Aviation Assistance
Information on Payments Made Under the Disaster Relief and Insurance Reimbursement Programs
Gao ID: GAO-03-1156R September 17, 2003
As a result of the September 11, 2001, terrorist attacks on the United States, the airline industry incurred significant losses resulting from the temporary shutdown of the nation's airspace and passengers' apprehensions about flying following the attacks. The Air Transportation Safety and System Stabilization Act (the Act) provided, among other things, $5 billion in emergency assistance to compensate air carriers for their direct and incremental losses stemming from the attacks. The Act also authorized the Department of Transportation (DOT) to reimburse air carriers for increases in their insurance premiums. On September 28, 2001, we completed the first phase of the work Congress requested, concluding that there was a reasonable basis to assume that the airlines' financial losses related to September 11 would exceed the $5 billion made available in the Act. Since then and pursuant to the second part of the request, we monitored DOT's progress in administering the disaster relief and insurance reimbursement programs and provided periodic status updates to Congress.
DOT designed and implemented a structured claim review process to help ensure that the $5 billion in disaster relief funds were used only to compensate carriers for their September 11 related losses. A team of DOT accountants, economists, and aviation analysts with support from the department's Offices of the General Counsel and the Inspector General administered the disaster relief program, reviewed carriers' loss claims, and determined carriers' allowable September 11 related losses. As specified in the Act, each carrier was compensated the lesser of allowable actual losses or the market share formula amount. The major air carriers claimed losses of $5.6 billion related to the terrorist attacks. These carriers have been paid $4.1 billion or 88 percent of the total $4.6 billion distributed. As of August 26, 2003, DOT reported that most air carriers had received their final payments pursuant to this program, although a small number of claims remained open due to unresolved issues. All the major carriers except Federal Express have received their final payment. Federal Express has an administrative appeal and a lawsuit pending with regard to its payment. Overall, the major carriers recovered approximately 73 percent of their claimed losses, although 8 of the 14 major carriers had all their September 11 losses compensated. The remaining 6 carriers' losses were only partially compensated because their allowable September 11 losses exceeded the amount determined by applying the market share formulae prescribed in the Act. Industry wide, 355 of the total 448 applicants receiving assistance were paid based on the formula. Because 93 carriers had actual losses less than their formula amount, DOT will not distribute the entire $5 billion provided in the Act. DOT advised the Congress of this fact and in February 2003 the Congress rescinded $90 million. DOT officials plan to return any remaining unused funds to the Treasury upon the completion of the program. With regard to the insurance reimbursement program, the FAA implemented a systematic review process to determine the increases carriers experienced in their war risk insurance premiums following the terrorist attacks and to reimburse the carriers accordingly. FAA utilized insurance providers' invoices to substantiate the premiums being charged immediately before September 11 and to evidence premium increases following September 11. For each of the major air carriers, we verified FAA's reimbursement determinations by independently recalculating these amounts. In total, 183 carriers were reimbursed $68 million for their increased insurance costs. The major carriers received $58 million, or 85 percent, of this total. Soon after the terrorist attacks, insurance providers generally cancelled carriers' war risk insurance coverage but then offered to reinstate the policies at a substantially higher cost and with reduced coverage limits. For the major carriers combined, the total annual cost for war risk coverage jumped from approximately $12 million prior to the attacks to more than $700 million immediately afterwards. This led to the Secretary of Transportation's determination that war risk insurance was not available commercially on reasonable terms and conditions and thus FAA was authorized to begin temporarily selling war risk coverage to air carriers operating domestic flights. Under current legislation, FAA may continue to provide war risk coverage through August 2004 with a possible extension through December 2004. In its 2003 Accountability Report, FAA reported that it had extended $113 billion in coverage to 71 carriers, thereby increasing the federal government's risk exposure. Meanwhile, air carriers have begun to explore other options including a risk retention group to provide more affordable coverage in anticipation of FAA's offering of war risk insurance terminating in 2004.
GAO-03-1156R, Aviation Assistance: Information on Payments Made Under the Disaster Relief and Insurance Reimbursement Programs
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September 17, 2003:
Congressional Requesters:
Subject: Aviation Assistance: Information on Payments Made Under the
Disaster Relief and Insurance Reimbursement Programs:
As a result of the September 11, 2001, terrorist attacks on the United
States, the airline industry incurred significant losses resulting from
the temporary shutdown of the nation's airspace and passengers'
apprehensions about flying following the attacks. The Air
Transportation Safety and System Stabilization Act[Footnote 1] (the
Act) provided, among other things, $5 billion in emergency assistance
to compensate air carriers for their direct and incremental losses
stemming from the attacks. The Act also authorized the Department of
Transportation (DOT) to reimburse air carriers for increases in their
insurance premiums.
On September 28, 2001, we completed and briefed you on the first phase
of the work you requested, concluding that there was a reasonable basis
to assume that the airlines' financial losses related to September 11
would exceed the $5 billion made available in the Act.[Footnote 2]
Since then and pursuant to the second part of your request, we
monitored DOT's progress in administering the disaster relief and
insurance reimbursement programs and provided periodic status updates
to your offices.
On September 3, 2003, we provided our final briefing addressing the
second aspect of your request. Specifically, for the $5 billion
disaster relief program, we discussed the process DOT employed to help
ensure that the payments it made were only for the direct and
incremental losses stemming from the terrorist attacks. We also
provided information about the losses claimed by the major air carriers
and payments made by DOT to these carriers and others that applied for
assistance. For the insurance reimbursement program, which was
administered by the Federal Aviation Administration (FAA), we discussed
the process FAA used to determine and reimburse air carriers for
insurance premium increases resulting from the September 11, 2001,
disaster. We also provided information on the total payments made under
the program. Finally, we discussed FAA's expanded in-house aviation
insurance program and the potential impact to the federal government.
The briefing slides, which provide more detail on our analysis, are
enclosed.
Results in Brief:
DOT designed and implemented a structured claim review process to help
ensure that the $5 billion in disaster relief funds were used only to
compensate carriers for their September 11 related losses. A team of
DOT accountants, economists, and aviation analysts with support from
the department's Offices of the General Counsel and the Inspector
General administered the disaster relief program, reviewed carriers'
loss claims, and determined carriers' allowable September 11 related
losses. As specified in the Act, each carrier was compensated the
lesser of allowable actual losses or the market share formula
amount.[Footnote 3] The major air carriers claimed losses of $5.6
billion related to the terrorist attacks. These carriers have been paid
$4.1 billion or 88 percent of the total $4.6 billion distributed. As of
August 26, 2003, DOT reported that most air carriers had received their
final payments pursuant to this program, although a small number of
claims remained open due to unresolved issues. All the major carriers
except Federal Express have received their final payment. Federal
Express has an administrative appeal and a lawsuit pending with regard
to its payment.
Overall, the major carriers recovered approximately 73 percent of their
claimed losses, although 8 of the 14 major carriers had all their
September 11 losses compensated. The remaining 6 carriers' losses were
only partially compensated because their allowable September 11 losses
exceeded the amount determined by applying the market share formulae
prescribed in the Act. Industry wide, 355 of the total 448 applicants
receiving assistance were paid based on the formula. Because 93
carriers had actual losses less than their formula amount, DOT will not
distribute the entire $5 billion provided in the Act. DOT advised the
Congress of this fact and in February 2003 the Congress rescinded $90
million.[Footnote 4] DOT officials plan to return any remaining unused
funds to the Treasury upon the completion of the program.
With regard to the insurance reimbursement program, the FAA implemented
a systematic review process to determine the increases carriers
experienced in their war risk insurance premiums following the
terrorist attacks and to reimburse the carriers accordingly.[Footnote
5] FAA utilized insurance providers' invoices to substantiate the
premiums being charged immediately before September 11 and to evidence
premium increases following September 11.[Footnote 6] For each of the
major air carriers, we verified FAA's reimbursement determinations by
independently recalculating these amounts. In total, 183 carriers were
reimbursed $68 million for their increased insurance costs. The major
carriers received $58 million, or 85 percent, of this total.
Soon after the terrorist attacks, insurance providers generally
cancelled carriers' war risk insurance coverage but then offered to
reinstate the policies at a substantially higher cost and with reduced
coverage limits. For the major carriers combined, the total annual cost
for war risk coverage jumped from approximately $12 million prior to
the attacks to more than $700 million immediately afterwards. This led
to the Secretary of Transportation's determination that war risk
insurance was not available commercially on reasonable terms and
conditions and thus FAA was authorized to begin temporarily selling war
risk coverage to air carriers operating domestic flights. Under current
legislation, FAA may continue to provide war risk coverage through
August 2004 with a possible extension through December 2004. In its
2003 Accountability Report, FAA reported that it had extended $113
billion in coverage to 71 carriers, thereby increasing the federal
government's risk exposure. Meanwhile, air carriers have begun to
explore other options including a risk retention group to provide more
affordable coverage in anticipation of FAA's offering of war risk
insurance terminating in 2004.
Scope and Methodology:
Our review primarily focused on the major air carriers. DOT defines a
major carrier as an air carrier whose annual operating revenue exceeds
$1 billion. To achieve our objectives we performed various procedures,
which are described in detail in Appendix I of the enclosed slides. We
did not audit the major air carriers or the underlying records
supporting the claims for disaster relief payments. Also, we did not
assess the reasonableness of the pre-or post-September 11 premiums
charged to carriers for war risk insurance coverage. We conducted our
review from September 2001 through August 2003 in accordance with
generally accepted government auditing standards.
Agency Comments:
We requested comments on a draft of these briefing slides from the
Secretary of Transportation or his designee. On August 26, 2003, DOT
provided us with oral comments expressing the department's general
agreement with the facts presented. DOT provided some technical
comments, which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from its date. At that time, we will send copies to the Secretary of
Transportation, the Administrator, Federal Aviation Administration,
and interested congressional committees. We will also provide copies to
others on request. The report will also be available at no charge on
the GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)
512-9508, or Phillip McIntyre, Assistant Director, at (202) 512-4373.
You may also reach us by e-mail at calboml@gao.gov or
mcintyrep@gao.gov. Other key contributors to this assignment were
Jeffrey Jacobson, Ruth Walk, and Doris Yanger.
Linda Calbom:
Director, Financial Management and Assurance:
Signed by Linda Calbom:
Enclosure:
List of Requesters:
The Honorable Robert C. Byrd:
Ranking Minority Member:
Committee on Appropriations:
United States Senate:
The Honorable Ernest F. Hollings:
Ranking Minority Member:
Committee on Commerce, Science and Transportation:
United States Senate:
The Honorable John D. Rockefeller IV:
Ranking Minority Member:
Subcommittee on Aviation:
Committee on Commerce, Science and Transportation:
United States Senate:
The Honorable Ron Wyden:
United States Senate:
The Honorable Lloyd Doggett:
House of Representatives:
Enclosure:
[See PDF for images]
[End of section]
(190038):
FOOTNOTES
[1] Pub. L. No. 107-42, 115 Stat. 230 (2001).
[2] The briefing slides and a summary of our analysis were included in
our October 5, 2001, correspondence to you. See GAO-02-133R Financial
Management: Assessment of the Airline Industry's Estimated Losses
Arising From the Events of September 11.
[3] The formula amount is calculated by dividing the carrier's
available seat miles (ASMs) or revenue ton miles (RTMs) by the universe
of ASMs/RTMs (a reflection of market share) multiplied by available
compensation.
[4] Public Law 108-7, sec 333, 117 Stat. 414 (2003)
[5] War risk insurance provides coverage to carriers for losses
resulting from war, terrorism, or other hostile acts. These policies
typically provide coverage for the aircraft and liability.
[6] The Act specified insurance increases were to be measured against
the rates in effect during the period September 4-10, 2001.