My name is Herb Kelleher. I co-founded Southwest Airlines in 1967. Because I am unable to perform competently any meaningful function at Southwest, our 25,000 Employees let me be CEO. That is one among many reasons why I love the People of Southwest

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Testimony of Herb Kelleher
CEO
Southwest Airlines
before the
National Civil Aviation Review Commission

My name is Herb Kelleher. I co-founded Southwest Airlines in 1967. Because I am unable to perform competently any meaningful function at Southwest, our 25,000 Employees let me be CEO. That is one among many reasons why I love the People of Southwest Airlines.

I speak today, however, not only on behalf of Southwest Airlines but also on behalf of America West Airlines; Alaska Airlines; Western Pacific Airlines; Reno Air; Valujet; and Frontier Airlines. These other, consumer friendly, low fare airlines authorized me to speak on their behalves since the opportunity to expatiate at today’s hearing is somewhat constrained. In the extremely limited time which has been allotted to me, I will proffer a few statements of fact, which possibly may not have been provided in the numerous briefings you have been subjected to in support of a new funding scheme for the FAA.

FACT: Airline deregulation works because low cost-low fare air carriers make it work. The DOT has estimated, in a published 1996 report, that in the absence of competition from low cost-low fare competitors:

1. American air travelers would be deprived of $6.3 billion per year in air fare savings;

2. There would have been no growth, but rather a diminution, in domestic air passenger traffic from 1988-95; and

3. That from 1988-95 passengers in markets with access to low cost-low fare carriers more than tripled, from about 33,000,000 to over 100,000,000 passengers per year.

SOURCE: U.S. Department of Transportation, "The Low Cost Airline Service Revolution," Office of Aviation and International Economics, April 1996. (Tab 1)

FACT: According to a published 1996 report of the U.S. General Accounting Office, communities served by low cost-low fare airlines generally get better service at lower fares. Communities not served by low cost-low fare competitors generally do not.

SOURCE: U.S. General Accounting Office, "Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities," GAO/RCED-96-79, April 1996. (Tab 2)

FACT: Despite representations to Congress that restoration of the excise tax would depress traffic and profits, the mega-carriers experienced record traffic at higher fares, resulting in record profits, after the tax was restored.

SOURCE: Various newsclips plus airline industry profit data. (Tab 3)

FACT: "Cost accounting" for complex networking activities is not a "science;" it is an "art," founded on assumptions which are readily subject to anti-competitive manipulation. Moreover, the FAA has no so-called "cost accounting" system. But even if it did, more than half its costs are fixed and not directly allocable.

SOURCE: Herb Kelleher; Coopers & Lybrand, "Federal Aviation Administration Financial Assessment," 1997; and U.S. General Accounting Office, "Transportation Financing: Challenges in Meeting Long-Term Funding Needs for FAA, Amtrak, and the Nation’s Highways," GAO/T-RCED-97-151, May 7, 1997. (Tab 4)

FACT: Based on several relevant indicators of ATC system use (e.g., fuel consumed or aircraft miles flown), Southwest Airlines’ use of the airway system correlates exactly with Southwest’s share of tax payments under today’s excise tax structure.

SOURCE: U.S. General Accounting Office, "FAA Financing: Issues and Options in Deciding to Reinstate or Replace the Airline Ticket Tax," GAO/T-RCED-97-56, February, 4, 1997. (Tab 5)

FACT: The so-called "user fee" scheme devised by the mega-carriers is based on criteria selected for the purpose of decreasing the mega-carriers’ tax burden and increasing everyone else’s. The GAO illustrated how the Big Seven, by cleverly manipulating the formulas, merely shifted $550 million in annual costs (i.e., recurring) from them to others in the industry. GAO said $500 million of that shift would fall on Southwest, America West, and other low-fare and small airlines. GAO also pointed out how the formulas created a special low fee for the commuter airlines "owned by or affiliated with one of the coalition airlines."

SOURCE: U.S. General Accounting Office, "Transportation Financing: Challenges in Meeting Long-Term Funding Needs for FAA, Amtrak, and the Nation’s Highways," GAO/T-RCED-97-151, May 7 1997; and, "FAA Financing: Issues and Options in Deciding to Reinstate or Replace the Airline Ticket Tax," GAO/T-RCED-97-56, February 4, 1997. (Tab 6)

FACT: A user fee system may be impossible to develop under any conditions. As stated by the Joint Tax Committee, "Allocation of these costs among FAA functions requires making subjective assumptions that are subject to dispute. (emphasis added) Therefore, it may be impossible to demonstrate whether any alternative tax structure more, or less, accurately assigns tax burdens to the persons creating FAA costs."

SOURCE: Joint Committee on Taxation, U.S. Congress, "Description and Analysis of Certain Revenue-Raising Provisions Contained in the President’s Fiscal Year 1998 Budget Proposal, JCS-10-97, April 16, 1997. (Tab 7)

FACT: Mega-carriers are the beneficiaries of substantial federal largesse and protection under the current system, which confers many competitive advantages upon them. Examples include: long-term, exclusive-use airport leases; domination of airport slots at the four slot-controlled airports; frequent flyer plans; ownership of computer reservations systems; and code sharing partnerships with commuter affiliates and foreign flag carriers.

SOURCE: U.S. General Accounting Office, "Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets," GAO/RCED-97-4, October, 1996; and "Airport and Airway Trust Fund: Issues Raised by Proposal to Replace the Airline Ticket Tax," GAO/RCED-97-23, December, 1996. (Tab 8)

FACT: The mega-carriers cause the congestion and delays of which they complain. These occur primarily at the largest hub airports which they dominate with their inefficient (in terms of the air and ground space utilization) hub/spoke systems. In fact, once one passes the 12 or so mega-hub airports dominated by the Big Seven, the delays are rather de minimis in nature.

SOURCE: Federal Aviation Administration, "1994 Aviation Capacity Enhancement Plan," Office of System Capacity and Requirements, DOT/FAA/ASC-94-1, 1994. (Tab 9)

FACT: The "blueprint" for successfully competing with the mega-carriers was provided by Southwest. The "linchpin" is low costs.

SOURCE: U.S. Department of Transportation, "The Low Cost Airline Service Revolution," Office of Aviation and International Economics, April 1996. (Tab 10)

FACT: The seven largest carriers have purposely joined together in a concerted attempt to try to impose a fee structure on U.S. airlines which merely shifts over $550 million in costs from high fare carriers to low fare carriers.

SOURCE: Roberts Roach & Associates, "Air Traffic Control User Fees: a proposal by the seven largest U.S. airlines," May 29, 1996; and, U.S. General Accounting Office, "Airport and Airway Trust Fund: Issues Raised by Proposal to Replace the Airline Ticket Tax," GAO/RCED-97-23, December, 1996. (Tab 11)

FACT: The proposal by the seven largest carriers created special tax rates for members of the "Group of Seven" and higher rates for everyone else. Interestingly, even among the Big Seven themselves, the treatment is not equal. For the "founding fathers" of the Big Seven (American, Delta, and Northwest), the effective tax rate was identical carried out to four decimal places, about .0845%. The four fellow travelers who joined the club late (United, TWA, USAir, and Continental) apparently paid a fee for their tardiness, because their effective tax rate was higher, about 9%. Non-club members were assessed much higher "dues" for participating in the ATC system. In the case of Southwest, about 16%.

SOURCE: Southwest Airlines (Tab 12)

FACT: Domestic low fare airlines pay the 10% excise tax on all passengers. The "Group of Seven," through a series of tax avoidance techniques, do not. This special tax status enjoyed by the mega-carriers is due primarily to the fact that their international passengers are either subject to a very low rate of taxation (e.g., $6 per passenger departure) or not taxed at all (e.g., the domestic portion of an "international" itinerary, and the entire arrival portion of a true international trip.

SOURCE: Southwest Airlines (Tab 13)

So, if these are the facts, why are we here?

Aside from the anti-consumer and anti-competitive issues raised above, the possible problem seems to be this: the arcane, and arguably unwanted or unintended consequence, of the Budget Enforcement Act is that some of the user funds collected and deposited into a dedicated trust fund cannot be spent for their intended purpose. This is a technical, legal problem. This is not a financial problem. The money, delivered by the ever-efficient excise tax, is always there. And, in any event, as others have told this Commission, the problem with the modernization program at the FAA has not been money but the FAA’s "culture." Furthermore, as Congressman James Oberstar said on the floor of the House of Representatives on February 7, 1997, the ATC modernization program, in spite of all the criticism, is already 87%-90% complete.

But every "problem" is not a "crisis." The crisis mongers have said that "Privatization" of key FAA governmental services will cure all ills. A "privatized FAA" is an oxymoron. The concept of "privatizing" a natural pure monopoly is absurd. Privatization, as an economic concept, only works in an environment where competition lives and thrives. Is anyone suggesting that we break up the FAA and allow competition in the delivery of air traffic control services? Probably not even the Big Seven have the temerity to put forth such a notion. Only those with special agendas could say, with a straight face, that "privatizing" a natural monopoly like the FAA will ever lead to innovation and greater productivity. To do so would defy the laws of economic gravity. The issue is not one of economic efficiency, but of economic power, economic domination, and economic control. The end game of the Big Seven is takeover and control of the FAA by the Big Seven, and for their exclusive benefit.

The public interest, as defined by the Airline Deregulation Act of 1978, literally made the Southwest Airlines of today and the other low fare carriers I speak for possible. Some people will just never get over that. Southwest and the very existence of low-fare competition is the only "crisis" of which they truly complain. They simply want you, the members of this Commission, to solve their manufactured "crisis." As they now admit, their so-called "user fee" is a mere stalking horse for privatization of the FAA. Translated, it simply means an FAA they will literally and figuratively "own." We, and the consumers of American air transportation, are hoping that they don’t get their way-and are trusting in you.