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Testimony:



Before the Subcommittee on Aviation, Committee on Commerce, Science and 

Transportation, U.S. Senate:



United States General Accounting Office:



GAO:



For Release on Delivery Expected at 9:30 a.m. EST:



Tuesday, March 11, 2003:



Commercial Aviation:



Issues Regarding Federal Assistance for Enhancing Air Service to Small 

Communities:



Statement of JayEtta Z. Hecker 

Director, Physical Infrastructure Issues:



Commercial Aviation:



GAO-03-540T:



GAO Highlights:



Highlights of GAO-03-540T, testimony before the Aviation Subcommittee, 

Senate Committee on Commerce, Science and Transportation



Why GAO Did This Study:



Small communities have long faced challenges in obtaining or retaining 

the commercial air service they desire.  These challenges are 

increasing as many U.S. airlines try to stem unprecedented financial 

losses through numerous cost-cutting measures, including reducing or 

eliminating service in some markets, often small communities.  

Congress will be considering whether to reauthorize its federal 

assistance programs for small communities. GAO was asked to describe 

the kinds of efforts that states and local communities have taken to 

enhance air service at small communities; federal programs for 

enhancing air service to small communities; and issues regarding the 

type and extent of federal assistance to enhance air service to small 

communities. 



What GAO Found:



Small communities have taken a variety of steps to try to obtain or 

improve air service, such as marketing to increase passengers’ 

demand for local service or offering financial incentives to airlines 

to attract new or enhanced service.  At communities GAO studied in 

depth, financial incentives were most effective in attracting new 

service.  However, the additional service often ceased when 

incentives ended.



The two key federal programs to help small communities with air 

service face increasing budgetary pressures and questions about their 

effectiveness.  Demand for these programs is heavy and may increase 

as airlines reduce service to communities.  The Essential Air Service 

program subsidizes carriers that provide air service to eligible 

small communities.  However, program costs have tripled since 1995, 

and fewer passengers use the subsidized local service.  Most choose 

to drive to their destination or to fly to and from another nearby 

airport with more service or lower fares.   The Small Community Air 

Service Development Pilot Program, in its first year of operation, 

provided $20 million in grants to help small communities enhance 

service.  Most programs funded appear similar to those undertaken 

by communities and may not result in sustainable service 

enhancements.    



Questions about the efficacy of these programs highlight issues 

regarding the type and extent of federal assistance for small 

community air service.  Reauthorization provides an opportunity for 

the Congress to clarify the federal strategy for assisting small 

communities with air service.



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



To view the full report, including the scope

and methodology, click on the link above.

For more information, contact JayEtta Z. Hecker at (202) 512-2834 

or heckerj@gao.gov.



Mr. Chairman and Members of the Subcommittee:



Thank you for inviting us to testify today on the issue of air service 

at small communities. These communities have long faced challenges in 

obtaining or retaining the commercial air service they desire. These 

challenges are increasing as many U.S. airlines try to stem 

unprecedented financial losses through numerous cost-cutting measures, 

including reducing or eliminating service in some markets. Small 

communities feel such losses disproportionately because they may have 

service from only one or two airlines. For them, reductions can mean no 

air service at all.



Over the past several years, we have issued a number of products 

examining air service provided to small communities. These reports have 

examined the use of regional jets, changes in the amount and type of 

service that small communities receive, options to enhance the long-

term viability of the federal Essential Air Service (EAS) program, and 

efforts to improve air service at small communities.[Footnote 1] In 

light of continuing concerns about small community air service and 

upcoming opportunities for the Congress to reauthorize federal 

assistance programs for small communities, we would like to summarize 

some key elements of our recent work. Today, my testimony addresses 

three topics: (1) the kinds of efforts that states and local 

communities have taken to enhance air service at small communities; (2) 

federal programs for enhancing air service to small communities; and 

(3) issues regarding the type and extent of federal assistance to 

enhance air service to small communities.



In summary:



* In recent years, states and local communities have undertaken a 

variety of efforts to enhance their air service. Our analysis of these 

efforts at nearly 100 small communities found that they comprise three 

main types: studies to evaluate potential markets, marketing efforts to 

increase consumer demand, and financial incentives to encourage 

airlines to either start or enhance air service. Financial incentives 

tended to offer the most promise for attracting new or additional air 

service. However, once the incentives ended, the additional service 

often ended as well. Longer-term sustainability of these air service 

improvements appears to depend on the community’s size and its ability 

to demonstrate a commitment to that air service, either by providing a 

profitable passenger base or through direct financial assistance.



* The two key federal programs for helping small communities with air 

service face increasing budgetary pressures and questions about their 

effectiveness.



* The EAS program, authorized under the Airline Deregulation Act of 

1978, guarantees that small communities served before deregulation 

continue to receive a certain level of scheduled air service. Its costs 

have more than tripled since fiscal year 1995, and indications are that 

without changes to the program, the demand for EAS subsidies will soon 

exceed its $113 million appropriation. At the same time, aggregate 

passenger levels at EAS-subsidized airports continue to fall. Often 

less than 10 percent of a community’s potential passengers use the 

subsidized local service; the rest choose to drive to their destination 

or drive to a larger airport that offers lower fares or more frequent 

service to more destinations. In 2000, the median number of passengers 

on each EAS-subsidized flight was just three.



* The Small Community Air Service Development Pilot Program (“Pilot 

Program”), authorized as part of the Wendell H. Ford Aviation 

Investment and Reform Act for the 21st Century (AIR-21), P.L. 106-181, 

provides grants to communities to enhance local air service. In fiscal 

year 2002, 180 communities (or consortia of communities) requested over 

$142.5 million in air service development grants--more than seven times 

the $20 million appropriated. The program funded some innovative 

approaches, such as Mobile, Alabama’s, program to provide ground 

handling services to an airline, but the majority of the grants funded 

the same types of projects noted earlier--studies, marketing 

activities, and financial incentives. If these communities experience 

the same results as the other state and local efforts we identified, 

their efforts are unlikely to attract new or enhanced service, or if 

they do, the service will last only as long as these funds are 

available. However, it is too early to evaluate the long-term 

effectiveness of these efforts.



* Questions about the efficacy of the two federal programs highlight 

issues regarding the type and extent of federal assistance for small 

community air service. The EAS program appears to be meeting its 

statutory objectives of ensuring air service to eligible communities, 

yet the program has not provided an effective transportation solution 

to most travelers to or from those communities. The Pilot Program also 

appears to have met its statutory objective of assisting communities in 

developing projects to enhance their access to the national air 

transportation system. Yet whether any of the projects funded will 

prove to be effective at developing sustainable air service is 

uncertain. Reauthorization provides an opportunity for the Congress to 

clarify the federal strategy for assisting small communities with 

commercial air service.



Background:



The nation’s small community airports, while large in number, serve 

only a small portion of the nation’s air travelers and face issues very 

different from those of larger airports. Airports that are served by 

commercial airlines in the United States are categorized into four main 

groups based on the annual number of passenger enplanements--large 

hubs, medium hubs, small hubs and nonhubs. In 2001, the 31 large hub 

airports and 36 medium hub airports (representing about 13 percent of 

commercial service airports) enplaned the vast majority--89 percent--of 

the more than 660 million U.S. passengers. In contrast, those normally 

defined as small community airports[Footnote 2] --the 69 small hub 

airports and 400 nonhub airports--enplaned about 8 percent and 3 

percent of U.S. passengers, respectively. There are significant 

differences in both the relative size and type of service among these 

communities, as shown in Figure 1.



Figure 1: Differences Among Categories of Commercial Service Airports 

in 2001:



[See PDF for image]



[End of figure]



Officials from small communities served by small hub and nonhub 

airports reported that limited air service is a long-standing problem. 

This problem has been exacerbated by the economic downturn and events 

of September 11. Fundamental economic principles help explain the 

situation small communities face. Essentially, these communities have a 

smaller population base from which to draw passengers, which in turn 

means they have limited potential to generate a profit for the 

airlines. Relatively limited passenger demand, coupled with the fact 

that air service is an inherently expensive service to provide, make it 

difficult for many such communities to attract and keep air service.



The recent economic downturn and events of September 11 dealt a severe 

financial blow to many major airlines, and the results of these losses 

can be felt in even the smallest communities. United Airlines and US 

Airways are in bankruptcy proceedings, and one Wall Street analyst is 

projecting industry losses of $6.5 billion for 2003, the third straight 

year of multi-billion dollar losses. While major airlines often do not 

serve small communities directly, many have agreements with smaller 

regional airlines to provide air service to small communities. This 

provides feeder traffic into the larger network. Consequently, 

financial problems for major airlines and their resulting cost-cutting 

efforts may ultimately affect the air service a small community 

receives.



Complicating the financial situation for both major and regional 

airlines is the growing presence of low-fare airlines, such as 

Southwest Airlines. Low-fare airlines’ business model of serving major 

markets, not small communities, has helped these airlines better 

weather the economic downturn. Airport officials have reported that 

these airlines’ low fares attract passengers from a large geographic 

area, and many small airports face significant “leakage” of potential 

local passengers to airports served by low-fare airlines. In a March 

2002 report,[Footnote 3] we found that almost half of the nonhub 

airports studied were within 100 miles of a major airline hub or an 

airport served by a low-fare airline, as illustrated in Figure 2. 

Further, over half of the 207 small community airport officials we 

surveyed said they believed local residents drove to another airport 

for airline service to a great or very great extent. Eighty-one percent 

of them attributed the leakage to the availability of lower fares from 

a major airline at the alternative airport.



Figure 2: Proximity of Small Community Airports to Other Airports 

Either Served by a Low-fare Airline or Serving as a Major Airline’s 

Hub:



[See PDF for image]



Note: The figure shows a selected sample of 202 small communities 

served by nonhub airports in the continental United States. For more 

information, see GAO-02-432.



[End of figure]



Local, state, and federal governments all play roles in developing and 

maintaining air service for small communities. Air service is a local 

issue because commercial airports in the United States are publicly-

owned facilities, serving both local and regional economies. Many state 

and local governments provide funding and other assistance to help 

communities develop or maintain local air service. The federal 

government has assisted in developing air service both through the EAS 

program, which subsidizes air service to eligible communities and the 

Pilot Program, which provided grants to foster effective approaches to 

improving air service to small communities.[Footnote 4] The assumption 

underlying these efforts is that connecting small communities to the 

national air transportation system is both fundamental for local 

economic vitality and is in the national interest.



The Administration’s budget proposal for fiscal year 2004 substantially 

reduces funding for small community air service. The budget would 

reduce EAS funding from $113 million in 2003 to $50 million in 2004 and 

would change the program’s structure by altering eligibility criteria 

and requiring nonfederal matching funds. The 2004 budget proposal does 

not include funds for the Pilot Program.



Local and State Air Service Improvement Efforts Fall Into 

Three Main Categories, but Financial Assistance Has Proven Most 

Effective:



Our recent review of nearly 100 small community air service improvement 

efforts undertaken by states, local governments, or airports[Footnote 

5] showed that communities attempted three main categories of efforts 

(see Table 1):



* studies, like those used by communities in Texas and New Mexico, to 

determine the potential demand for new or enhanced air service;



* marketing, like Paducah, Kentucky’s, “Buy Local, Fly Local” 

advertising campaign, used to educate the public about the air service 

available or Olympia, Washington’s, presentations to airlines to inform 

them about the potential for new or expanded service opportunities; 

and:



* financial incentives, such as the “travel bank” program implemented 

by Eugene, Oregon, in which local businesses pledged future travel 

funds to encourage an airline to provide new or additional service.



Table 1: Types of Air Service Development Efforts Undertaken by 98 

Communities With Small Hub or Nonhub Airports:



Type of effort: Studies; Nonhub airports: (81 airports): Number: 60; 

Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports: 

(17 airports): Number: 15; Small hub airports: Percent of total: 88%; 

[Empty]; Combined total: (98 airports): Number: 75; Combined total: 

Percent of total: 77%.



Type of effort: Marketing; Nonhub airports: (81 airports): Number: 60; 

Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports: 

(17 airports): Number: 16; Small hub airports: Percent of total: 94%; 

[Empty]; Combined total: (98 airports): Number: 76; Combined total: 

Percent of total: 78%.



Type of effort: Financial incentives; Nonhub airports: (81 airports): 

Number: 33; Nonhub airports: Percent of total: 41%; [Empty]; Small hub 

airports: (17 airports): Number: 11; Small hub airports: Percent of 

total: 65%; [Empty]; Combined total: (98 airports): Number: 44; 

Combined total: Percent of total: 45%.



Type of effort: Other; Nonhub airports: (81 airports): Number: 15; 

Nonhub airports: Percent of total: 19%; [Empty]; Small hub airports: 

(17 airports): Number: 0; Small hub airports: Percent of total: 0%; 

[Empty]; Combined total: (98 airports): Number: 15; Combined total: 

Percent of total: 15%.



Source: GAO analysis.



Notes: Columns will not add to total number of airports shown because 

some airports undertook multiple efforts.



[End of table]



Studies by themselves have no direct effect on the demand for or supply 

of air service, but they can help communities determine if there is 

adequate potential passenger demand to support new or improved air 

service. Marketing can have a more direct effect on demand for air 

service if it convinces passengers to use the local air service rather 

than driving or flying from another airport. While the specific effect 

is difficult to ascertain, an airport official from Shenandoah Valley, 

Virginia, pointed out that his airport’s annual enplanements more than 

doubled--from 8,000 to 20,000--after a marketing and public relations 

campaign. Marketing the airport to airlines may also have a direct 

effect on the supply of air service if the efforts succeed in 

attracting new airlines or more service from existing airlines.



Financial incentives most directly affected the level of air service 

provided in the communities we studied. Financial incentives mitigate 

some of the airline’s risk by providing some assurance about the 

financial viability of the service. The incentives take a number of 

different forms, as shown in Table 2. Some programs provided subsidies 

to airlines willing to supply service. Some provided revenue 

guarantees, under which the community and airline established revenue 

targets and the airline received payments only if actual revenues did 

not meet targets.



Table 2: Major Types of Financial Incentive Programs:



Type of financial incentive: Reduced airport fees; Description: Airport 

reduces fees charged to carriers--landing fees, lease rates, or fuel 

flowage fees in exchange for air service. (This is often only one 

element of an air service improvement program.); Prevalence among 

nonhub airports studied (total = 81): Number: 10; Prevalence among 

nonhub airports studied (total = 81): Percent of total: 12%; [Empty]; 

Prevalence among small hub airports studied (total = 17): Number: 7; 

Prevalence among small hub airports studied (total = 17): Percent of 

total: 41%.



Type of financial incentive: Subsidies; Description: Financial 

assistance to a carrier assists with start-up, operating or other 

costs. Carrier may receive a set amount per period or reimbursement for 

expenses incurred, sometimes up to a cap.; Prevalence among nonhub 

airports studied (total = 81): Number: 10; Prevalence among nonhub 

airports studied (total = 81): Percent of total: 12%; [Empty]; 

Prevalence among small hub airports studied (total = 17): Number: 1; 

Prevalence among small hub airports studied (total = 17): Percent of 

total: 6%.



Type of financial incentive: Revenue guarantees; Description: Community 

and carrier officials set revenue targets and communities pay carriers 

only if revenue from operations does not meet agreed-upon target. 

Payments are often capped.; Prevalence among nonhub airports studied 

(total = 81): Number: 9; Prevalence among nonhub airports studied 

(total = 81): Percent of total: 11%; [Empty]; Prevalence among small 

hub airports studied (total = 17): Number: 3; Prevalence among small 

hub airports studied (total = 17): Percent of total: 18%.



Type of financial incentive: Travel bank; Description: Businesses or 

individuals pledge future travel funds to a carrier providing new or 

expanded air service. Travel funds are deposited in an account, 

administered by a business entity (such as the Chamber of Commerce) and 

pledging businesses draw against these funds (often using credit card 

supplied for this purpose) to purchase tickets.; Prevalence among 

nonhub airports studied (total = 81): Number: 4; Prevalence among 

nonhub airports studied (total = 81): Percent of total: 5%; [Empty]; 

Prevalence among small hub airports studied (total = 17): Number: 3; 

Prevalence among small hub airports studied (total = 17): Percent of 

total: 18%.



Type of financial incentive: Other; Description: [Empty]; Prevalence 

among nonhub airports studied (total = 81): Number: 6; Prevalence among 

nonhub airports studied (total = 81): Percent of total: 7%; [Empty]; 

Prevalence among small hub airports studied (total = 17): Number: 3; 

Prevalence among small hub airports studied (total = 17): Percent of 

total: 18%.



Source: GAO analysis.



[End of table]



Financial incentives can attract new or enhanced air service to a 

community, but incentives do not guarantee that the service will be 

sustained when the incentives end. We studied the efforts of 12 

communities in detail, all but one of which used a financial incentive 

program. Of these, five had completed their program but only Eugene, 

Oregon, was able to sustain the new service after the incentive program 

ended. At the other four--all nonhub airports smaller than Eugene--the 

airline ceased service when the incentives ended.



However, while a community’s size is important, it is largely beyond a 

community’s control. We identified two other factors, more directly 

within a community’s control, that were also important for success. The 

first, the presence of a catalyst for change, was particularly 

important in getting the program started. The catalyst was normally 

state, community, or airport officials who recognized the air service 

deficiencies and began a program for change. More important to the 

long-term sustainability, however, was a community consensus that air 

service is a priority. This second factor involves recognizing that 

enhanced air service is likely to come at a price and developing a way 

in which the community agrees to participate. At many of the 

communities we studied, there was not a clear demonstration of 

community commitment to air service.



Two Federal Programs Which Aid Small Communities Face Budgetary 

Pressures and Questions About Their Effectiveness:



The two major federal efforts to help small communities attract or 

retain air service are the EAS program and the Pilot Program. The 

Congress established EAS as part of the Airline Deregulation Act of 

1978, due to concern that air service to some small communities would 

suffer in a deregulated environment. The act guaranteed that 

communities served by airlines before deregulation would continue to 

receive a certain level of scheduled air service. If an airline cannot 

provide service to an eligible community without incurring a loss, then 

the Department of Transportation (DOT) can use EAS funds to award that 

airline, or another airline willing to provide service, a subsidy. 

Funding for EAS was $113 million for fiscal years 2002 and 2003. The 

other major program, the Pilot Program, was authorized as part of the 

Wendell H. Ford Aviation Investment and Reform Act for the 21st Century 

(AIR-21). The Pilot Program’s mission is to assist communities in 

developing projects to enhance their access to the national air 

transportation system. The Pilot Program differs from EAS because 

communities, not airlines, receive the funds and the communities 

develop the program that they believe will best address their air 

service needs. The Congress appropriated $20 million in both fiscal 

years 2002 and 2003 for this effort.



EAS Costs Are Increasing but Passenger Usage Is Not:



The EAS program costs have increased dramatically since 1995, but the 

actual number of passengers using EAS-subsidized air service has 

dropped. Total program funding increased from $37 million in 1995 to 

$113 million in 2002 (2002 constant dollars). Further, during this 

period of time, the subsidy per community nearly doubled, from almost 

$424,000 to over $828,000. However, the total passenger enplanements at 

EAS-subsidized communities decreased about 20 percent (between 1995 and 

2000) falling from 592,000 to 477,000. As a result, the per passenger 

subsidy (for continental U.S. communities) increased from $79 to an 

estimated $229 in 2002, a nearly 200-percent increase. Table 3 provides 

more information.



Table 3: EAS Service Changes as of July 1, 2002 (Continental United 

States):



Service elements: Number of subsidized communities; 1995: 75; 1999: 68; 

2002 (est.): 79; Percent change: 5.3%.



Service elements: Median daily passengers enplaned per community; 1995: 

11; 1999: 8; 2002 (est.): 10; Percent change: -9.1%.



Service elements: Average subsidy per community; 1995: $423,803; 1999: 

$668,448; 2002 (est.): $828,474; Percent change: 95.5%.



Service elements: Average subsidy per passenger; 1995: $79; 1999: $133; 

2002 (est.): $229; Percent change: 189.9%.



Source: GAO analysis of DOT and FAA data.



Note: Passenger estimates for 2002 are based on passenger enplanements 

for 2000.



Note: Subsidy figures are in 2002 constant dollars.



[End of table]



Two key factors will likely continue to increase EAS program costs in 

the future. First, more communities may require subsidized 

service.[Footnote 6] As of February 2003, the EAS program served 125 

communities, up from the 114 served only 7 months earlier. Of these, 88 

are in the continental United States and 37 are in Alaska, Hawaii, and 

Puerto Rico. According to DOT officials, more small communities will 

likely lose unsubsidized commercial service in the future--especially 

those served by one airline. Some of these communities could be 

eligible to receive an EAS subsidy. In October 2001, there were 98 

small communities being served by one carrier. Of the 98, 25 have 

smaller populations and lower levels of employment than the typical 

EAS-subsidized community, 21 have lower levels of income per capita, 

and 35 have lower levels of manufacturing earnings. Second, EAS-

subsidized communities tend to generate limited passenger revenue 

because surrounding populations are small and the few travelers 

generated in each community tend to drive to their destinations or fly 

from other, larger airports for lower airfares and improved service 

options.[Footnote 7] EAS community airports may serve less than 10 

percent of the local passenger traffic; over half of the subsidized 

communities in the continental U.S. are within 125 miles of a larger 

airport. This low demand and “passenger leakage” to other airports 

depress the revenue carriers can make from EAS routes, making the 

program less attractive to airlines and increasing subsidy costs.



There are clear questions about the EAS program’s effectiveness. In a 

recent report on the EAS program, we outlined a number of options that 

the Congress could consider to enhance the long-term viability of the 

program.[Footnote 8] For example, one option was to target subsidized 

service to more remote communities with fewer other transportation 

options. Another option was to restructure or replace subsidies to 

airlines with local grants. This could enable communities to better 

match their transportation needs with locally available options. Some 

of the options discussed in our report were incorporated in the 

Administration’s fiscal year 2004 budget proposal.



Demand Is Heavy for Pilot Program Funds but It Is Too Early to Assess 

Program Effectiveness:



In its first year of operation, small communities demonstrated an 

extraordinary demand for air service development funds. DOT received 

180 applications requesting over $142.5 million--more than seven times 

the funds available--from communities in 47 states. By December 2002, 

DOT had awarded nearly $20 million in grants to 40 small communities 

(or consortia of communities). The grants ranged in amount from $44,000 

to over $1.5 million. Some of the grants are being used for such 

innovative ideas as the following:



* Mobile, Alabama, a small hub, received a grant of $457,000 to 

continue providing ground handling service for one of its airlines. 

While this is a common practice in Europe, a Mobile official told us 

that he is only aware of one other airport in the United States that 

provides these services for an airline.



* Baker City, Oregon, received a grant of $300,000 to invest in an air 

taxi franchise. Baker City has a small population and is in a fairly 

remote part of Oregon that does not have scheduled airline service. The 

community decided to pursue an alternative to scheduled service and 

purchased an air taxi franchise from SkyTaxi, a company that provides 

on-demand air service.



* Casper, Wyoming, received a grant of $500,000 to purchase and lease 

back an aircraft to an airline to ensure that the airline serves the 

community. It is fairly unusual for a community to approach air service 

development by purchasing an aircraft to help defray some of the 

airline’s costs and mitigate some of the airline’s risk in providing 

the service.



However, the majority of these grants funded the same types of projects 

discussed earlier--studies of a community’s potential market, marketing 

activities to stimulate demand for service or to lure an airline, and 

financial incentives such as subsidies to airlines for providing 

service. If these communities experience the same results as the other 

state and local efforts we identified, their efforts are unlikely to 

attract new or enhanced service for the small communities using them, 

or if they do, the service will only last as long as these funds are 

available.



Since final grant agreements were signed in December 2002, it is too 

early to determine how effective the various types of initiatives might 

prove to be. Additionally, some of the funded projects contain multiple 

components and some are scheduled to be implemented over several years. 

Therefore, it might be some time before DOT is able to evaluate the 

initial group of projects to determine which have been effective in 

initiating or enhancing small community air service over the long-term.



Implications for Future Federal Efforts to Assist:



Small Communities:



As air service to small communities becomes increasingly limited and as 

the national economy continues to struggle, questions about the 

efficacy of those programs highlight issues regarding the type and 

extent of federal assistance for small community air service.



The EAS program appears to be meeting its statutory objectives of 

ensuring air service to eligible communities, yet the program clearly 

has not provided an effective transportation solution for most 

travelers to or from those communities. Subsidies paid directly to 

carriers support limited air service, but not the quality of service 

that passengers desire, and not at fares that attract local passenger 

traffic. As a result, relatively few people who travel to or from some 

of these communities use the federally-subsidized air service. Many 

travelers’ decisions to use alternatives--whether another larger 

airport or simply the highway system--are economically and financially 

rational.



Several factors--including increasing carrier costs, limited passenger 

revenue, and increasing number of eligible communities requiring 

subsidized service--are likely to affect future demands on the EAS 

program. The number of communities that are eligible for EAS-subsidized 

service is likely to increase in the near term, creating a subsidy 

burden that could exceed current appropriations. Should the EAS program 

be fully funded so that no eligible community loses its direct 

connection to the national air transportation network? Should the EAS 

program be fundamentally changed in an attempt to create a more 

effective transportation option for travelers? In August 2002, we 

identified various options to revise the program to enhance its long-

term viability, along with some of the associated potential effect.



The Pilot Program also appears to have met its statutory objective of 

extending federal assistance to 40 nonhub and small hub communities to 

assist communities in developing projects to enhance their access to 

the national air transportation system. Yet whether any of the projects 

funded will prove to be effective at developing sustainable air service 

is uncertain. Relatively few communities offered innovative approaches 

to developing or enhancing air service. Most of the initiatives that 

received federal grants resembled other state or local efforts that we 

had already identified. Evidence from those efforts indicated that some 

communities could develop sustainable air service--but likely only 

small hub communities that have a relatively large population and 

economic base. Among smaller, nonhub communities, direct financial 

assistance to carriers was most effective at attracting air service, 

but only as long as the financing existed. If the Pilot Program is 

extended, will it essentially become another subsidy program?



Reauthorization provides an opportunity for the Congress to clarify the 

federal strategy for assisting small communities with commercial air 

service. We believe that there may be a number of questions that need 

to be addressed, including the following: What amount of assistance 

would be needed to maintain the current federal commitment to both 

small hub and nonhub airports? Would federal assistance be better 

targeted at nonhub or small hub communities, but not both? Rather than 

providing subsidies directly to carriers, should federal assistance be 

directed to states or local communities to allow them to determine the 

most effective local strategy? What role should state and local 

governments play in helping small communities secure air service?



Mr. Chairman and members of the Subcommittee, this concludes my 

statement. I would be pleased to answer any questions you or other 

members of the Subcommittee might have.



Contact and Acknowledgment:



For further information on this testimony, please contact JayEtta 

Hecker at (202) 512-2834. Individuals making key contributions to this 

testimony included Janet Frisch, Steve Martin, Stan Stenersen, and 

Pamela Vines.



[End of section]



Related GAO Products:



Commercial Aviation: Factors Affecting Efforts to Improve Air Service 

at Small Community Airports. GAO-03-330. Washington, D.C.: January 17, 

2003.



Commercial Aviation: Financial Condition and Industry Responses Affect 

Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.



Options to Enhance the Long-term Viability of the Essential Air Service 

Program. GAO-02-997R. Washington, D.C.: August 30, 2002.



Commercial Aviation: Air Service Trends at Small Communities Since 

October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.



“State of the U.S. Commercial Airlines Industry and Possible Issues for 

Congressional Consideration”, Speech by Comptroller General of the 

United States David Walker. The International Aviation Club of 

Washington: November 28, 2001.



Financial Management: Assessment of the Airline Industry’s Estimated 

Losses Arising From the Events of September 11. GAO-02-133R. 

Washington, D.C.: October 5, 2001.



Commercial Aviation: A Framework for Considering Federal Financial 

Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.



Aviation Competition: Restricting Airline Ticketing Rules Unlikely to 

Help Consumers. GAO-01-832. Washington, D.C.: July 31, 2001.



Aviation Competition: Challenges in Enhancing Competition in Dominated 

Markets. GAO-01-518T. Washington, D.C.: March 13, 2001.



Aviation Competition: Regional Jet Service Yet to Reach Many Small 

Communities. GAO-01-344. Washington, D.C.: February 14, 2001.



Airline Competition: Issues Raised by Consolidation Proposals. GAO-01-

402T. Washington, D.C.: February 7, 2001.



Aviation Competition: Issues Related to the Proposed United Airlines-US 

Airways Merger. GAO-01-212. Washington, D.C.: December 15, 2000.



Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, 

and Passenger Traffic. GAO/RCED-00-34. Washington, D.C.: April 14, 

2000.



Aviation Competition: Effects on Consumers From Domestic Airline 

Alliances Vary. GAO/RCED-99-37. Washington, D.C.: January 15, 1999.



Airline Deregulation: Changes in Airfares, Service Quality, and 

Barriers to Entry. GAO/RCED-99-92. Washington, D.C.: March 4, 1999.



FOOTNOTES



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



[2] The Wendell H. Ford Aviation Investment and Reform Act for the 21st 

Century (AIR-21), P.L. 106-181, defines small communities as including 

both nonhub and small hub community airports.



[3] U.S. General Accounting Office, Air Service Trends at Small 

Communities Since October 2000, GAO-02-432 (Washington, D.C.: March, 

29, 2002).



[4] Beyond these programs, the federal government has also played a key 

role in providing funding critical to building and improving airport 

infrastructure through its Airport Improvement Program. In fiscal year 

2002 alone, this program provided $3.2 billion to airports, over $1 

billion of which went to small hub and nonhub airports.



[5] To identify these airports, we reviewed all 180 applications for 

the Pilot Program, which included information on previous efforts to 

improve air service. We also spoke with airline industry officials and 

transportation officials from each of the 50 states and reviewed other 

available data. We then interviewed airport or community officials from 

98 small communities that had undertaken some air service development 

efforts. For more information, see U.S. General Accounting Office, 

Commercial Aviation: Factors Affecting Efforts to Improve Air Service 

at Small Community Airports, GAO-03-330 (Washington, D.C.: January 17, 

2003).



[6] Increases in program costs may be restrained as some communities 

lose their eligibility. They may lose their eligibility because the 

combination of decreased passenger traffic and increased subsidy levels 

means that some may exceed the statutory maximum of $200 per passenger 

for communities within 210 miles of a medium or large hub airport. 

However, DOT has not always dropped communities from the program 

because they no longer meet eligibility requirements. We reported in 

2000 that DOT considers extenuating circumstances that may have caused 

a temporary decline in passenger traffic.



[7] It is important to note that EAS-subsidized airlines typically do 

not set the airfares charged for the major markets for EAS travelers. 

Instead, fares are set by the major network airlines with which EAS 

airlines usually have contractual agreements. Depending upon the exact 

agreement, the EAS airline usually sets fares for travel only in 

“local” markets (i.e., between the EAS community and the connecting 

hub), while the major airline sets the fares for travel between the EAS 

community and the key destinations beyond the connecting hub.



[8] U.S. General Accounting Office, Options to Enhance the Long-term 

Viability of the Essential Air Service Program, GAO-02-997R 

(Washington, D.C.: August 30, 2002).