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Testimony of John W. Olcott
President
National Business Aircraft Association, Inc.
before the
National Civil Aviation Review Commission
U.S. Department of Commerce Autitorium
Wednesday, May 28, 1997

Introduction

On behalf of the Board of Directors of the National Business Aircraft Association, Inc. (NBAA) and its more than 4,600 Member Companies which own or operate general aviation aircraft as an aid to their business or otherwise are involved with business aviation, we welcome the opportunity to appear before the National Civil Aviation Review Commission.

We have great respect for the awesome responsibility that has been placed upon the Members and Staff of the Commission to evaluate and develop recommendations concerning the funding needs of the Federal Aviation Administration (FAA) and the national air transportation system, the various means for financing those needs, and the agency’s critical safety function. NBAA’s vision is to be the effective force for enhancing the safety, efficiency and acceptance of business aviation, thus we sincerely hope our presentation will serve as an effective contribution to your important deliberations.

Enabling Technology

Air transportation is an enabling technology for achieving our nation’s economic and social objectives as we enter the 21^st century. As reflected in former Commerce Secretary Michael Kantor’s report to the President, our nation’s security will be as dependent on economic strength as it will be on military prowess during the next century. Future battles to preserve our way of life will be economic and will be fought by businessmen and businesswomen who will go to the front line on civil aircraft. Safe, efficient and reliable air transportation, on the domestic front and globally, is vital for establishing a U.S. presence in emerging markets and maintaining our competitiveness in areas where we currently do business. Indeed, the Commission’s role is extremely challenging because if a funding mechanism is recommended that inhibits any element of the enabling technology of air transportation, especially a key economic driver such as business aviation, the nation will not fulfill its obligations and meet its goals.

National Commitment

The Commission has a unique opportunity to articulate the importance of air transportation in achieving our country’s strategic goals and to call for a national commitment to develop an air transportation infrastructure that will continue to lead the world in the 21^st century. We observe that air transportation is to the 21^st century what space was to the last half of the 20^th century, when our nation felt threatened by the strides the USSR was making in another arena that affected our national security. In the late 1950s we heard Sputnik’s signal from space and thought of our enemy orbiting the earth and firing upon us. So we committed the people and dollar resources to be first in space. President Kennedy had the vision to see the United States put a man on the moon by the end of the 1960s, and the country never looked back.

We need leadership with vision to look beyond the obvious and see opportunities, as well as potential risks. An advanced air transportation infrastructure provides opportunities to preserve our nation’s economic strength, maintain our quality of life and assure our continued security. Air transportation must be a national priority. Government must accept its responsibility to assure that our nation remains the world’s most capable air transportation provider.

Benefits to the General Public and the General Fund Contribution

It is appropriate to recognize the public benefit of the national air transportation system, which makes a compelling argument for a General Fund contribution to help pay for that system. A relatively small portion of the FAA budget comes from the General Fund of the U.S. Treasury; over two-thirds of FAA funding comes from excise taxes, which in effect are fees collected from users. This shared funding allows the federal government to fulfill its responsibility in facilitating our nation’s air transportation system. This is a responsibility NBAA believes is proper and essential for three fundamental reasons:

1. Non-users benefit economically and socially from a safe, efficient and effective air transportation system. Property values and employment levels, for example, are higher in regions with access to good air transportation, yet it is not possible to charge the non-users who benefit from those economic and quality of life advantages outside of general taxes.
2. Our nation’s tax revenues are enhanced by the economic impact of a safe, efficient and effective air transportation system, since transportation drives the economy upon which taxes are paid. Imagine what the economy and thus the federal tax revenues of our nation would be if there were no air transportation.
   The general fund contribution spurs tremendous economic growth and tax revenues. In its study entitled The Economic Impact of Civil Aviation on the U.S. Economy Update, Wilbur Smith Associates estimated that the U.S. air transportation system generated $771 billion in economic activity – 5.9 percent of our nation’s GNP. Assuming a modest tax rate, civil aviation contributes directly, indirectly or through induced impacts roughly $30 billion in federal taxes each year, an excellent return on the government’s $2 to $3 billion annual investment.
3. For safety, efficiency and effectiveness, our nation’s ATC system must be a monopoly. European ATC involves about 20 countries and about 40 discrete authorities. A study by IATA concluded that rationalizing Europe’s ATC system under one authority (i.e. a monopoly) would double the number of aircraft handled in European airspace daily. Such greater efficiency would only equal the density that routinely operates each day in the Northeast Corridor of the United States. Only government, with Congressional oversight, should run monopolies.

Given these important facts and benefits to the general public, it is clearly appropriate that the FAA and the ATC system be the responsibility of our national government and that some level of public funding be applied to support it.

Traditional Funding

It also is appropriate that the national air transportation system is primarily designed to accommodate the needs of the commercial airlines and their passengers. Accordingly, related revenues and capital investments are primarily based upon those needs. It should be noted hat general aviation accounts for less than 5 percent of the movements at the nation’s top five airports and less than 10 percent of the movements at the nation’s top 20 airports.

Despite strong evidence that the real problems of the FAA are management-related rather than revenue-related, a great deal of the debate on user fees has focused on the FAA’s projected shortfall in funds between now and the year 2002. It is important to note, however, that those estimates are based upon existing practices and current levels of service.

Under a reformed FAA, those projections are inappropriate. Furthermore, as you know, the General Accounting Office, in a January 1997 study of the agency’s air traffic control modernization program, found that the FAA’s cost estimating process is flawed (as did Coopers & Lybrand in its efforts for the Commission). Among other things, the GAO report states that: "Congress does not have reliable cost information to use in making funding decisions about FAA." In short, there is no factual basis for claims that the FAA faces a long-term funding shortfall.

In fact, the revenue system the FAA has historically relied on – a combination of excise taxes and General Fund contributions – has provided a steady, reliable and abundant source of funds for the agency. The FAA, over the years, has spent billions of dollars on facilities and equipment and even greater amounts on operations and maintenance. The agency, however, has not capitalized on those investments because it lacked the management structure needed to use its dollar and people resources efficiently and effectively. Now, with the enactment of personnel and procurement reforms and an administration "reinventing government" effort to change the culture of government service from within, the FAA may finally be on the road to "reinventing" its operations from within and making better use of the many resources provided through the traditional funding system.

NBAA strongly supports the reinstatement of the aviation excise taxes, in particular the fuel taxes paid by general aviation (turbine and piston), well beyond their next expiration date of September 30, 1997. This action would make sense in that the traditional system works well, at least from our perspective as incremental users of a system designed primarily for the commercial airlines and their passengers.

Simply put, we believe the FAA funding system we have relied on to finance the agency for more than 25 years is a useful, appropriate and efficient system that reflects the benefits that both the general public and direct users receive from its operation. It has enabled our nation’s air transportation system to thrive as the world’s safest and most efficient; it is the proper system to ensure that our future needs are met.

User Fees and Unintended Consequences

In contrast, a system funded entirely by direct users will be under-capitalized and under-utilized, according to most economists and a recent literature search by Arthur Andersen (attached). If fees from users are expected to cover all FAA costs, users will be discouraged from using air transportation services to the point of putting at risk economic development as well as aviation safety. The result is a tradeoff between safety, efficiency and cost recovery (full cost recovery through charges to users may result in lost productivity, lost economic growth, lost competitiveness and lost tax revenues to the federal government, as well as higher accident rates).

In addition, it seems unwise to give the FAA authority to impose fees on the community it serves. As such, a user fee system would reduce, if not eliminate, the incentive for the FAA to operate more efficiently. After all, what incentive would there be to change an operation that produces revenues even if a better system exists? Since the FAA enjoys monopoly status, the consumer would have no choice but to pay the FAA’s imposed user fees or avoid FAA services.

A user fee system also would create significant administrative costs and headaches that could discourage growth and require new bureaucracies. At a time when the Administration and Congress are focused on making government more efficient, it makes little sense to switch from a system with low administrative costs and high compliance to one that will undoubtedly require mountains of paperwork and an army of bureaucrats.

Furthermore, a system in which a price is placed on FAA services could have detrimental safety effects. Pilots could be discouraged from filing flight plans, checking the weather or contacting the tower if they are charged for doing so. The current system avoids such risks. General aviation accident rates are higher in countries with high user fees.

NBAA is especially concerned with the unintended consequences of proposals for new user fees on "general aviation turbine aircraft" for the following reasons:

1. Safety would be placed at risk if operators were encouraged to avoid FAA services in order to avoid paying user fees. If only five percent of turbine operators choose not to file IFR flight plans, over 500 high performance aircraft would be outside the traditional ATC system. Utilization of general aviation turbine aircraft has high price elasticity.
2. Utilization of "general aviation turbine aircraft" would be reduced significantly (on the order of one-third or more according to recent studies, attached) which would harm many companies – small, medium and large – and be detrimental to the national economy, including thousands of rural cities and towns that now benefit from the ebb and flow of commerce facilitated only by business aviation.
3. Reduction in business activity also would result in a reduction of business tax revenues, locally and nationally.
4. Existing aviation policy would be affected, possibly in a way that would discourage new entrants to air transportation.
5. "General aviation turbine aircraft" could be subject to discrimination.
6. There would be reduced aviation tax revenues from all sources, including lost fuel taxes and lost taxes due to reduced sales of aviation related products and services, inhibited economic activity and negative impact on related jobs in general.

NBAA has been and remains especially troubled by a proposal by President Clinton that would target our community for new and potentially damaging taxes or fees. The proposal exhibits a fundamental misunderstanding of "business aviation" and the vital role it plays in business productivity and business revenues (and the tax revenues they generate) of American companies. And, it seems inappropriate to consider a proposal that would divert aviation revenues to other programs. It is particularly puzzling that President Clinton would move in this direction given his previous comments about the business aviation community in a 1992 letter addressed to NBAA, which states:

HLB Risk and Policy Analysis of the FAA’s 1995 Cost Allocation Study

The firm Hickling Lewis Brod, Inc., (HLB) of Washington, DC, and Ottawa, Ontario, has conducted a quantitative critique and policy analysis of the FAA’s 1995 Cost Allocation Study (CAS), which was performed by the firm GRA, Inc. The HLB analysis sheds light on the risk profile of the cost allocation results presented in the 1995 CAS and indicates a high probability that reliance on those results risks significant over allocation to and over charging of general aviation turbine aircraft. We caution the Commission that using the 1995 CAS results may lead to significant unintended consequences. HLB estimates that utilization of general aviation turbine aircraft could be reduced by as much as one-half.

In our judgement and in the judgement of experts retained by NBAA, the assumptions made in the 1995 CAS represent a limited and misleading assessment of how costs are incurred and how they should be allocated within the national air transportation system.

Excise Taxes Revisited – An Appropriate, Use-Based System

Rather than take chances with a risky and unproven system, NBAA strongly supports the excise tax system under which general aviation – turbine and piston – pays for its use of the air transportation system through a per gallon tax of 19.4 cents on aviation gasoline and 21.9 cents on jet fuel – (Note, these amounts include 4.3 cents per gallon for deficit reduction). NBAA believes that the fuel tax is an appropriate reflection of the use of the system. Aircraft that fly further distances burn more fuel and pay higher taxes. In addition, the jet fuel that sophisticated aircraft burn is taxed at a higher rate than the aviation gasoline that less sophisticated aircraft use.

Some have criticized the fuel tax, claiming that it does not reflect general aviation’s use of the system. While some cost allocation studies that have been performed and relied upon in the past claim that business aviation is not paying its "fair share," it is important to note that those studies focus on "fully allocated costs" rather than the "avoidable" or "incremental" costs of business aviation. That important distinction is critical when determining what costs of the aviation system should be borne by different segments of the aviation community.

NBAA believes that the right question to ask is: "How much more does it cost the FAA to operate due to the various elements of general aviation, including business aviation?" We observe that incremental costs are a more appropriate means for determining the business aviation community’s "fair share."

Turbine-powered business aircraft are incremental users of an air traffic control system that is designed, built and maintained for the commercial air carriers and their passengers.

• If a business jet or turboprop never flew again, capital and maintenance costs of our nation’s ATC system would experience little change.
• Most of the dollars earmarked for airport improvement also would remain within the FAA budget.
• Only incremental costs associated with a limited percentage of controllers would be affected, and those dollars are significantly less than the fully allocated costs often attributed to business aviation.

If turbine-powered business aircraft never flew again, the real losers would be American businesses, communities, and the federal government. Loss of productivity would reduce corporate sales, curtail jobs in Rural America, severely limit air access to much of our country, and lower federal revenues thus making less money available for other worthwhile government programs.

A collection method for funding the FAA needs to be effective, efficient and non-inhibiting. It should be easy to administer and not create unintended consequences such as restricting the economy or creating safety concerns. Finally, the funding system should contribute to making the existing air transportation system more efficient so as to allow the commercial airlines and business aviation to bring the ebb and flow of commerce to all regions of the country and the globe.

The Real World of Business Aviation

NBAA Member Companies are the world’s most active users of general aviation for business transportation as well as extensive users of the airlines, purchasing more than $11 billion in tickets annually. NBAA Member Companies rely heavily on safe and efficient transportation to service customers, expand markets and facilitate the ebb and flow of commerce to thousands of rural communities in the United States and abroad.

Business aviation provides access to economic opportunity with proven results, and our community stands ready to make even greater contributions through an improved FAA and air transportation system. To be successful in that endeavor, we must recognize and understand the problems at the FAA and act rationally and responsibly to address them in the most appropriate and effective manner. Great strides were made toward that end with the enactment by the 104^th Congress of legislation that acknowledged the need to explore innovative financing mechanisms while recognizing the importance of improved FAA management.

We have always expressed a willingness to pay our fair share of the costs of the system, if those costs are fairly and effectively determined through incremental cost analysis, and if the revenues collected are utilized for the purpose of system capacity enhancement and modernization. As indicated, the business aviation community believes the most efficient, effective and fair way to pay our fair share is through the fuel tax. We also want to see more innovative use of the revenues that are derived from the aviation community, and encourage more autonomy for the FAA, which should continue to be reformed from within. A General Fund contribution should also be maintained. Finally, NBAA reiterates the importance of a mechanism for raising revenue from the aviation community that does not inhibit air transportation’s effect on the economy and that avoids any safety implications.

To assist the Commission in developing a full understanding of and appreciation for the business aviation community, we are providing each Commissioner and Staff member a copy of a new publication developed for the Commission and published today for your use that presents the real world of business aviation. This publication incorporates the results of a Louis Harris & Associates, Inc., survey of general aviation turbine aircraft operators and provides information concerning the demographics of the business aviation community that should be helpful.

Conclusion

In conclusion, we urge the Commission to recognize the pivotal role that air transportation will play in facilitating our nation’s economic, social and security needs for the 21^st century. Reform of the FAA and the ATC system, as well effective consideration of the related funding, financing and safety issues, are critical to the long-term economic stability of the nation and the business aviation community. NBAA and the entire business aviation community stand ready to work with the Commission, Congress and the Administration to ensure that our nation’s air transportation system remains the safest and most efficient in the world. This is a unique opportunity to further elevate the debate on this issue and to truly make significant progress.

We should not and cannot, however, waste our energies focusing on switching to an unproven and risky user fee system. Instead, we should recognize the many strengths of the existing, traditional system, and aggressively pursue changes that will enable the FAA and the entire aviation community to be more effective.

Again, thank you for this opportunity to testify. I would be pleased to respond to questions or comments that any of the Commissioners might have.