news>>Mark Hansen testifies about NextGen Financing

Statement of
Mark M Hansen
Professor of Civil and Environmental Engineering
Institute of Transportation Studies
University of California, Berkeley
 before the
Senate Committee on Finance

July 12, 2007

Summary

Introduction
Thank you for the opportunity to testify about the aviation trust fund and its role in creating a fair, efficient, and modern air transportation system. As a Professor of Transportation Engineering at UC Berkeley, Chair of the TRB Committee on Aviation and Airspace Capacity and Delay, and an active researcher in the field for some 20 years, I have had the opportunity to analyze and study many different facets of the US Aviation System. I would like to share my own perspective on how the trust fund should be changed to develop the air transport system that the US needs and deserves.

In my view such a system must

1. evolve in response to changing needs;
2. be financed with tax contributions from all user classes that contribute to this need; and
3. when necessary allocate services in a manner that gives priority to those who pay.

I will elaborate upon these points and their implications for the trust fund.

1. Evolving Usage The US has always led the world in finding new ways to both supply and use civil air transport. This week's All-Star Game took place in San Francisco, to which the Giants could move in the late 1950s after improved air transport made it readily accessible to the rest of the nation. The US innovated airline deregulation, which has now been adopted in most of the developed world. Deregulation engendered a whole new class of air carrier in the US—the so-called low-cost carrier—which are now sprouting up around the globe.

Deregulation made airline travel affordable to the masses, but less palatable to high-end business users. This led to strong growth in the market for business jets, deliveries of which tripled in the 1990s. These jets allow those with means to fly non-stop between thousands of US airports and to do so on their own schedule. A wide range of methods for providing on-demand air transportation, from in-house airlines to fractional ownership, to chartering have allowed a diverse set of customers to participate in this market.

Innovation in on-demand air transport continues. A new generation of 2-6 seat, very light jets (VLJs) is entering the market. They will also enable fundamentally new service concepts. For example, Day Jet is pioneering the use of VLJs as shared taxis providing next-day service to individual customers.

Another example is a company called MVP air that is poised to enter the intercollegiate athletic travel market. Using 30-seat jet aircraft, MVP plans to transport college teams on routes which are not well served by commercial air carriers. Consider, for example, a Big Sky game in which Montana visits Northern Arizona. A charter would take just 3-4 hours campus-to-campus, while the best commercial airline option would require, each way, 2 stops, 10 hours, and 200 miles of airport access travel.

The economics of on-demand air travel rests primarily on individuals' and companies' willingness to pay more for air transport per se in exchange for time savings, reduced nights away from home, and other benefits. For the Big Sky, we calculated that a dedicated athletic charter would reduce travel cost if collegiate athletes' time was valued at more than $3.70 per hour, about half the new minimum wage. While the athletes would no doubt agree that their time is worth much more than this, we will see what the colleges think. This typifies the kind of decision that will determine the ultimate market potential for on-demand air transport.

In some ways, the dynamics in this system mirror those of surface transport, where, over time, public transit (akin to the commercial airlines) was supplanted by the automobile (akin to on-demand air transport) as the dominant mode. One similarity is that the commercial airline system gets better with more traffic, since this can support more flights, on larger planes, between more places. The growth of on-demand air transport has and will continue to reduce the traffic density on which the airline system thrives.

It is highly unlikely that commercial air transport will decline to the same extent that public transit did, however. Personal planes will never be as inexpensive as cars, airfields will always require more land than driveways, and a obtaining a pilot's license will always be more difficult than obtaining a drivers license. Therefore, on-demand air transport, like commercial air travel, will continue to require getting to an airport to access a shared vehicle operated by a professional pilot, all important deterrents that were missing in the surface transport case.

2. Accommodating Growth and Change in Demand

Infrastructure and air traffic service providers must strive to accommodate traffic changes resulting from on-demand air transport. As on-demand service providers have joined traditional airlines on higher altitude jet routes, minimum vertical separations have been reduced, sectors redesigned, and controller decision-support tools introduced to make more room. 

Faced with the possible proliferation of on-demand, small jet services, however, many in the aviation community propose a transformation, rather than a mere adaptation, of the current system. The transformed system, NextGen, is envisioned to increase en route and terminal capacity by as much as three-fold over the next 20 years. Recognizing uncertainty about just how far the on-demand phenomenon will go, the NextGen proponents seek a system in which this is determined by the market, without regard to infrastructure limitations. The broad outlines of how such a transformed system would operate are becoming clear, and the details are the subject of an active, multi-agency research and development program overseen by the Joint Program and Development Office (JPDO).

While NextGen offers a technical solution, it is equally important to solve the problem of finance, and this is where trust fund changes are required. Commercial airlines generate 95% of the funds for the current system. If the structures of the taxes feeding the trust fund are not changed, we face the prospect of financing a system designed to serve a increasingly diverse set of users by taxing just one subset. This is obviously unfair and regressive; it is also inefficient and risky. It is inefficient because it makes airline travel artificially expensive and on-demand air transport artificially cheap. It is risky because trust fund receipts will depend on the demand for commercial airline travel, while system costs depend on the totality of flight traffic. NextGen should thus be financed in a balanced manner that reflects how each type of user contributes to the cost and the need for system transformation.

3. Allocating Scarce Capacity

If NextGen cannot be financed in this way, we should plan for a more limited set of capacity enhancements geared to the needs of the commercial airlines. For this to work, FAA must have the authority to restrict access to congested parts of the system in a manner that favors those who are footing the bill. This can be done administratively, or through market mechanisms. It may be that non-airline users would prefer this solution—agreeing to avoid certain parts of the system in exchange for a reduced tax burden. The key point is that they should not have both unrestricted access and a virtually free ride.

Summary

In summary, the growth of convenient, and relatively expensive, on-demand air travel in small jets represents the flip side of airline deregulation that also brought us historically low fares and a more austere commercial airline product. The on-demand market may continue to grow and capture market share from commercial airlines, and should thus help bear financial burden for infrastructure to support this growth. If, on the other hand, airline passengers continue to shoulder the brunt of this burden, NextGen goals should be scaled back, and airlines should be given priority access at times and places where demand exceeds capacity.

This concludes my testimony. Thanks again for the opportunity to give it. I look forward to your questions.