Aviation Assistance:

Compensation Criteria and Payment Equity under the Air Transportation Safety and System Stabilization Act

GAO-04-725R: Published: Jun 4, 2004. Publicly Released: Jun 4, 2004.

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Linda M. Calbom
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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) 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.

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