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Testimony:

Before the Subcommittee on Aviation, Senate Committee on Commerce, 
Science, and Transportation:

United States General Accounting Office:

GAO:

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

Tuesday, May 18, 2004:

Federal Aviation Administration:

Challenges for Transforming Into a High-Performing Organization:

Statement of JayEtta Z. Hecker, Director 
Physical Infrastructure Team:

GAO-04-770T:

GAO Highlights:

Highlights of GAO-04-770T, a report to the Subcommittee on Aviation, 
Senate Committee on Commerce, Science, and Transportation 

Why GAO Did This Study:
Over the last two decades, FAA has experienced difficulties meeting the 
demands of the aviation industry while also attempting to operate 
efficiently and effectively. Now, as air traffic returns to pre-9/11 
levels, concerns have again arisen as to how prepared FAA may be to 
meet increasing demands for capacity, safety, and efficiency.

FAA’s air traffic control (ATC) modernization efforts are designed to 
enhance the national airspace system through the acquisition of a vast 
network of radar, navigation, and communication systems. Nine years 
have passed since Congress provided FAA with personnel and acquisition 
reforms. However, projects continue to experience cost, schedule and 
performance problems. FAA’s Air Traffic Organization (ATO) is its most 
current reform effort. Expectations are that the ATO will bring a 
performance management approach to ATC modernization. 

This statement focuses on three main questions: (1) What are some of 
the major challenges and demands that confront FAA? (2) What is the 
status of FAA’s implementation of reforms and/or procedural relief that 
Congress provided? and (3) What are some of the critical success 
factors that will enable FAA to become a high-performing organization? 

What GAO Found:

A forecasted increase in air traffic coupled with budgetary constraints 
will challenge FAA’s ability to meet current and evolving operational 
needs. The commercial aviation industry is still recovering from 
financial losses exceeding $20 billion over the past 3 years. Many 
airlines cut their operating expenses, but FAA’s budget continued to 
rise (see figure). However, transportation tax receipts into the 
Airport and Airways Trust Fund, from which FAA draws the majority of 
its budget, have fallen by $2.0 billion (nearly 20 percent) since 1999 
(in constant 2002 dollars). Cost-cutting and cost-control will need to 
be watchwords for FAA from this point forward. 

FAA has implemented many of the reforms authorized by Congress 9 years 
ago, but achieved mixed results. Despite personnel and acquisition 
reforms the agency contended were critical to modernizing the nation’s 
air traffic control (ATC) system, systemic management issues continue 
to contribute to the cost overruns, schedule delays, and performance 
shortfalls. FAA’s most current reform effort, the Air Traffic 
Organization (ATO) -- a new performance-based organization mandated by 
AIR-21 that is operating the ATC system – is just now being put in 
place. 

To meet its new challenges, FAA must fundamentally transform itself 
into a high-performing organization. The key characteristics and 
capabilities of high-performing organizations fall into four themes: 
(1) a clear, well articulated, and compelling mission; (2) strategic 
use of partnerships; (3) focus on the needs of clients and customers; 
and (4) strategic management of people. FAA has taken some promising 
steps through its new ATO to restructure itself like high-performing 
organizations, but still faces significant and longstanding systemic 
management challenges. Even modest organizational and operational 
changes at FAA can be difficult and time consuming. 

What GAO Recommends:

GAO is making no recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-770T.

To view the full product, 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.

[End of section]

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to participate in today's hearing to 
discuss the challenges that FAA faces both in the immediate environment 
and over the next decade. We all recall that in the summer of 2000, the 
air traffic control system lacked the capacity to handle demand 
efficiently, and flight delays produced near-gridlock conditions at 
several U.S. airports. A combination of factors --the downturn in 
travel caused by the general economic slowdown, SARS, and of course the 
crises instigated by the events of 9/11 - reduced traffic significantly 
and reduced pressure on the air traffic control system.

Passenger traffic and airline operations are slowly returning to 
previous levels, making this an appropriate time to re-examine the 
status of nation's aviation leadership and infrastructure and its 
preparations for the future of air transport over the next decade. 
FAA's budget request for 2005 provides a starting point from which to 
review the agency's direction.

My statement today focuses on three main questions: (1) What are some 
of the major challenges and demands that confront FAA? (2) What is the 
status of FAA's implementation of reforms and/or procedural relief that 
Congress provided? And (3) What are some of the critical success 
factors that will enable FAA to become a high-performing organization? 
Our statement is based on our past reports on ATC modernization and 
airline competition work--updated to reflect important milestones and 
recent interviews with key stakeholders in the aviation community, 
including several current and former FAA officials. We performed our 
work in accordance with generally accepted government auditing 
standards.

In summary:

Significant external and internal demands will challenge FAA's ability 
to meet current operational needs and require it to adapt to meet the 
evolving needs of the aviation industry. The commercial aviation 
industry is still recovering from financial losses exceeding $20 
billion over the past 3 years. The downturn in travel has affected the 
Airport and Airways Trust Fund, from which FAA draws the majority of 
its budget. Transportation tax receipts into the Trust Fund fell by a 
total of $2.0 billion (19.6 percent) between 1999 and 2003. The overall 
condition of the Federal budget adds more pressure on FAA's budget. 
Taken together, cost-cutting and cost-control need to be watchwords for 
FAA from this point forward. To meet the demands of the aviation 
industry for safe, secure, and efficient operations and for additional 
capacity to meet forecasted growth, FAA will need to continue to 
improve its management controls. Traditionally, FAA's ability to 
operate efficiently and effectively - particularly regarding its air 
traffic control modernization projects --have been hampered by 
inadequate management of information technology and financial 
management controls.

Nine years have passed since Congress provided FAA with the personnel 
and acquisition reforms the agency contended were critical to 
successfully modernizing the nation's air traffic control (ATC) system. 
Despite these reforms, systemic management issues, including inadequate 
management controls and human capital issues continue to contribute to 
the cost overruns, schedule delays, and performance shortfalls that 
FAA's major ATC projects have consistently experienced in the past.

* Personnel reforms addressed three broad areas: (1) compensation and 
performance management, (2) workforce management, and (3) labor and 
employee relations. FAA has taken steps to implement a number of 
reforms in each of the three areas.[Footnote 1] For example, in the 
area of labor and employee relations, FAA implemented initiatives 
establishing new partnership forums for union and nonunion employees 
and a new model work environment program.[Footnote 2] However, in 
February 2003, we found that the agency had not fully incorporated 
elements that are important to effective human capital management, 
including data collection and analysis, performance goals and measures, 
and establishing links between reform goals and program goals.

* As part of its procurement reforms, FAA introduced a new acquisition 
management system in 1996 to reduce the time and cost to deploy new 
products and services. To FAA's credit, our work has shown improvements 
in the agency's oversight of investment risk, tracking key information 
from the investment selection process in a management information 
system, and implementation of guidance for validating costs, benefits, 
and risks. However, in estimating the costs of new projects, FAA has 
not yet incorporated actual costs from developing related systems. 
Moreover, the agency has not yet implemented processes for evaluating 
projects after implementation in order to identify lessons learned and 
improve the investment management process. These weaknesses have 
impeded FAA's ability to manage its investments effectively and make 
sound decisions about continuing, modifying, or canceling projects.

* FAA's Air Traffic Organization (ATO) is one of its most current 
reform effort. Under the leadership of a Chief Operating Officer, the 
ATO is a new performance-based organization that is operating the ATC 
system. While the ATO holds promise for laying the foundation for much 
needed and overdue organizational change, progress has been slow, and 
the office still faces significant challenges to implementing reform:

To meet the challenges of the 21st century, FAA must fundamentally 
transform itself to become a high-performing organization. Our work has 
shown that high-performing organizations have adopted management 
controls, processes, practices, and systems that are consistent with 
prevailing best practices and contribute to concrete organizational 
results. Specifically, the key characteristics and capabilities of 
high-performing organizations fall into four themes (1) a clear, well 
articulated, and compelling mission; (2) strategic use of partnerships; 
(3) focus on the needs of clients and customers; and (4) strategic 
management of people. To facilitate the transformation of federal 
agencies to high performing organizations, we have also recommended 
that agencies apply the Chief Operating Officer concept to provide 
long-term attention and focus on management issues and transformational 
change. FAA has begun implementing this concept. While FAA has taken 
some promising steps through its new ATO to restructure itself in a 
manner consistent with high-performing organizations, the agency still 
faces significant and longstanding systemic management challenges which 
must be overcome if it is to meet the demands and match the pace of 
ongoing changes in the aviation industry and transform itself into a 
world-class organization. Our work for more than two decades has shown 
that even modest organizational and operational changes at FAA can be 
difficult and time consuming, which underscores the difficult road 
ahead for FAA's leadership.

Significant External and Internal Demands Will Challenge FAA's Current 
and Evolving Operations:

FAA faces significant demands that will challenge its ability to 
operate both in the current environment and in what it expects to 
encounter in the coming decade. With the industry still attempting to 
recover from the most tumultuous period in its history, FAA's funding 
is constrained by lowered Airports and Airways Trust Fund receipts and 
increased pressure on the contribution from the General Fund. To meet 
its current and future operational challenges, FAA is facing demands 
for greater efficiency and accountability. And it goes without saying 
that FAA must continue to meet demands for maintaining safety 
standards.

The U.S. Commercial Aviation Industry Is Still Recovering From 
Unprecedented Financial Chaos:

Since 2001, the U.S. airline industry has confronted financial losses 
of previously unseen proportions. Between 2001 and 2003, the airline 
industry reported losses in excess of $20 billion. A number of factors 
- including the economic slowdown, a shift in business travel buying 
behavior, and the aftermath of the September 11, 2001 terrorist 
attacks--contributed to these losses by reducing passenger and cargo 
volumes and depressing fares. The industry has reported smaller losses 
since 2001, but still may not generate net profits for 2004.

To improve their financial position, many airlines cut costs by various 
means, notably by reducing labor expenditures and by decreasing 
capacity through cutting flight frequencies, using smaller aircraft, or 
eliminating service to some communities. According to data from the 
Bureau of Transportation Statistics, large U.S. air carriers cut their 
operating expenses by $7.8 billion from 2000 through 2002. The drop in 
total large air carrier operating expenses stands in sharp contrast to 
increases in FAA's budget. (See Figure 1.):

Figure 1: Changes in Air Carrier Operating Expenses Compared to Changes 
in FAA Budget, 1998 - 2003 (nominal dollars, indexed to 100):

[See PDF for image]

[End of figure]

Budgetary Pressure on FAA Will Increase Over Time:

FAA's budget - which has increased from $9 billion in 1998 to $14 
billion in 2004 --will be under pressure for the foreseeable future. 
Over the past 10 years, FAA has received on average approximately 80 
percent of its annual funding from the Airports and Airways Trust Fund 
(Trust Fund), which derives its receipts from taxes and fees levied on 
airlines and passengers.[Footnote 3] The downturn in passenger travel, 
accompanied by decreases in average yields, has resulted in lowered 
receipts into the Trust Fund. On average, domestic yields have fallen 
since 2000, and are at their lowest levels since 1987. As a result, the 
total amount of transportation taxes that were remitted to the Trust 
Fund declined by $2.0 billion (19.6 percent) between fiscal years 1999 
and 2003 (in 2002 dollars).

Contributions from the General Fund have averaged about 20 percent of 
FAA's budget since 1994, but total Federal spending is under increasing 
stress because of growing budget deficits. According to the March 2004 
analysis from the Congressional Budget Office, the Federal deficit 
under the President's fiscal 2005 budget will be $358 billion.

Clearly, a major challenge for FAA both now and into the future will be 
cost-cutting and cost control.

* Operating costs represent over half of FAA's budget. For 2005, the 
Administration has requested $7.8 billion for Operations. Because 
salaries and benefits make up 73 percent of that total, restraining the 
growth in operations spending will be extremely difficult, even with 
improvements in workforce productivity.

* Capital expenses (i.e., the Facilities and Equipment account) 
represent less than 20 percent of FAA's budget, but virtually none of 
the projects requested for funding for 2005 is expected to generate any 
savings in the Operations account.

* Funds for airports' capital development have more than doubled since 
1998, rising from $1.6 billion (18.3 percent of the total) to a 
requested $3.5 billion (25.1 percent of the total) in 2005. Current 
funding levels are sufficient to cover much of the estimated cost of 
planned capital development. However, building new runways is not 
always a practicable way to increase capacity. FAA must decide how to 
increase capacity and service, as well as improve system efficiency and 
safety.

Financial Pressure Adds Premium to Improving Management Controls:

FAA's ability to operate efficiently and effectively - particularly 
regarding its air traffic control modernization projects --have been 
hampered over time by inadequate management of information technology 
and financial management controls. FAA's ATC modernization projects 
have consistently experienced cost, schedule, and performance problems 
that we and others have attributed to systemic management issues.

The effect has been extraordinary cost growth and a persistent failure 
to deploy systems. FAA initially estimated that its ATC modernization 
efforts could be completed over 10 years at a cost of $12 billion. Two 
decades and $35 billion later, FAA still has not completed key 
projects, and expects to need another $16 billion thru 2007, for a 
total cost of $51 billion. GAO has kept major FAA modernization systems 
on the watch list of high-risk federal programs since 1995.

We believe that, in the current budget environment, cost growth and 
schedule problems with ongoing modernization efforts can have serious 
negative consequences: postponed benefits, costly interim systems, 
other systems not being funded, or a reduction in the number of units 
purchased.

Forecasts of Future Aviation Activity Add Further Demands for Immediate 
Improvements in FAA Operations:

FAA recognizes that future U.S. air transport activity will likely 
place significant demands on its ability to keep the system operating. 
FAA's most recent forecasts project significant increases in overall 
system activity by 2015. Along with increased movements of aircraft and 
passengers comes an increased workload for FAA, as well as demands for 
more efficient operations and/or an expansion of capacity. (See Table 
1).

Table 1: Forecasted Increase in Commercial Air Passengers, Operations, 
and FAA Workload:

Industry activity measure: Enplanements (millions); 
2003: 641.4; 
2015 (est.): 1057.6; 
Percent change: 65.0.

Industry activity measure: Large carrier fleet; 
2003: 4,090; 
2015 (est.): 5,732; 
Percent change: 40.1.

Industry activity measure: Regional carrier fleet; 
2003: 2,672; 
2015 (est.): 4,303; 
Percent change: 61.0.

FAA workload measure: Instrument operations (millions); 
2003: 26.3; 
2015 (est.): 36.8; 
Percent change: 39.9.

FAA workload measure: Commercial instrument flight rule aircraft 
handled at Air Route Traffic Control Centers (millions); 
2003: 31.9; 
2015 (est.): 44.9; 
Percent change: 40.8. 

Source: FAA.

[End of table]

Evidence of FAA's inability to meet system capacity demands already 
exists from the experience at Chicago O'Hare earlier this year. To 
reduce flight delays, FAA asked American Airlines and United Airlines 
to reduce their peak scheduled operations by 7.5 percent by June 10. As 
Secretary Mineta has already recognized, unless system capacity 
expands, the nation will face "…more and more O'Hares as [the] economy 
continues to grow, and as new technology and competition bring even 
greater demand." It seems clear, however, that FAA's Operational 
Evolution Plan[Footnote 4], a few additional runways, and updating more 
controller workstations with the Standard Terminal Automation 
Replacement System (STARS)[Footnote 5] are not the answer to the 
system's need for capacity. We cannot pave our way to the year 2025.

Despite Personnel and Acquisition Reforms, Systematic Management Issues 
Continue to Impede ATC Modernization:

Over the years, systematic management issues, including inadequate 
management controls and human capital issues have contributed to the 
cost overruns, schedule delays, and performance shortfalls that FAA has 
consistently experienced in acquiring its major ATC modernization 
systems. Historically, some of the major factors impeding ATC 
acquisitions included an ineffective budget process and an inability to 
provide good cost and schedule estimates. A number of cultural problems 
including widely diffused responsibility and accountability, 
inadequate coordination, and poor contract management/oversight also 
slowed the progress of individual projects. Problems within FAA's 
acquisition and procurement processes included an inability to obligate 
and spend appropriate funds in a timely manner, a complicated 
procurement and acquisition cycle, failure to field systems in a timely 
fashion, and an inability to field current technology systems. FAA 
lacked a means to strategically analyze and control requirements, and 
good cost and schedule estimates were often not effectively developed 
and integrated into acquisition plans. To address many of these issues, 
Congress passed legislation in 1995 exempting FAA from many of the 
existing Federal personnel and procurement laws and regulations and 
directed the agency to develop and implement new acquisition and 
personnel systems. More recently, in 2000, the Congress and the 
administration together provided for a new oversight and management 
structure and a new air traffic organization to bring the benefits of 
performance management to ATC modernization.

FAA Has Taken Steps to Implement Human Capital Strategies, but Further 
Efforts are Needed:

According to FAA, burdensome government-wide human capital rules 
impeded its ability to hire, train, and deploy personnel and thereby 
hampered its capacity to manage ATC modernization projects efficiently. 
In response to these concerns, Congress granted FAA broad exemptions 
from federal personnel laws and directed the agency to develop and 
implement a new personnel management system.

* Human capital reforms: Following the human capital exemptions granted 
by Congress in 1995, FAA initiated reforms in three primary areas: 
compensation and performance management, workforce management, and 
labor and employee relations. In the area of compensation and 
performance management, FAA introduced two initiatives--a new, more 
flexible pay system in which compensation levels are set within broad 
ranges, called pay bands, and a new performance management system 
intended to improve employees' performance through more frequent 
feedback with no summary rating. Both new systems required an exemption 
from laws governing federal civilian personnel management found in 
title 5 of the United States Code. In the area of workforce management, 
FAA implemented a number of initiatives in 1996 through the 
establishment of agency-wide flexibilities for hiring and training 
employees. In the area of labor and employee relations, FAA established 
partnership forums for union and nonunion employees and a new model 
work environment program. Other human capital initiatives have included 
restructuring FAA's organizational culture and implementing means to 
provide sustained leadership.

* Organizational culture: FAA issued an organizational culture 
framework in 1997 that attempted to address some of the vertical 
"stovepipes" that conflicted with the horizontal structure of ATC 
acquisition team operations. A key piece of this framework included the 
establishment of integrated product teams in an attempt to improve 
collaboration among technical experts and users. Moreover, integrated 
teams have not worked as intended. For example, competing priorities 
between two key organizations that were part of the Wide Area 
Augmentation System's integrated team ultimately negated its 
effectiveness and undermined its ability to meet the agency's goals for 
the system.

* Sustained leadership: Until former Administrator Garvey completed her 
5-year term in 2002,[Footnote 6] FAA had been hampered by a lack of 
sustained leadership at FAA was also problematic.[Footnote 7] During 
the first 10 years of the ATC modernization effort, the agency had 
seven different Administrators and Acting Administrators, whose average 
tenure was less than 2 years. Such frequent turnover at the top 
contributed to an agency culture that focused on short-term 
initiatives, avoided accountability, and resisted fundamental 
improvements to the acquisition process. .

Nine years have passed since the agency received broad exemptions from 
laws governing federal civilian personnel management. While FAA has 
taken a number of steps since personnel reforms were implemented, it is 
not clear whether and to what extent these flexibilities have helped 
FAA to more effectively manage its workforce and achieve its mission. 
The agency did not initially define clear links between reform goals 
and program goals, making it difficult to fully assess the impacts of 
personnel reform. FAA has not yet fully implemented all of its human 
capital initiatives and continues to face a number of key challenges 
with regard to personnel issues. In our February 2003 report, we found 
that the agency had not fully incorporated elements that are important 
to effective human capital management into its overall reform effort, 
including data collection and analysis and establishing concrete 
performance goals and measures. Currently, the agency is still working 
to implement tools to keep accurate cost and workforce data. The new 
Air Traffic Organization has announced plans for establishing cost 
accounting and labor distribution systems, but they are not yet in 
place. More comprehensive cost accounting systems and improved labor 
distribution systems are necessary to maximize workforce productivity 
and to plan for anticipated controller retirements. More broadly, 
taking a more strategic approach to reform will allow the agency to 
better evaluate the effects of human capital initiatives, which it sees 
as essential to its ATC modernization effort.

ATC Projects Continue to Experience Cost, Schedule, and Performance 
Problems:

FAA established its current acquisition management system (AMS) in 1996 
following acquisition reform. The agency has reported taking steps to 
overseeing investment risk and capturing key information from the 
investment selection process in a management information system. It has 
also implemented guidance for validating costs, benefits, and risks.

FAA has also taken steps to improve the management of its ATC 
modernization efforts. For example, it implemented an incremental, 
"build a little, test a little" approach that improved its management 
by providing for mid-course corrections and thus helping FAA to avoid 
costly late-stage changes. In the area of management controls, FAA has 
(1) developed a blueprint for modernization (systems architecture) to 
manage the development of ATC systems; (2) established processes for 
selecting and controlling information technology investments, (3) 
introduced an integrated framework for improving software and system 
acquisition processes, and (4) improved its cost-estimating and cost-
accounting practices. Nonetheless, ATC modernization efforts continue 
to experience cost, schedule, and performance problems.

FAA is not yet incorporating actual costs from related system 
development efforts in its processes for estimating the costs of new 
projects. Further, the agency has not yet fully implemented processes 
for evaluating projects after implementation in order to identify 
lessons learned and improve the investment management process. Reliable 
cost and schedule estimates are essential to addressing some of the 
ongoing problems with ATC acquisitions.

In addition to controlling cost and schedule overruns, FAA needs to 
take concrete steps to identify and eliminate redundancies in the 
National Airspace System (NAS). FAA must review its long-term ATC 
modernization priorities to assess their relative importance and 
feasibility in light of current economic constraints, security 
requirements, and other issues. The ongoing challenges facing air 
traffic control modernization efforts led Congress and the 
administration to create a new oversight and management structure 
through the new Air Traffic Organization (ATO) in order to bring the 
benefits of performance management to ATC modernization.

Progress in Establishing the New Air Traffic Organization Has Been 
Slow:

The ATO was created by an executive order in 2000 to operate the air 
traffic control system. In the same year, Congress enacted legislation 
establishing the Air Traffic Services Subcommittee, a five-member board 
to oversee the ATO and a chief operating officer to manage the 
organization. The ATO was designed to bring a performance management 
approach to ATC modernization efforts.

The Air Traffic Services Subcommittee has made some initial efforts 
with regard to the establishment of the ATO. They have taken steps to 
focus on the structure of the ATC system, including reviewing and 
approving performance metrics for the ATO, establishing a budget, and 
approving three large procurements that FAA initiated.

However, progress in establishing the organization has been slow, given 
that FAA received the mandate to establish the ATO nearly four years 
ago. FAA encountered difficulties finding a qualified candidate to take 
the position of chief operating officer, and did not fill the vacancy 
until June 2003. The final executive positions for the organization 
including the Vice-Presidents of Safety and Communications were just 
filled last month.

Key tasks for the ATO will include organizational restructuring, 
implementing effective financial management and cost-accounting 
systems, evaluating day-to-day business practices, and fostering growth 
with efficiency. Rapidly changing technology, limited financial 
resources, and the critical importance of meeting client needs will 
present significant challenges in order for the ATO to truly evolve 
into a high performing organization.

FAA's Future Success Hinges on Several Critical Success Factors:

To successfully meet the challenges of the 21st century, FAA must 
fundamentally transform its people, processes, technology, and 
environment to build a high-performing organization. Our work has shown 
that high-performing organizations have adopted management controls, 
processes, practices, and systems that are consistent with prevailing 
best practices and contribute to concrete organizational results. 
Specifically, the key characteristics and capabilities of high-
performing organizations fall into four themes as follows:

* A clear, well-articulated, and compelling mission. High-performing 
organizations have a clear, well-articulated, and compelling mission, 
strategic goals to achieve it and a performance management system that 
aligns with these goals to show employees how their performance can 
contribute to overall organizational results. FAA has taken its first 
steps toward creating a performance management system by aligning its 
goals and budgetary resources through its Flight Plan--blueprint for 
action for fiscal year 2004 through 2008--and its fiscal year 2005 
budget submission. In addition, the new ATO has published both its 
vision and mission statement.

Our past work has found that FAA's ability to acquire new ATC 
modernization systems has been hampered by its organizational culture, 
including employee behaviors that did not reflect a strong commitment 
to mission focus. Given the central role that FAA's employees will play 
in achieving these performance goals and overall agency results, it is 
critical for them to both embrace and implement the agency's mission in 
the course of their daily work. In addition, our work has found 
regularly communicating a clear and consistent message about the 
importance of fulfilling the organization's mission helps engage 
employees, clients, customers, partners, and other stakeholders in 
achieving higher performance.

* Strategic use of partnerships. Since the federal government is 
increasingly reliant on partners to achieve its outcomes, becoming a 
high-performing organization requires that federal agencies 
effectively manage relationships with other organizations outside of 
their direct control. FAA is currently working to forge strategic 
partnerships with its external customers in a number of ways. For 
example, the agency recently announced a program to create "express 
lanes in the sky" to reduce air traffic delays this spring and summer 
and is in the early stages of working with selected federal partners to 
develop a long-term plan for the national aerospace system (2025) and 
to leverage federal research funds to conduct mutually beneficial 
research. In addition, FAA has ongoing partnerships with the aviation 
community to assess and address flight safety issues (e.g., development 
of technology to prevent fuel tank explosions and to reduce the 
potential for aircraft wiring problems through development of a "smart 
circuit breaker").

However, our past work has shown that forging strategic partnerships 
with organizations outside of FAA can be difficult and time-consuming. 
For example, FAA's efforts to establish voluntary data sharing 
agreements with airlines--Flight Operational Quality Assurance Program 
(FOQA)--spanned more than a decade, due in part, to tremendous 
resistance from aviation community stakeholders who formed a rare 
alliance to oppose several of FAA's proposals. In addition, when 
attempting to increase airport capacity (e.g., new runways), FAA and 
airport operators have frequently faced opposition from the residents 
of surrounding communities and environmental groups. Residents are 
often concerned about the potential for increases in airport noise, air 
pollutant emissions, and traffic congestion.

* Focus on needs of clients and customers. Serving the needs of clients 
and customers involves identifying their needs, striving to meet them, 
measuring performance, and publicly reporting on progress to help 
assure appropriate transparency and accountability. To better serve the 
needs of its clients and customers, FAA published Flight Plan, which 
provides a vehicle for identifying needs, measuring performance, and 
publicly reporting progress. Flight Plan includes performance goals in 
the areas of safety, greater capacity, international leadership, and 
organizational excellence, which are linked to the agency's budget and 
progress monitored through a Web-based tracking system.

However, over the years, FAA's efforts to meet client and customer 
needs have not always been successful, and some have had a long lasting 
negative impact. FAA has had particular difficulty fielding new ATC 
modernization systems within cost, schedule and performance goals to 
meet the needs of the aviation community. Agency promises to deliver 
new capabilities to airlines via improvements to the ATC system led 
some airlines to install expensive equipment in their aircraft to 
position themselves to benefit from expected FAA services; however, 
when the agency failed to deliver on those promises, participating air 
carriers were left with equipment that they could not use--no return on 
their investment. In addition, shifting agency priorities have made it 
difficult for the aviation industry to anticipate future requirements 
and plan for them in a cost-effective manner (e.g., providing air 
carriers with adequate lead time to purchase new equipment and airframe 
manufacturers with lead time to incorporate changes into new commercial 
airplane designs). Furthermore, the absence of a full-functioning cost-
accounting system makes it difficult for FAA to assess the actual cost 
of providing services to users of the National Airspace System.

* Strategic management of people. Most high-performing organizations 
have strong, charismatic, visionary, and sustained leadership, the 
capability to identify what skills and competencies the employees and 
the organization need, and other key characteristics including 
effective recruiting, comprehensive training and development, 
retention of high-performing employees, and a streamlined hiring 
process. Toward this end, FAA has hired a Chief Operating Officer (COO) 
to stand up its new ATO. Our work on high-performing organizations has 
recommended use of the COO concept to facilitate transformational 
change in federal agencies and to provide long-term attention and focus 
on management issues. Furthermore, FAA has placed 78 percent of its 
workforce under a pay-for-performance system[Footnote 8] and 
implemented a training approach for its acquisition workforce which 
reflects four of the six elements used by leading organizations to 
deliver training effectively.[Footnote 9] However, it is too soon to 
know the extent to which these elements of effective training will be 
incorporated into the new ATO. Finally, FAA is currently conducting an 
Activity Value Analysis, a bottoms-up effort to establish a baseline of 
ATO headquarters activities and their value to stakeholders. The 
results of this analysis are intended to help FAA's leadership target 
cost-cutting and cost savings efforts.

Despite FAA's efforts to date, our past work has found the agency's 
strategic management of human capital lacking. For example, 
organizational culture issues at FAA (e.g., its vertical, stovepiped 
structure) have discouraged collaboration among technical experts and 
users of the ATC system and contributed to the agency's inability to 
deliver new ATC systems within cost, schedule and performance goals. 
One of the most significant early challenges facing the ATO will be 
negotiating a new contract with air traffic controllers, which is due 
to expire in September 2005. The DOT IG has repeatedly noted that 
despite the importance of controllers' jobs, that FAA simply cannot 
sustain the continued salary cost growth for this workforce, which rose 
from an average salary of $72,000 in 1998 to $106,000 in 2003. Given 
the inextricable link between FAA's operating costs and its controller 
workforce, striking an acceptable balance between controllers' contract 
demands and controlling spiraling operating costs will be a strong 
determinant of the ATO's credibility both within FAA and across the 
aviation industry.

While FAA has taken some promising steps through its new ATO to 
restructure itself in a manner consistent with high-performing 
organizations, the agency still faces significant and longstanding 
systemic management challenges. These challenges must be overcome if 
FAA is to keep pace with ongoing changes in the aviation industry and 
transform itself into a world-class organization. Our work for more 
than two decades has shown that even modest organizational, 
operational, and technological changes at FAA can be difficult and time 
consuming, all of which underscores the difficult road ahead for FAA 
and its new ATO.

This concludes my statement. I would be pleased to respond to any 
questions that you or other Members of the Subcommittee may have at 
this time.

For further information on this testimony, please contact JayEtta 
Hecker at (202) 512-2834 or by e-mail at heckerj@gao.gov. Individuals 
making key contributions to this testimony include Samantha Goodman, 
Steven Martin, Beverly Norwood, and Alwynne Wilbur.

FOOTNOTES

[1] FAA's Modernization Efforts--Past, Present, and Future 
(GAO-04-227T): October 30, 2003.

[2] Human Capital Management: FAA's Reform Effort Requires a More 
Strategic Approach, GAO-03-156, February 2003.

[3] The Trust Fund was established by the Airport and Airway Revenue 
Act of 1970 (P.L. 91-258) to help fund the development of a nationwide 
airport and airway system and to fund FAA investments in air traffic 
control facilities. It provides all of the funding for the Airport 
Improvement Program, which provides grants for construction and safety 
projects at airports; the Facilities and Equipment account that funds 
technological improvements to the air traffic control system; and a 
Research, Engineering, and Development account, which supports aviation 
safety, mobility, and environmental goals. In fiscal year 2002, the 
Trust Fund provided 79 percent of the funding for FAA Operations, which 
represented almost 50 percent of Trust Fund expenditures. The Trust 
Fund is supported by 10 dedicated excise taxes. In fiscal year 2002, 
the Trust Fund received about $10 billion in revenue from these taxes 
and interest.

[4] The Operational Evolution Plan is an ongoing 10-year plan developed 
by the FAA to increase the capacity and efficiency of the national 
airspace system, while enhancing safety and security.

[5] STARS will replace controller workstations with new color displays, 
processors, and computer software at FAA and DOD terminal air traffic 
control facilities--within 5 to 50 nautical miles of an airport.

[6] To provide FAA's ATC modernization efforts with needed direction 
and stability, the Congress established a 5-year term for the FAA 
Administrator in 1994. Former Administrator Garvey was the first to 
complete a term of this length in 2002. 

[7] Congress established a 5-year term for the FAA Administrator in 
1994.

[8] Inspector General, U.S. Department of Transportation, Key Issues 
for the Federal Aviation Administration's FY 2005 Budget, CC-2004-038 
(April 22, 2004).

[9] To deliver training effectively, leading organizations' training 
approaches generally include six elements: (1) prioritize initiatives 
most important to the agency; (2) demonstrate top-level commitment and 
provide resources; (3) identify those who need training on specific 
initiatives and set training requirements; (4) tailor training to meet 
the needs of the workforce; (5) track training to ensure it reaches the 
right people; and (6) measure effectiveness of training. GAO found that 
FAA's acquisition organization has highly developed processes for 
elements 1, 2, 4, and 5.