) 2000: [Empty];
Net income (loss) 2001: [Empty];
Net income (loss) 2002:2Q: $27,590,000[H].
Low-fare carriers: Southwest;
Net income (loss) 2000: $603,093,000;
Net income (loss) 2001: $511,147,000;
Net income (loss) 2002:2Q: $123,683,000.
Low-fare carriers: Vanguard;
Net income (loss) 2000: ($26,031,626);
Net income (loss) 2001: ($30,914,459);
Net income (loss) 2002:2Q: ($7,963,262)[I].
Low-fare carriers: Total;
Net income (loss) 2000: $663,666,374;
Net income (loss) 2001: $412,140,541;
Net income (loss) 2002:2Q: $88,883,166.
Source: Airline annual reports and SEC filings.
Notes: Unless otherwise stated, 2002:Q2 data is for six (6) months
ended 6/30/02. Spirit Airline‘s data is unavailable as it is a
privately held concern.
[A] Three (3) months ended 6/30/02. Alaska Air Group, Inc.
[B] America West Holdings Corp.
[C] AMR Corporation.
[D] UAL Corporation.
[E] US Airways Group.
[F] AirTran Holdings, Inc.
[G] ATA Holdings, Inc. and subsidiaries. Formerly Amtran, Inc.
[H] Data reflects Frontier FY 2001 ended 3/31/01; FY 2002 ended
3/31/02; FY 2003:1Q three (3) months ended 6/30/02.
[I] JetBlue Airways Corporation went public on 4/11/2002.
[J] Three (3) months ended 3/31/02. Filed Chapter 11 on 7/30/02.
[End of table]
[End of section]
Appendix II: Summary of Network and Lowfare Carrier Enplanements, 2000-
2002 (January to May):
Network carriers: Alaska;
2000: 12,841,367;
2001: 13,241,705;
Percentage change (2000-2001): 3.1%;
2002 (Jan to May): 5,067,518;
2001 (Jan to May): 5,570,751;
Percentage change (Jan to May 2001-2002): -9.0%.
Network carriers: America West;
2000: 19,989,290;
2001: 19,432,305;
Percentage change (2000-2001): -2.8%;
2002 (Jan to May): 7,506,559;
2001 (Jan to May): 8,484,761;
Percentage change (Jan to May 2001-2002): -11.5%.
Network carriers: American;
2000: 69,431,436;
2001: 62,661,131;
Percentage change (2000-2001): -9.8%;
2002 (Jan to May): 31,772,755;
2001 (Jan to May): 27,156,822;
Percentage change (Jan to May 2001-2002): 17.0%.
Network carriers: Continental;
2000: 37,118,040;
2001: 35,085,749;
Percentage change (2000-2001): -5.5%;
2002 (Jan to May): 13,445,688;
2001 (Jan to May): 15,311,743;
Percentage change (Jan to May 2001-2002): -12.2%.
Network carriers: Delta;
2000: 100,389,816;
2001: 88,928,779;
Percentage change (2000-2001): -11.4%;
2002 (Jan to May): 34,372,033;
2001 (Jan to May): 38,791,329;
Percentage change (Jan to May 2001-2002): -11.4%.
Network carriers: Northwest;
2000: 49,464,897;
2001: 45,570,838;
Percentage change (2000-2001): -7.9%;
2002 (Jan to May): 17,328,913;
2001 (Jan to May): 19,515,133;
Percentage change (Jan to May 2001-2002): -11.2%.
Network carriers: United;
2000: 73,757,167;
2001: 65,259,307;
Percentage change (2000-2001): -11.5%;
2002 (Jan to May): 22,852,094;
2001 (Jan to May): 28,424,896;
Percentage change (Jan to May 2001-2002): -19.6%.
Network carriers: US Airways;
2000: 58,035,050;
2001: 53,806,153;
Percentage change (2000-2001): -7.3%;
2002 (Jan to May): 19,428,304;
2001 (Jan to May): 24,287,301;
Percentage change (Jan to May 2001-2002): -20.0%.
Low-fare carriers:
2000:
2001:
Percentage change (2000-2001):
2002 (Jan to May):
2001 (Jan to May):
Percentage change (Jan to May 2001-2002):
Low-fare carriers: AirTran;
2000: 8,014,274;
2001: 8,306,772;
Percentage change (2000-2001): 3.6%;
2002 (Jan to May): 3,868,744;
2001 (Jan to May): 3,661,883;
Percentage change (Jan to May 2001-2002): 5.6%.
Low-fare carriers: American Trans Air;
2000: 6,183,661;
2001: 6,856,076;
Percentage change (2000-2001): 10.9%;
2002 (Jan to May): 3,056,609;
2001 (Jan to May): 2,938,045;
Percentage change (Jan to May 2001-2002): 4.0%.
Low-fare carriers: Frontier;
2000: 3,065,564;
2001: 2,907,611;
Percentage change (2000-2001): -5.2%;
2002 (Jan to May): 1,468,583;
2001 (Jan to May): 1,329,633;
Percentage change (Jan to May 2001-2002): 10.5%.
Low-fare carriers: JetBlue;
2000: 1,147,761;
2001: 3,118,096;
Percentage change (2000-2001): 171.7%;
2002 (Jan to May): 2,055,962;
2001 (Jan to May): 1,131,841;
Percentage change (Jan to May 2001-2002): 81.6%.
Low-fare carriers: Southwest;
2000: 82,170,284;
2001: 82,234,829;
Percentage change (2000-2001): 0.1%;
2002 (Jan to May): 32,570,332;
2001 (Jan to May): 34,679,716;
Percentage change (Jan to May 2001-2002): -6.1%.
Low-fare carriers: Spirit;
2000: 2,817,734;
2001: 3,290,277;
Percentage change (2000-2001): 16.8%;
2002 (Jan to May): 1,443,537;
2001 (Jan to May): 1,537,719;
Percentage change (Jan to May 2001-2002): -6.1%.
Low-fare carriers: Vanguard;
2000: 1,880,257;
2001: 1,421,062;
Percentage change (2000-2001): -24.4%;
2002 (Jan to May): 664,479;
2001 (Jan to May): 587,492;
Percentage change (Jan to May 2001-2002): 13.1%.
Source: GAO analysis of data from BACK Aviation Solutions.
[End of table]
[End of section]
Related GAO Products:
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.
Proposed Alliance Between American Airlines and British Airways
Raises Competition Concerns and Public Interest Issues. GAO-02-293R.
Washington, D.C.: December 21, 2001.
’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-01-831. 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. RCED-00-34. Washington, D.C.: April 14, 2000.
Aviation Competition: Effects on Consumers from Domestic Airline
Alliances Vary RCED-99-37. Washington, D.C.: January 15, 1999.
[End of section]
Footnotes:
[1] Commercial Aviation: A Framework for Considering Federal Financial
Assistance (GAO-01-1163T), September 20, 2001.
[2] P.L. 107-42.
[3] See list of related GAO products attached to this statement.
[4] In general, ’code sharing“ refers to the practice of airlines
applying their names”and selling tickets via reservation systems”to
flights operated by other carriers.
[5] For the purpose of this report, major airlines include Alaska
Airlines, America West Airlines, American Airlines, American Trans Air,
Continental Airlines, Delta Air Lines, Northwest Airlines, Southwest
Airlines, United Airlines, and US Airways.
[6] The Air Transportation Stabilization Board is composed of the
Chairman of the Federal Reserve, the Secretary of Transportation, the
Secretary of Treasury, and the Comptroller General. The Comptroller
General is a non-voting member.
[7] The Air Transportation Safety and System Stabilization Act (Title
III) authorized the Secretary of the Treasury to change the due date
for any tax payment due between September 10 and November 15 to some
time after November 15 (with January 15, 2002 as the maximum
extension). The act specifies taxes that may be postponed to include
excise and payroll taxes. Under Title II, (Aviation Insurance), the act
also authorized DOT to reimburse qualifying air carriers for insurance
increases experienced after the events of September 11th for up to 180
days. Funding constraints effectively limited the program to
reimbursing carriers their excess war risk insurance premiums for only
30 days.
[8] The federal government has provided significant amounts of
financial assistance under the Stabilization Act. First, according to
data from DOT, as of September 18, 2002, 396 passenger and cargo
carriers had received payments totaling $4.6 billion. Second, 16
carriers submitted applications for loan guarantees. The Board approved
a loan of $429 million to America West Airlines, and conditionally
approved the applications of US Airways, Inc. for a federal guarantee
of $900 million and American Trans Air for a federal guarantee of
$148.5 million. The Board has denied the applications of four airlines.
Third, various airlines have taken advantage of the tax deferment. For
example, Southwest stated that it deferred approximately $186 million
in tax payments until January 2002. Finally, the Federal Aviation
Administration provided reimbursements to air carriers for up to 30 days
of increased war risk insurance expense. To date, 188 air carriers have
received $56.9 million in reimbursements. We are completing reviews of
the $5 billion financial assistance program and the War Risk Insurance
Reimbursement program to ensure that payments made were in compliance
with the act.
[9] Network carries are defined as carriers using a hub and spoke
system. Under this system, airlines bring passengers from a large
number of ’spoke“ cities to one central location (the hub) and
redistribute these passengers to connecting flights headed to
passengers‘ final destinations. We adopted DOT‘s definition of low-fare
carriers, which includes AirTran, American Trans Air, Frontier,
JetBlue, Southwest, Spirit, and Vanguard.
[10] ’Enplanements“ represents the total number of passengers boarding
an aircraft. Thus, for example, a passenger that must make a single
connection between his or her origin and destination counts as two
enplaned passengers because he or she boarded two separate flights.
[11] The amount that the industry paid for security in 2000 is in
question. ATA‘s $1 billion estimate, made in August 2001, included $462
million annually for direct costs, $50 million for security technology
and training costs, and $110 for acquisition of security equipment.
Since then, ATA certified that the industry incurred only about $300
million in securityrelated costs. The amount is important, because the
airlines are required to remit an amount equal to the security costs
incurred by the airlines in calendar year 2000 to the U.S. government,
which assumed certain civil aviation security functions through the
Transportation Security Administration. DOT‘s Inspector General is
examining the discrepancy between the $1 billion and the $300 million
estimates.
[12] Under 49 USC 41734, carriers must file a notice with DOT of their
intent to suspend service, and DOT is compelled by statute to require
those carriers to continue serving those communities for a 90-day
period.
[13] The EAS program, established as part of the Airline Deregulation
Act of 1978, guaranteed that communities served by air carriers before
deregulation would continue to receive a certain level of scheduled air
service, with special provisions for Alaskan communities. As of July 1,
2002, the EAS program provided subsidies to air carriers to serve 114
communities.
[14] DOT is authorized under 49 U.S.C. 41712 to block the airlines from
implementing their agreements, if it determines that the agreements‘
implementation would be an unfair or deceptive practice or unfair
method of competition. Such a determination is analogous to the review
of major mergers and acquisitions conducted by the Justice Department
and the Federal Trade Commission under the Hart-Scott-Rodino Act, 15
U.S.C. 18a.
[15] Airline Competition: Issues Raised by Consolidation Proposals (GAO-
01-402T), February 7, 2001.
[16] GAO has recently initiated an analysis of issues relating to
airline industry labormanagement relations conducted under the Railway
Labor Act.
[17] Congress created the Small Community Air Service Development Pilot
Program under the Wendell H. Ford Aviation Investment and Reform Act
for the 21st Century (P.L. 106-181). That act authorized $75 million
over 3 years. DOT made no awards under the act in fiscal year 2001,
because the Congress did not appropriate any funds for the first year
of the program but $20 million was appropriated for fiscal year 2002.
[18] Figures in constant 2002 dollars.
[19] ’Open skies“ agreements are bilateral air service agreements that
remove the vast majority of restrictions on how the airlines of the two
countries signing the agreement may operate between, behind, and beyond
gateways in their respective territories. DOT has successfully
negotiated open skies agreements with 56 governments, including many in
Europe.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Jeff Nelligan, Managing Director, AndersonP1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
