Aviation Assistance
Compensation Criteria and Payment Equity under the Air Transportation Safety and System Stabilization Act Gao ID: GAO-04-725R June 4, 2004In response to the September 11, 2001, terrorist attacks on the United States, the Congress enacted the Air Transportation Safety and System Stabilization Act (Stabilization Act) that provided, among other things, $5 billion in emergency assistance to compensate the nation's air carriers for losses incurred as a result of the attacks. Pursuant to a previous congressional request, we monitored the Department of Transportation's (DOT) progress in administering the emergency assistance program. As a result of our work, we reported on the payment process DOT employed to administer the program, details on the losses claimed by the air carriers, and the payments disbursed under the program. Now, Section 824 of the Vision 100 Century of Aviation Reauthorization Act requires that we report on the criteria and procedures used by DOT to compensate air carriers under the Stabilization Act emergency assistance program with a particular focus on whether it is appropriate to compensate air carriers for the decrease in value (asset impairment) of their aircraft after September 11, 2001, and to ensure that comparable air carriers receive comparable percentages of the maximum compensation payable. DOT published its criteria and procedures in a series of guidelines and regulations promulgated between September 2001 and August 2002. The DOT regulations relevant to asset impairment and comparable compensation, among others, are the subject of a suit pending in the U.S. Court of Appeals for the District of Columbia Circuit. Since DOT's regulations are subject to the court's review, we will not specifically address the appropriateness of DOT's criteria and procedures as they relate to these matters. The litigation is discussed in more detail later in this report. In light of the ongoing litigation, GAO met with staff and agreed that we would (1) describe the measure(s) by which the air carriers were compensated under the Stabilization Act as well as DOT's criteria and procedures, such as policies on impairment, established to administer the program and (2) determine if there are possible scenarios under which air carriers, comparable in size and type (cargo or passenger), conceivably could receive different levels of compensation.
Sections 101 and 103 of the Stabilization Act established three criteria on which to base air carriers' compensation amounts: (1) direct losses incurred as a result of the federal ground stop order and incremental losses incurred from September 11 through December 31, 2001, as a result of the terrorist attacks; (2) carrier type (e.g., passenger or cargo); and (3) a calculated formula amount based upon each carrier's percentage of industry capacity and the total amount of compensation available under the legislation. Because the statute required that the maximum air carrier compensation amounts be equal to the lesser of direct and incremental losses as determined by DOT or this formula amount, the formula effectively "capped" the amount of compensation an air carrier could receive for its September 11-related losses. DOT published a series of procedural rules describing the compensation process and provided additional guidance for how it would determine, among other things, direct and incremental losses, including policies relating to the exclusion of asset impairment losses. Generally, DOT excluded impairment losses for a number of reasons, including DOT's view that these losses were presumed to be typically experienced over a period much longer than the September 11 through December 31, 2001, compensation period and that it would be difficult, if not impossible, to separate impairment losses due to the terrorist attacks from impairment losses associated with the general economic slowdown generally acknowledged to be under way at the time of the attacks. A number of factors influenced the amount of compensation air carriers ultimately received under the Stabilization Act. Conceivably, these factors could result in scenarios in which comparable air carriers could have received different levels of compensation. For example, two air carriers could have comparable losses related to September 11, but be subject to different formula caps because they had different capacity levels. If one or both carriers had losses that exceeded the formula amount, the formula would cap the compensation amount at different levels. Other factors unique to individual air carriers, such as geographic location and carrier forecasts, influenced the amount of direct and incremental losses an air carrier reported and affected the compensation levels air carriers could potentially receive. For example, air carriers located on the East Coast where the market showed a greater sensitivity to the terrorist attacks may have incurred more revenue decline and more direct and incremental losses than carriers on the West Coast. Also, because forecasts formed the basis of a carrier's direct and incremental losses, an optimistic forecast could have resulted in more direct and incremental losses than a pessimistic forecast. These and other factors or combinations of factors influenced the levels of compensation in different ways for different carriers.
GAO-04-725R, Aviation Assistance: Compensation Criteria and Payment Equity under the Air Transportation Safety and System Stabilization Act
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June 4, 2004:
The Honorable John McCain:
Chairman:
The Honorable Ernest Hollings:
Ranking Minority Member:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Don Young:
Chairman:
The Honorable James L. Oberstar:
Ranking Democratic Member:
Committee on Transportation and Infrastructure:
House of Representatives:
Subject: Aviation Assistance: Compensation Criteria and Payment Equity
under the Air Transportation Safety and System Stabilization Act:
In response to the September 11, 2001, terrorist attacks on the United
States, the Congress enacted the Air Transportation Safety and System
Stabilization Act (Stabilization Act)[Footnote 1] that provided, among
other things, $5 billion in emergency assistance to compensate the
nation's air carriers for losses incurred as a result of the attacks.
Pursuant to a previous congressional request, we monitored the
Department of Transportation's[Footnote 2] (DOT) progress in
administering the emergency assistance program. As a result of our
work, we reported[Footnote 3] on the payment process DOT employed to
administer the program, details on the losses claimed by the air
carriers, and the payments disbursed under the program.
Now, Section 824 of the Vision 100 - Century of Aviation
Reauthorization Act[Footnote 4] requires that we report on the criteria
and procedures used by DOT to compensate air carriers under the
Stabilization Act emergency assistance program with a particular focus
on whether it is appropriate to compensate air carriers for the
decrease in value (asset impairment) of their aircraft after September
11, 2001, and to ensure that comparable air carriers receive comparable
percentages of the maximum compensation payable. DOT published its
criteria and procedures in a series of guidelines and regulations
promulgated between September 2001 and August 2002.
The DOT regulations relevant to asset impairment and comparable
compensation, among others, are the subject of a suit pending in the
U.S. Court of Appeals for the District of Columbia Circuit. Since DOT's
regulations are subject to the court's review, we will not specifically
address the appropriateness of DOT's criteria and procedures as they
relate to these matters. The litigation is discussed in more detail
later in this report. In light of the ongoing litigation, we met with
your staff and agreed that we would (1) describe the measure(s) by
which the air carriers were compensated under the Stabilization Act as
well as DOT's criteria and procedures, such as policies on impairment,
established to administer the program and (2) determine if there are
possible scenarios under which air carriers, comparable in size and
type (cargo or passenger), conceivably could receive different levels
of compensation.
In order to address the first objective, we reviewed the Stabilization
Act, analyzed DOT's regulations and implementation guidance, and
interviewed the DOT staff who administered the program. Additionally,
we reviewed and analyzed the arguments contained in the legal briefs
filed by the air carriers and DOT in the U.S. Court of Appeals for the
District of Columbia Circuit. For the second objective, we determined
if there were possible scenarios under which comparable air carriers
could potentially receive different amounts of compensation. On the
basis of our previous work,[Footnote 5] we identified various factors
that influenced the amount of compensation a carrier could receive and
illustrated the impact of these factors in several different scenarios.
We discussed these scenarios with the DOT officials who administered
the program to obtain assurances that our scenarios were representative
of situations that they observed in administering the program. We were
unable to base our scenarios on details from actual claim files because
of the confidential and proprietary nature of much of those data. We
requested comments on a draft of this report from the Secretary of
Transportation or his designee. Written comments from the Assistant
Secretary of Administration are reprinted in the enclosure. Our work
was performed from February 2004 through May 2004 in accordance with
U.S. generally accepted government auditing standards.
RESULTS IN BRIEF:
Sections 101 and 103 of the Stabilization Act established three
criteria on which to base air carriers' compensation amounts: (1)
direct losses incurred as a result of the:
federal ground stop order and incremental losses incurred from
September 11 through December 31, 2001, as a result of the terrorist
attacks; (2) carrier type (e.g., passenger or cargo); and (3) a
calculated formula amount based upon each carrier's percentage of
industry capacity and the total amount of compensation available under
the legislation. Because the statute required that the maximum air
carrier compensation amounts be equal to the lesser of direct and
incremental losses as determined by DOT or this formula amount, the
formula effectively "capped" the amount of compensation an air carrier
could receive for its September 11-related losses. DOT published a
series of procedural rules describing the compensation process and
provided additional guidance for how it would determine, among other
things, direct and incremental losses, including policies relating to
the exclusion of asset impairment losses. Generally, DOT excluded
impairment losses for a number of reasons, including DOT's view that
these losses were presumed to be typically experienced over a period
much longer than the September 11 through December 31, 2001,
compensation period and that it would be difficult, if not impossible,
to separate impairment losses due to the terrorist attacks from
impairment losses associated with the general economic slowdown
generally acknowledged to be under way at the time of the attacks.
A number of factors influenced the amount of compensation air carriers
ultimately received under the Stabilization Act. Conceivably, these
factors could result in scenarios in which comparable air carriers
could have received different levels of compensation. For example, two
air carriers could have comparable losses related to September 11, but
be subject to different formula caps because they had different
capacity levels. If one or both carriers had losses that exceeded the
formula amount, the formula would cap the compensation amount at
different levels. Other factors unique to individual air carriers, such
as geographic location and carrier forecasts, influenced the amount of
direct and incremental losses an air carrier reported and affected the
compensation levels air carriers could potentially receive. For
example, air carriers located on the East Coast where the market showed
a greater sensitivity to the terrorist attacks may have incurred more
revenue decline and more direct and incremental losses than carriers on
the West Coast. Also, because forecasts formed the basis of a carrier's
direct and incremental losses, an optimistic forecast could have
resulted in more direct and incremental losses than a pessimistic
forecast. These and other factors or combinations of factors influenced
the levels of compensation in different ways for different carriers.
Three air carriers are seeking from the U.S. Court of Appeals for the
District of Columbia Circuit a judicial determination that DOT's
regulations implementing provisions of the Stabilization Act relating
to direct and incremental losses are inconsistent with that act and
reflect "arbitrary and capricious" administrative actions by DOT. As of
June 4, 2004, the court had not issued its decision, nor had the
carriers participating in this lawsuit settled their compensation
claims with DOT. DOT officials also told us the claims of a small
number of other carriers also remain pending. Therefore, the emergency
assistance program, although substantially completed, is still ongoing.
In commenting on a draft of this report, DOT said it found our report
to be accurate and well reasoned. DOT offered additional support for
and amplification of what it felt were key issues. DOT's comments are
reprinted in the enclosure.
CRITERIA AND PROCEDURES USED BY DOT UNDER THE STABILIZATION ACT:
The Stabilization Act established that air carriers could be
compensated for direct and incremental losses caused by the terrorist
attacks and related ground stop order, subject to a cap based on a
formula allocation of the total compensation amount. DOT published a
series of procedural rules describing the compensation process and
provided additional guidance for how it would determine, among other
things, direct and incremental losses, including policies relating to
the exclusion of asset impairment losses.
Statutory Criteria:
Sections 101 and 103 of the Stabilization Act[Footnote 6] established
three criteria on which to base air carriers' compensation amounts: (1)
direct losses incurred as a result of the federal ground stop order
[Footnote 7] and incremental losses incurred from September 11 through
December 31, 2001, as a result of the terrorist attacks; (2) carrier
type (e.g., passenger or cargo); and (3) a calculated formula amount
based upon each carrier's percentage of industry capacity and the
total amount of compensation available. Each carrier was to receive
maximum compensation equal to the lesser of these demonstrated direct
and incremental losses or the formula amount.
The Stabilization Act distinguished between passenger and cargo
carriers. It allocated $4.5 billion[Footnote 8] to be used to
compensate passenger-only carriers and combined passenger and cargo
carriers; the remaining $500 million was to be used to compensate
cargo-only carriers. The Stabilization Act, as illustrated in step 1 of
figure 1, specified how to calculate the air carriers' formula amounts.
For passenger carriers, the available amount of compensation ($4.5
billion) was to be multiplied by the ratio of the individual carrier's
August 2001 available seat miles (ASM), a measure of available
capacity, to total available seat miles of all applying carriers.
Similarly, for cargo carriers, the available amount of compensation
($500 million) was to be multiplied by the ratio of the latest
quarterly data available for revenue ton miles (RTM), a measure of
utilized capacity, to total revenue ton miles of all applying carriers.
This formula effectively capped the amount of compensation an air
carrier could receive for its September 11-related losses. Direct and
incremental losses exceeding the formula amount were not compensated.
Figure 1: Calculation of an Air Carrier's Maximum Compensation Amount:
[See PDF for image]
[End of figure]
Structured Payment Process:
As we reported in September 2003, DOT developed a structured payment
process to implement the statutory provisions set forth in the
Stabilization Act and expedite the distribution of funds. Generally,
DOT's compensation process consisted of a series of payment rounds. In
each payment round, as initial estimates of losses were replaced with
actual accounting data for the compensation period, air carriers were
allowed to receive an increased percentage of their total compensation.
Maximum compensation equaled the lesser of the carrier's direct and
incremental losses as determined by DOT or the carrier's formula
amount, as shown in step 2 of figure 1.
The department published program guidance in a series of Federal
Register notices of final regulations[Footnote 9] that took effect
immediately without a formal comment period. However, in publishing
each set of notices, DOT solicited comments from air carriers and
others, and responded to them in subsequent notices. Table 1 summarizes
the chronology of the procedural rules and the amount of maximum
compensation allowed under each payment round.
Table 1: DOT Procedural Rules:
Publication: Program Guidance Letter;
Date: October 1, 2001[A];
Significant issues addressed in guidance: Structure of the payment
process and policies for initial disbursement of funds;
Maximum percentage of compensation allowed: 50%.
Publication: Rule #1;
Date: October 29, 2001;
Significant issues addressed in guidance: Round 2 application and
submission deadlines;
Maximum percentage of compensation allowed: 85%.
Publication: Rule #2;
Date: January 2, 2002;
Significant issues addressed in guidance: Various air carrier comments;
Maximum percentage of compensation allowed: [Empty].
Publication: Rule #3;
Date: April 16, 2002;
Significant issues addressed in guidance: Round 3 application, audit
requirements, clarification of emerging issues, and air carrier
comments;
Maximum percentage of compensation allowed: 100%.
Publication: Rule #4;
Date: August 20, 2002;
Significant issues addressed in guidance: Various air carrier comments;
Maximum percentage of compensation allowed: [Empty].
Source: GAO analysis;
Note: Based on Program Guidance Letter (Oct. 1,
2001); 66 Fed. Reg. 54, 616 (Oct. 29, 2001); 67 Fed. Reg. 250 (Jan. 2,
2002); 67 Fed. Reg. 18, 468 (Apr. 16, 2002); 67 Fed. Reg. 54, 058 (Aug.
20, 2002); [A] Draft versions of the Program Guidance Letter were
distributed to air carriers immediately after the Stabilization Act was
signed into law.
[End of table]
Principle for Determining Direct and Incremental Losses:
An integral part of the payment process was the determination of direct
and incremental losses. DOT generally calculated an air carrier's
direct and incremental losses as the adjusted difference between
forecasted and actual financial results for the period September 11
through December 31, 2001. Specifically, DOT presumed that the
difference between an air carrier's pre-September 11 forecasted
financial results and actual financial results for the compensable
period would approximate the carrier's direct and incremental losses
related to the terrorist attacks. DOT expected the carrier to make
adjustments to this difference for items the carrier could demonstrate
to the department's satisfaction were unrelated to the terrorist
attacks. For example, an air carrier could exclude unrelated income,
such as an unforecasted tax settlement from a prior year that was
received during the compensable period, if it was substantiated with
appropriate tax and accounting records.
Under DOT's basic principle of calculating losses, revenue decline was
the primary driver of losses. DOT offset these losses with any cost
savings as well as any incremental gains or profits incurred after the
federal ground stop order through the end of the compensable period
that were deemed to have resulted from the terrorist attacks.
Issues Addressed in the Procedural Rules:
Although the basic principal for determining direct and incremental
losses appears straightforward, several issues arose during the
administration of the program. As a result, DOT published specific
guidance on how impairment and certain cost savings, among other
issues, should be considered in the calculation of direct and
incremental losses.
Impairment Losses:
In its April 16, 2002, rule, DOT defined the criteria that certain
items, such as impairment losses, were required to meet in order to be
included in the calculation of losses and be compensated. The
procedural rule said such items must be presented to DOT for review on
a case-by-case basis and be (1) a direct result of the terrorist
attacks of September 11; (2) fully borne (incurred) within the
September 11 to December 31, 2001, period; (3) permanent; (4)
nonduplicative; and (5) reported in accordance with U.S. generally
accepted accounting principles, except if these principles would
require or allow treatment inconsistent with the Stabilization Act. If
items claimed by air carriers did not meet these standards, DOT
generally excluded them from the calculation of direct and incremental
losses.
Applying these criteria, DOT determined that impairment losses,
representing the permanent devaluation of an asset (such as aircraft)
as a result of a decline in the market value of the asset or revenue-
generating capabilities, ordinarily did not meet all of the above-
stated criteria of a compensable loss and were generally excluded. DOT
believed that impairment losses were typically experienced over a
period of time much longer than the September 11 through December 31,
2001, compensation period and, therefore, generally would not qualify
as "incurred" compensable losses under the Stabilization Act. DOT also
explained that it lacked the "practical ability to monitor accounting
for those assets in the future to ensure that they recapture excess
compensation" if the assets were returned to service. Additionally,
impairment losses were considered duplicative. DOT's April 2002
procedural rule stated "the theoretical basis for an impairment charge
is an expected decline in asset value that reflects an expected
permanently reduced demand and reduced ability to generate revenue.
However, since we are already compensating carriers for the actual
decline in revenue they are experiencing through the end of the year,
there is an inherent duplication in also compensating them for the
associated asset devaluation costs." Further, DOT claimed that its
position was consistent with a Financial Accounting Standards Board
Emerging Issues Task Force statement that "impairment of long-lived
assets as a result of the September 11 events would in many cases be
impossible to measure separately from impairment due to the general
economic slowdown that was generally acknowledged to be under
way."[Footnote 10]
A number of carriers objected to the exclusion of impairment losses on
the basis that these losses had "real world" impacts on air carrier
finances, such as a carrier's ability to obtain credit, and that asset
write-downs are recognized as losses under U.S. generally accepted
accounting principles. Additionally, for some carriers, excluding
impairment losses reduced their direct and incremental losses to less
than the maximum possible compensation as calculated by the formula
amount and therefore decreased the amount of compensation they
received.
Cost Savings:
Generally, DOT presumed that management actions taken after September
11 to achieve cost savings were prompted by the terrorist attacks,
implicitly if not explicitly, and should, therefore, offset revenue
decline, and in turn reduce compensable losses.[Footnote 11] In the
April 16, 2002, procedural rule, DOT gave the following reasons for its
decision to offset revenue decline with cost savings: (1) cost
reduction plans developed prior to September 11 would have been
accounted for in the pre-September 11 forecasts, (2) post-September 11
cost reduction plans were attributable to changed expectations after
the attacks, (3) excluding post-September 11 cost reductions would
result in compensating carriers for losses not actually incurred, and
(4) DOT interpreted the Congress's statutory language as "indicating an
intent that carriers not receive increased compensation for achieving
savings in costs, which they have an independent obligation to their
managements and shareholders to achieve, and which it is reasonable to
expect them to undertake to mitigate the need for compensation.":
Some air carriers objected to DOT's presumption of considering all cost
savings as related to the terrorist attacks and requested a case-by-
case review approach. For example, one air carrier, which took
significant actions to reduce food service expenses, argued that its
actions to cut costs exceeded the industry's average expense decrease
in food service. Therefore, the carrier concluded, its actions went
beyond what was reasonably expected of an air carrier to accomplish
after the terrorist attacks and the excess amount should be excluded
from the calculation. DOT did not agree with the air carrier's
argument.
SCENARIOS RESULTING IN DIFFERENT LEVELS OF COMPENSATION:
On the basis of our previous work and interviews with DOT officials, we
determined that a number of factors influenced the amount of
compensation air carriers ultimately received under the Stabilization
Act. Conceivably, these factors could result in scenarios in which
comparable air carriers could have received different levels of
compensation. For example, as described in scenario 1 below, two
comparable air carriers could have had comparable losses related to
September 11, but be subject to different formula caps because they had
different capacity levels. If one or both carriers had losses that
exceeded the formula amount, the formula would cap the compensation
amount at different levels. Additionally, as illustrated in scenarios 2
through 5, other factors unique to individual air carriers influenced
the amount of direct and incremental losses air carriers reported as
well as the affected compensation levels they could potentially
receive. Scenarios 2 through 5 assume that the two carriers were
comparable in terms of size (in this case, capacity as defined by the
Stabilization Act) and incurred losses less than their formula caps,
thus making them eligible for compensation not to exceed their direct
and incremental losses. DOT officials who administered the compensation
program agreed that these illustrations are representative of
situations observed during their review.
Scenario 1: Formula Impact:
As discussed previously, each carrier's formula amount was calculated
based upon the air carrier's measure of capacity. It is possible that
two carriers could be comparable in organizational structure or even
annual revenues, but yet report different amounts of capacity. As a
result, two comparable air carriers could potentially have comparable
losses related to September 11, yet be eligible to receive different
formula amounts. If both of these carriers had losses that exceeded the
formula amount, the formula would cap the carriers' compensation
amounts at different levels.
For example, carrier A and carrier B are comparable carriers in that
they both reported $50 million in annual revenue and incurred $10
million in direct and incremental losses related to the attacks during
the compensable period. However, carrier A reported more available seat
miles for the required August 2001 period than did carrier B. As a
result, and as shown in table 2, carrier A received $10 million while
carrier B's compensation was capped by the formula amount.
Table 2: Impact of the Statutory Formula (Dollars in Millions).
Carrier A;
Gross revenues: $50;
Direct and incremental losses: $10;
Formula cap: $11;
Compensation received: $10.
Carrier B;
Gross revenues: $50;
Direct and incremental losses: $10;
Formula cap: $8;
Compensation received: $8.
Source: GAO analysis of hypothetical data.
[End of table]
In another example of the formula impact, two cargo carriers similar in
all aspects except that they transport different types of cargo could
also receive different levels of compensation as a result of the
formula cap. For cargo carriers, the statutory measure of capacity used
in the formula calculation is actual revenue ton miles flown (not
available capacity, as was the case with passenger carriers.) This
could result in a carrier that transports generally heavier cargo
reporting more revenue ton miles than a carrier hauling lighter cargo.
For example, assume that carriers C and D are similar in all aspects
except for the nature of their cargo. Although both carriers fly
identical planes that generate the same revenue, carrier D, as a result
of its lighter cargo, transported less tonnage than carrier C and,
therefore, if compensated pursuant to the formula, would receive less
compensation than carrier C.
Scenario 2: Geographic Location:
The primary location of an air carrier's operations may have influenced
the amount of losses an air carrier incurred after September 11. As
stated previously, revenue decline was the primary driver of an air
carrier's direct and incremental losses. If a carrier, due to its
geographic location or affiliation with a particular airport, suffered
more revenue decline (i.e., flew fewer passengers due to the terrorist
attacks or had planes grounded for an extended period due to security
concerns)[Footnote 12] than a carrier comparable in size and type, it
is likely that this carrier could have incurred more losses and
received more compensation than the comparable carrier.
After the terrorist attacks, passenger traffic declined across the
nation; however, traffic through the northeast corridor (where the
terrorist attacks occurred) declined more sharply than in other areas.
To illustrate how this situation affected comparable carriers, assume a
majority of carrier E's operations are centered in the northeast, while
a majority of carrier F's operations are centered in the Northwest. In
this case, carrier E in the Northeast carried fewer passengers during
the compensation period and reported a larger revenue decline than
carrier F. Although carriers E and F are comparable in size, carrier E
received more compensation as a result of larger direct and incremental
losses.
Scenario 3: Impact of the Inherent Imprecision of Forecasts:
Forecasts of financial results for the September 11 through December
31, 2001, period formed the basis of DOT's calculation of direct and
incremental losses.[Footnote 13] The precision of the forecasts
influenced the amount of direct and incremental losses an air carrier
could report on its application. Recognizing the importance of the
quality of the forecasts, DOT required the air carriers to provide the
two most recent forecasts (e.g., August and July forecasts) and their
corresponding actual performance. DOT officials said they extensively
reviewed this information and generally requested additional data to
determine the reasonableness of each carrier's forecast. DOT reviewed
year-over-year trends of historical data, comparisons to similar
carriers' forecasts, related documentation maintained by other DOT
offices, and rates of return. As a result of these procedures, DOT said
it revised, amended, or recreated many air carrier forecasts in order
to normalize or control for forecasts that could significantly affect
the calculation of a carrier's losses.[Footnote 14] Even with these
procedures, the inherent imprecision of forecasting could still have
influenced many carriers' ultimate compensation determination.
Assume carriers G and H are comparable passenger carriers that reported
the same financial results for the compensable period. However, carrier
G had forecasted $100 million in revenues for the compensable period,
whereas carrier H had produced a slightly more optimistic forecast of
$105 million. Although the revenue forecasts for both carriers G and H
might have been considered reasonable, carrier H received more
compensation as a result of its more optimistic forecast, as shown in
table 3.
Table 3: Impact of Optimistic Forecast (Dollars in Millions).
[See PDF for table]
Source: GAO analysis of hypothetical data.
[End of table]
Scenario 4: Quality of an Air Carrier's Application:
To receive compensation, the Stabilization Act required that air
carriers demonstrate losses related to terrorist attacks to the
"satisfaction of the President using sworn financial statements or
other appropriate data." DOT's procedural rules specified the nature
and content of the data to be included in applications as well as
additional criteria and requirements. For example, in the third payment
round, DOT required agreed-upon procedures to be performed by
independent public accountants on the information submitted by the air
carriers.[Footnote 15] The purpose was to verify that the amounts
submitted either agreed with or reconciled to the carriers' financial
systems and other supporting documentation. Despite these guidelines,
the review team stated that the quality and amount of supporting
documentation accompanying the air carrier applications varied widely.
Some applications contained extensive supporting documentation; in
other cases DOT staff had to request that additional information be
submitted to support the carrier's claims. DOT told us that if losses
or adjustments to losses submitted by the air carriers were ultimately
not supported to DOT's satisfaction, the losses were excluded from
amounts eligible for compensation.
Scenario 5: Management Response to the Terrorist Attacks:
After the terrorist attacks occurred, the federal government shut down
the nation's airspace. When air travel resumed, passenger traffic had
significantly declined, reducing operating revenues for most carriers.
To mitigate the reduction in revenue, some carriers took aggressive
measures to reduce costs, conserve cash, and preserve liquidity.
Alternatively, some carriers did not take as immediate or aggressive
actions to reduce costs, while others that already had low-cost
structures had fewer opportunities in their business models to cut
costs. As previously discussed, DOT offset cost savings, whether
achieved through management action or as a by-product of volume
decline, against revenue decline in the calculation of direct and
incremental losses. Said in another way, the amount of cost savings
achieved reduced the levels of compensation air carriers could
potentially receive.
To illustrate, suppose carriers I and J were comparable in size and
forecasted identical financial performance for the compensable period.
After the attacks, carrier I aggressively cut costs and reduced
expenses 10 percent during the period September 11 through December 31,
2001. Carrier J took fewer, less aggressive measures to reduce costs,
and at the end of the period, expenses were reduced by only 5 percent.
As shown in table 4, carrier I's cost savings reduced its direct and
incremental losses by more than carrier J's, and therefore carrier I
received less in compensation than carrier J.
Table 4: Impact of Aggressive Cost Reduction (Dollars in Millions):
Carrier I.
[See PDF for image]
Source: GAO analysis of hypothetical data.
[End of table]
PENDING LITIGATION:
DOT's regulations as partly described in this report are the subject of
pending litigation. Three air carriers are seeking from the U.S. Court
of Appeals for the District of Columbia Circuit a judicial
determination that DOT's regulations implementing provisions of the
Stabilization Act relating to direct and incremental losses are
inconsistent with that act and reflect "arbitrary and capricious"
administrative actions by DOT.[Footnote 16] In particular, the air
carriers contended that DOT's payment rules and assumptions improperly
combined two categories of losses under Section 101(a)(2) of the act
into one by offsetting losses that were incurred during the federal
ground stop order with any incremental gains after the federal ground
stop order. Also, the air carriers contended that DOT improperly
excluded aircraft impairment costs, among others, as compensable losses
under the act. They argued that these rules establish "overly
simplistic" criteria and "irrebuttable presumptions," and, further,
that they result in "impermissibly" different percentages of allowable
maximum compensation among comparable air carriers.
DOT, in defending its regulations argued that, among other reasons, it
permissibly interpreted the Stabilization Act as providing for one
"loss period," September 11 through December 31, 2001, with two types
of compensable losses, direct and incremental. It also argued that its
regulations provide a rational basis for determining how certain items,
such as aircraft impairment or cost savings, should be recognized in
calculating carriers' compensation.
The court held oral arguments on these issues in October 2003 after
receiving the parties' legal briefs from April through June 2003. As of
June 4, 2004, the court had not issued its decision, nor had the
carriers participating in this lawsuit settled their compensation
claims with DOT. DOT officials told us the claims of a small number of
other carriers also remain pending. Therefore, the emergency assistance
program, although substantially completed, is still ongoing.
AGENCY COMMENTS:
We requested comments on a draft of this report from the Secretary of
Transportation or his designee. The Assistant Secretary for
Administration provided the department's written comments, stating that
the report correctly described DOT's administration of the program and
concurring with our finding that various factors can cause differences
in compensation amounts. The department characterized our report as
accurate and well reasoned and provided additional support and
amplification of what DOT considered to be key issues. Its comments are
reprinted in the enclosure. DOT also provided separate specific
technical comments that we considered and incorporated into this report
as appropriate.
We are sending copies of this report to the Secretary of Transportation
and interested congressional committees. This report will also be
available at no charge on GAO's 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 report were Abe Dymond and Ruth Walk.
Signed by:
Linda M. Calbom:
Director, Financial Management and Assurance:
Enclosure:
Comments from the Department of Transportation:
U.S. Department of Transportation:
Assistant Secretary for Administration:
400 Seventh St SW:
Washington, D.C. 20580:
MAY 25 2004:
Ms. Linda Calbom:
Director, Financial Management and Assurance
U.S. General Accounting Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Calbom:
We reviewed the General Accounting Office (GAO) draft report, "Aviation
Assistance: Compensation Criteria and Payment Equity Under the Air
Transportation Safety and System Stabilization Act," and find it to be
accurate and well-reasoned.
The draft report correctly noted that the Department of
Transportation's (DOT) general exclusion for compensation of impairment
losses was explained and adopted through the rulemaking process. Also,
we concur with GAO's finding that under the Stabilization Act,
differences in compensation amounts between similar carriers can
appropriately exist due to application of the statutory formula cap,
carriers' geographic locations, differing qualities of carrier
forecasts and applications, and varying carrier management responses to
the terrorist attacks. We offer these additional comments to support
and amplify these GAO observations, as well as other key aspects of the
Department's process covered by the GAO draft report.
First, GAO correctly identified DOT's handling of compensable losses
incurred. It is important to note that Congress identified two
different types of losses that may be compensated under the time period
covered by this program--direct losses incurred from the federal
shutdown of the aviation system, and incremental losses incurred,
stemming from the terrorist attacks, through December 31, 2001. DOT
applied the Stabilization Act to provide compensation based on the
accumulation of those losses actually incurred. This provided
compensation for actual losses while avoiding the potential for a
windfall if a carrier were to receive compensation for one type of loss
without regard to its offsetting gains in the time period through
December 31, 2001.
Second, DOT concurs with GAO's finding that a number of criteria were
examined for air carriers claiming September 11 losses due to write-
downs (impairments) of flight equipment purportedly stemming from the
terrorist attacks. In this regard, GAO specifically noted the Financial
Accounting Standards Board finding that it would be "impossible" in
many cases to measure impairments due to the September 11 events
separately from those due to the general economic slowdown then
generally acknowledged to be under way. However, another factor noted
by GAO deserves additional emphasis. One of the most important elements
in assessing losses properly attributable to the eligible period from
September 11 through December 31, 2001, was the fact that DOT was
already compensating air carriers for all aviation-related revenue
losses for that eligible period. DOT determined that to further
compensate air carriers for impairment losses stemming, in large part,
from reduced revenue-generating capacity of that same equipment over
the eligible period would have essentially paid them twice for the same
loss.
Third, the scenarios developed by GAO are accurate in helping to
describe circumstances under which air carriers arguably comparable in
terms of business plan or size might have been compensated at different
levels, and under which carriers might be compensated at levels not in
proportion to their relative available seat-miles or revenue ton-miles.
Since pre-September I 1 forecast information provided the baseline for
the compensation paid to carriers for their losses incurred, DOT
attached great significance to the assumptions inherent in the
carrier's own forecasts, the logical bases for those forecasts, and the
consistency of carrier forecasts with historical trends. Moreover. DOT
notes the importance of GAO's finding that different management
responses to the terrorist attacks (Scenario 5) could explain why
seemingly "comparable" carriers might have received different levels of
compensation. As GAO pointed out, such carriers may have achieved quite
different actual financial results for the compensation period,
depending upon how management was positioned to recover from the
attacks. The organizational structures of air carriers sometimes had an
effect on their compensation as well. In addition, air carriers might
also be differentiated due to business relationships, both with
government and private industry, entered into or expanded after the
Federal shutdown. Increased military shipments, diversion of mail due
to the anthrax scare, and diversion of belly-cargo from passenger to
cargo aircraft for security reasons arc examples of situations that
created business opportunities for some carriers after the terrorist
attacks. Not all carriers could take equal advantage of those
opportunities, but those that could earned revenues that often
substantially reduced the size of their compensable losses.
We appreciate the opportunity to review the draft report and offer
comments. If you have any questions, please contact Martin Gertel of my
staff on (202) 366-5145.
Sincerely,
Signed by:
Vincent T. Taylor:
[End of section]
(190119):
FOOTNOTES
[1] Air Transportation Safety and System Stabilization Act, Pub. L. No.
107-42, 115 Stat. 230 (Sept. 22, 2001). This act was later amended by
the Aviation and Transportation Security Act, Pub. L. No. 107-71, §
124, 115 Stat. 597, 631 (Nov. 19, 2001).
[2] The Stabilization Act directed the President to take actions to
compensate air carriers. The President subsequently delegated his
authority to do so to the Secretary of Transportation, 66 Fed. Reg.
49,507 (Sept. 27, 2001).
[3] U.S. General Accounting Office, Aviation Assistance: Information on
Payments Made Under the Disaster Relief and Insurance Reimbursement
Programs, GAO-03-1156R (Washington, D.C.: Sept. 17, 2003).
[4] Vision 100 - Century of Aviation Reauthorization Act, Pub. L. No.
108-176, § 824, 117 Stat. 2490, 2595 (Dec. 12, 2003).
[5] Work performed for GAO-03-1156R was conducted from September 2001
through August 2003 and was performed in accordance with U.S. generally
accepted government auditing standards.
[6] Pub. L. No. 107-42, § 101(a)(2)(A) and (B) and § 103(b).
[7] The Federal Aviation Administration ordered a federal ground stop
order (a shutdown of the nation's airspace) from September 11 through
the morning of September 13, 2001, although some planes were allowed to
reposition and return to their starting locations during that time.
Certain airspace and airports were not returned to pre-September 11,
2001, status until later. For example, Ronald Reagan Washington
National Airport, which services Washington, D.C., was phased back into
operation beginning October 4, 2001.
[8] Under the amendment to the Stabilization Act, $35 million of this
amount was set aside for smaller air carriers and distributed using a
modified formula calculation.
[9] These regulations are codified at Title 14, Code of Federal
Regulations Part 330 (2004).
[10] The Emerging Issues Task Force (EITF) No. 01-10, "Accounting for
the Impact of the Terrorist Attacks of September 11, 2001," November
14-15, 2001. EITF assists the Financial Accounting Standards Board by
promptly identifying, discussing, and resolving financial accounting
issues within the framework of existing authoritative literature.
[11] Offsets, in some cases, may not necessarily reduce an air
carrier's resulting compensation amount if the resulting direct and
incremental losses exceeded, and therefore were capped by, the formula
amount.
[12] For example, Ronald Reagan Washington National Airport was closed
due to security concerns after the September 11, 2001, terrorist
attacks until October 4 when flights gradually resumed.
[13] As previously discussed, baseline losses used to determine
compensation for individual air carriers were calculated as the
difference between forecasted and actual financial results for the
September 11 through December 31, 2001, period.
[14] DOT said several small air carriers did not produce forecasts. In
that event, DOT created forecasts for them based upon historical
financial and operational data.
[15] Small air carriers were required to submit simplified agreed-upon
procedures.
[16] The carriers also allege that in promulgating the April 16, 2002,
and August 20, 2002, rules, DOT failed to follow proper rule-making
procedures required by the Administrative Procedure Act, 5 U.S.C. §
553.
