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Aviation Noise Control
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This file contains a James Cannon memorandum submitting the Secretary of Transportation's recommendations.
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The original documents are located in Box 1, folder "Aviation Noise Control" of the
Richard B. Cheney Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 1 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
INFORMATION
WASHINGTON
December 22, 1976
MEMORANDUM FOR THE PRESIDENT
FROM:
SUBJECT:
Financing Aviation Noise Standards
JIM CANNON Jun
Secretary Coleman has completed hearings on whether additional
financing might be necessary to enable airlines to meet the
new FAA noise regulations. (Tab A).
In brief, Secretary Coleman recommends:
1.
Enactment of your Aviation Regulatory Reform
proposals;
2.
Reducing by 2 percent the existing federal tax
on air passenger tickets and freight bills:
3.
Proposing that CAB simultaneously impose a
2 percent environmental surcharge on air pass-
enger tickets and freight bills; and
4.
Depositing the revenues from the 2 percent
environmental surcharge into a fund to finance
replacement aircraft.
Cample
Staff
TAB A
OF
DEPARTMENT
THE SECRETARY OF TRANSPORTATION
*
WASHINGTON, D.C. 20590
UNITED
AMERICA
STATES
OF
MEMORANDUM FOR THE PRESIDENT
SUBJECT: Financing for Replacement of Noisy Aircraft
On October 21, you asked me to hold a public hearing on whether,
assuming responsible action on aviation regulatory reform, there
is a need for a special financing arrangement to ensure timely and
economically efficient compliance with the new FAA rule that you
approved to quiet the existing aircraft fleets. Should a financing
proposal be determined necessary, you further directed me to
recommend what kind of special financing arrangement would be
appropriate. I held that hearing on December 1 and am reporting
the results to you with my determination that limited additional
financing arrangements will be necessary and my recommendation
for a financing program. Although the expeditious enactment of
aviation regulatory reform will bring about the kind of economic
environment over the long term that will enable compliance with
environmental requirements, we are faced with an immediate
timing problem if the air carriers are to comply with the schedule
set forth in the noise rule in the most effective way. A summary
of the principal points made at my public hearing is enclosed with
this memorandum.
Witnesses at the hearing generally supported the need for a special
financing program. The clear consensus of opinion and the great
weight of the testimony I received strongly support the conclusion that
retrofitting many of the older four-engine aircraft simply would be
undesirable. The noise regulation therefore will force the retirement
of most of these aircraft. At present, the airline industry is financially
incapable of placing a sufficient number of orders to permit the manu-
facturers to develop a new generation aircraft and deliver it in time
2
to replace these noisy aircraft. Such new generation aircraft would
not only be much quieter than existing planes (even if they are retro-
fitted) but would also be substantially more fuel efficient, thus
contributing to our national goal of fuel conservation. An early start
on new aircraft development also would contribute to other important
national goals such as higher employment, increased exports, and
continued world leadership in aviation technology.
Witnesses who addressed the subject also gave firm support to the
type of financing approach I recommended to you last August, and
I therefore have concluded that I should again recommend it, or a
variation thereof, as a feasible and fiscally sound way for achieving
the objectives of our aircraft noise program. The basic plan has
the following main features:
1. CAB would impose a 2% environmental surcharge on air
passenger tickets and waybills for a period of up to 10
years; at the same time, the present ticket and waybill
taxes would be reduced by an offsetting 2 percentage points.
Thus the cost to the users of air transportation would
remain the same.
2. The revenues from the 2% surcharge, which would amount
to some $3 billion over 10 years, would be deposited in a
fund managed by an escrow agent either designated by the
airlines under an intercarrier agreement approved by the
CAB or created by statute. Every effort should be made
to keep this fund in the private sector to minimize govern-
ment involvement in the management of the financing
program.
3. The revenues accumulated in the fund would be distributed
either in accordance with the intercarrier agreement, or
pursuant to statute, in a way that would give relatively
more aid to those carriers that must incur the heaviest
expense in replacing noisy aircraft. The distribution of
funds would be based upon the revenue produced by each
of the carriers participating in the agreement, and would
be designed to take into consideration the need for assuring
the support of the financial community, which will provide
most of the required financing.
3
4. Amounts distributed to the carriers from the fund would
provide approximately one-third of the cost of new quieter
aircraft to replace the noisy four-engine planes now in the
fleet.
5. Funds remaining after airlines have received their appro-
priate entitlements would be transferred to the Airport and
Airway Trust Fund and applied to airport noise reduction
projects.
6. Funds from the existing balances in the Airport and Airway
Trust Fund would be used for financing the cost of retro-
fitting two and three engine aircraft.
In reaching this position, I also considered a number of other types
of financing arrangements, including direct payment to carriers out
of uncommitted balances in the Airport and Airway Trust Fund,
government loan guarantees, and pollution taxes. Each of these
approaches fell short in one respect or another, i.e., they did not
ensure the success of the replacement program, or they called for
excessive government involvement in the management of the finan-
cing mechanisms, etc. At the hearing, two members of the financial
community proposed a plan similar to the one I favor, but they would
use the fund created by the 2% surcharge to help borrow money at very
favorable interest rates which, in turn, would be loaned by the fund
to the carriers. I believe this approach might provide more help
than is necessary for an effective financing program. Nevertheless,
this type of proposal promises to provide a net surplus over the life
of the program that could be repaid to the Treasury. Thus, it may
present an opportunity to provide a mechanism that not only would
encourage an economically sound noise abatement program, but which
could also have a favorable budgetary impact. Therefore, I have not
ruled out the possibility of endorsing such a proposal.
In order to move toward the creation of an effective financing
mechanism, I ask your approval to submit the necessary implementing
legislation to the new Congress early in January. Basically this
legislation would do the following:
1. Amend the Federal Aviation Act to authorize CAB to approve
intercarrier agreements to achieve noise control objectives
4
including the establishment of an aircraft replacement fund,
to be managed in the private sector.
2. Amend the Internal Revenue Code to reduce existing air
passenger ticket and waybill taxes by 2 percentage points
at such time that CAB certifies to the Secretary of the
Treasury that (1) it has approved an intercarrier agreement
containing the provisions referred to above necessary to
assure success of the program or, to authorize a nonprofit
trust or coproration to be created to receive the 2% surcharge
and use it for the replacement or retrofit of noisy aircraft,
and that (2) the Board will approve the imposition of a special
2% environmental surcharge on tickets and waybills on a date
certain, but not earlier than October 1, 1977.
3. Amend the Airport/Airway Act to authorize appropriations
for the purpose of financing the retrofit of two and three engine
aircraft to meet existing Federal noise standards.
With this legislation before the Congress, this Administration will have
advanced a complete program to deal with the aircraft noise program.
As you know, pursuant to your direction, by January 1 the Federal
Aviation Administrator will have issued a final regulation requiring
existing aircraft to meet more stringent noise standards. The legis-
lation and financing plan I am proposing will permit the requirements
of that regulation to be met in a timely fashion, minimizing the burden
on the industry and the users of air transportation, while achieving the
broader national objectives I have discussed earlier.
I appreciate, at the same time, your continuing concern about the
impact which this or any financing scheme might have on the Federal
budget. As I have indicated to you before, it is my firm conviction
that the next Congress will reduce, in any event, the passenger ticket
tax by at least 2 percentage points, based on the industry's valid claims
that this reduction is justified by the Trust Fund surpluses (now $1. 4
billion and growing) and the fact that DOT studies show that airlines
are now paying more than their fair share of the costs of operating
the airways. Nevertheless, any proposal to reduce tax revenues by
some $300 million per year without offsetting adjustments must be a
5
matter of concern. In this regard, however, I do wish to bring the
following mitigating factors to your attention:
1. I have just transmitted to the OMB draft legislation which
would impose for the first time a system of waterway user
charges. As you know, you approved such legislation last
year but Congress did not act on it. The bill I am now
proposing and which I urge you to submit to the Congress,
would produce $80 million per year in new revenues. As
I understand it, these amounts have not been reflected in
current FY 1978 budget totals by OMB.
2. Our analysis indicates that the aircraft replacement program
which I am recommending would generate some $8 billion or
more in sales by the aircraft and engine manufacturers over
a 10-year period. We estimate that this significant increase
in revenues to the affected industries will yield as much as
$1 billion in added Federal corporation tax revenues. In
addition, we estimate that nearly $500 million in added per-
sonal income revenues will result from the increased employ-
ment the program will generate. While added Federal income
will not begin to flow in the early years of the program, we
believe that beginning in the third year the amounts will be
significant, becoming a major offset to the air user tax loss.
In summary, I believe that after a full, exhaustive, and public search
for the best way to accomplish our aircraft noise control objectives,
we have reached a remarkably broad consensus on the basic outlines
of a sound approach.
I urge that you approve my proposal to submit to the Congress
legislation that would authorize the financing program I have set
forth here. Without such legislation the airlines would be compelled
to curtail service or resort to inefficient means to comply with the
new noise requirements you directed in October. By submitting my
legislative proposal, your Administration will have taken all the
necessary actions to assure that aircraft noise reduction objectives
6
will be achieved on a timely and efficient basis and in a way which
will yield the other important national benefits I have outlined to
you.
William T. Coleman, Jr.
Enclosure
FUND LIBRARY FRED
Department of Transportation
SUMMARY ANALYSIS OF ISSUES RAISED AT THE
PUBLIC HEARING OF DECEMBER 1, 1976 CONCERNING
FINANCING AIRCRAFT NOISE REDUCTION REQUIREMENTS
On December 1, 1976, a public hearing was conducted on the financing
of the aircraft noise reduction requirements to be promulgated as an
amendment to the Federal Aviation Regulations, 14 CFR Part 36. In
anticipation of this hearing the Department of Transportation published
a Statement of Issues listing the issues it hoped would be addressed by
witnesses. This paper summarizes and analyzes the testimony and
other materials submitted in connection with this hearing, following,
in general, the original Statement of Issues. Certain other matters
raised by various witnesses are also addressed.
A. Would it, from the standpoint of the national interest, be more
advantageous to meet the new noise standards by replacing some
or all of the 707s and DC-8s with new generation aircraft rather
than by modifying them?
DOT invited views of interested persons on the issue of whether the
national interest would be better served by replacement rather than
modification of the 707s and DC-8s, and outlined the major con-
siderations bearing on the issue, as well as its current position on
each. These were:
- The cost of replacement versus the cost of modification.
In terms of capital outlay only, retrofit which will provide
compliance with Part 36 standards is the least costly and
possibly quickest means of attaining the required noise
reduction. However, when other aspects of the replace-
ment versus retrofit question are considered, replacement
becomes clearly preferable to retrofit for certain aircraft,
particularly when looking at the long run economic and social
FORD CISAACY
2
ramifications of the program. The noisiest aircraft
in the fleet (narrow-body four-engine jets equipped
with JT3D or JT4A engines) are also the oldest and
are becoming economically obsolescent. Retro-
fitting these planes would impose an operating cost
penalty and would not extend their physical lives and
would be quite expensive ($1. 2 to $2. 6 million or
more for each aircraft).
- The noise reduction achievable by modification
compared to that achievable by replacement. New
generation replacement aircraft would be quieter
than the quietest aircraft in operation now, and far
quieter than retrofitted aircraft.
- Significant ancilliary benefits would accrue from
a replacement program. Replacement would mean
greater fuel efficiency, the application of advanced
concepts in a new technology aircraft and thus a safer,
more efficient operation, increased employment, a
stronger aerospace industry, and technologically
advanced aviation products for export.
In general, there was overwhelming agreement with the Depart-
ment's view as to the merits of a replacement program for 707s
and DC-8s. Most of the testimony both substantiated and elaborated
on the tentative evaluation made by the Department in the Statement
of Issues summarized above. The representative of the air carrier
industry indicated that major aerospace manufacturers were develop-
ing new engines that would be quieter, more fuel efficient and
available in time to carry out the proposed replacement program.
The impact of replacement on employment was also detailed in his
testimony. It was estimated that 11 each billion dollars in air-
craft sales generates 60,000 job years; thus, a $6 billion replace-
ment program would create 360,000 job years. "
19RD
3
One airline executive claimed that much of the retrofit cost would
be wasted since it would hasten the economic obsolescence of the
planes involved by making them less fuel efficient. He argues
that his company might have to ground its 707s rather than incur
the costs of retrofitting them, and that would result in a significant
reduction in his airline's capacity.
Other airline executives pointed out that a retrofit kit for DC-8s
has not yet been developed, and said it is not known how long the
development, testing and installation of the kits would take. The
representative of one airline stated that 90 percent of its fleet
would come under retrofit requirements at a cost of at least $22
million, an expenditure which, in its view, would not add to the
productivity or longevity of its aircraft. It was further asserted
that in addition to providing greater noise reduction benefits and
greater economic efficiency, a replacement program offered the
potential for significantly reducing traffic congestion through the
use of newer, widebody aircraft combined with reductions in flight
frequency.
Two witnesses did bring forward proposals for re-enginning (as
opposed to retrofitting) newer 707s and DC-8s. Such a program
would in their view present significant cost savings while extend-
ing the lives of the aircraft. The Department agrees that this
alternative is certainly worthy of consideration if the engines
can be developed and certificated in time to meet the deadlines
of the carriers. However, in the final analysis the choice among
retrofitting, re-enginning or replacement should be left to the
best business judgment of the airlines.
Witnesses who can be characterized as representing environmental
or consumer groups were divided in their support for, or opposition
to, a replacement program as compared to retrofit. It should be
noted, however, that the arguments raised in favor of a retrofit
program dealt not with any perceived superiority of that alter-
native, but stemmed from the expectation that it could be accom-
plished faster than a replacement program and thereby provide
at least modest noise relief sooner.
FORD
BERACO
LIBRARY
4
In summary, the overwhelming majority of the testimony on the
need for financing was in substantial agreement with the Depart-
ment's view that from the standpoint of an economic and public policy,
replacement of the older DC-8s and 707s has substantial advantage
over retrofit.
B. Assuming that replacement of some aircraft is preferable
from the national interest standpoint, is there a need for
special financing provisions to enable aircraft operators
to meet the deadlines stipulated in the new standards?
Although the various witnesses provided a number of rationales for
their positions, virtually all of them agreed with the Department's
conclusion that the airline industry is financially incapable of im-
plementing a replacement program within the deadlines in the
new noise regulations, and that a special financing arrangement
is vital.
The Department's own financial analysis had identified several
factors which argued for such a special arrangement:
1. The weakness of the airline industry's financial
situation. The poor profit performance of many major
carriers over the past ten years, exacerbated by
the recent economic downturn, prevents them from
ordering the new aircraft they need to replace
economically obsolete equipment.
2. Even without the noise requirements, the airlines
face some difficulty in meeting their estimated capital
requirements between 1976 and 1985. In the early 1980's
the industry will need to order a substantial number of
new aircraft for replacement and traffic growth, thus
creating a heavy demand for capital even without considering
the effect of the new noise regulations. Meeting the noise
requirements with a reasonable mix of retrofit and replace-
ment will add from $6 to $8 billion to the estimated $32
billion in capital needs of the trunk carriers between now
5
and 1985. The carriers will no doubt find it difficult
to meet their normal needs, not to mention the added
burden that the new noise regulations will create.
3. Front end capital must be available promptly if more
quiet aircraft are to be available in time to meet noise
deadlines. A lead time of four to five years is necessary
in the development of new generation aircraft, which means
an almost immediate start is necessary if the new aircraft
are to replace noisy aircraft by the compliance deadlines.
Manufacturers require a large number of firm orders with
front end capital ($500 to $1 billion) before they can
start production of a new aircraft. The airlines cannot at
this time place sufficient orders for new aircraft because
of their poor financial situation.
4. A special financing arrangement for a replacement
program is in the national interest. Development of
new quieter aircraft will have positive impacts on U.S.
employment and export levels. U.S. aerospace industry
employed some 942 thousand people in 1975 and exported
almost $2.5 billion worth of civil aircraft.
5. The financial benefits that will accrue from regulatory
reform will not be available soon enough to finance a
replacement program. Were the airlines operating in an
environment that would be created by the regulatory reform
bill, they would be able to generate the capital needed to
bring their fleets in compliance with FAA noise standards.
Under the present circumstances, the period between enact-
ment and implementation of the legislation will not allow for
the aircraft developmental lead-time needed to develop new
generation aircraft before the deadlines in the noise regu-
lations.
In reacting to the Department's tentative conclusions in the Statement
of Issues, the representative of the Air Transport Association (ATA)
and senior airline executives confirmed my understanding that virtually
none of the carriers who would be most affected by the noise regulations
is in a position to make the capital expenditures required to comply with
them through replacement. Indeed, it was pointed out that most of
6
these carriers were already at their debt limits and, without signi-
ficant and sustained profit improvement, had no hope of obtaining
equipment financing from their traditional lenders in the near
future without some special financing mechanism.
As a group, witnesses from the financial community (banks,
insurance companies, and Wall Street analysts) provided testimony
highlighting the high proportion of debt in airline capital structures.
A witness from the insurance industry summarized the general
view of the lenders by noting that the recent financial performance
of the industry had significantly lowered investor confidence in the
airlines. Moreover, the airlines already have about $6 billion of
debt coming due between now and 1985. In summary, the financial
community recognizes the desirability of an accelerated aircraft
replacement program but is unwilling. and in some cases unable, to
risk further financial exposure in the air carrier industry without
a special financing program.
Another argument in favor of a special financing program was
advanced by the Salomon Brothers' representative. His analysis
showed that a financing program which encouraged the timely
development of new generation aircraft could have a significant
impact on future airline profitability by producing overall airline
productivity gains (similar to those achieved when jets were
introduced) which would relieve to some degree the pressure of the
cost escalation spiral which has plagued the air carrier industry
over the recent past.
While there was some disagreement among the representatives of
aerospace manufacturers as to whether long-term noise goals
could best be accomplished by replacement using derivatives of
existing aircraft models or an aircraft involving new develop-
ment programs, there was no disagreement with the Department's
judgment that both financial and timing considerations required a
special financing arrangement if an aircraft replacement program
were to be activated in time to meet the regulatory deadlines. While
competitive considerations are involved in these differing view-
points, the sound course would appear to favor a financing arrange-
ment that would permit the broadest possible discretion to the air
7
carriers in choosing whether to go for a completely new technology
aircraft or to purchase a derivative model.
With regard to questions about financing and timing, the Boeing
Aircraft representative pointed out that development of a completely
new aircraft would take about four years, and that the company
would require firm orders for 50 aircraft before it could go ahead
with the program. This would represent an airline commitment of
about $1 billion, and 30 percent would be required in down payments.
The Douglas Aircraft representative suggested that a lower cost
alternative to replacement of the DC-8s and 707s might be to
refit them with new high bypass engines.
The representative of the Council on Wage and Price Stability, while
not directly disputing the Department's view that a special financing
arrangement would be needed, argued that it could possibly con-
stitute a dangerous precedent in terms of Government intervention
in the private marketplace. The witness did not recommend any
alternative solution other than to suggest the imposition of a
pollution tax (and possibly an increase in fares) or doing nothing
and relying on market forces.
Delta Airlines, in a letter to the Department for inclusion in the
hearing record, argued that 11 the need for financing outside the
normal rate-making function of the Civil Aeronautics Board is
non-existent. " Delta believes that because international aircraft
are exempt (international carriers, Pan Am and TWA in particular,
have many four-engine jets in their fleet) there would be no inequities.
Delta also argues that a special financing arrangement would be
inequitable to carriers that have expended significant funds to
modify their fleets without government assistance.
In summary, the overwhelming consensus of the testimony discussed
above, as well as that of witnesses representing airport operators,
consumers, and others, constitutes a reaffirmation of the need for
and special benefits to be derived from a special financing arrange-
ment for replacing four-engine aircraft as part of the overall aircraft
noise reduction program. Further, ample support was provided for
the view that such an arrangement would be in the public interest.
Delta's argument that no inequity would exist if carriers were to
8
simply recoup costs through fare and rate increases is not imme-
diately cogent. United Airlines (which has no international operations)
and American Airlines also have large numbers of four-engine jets
that will be affected by the noise rule, and it is not clear that the
international exemption removes the inequity.
C. If special financing arrangements are found to be necessary,
what specific approach should be taken?
For the purpose of exposition, this issue can be divided into three
aspects: the source of funds, the financing vehicle, and the basis
for entitlement and disbursement.
Source of Funds
Alternative sources of funds considered were the uncommitted balance
of the Airport and Airway Trust Fund, a surcharge on passenger tickets
and waybills, a pollution tax on carriers, the use of general Govern-
ment revenues, Government loan guarantees, and traditional private
sector sources. All but a few witnesses supported a surcharge on
tickets and cargo waybills as the preferred source of funding, to be
accompanied by an equivalent reduction in current user tax rates.
Several witnesses, including Congressmen James H. Scheuer and Norman
Mineta,
support use of the Trust Fund to finance a noise
abatement program. The Los Angeles Airport Commission supported
this notion on the condition that the Airport and Airway Trust Fund
not be handicapped in the future and urged that general tax sources
be considered to supplement the Fund. The Airport Operators
Council International supported special financing to enable the
carriers to meet or beat the deadline, but expressed opposition
to diverting too much money from the Airport and Airway Trust
Fund so that it could not accomplish its historical objectives.
At the hearing, the Council on Wage and Price Stability supported a
pollution tax as a promising approach employing a financial incentive
and noted that the Department did not pursue a pollution tax as a
means of financing replacement because it would place further burden
on an industry that is already in poor financial condition. In a sub-
sequent written submission, the Council made it clear that it considered
the pollution tax as an alternative to the noise rule itself. The pollu-
tion tax would generate about $146 million a year. The Council did not
elaborate on its thought that the tax could be structured so that carriers
in weak financial condition would not be harmed. In a written submission,
9
IATA opposed the pollution tax approach. Northwest Airlines, in a
written statement, strongly favored a set per ticket or per passenger
charge rather than one that is a percentage of the ticket or waybill
price. In Northwest's view, the percentage surcharge discriminates
against long-distance passengers since noise is a problem at take-off
and landing and is not a factor in high-altitude, long-range flight.
The National Business Aircraft Association suggested that tax credit
might be a more workable and practical method for consideration in
the private sector, but its main concern was that the financing aid
should provide for equitable treatment of commercial and non-
commercial operators.
The Department continues to favor a surcharge because it can be
neatly matched with an equivalent reduction in user charges and
thus avoid any change in user transportation costs. Payment of
retrofit costs only (an estimated $350 million to retrofit the newer
2- and 3-engine planes) from the Airport and Airway Trust Fund
is a reasonable course, and I consider it preferable in order to in-
volve the Congress closely in the question of retrofitting the newer
2- and 3-engine planes. However, payment of these costs from the
Fund generated by the surcharge would avoid legislative controversy.
The Department agrees that the Fund should not be depleted and
recommends that its use be limited to the costs of retrofit.
The pollution tax advocated by the Council on Wage and Price Stability,
since it is proposed as an alternative to the rule, need not be con-
sidered as a financing arrangement supplementary to the rule. Also,
it is less desirable than the surcharge since it would heavily involve
the Government in the collection and disbursement of funds, and the
funds to be generated would not be sufficient to allow carriers to
replace noisy aircraft with new generation aircraft by the noise rule
deadline.
The Department supports a reduction in the user taxes in an equiva-
lent amount to the surcharge. Such a reduction has been proposed
as part of a bill aimed at aircraft noise reduction introduced by
Congressman Norman Mineta of California and co-sponsored by fifty
other Congressmen. Also, a reduction was previously proposed by
the Department outside the context of the noise financing problem
to reduce the existing uncommitted balance in the Trust Fund.
10
Financing Vehicle
The widest support of a financing vehicle was for a private and inde-
pendent third party such as an escrow agent that would collect and
disburse the funds. Two proposals that would use surcharge revenues
to obtain additional funds through issuance of debt were presented as
superior to the escrow concept. Donaldson, Lufkin, and Jenrette
Securities Corporation proposed creation of a separate non-profit
corporation that would borrow $1 billion from the Airport and Airway
Trust Fund and use revenues from the surcharge to obtain funds by
issuing bonds and loaning funds to the airlines at a favorable interest
rate. 1/ White, Weld and Company proposed formation of an Aircraft
Replacement Cooperative with shares owned by the airlines. The
Cooperative would provide downpayment financing in exchange for a
claim on the eventual residual value of the aircraft, and the balance
of the financing would be accomplished through the purchase or
guarantee of preference stock of member airlines. In both of these
plans the financing vehicle would stay in existence to collect loan
payments until near the end of the century.
At the present time the Department continues to favor the escrow
concept. Creation of a loan pool for the airlines is probably exces-
sive in terms of the need for replacement funds related to noise
regulations, and the long-term existence of the financing entity is less
desirable than a plan which would terminate the special financing
arrangement by mid-1985. There are some advantages to this type
of concept, however, such as flexibility as to equity and loan payments
and the possibility of recovering all the surcharge revenues and interest
paid on them (through loan repayments) for eventual return to the Air-
port and Airway Trust Fund.
Disbursement
The hearings generated comments about a wide range of alternatives
for disbursement. Many witnesses addressed the disbursement question
in the context of the extent to which replacement should be supported by
any special financing arrangement. The Air Transport Association took
the position that the system of entitlement to such financing should provide
incentives for carriers to replace older aircraft. The details of this plan
as presented in the ATA's letter of May 14, 1976, were as follows:
1/ Alternatively, a portion of the funds could be dispersed in cash
and the remainder held as security for debt.
11
(a) "Carriers would receive total entitlements calculated
by apportioning all the above collections on the basis
of each carrier's actual passenger and cargo system
revenue.
(b) "Each carrier flying B-707s and DC-8s (and a limited
number of B-747s ) would be entitled to draw an amount
equivalent to the cost of retrofitting the aircraft.
(c) "To provide an incentive for replacement rather than
retrofit, each carrier would receive a replacement
entitlement which would be based on that carrier's
total entitlement less his retrofit entitlement. This
entitlement, along with the retrofit entitlement, would
be available for new aircraft purchases. "
Two carriers dissented from the ATA approach. Delta, as noted above,
believes that any cross subsidy or Federal subsidy is inequitable.
Northwest dissented from the ATA's percentage surcharge in favor
of a $1.00 surcharge per passenger. They also advocated that carriers
collect the funds, retain them, and return any funds to the Treasury
not used for either retrofit or replacement. Congressman Mineta (in
a written submission) strongly argued that any payments be limited to
retrofit costs.
In written submissions, the Airport Operators Council International
and EPA suggested an incentive scheme which would pay the airlines
more for quieter aircraft. AOCI also suggested setting the payment
schedule to provide more aid in earlier years to induce carriers to
quiet their fleets as early as possible.
The Secretary of Transportation of Massachusetts urged judicious use
of any special funding. He agreed that funding should probably cover
the direct costs of retrofit, and if the Government wishes to encourage
replacement, the development of a new aircraft could be funded or
payments could be made in amounts equivalent to retrofit costs or on
aircraft. the basis of a unit of noise reduction to encourage introduction of quieter
While the Department is open on the question of disbursement formulas,
the need for some redistribution of funds in favor of the carriers with
the greatest need to replace noisy equipment still seems evident. Other-
wise, the goal of achieving quick production of a new technology aircraft
would not be realized, as major carriers could not order it. Any formula
which recognizes carrier need and keeps cross-subsidy within reasonable
bounds would be acceptable. Basing the disbursement on system revenue
12
appears in general to be a reasonable approach. The proposal to
limit replacement payments to retrofit costs would prevent the pro-
gram from generating a sufficient amount of funds to start production
of a new aircraft, since the difference between the cost of retrofitting
all noisy aircraft and the total payments for those that are actually
retrofitted would be too small. Basing payments to carriers on unit
of noise reduction seems impractical, and paying more for quieter air-
craft may result in degradation of the carriers' efficiency, because a
larger (e.g. g. DC-10) aircraft could be preferable to the new generation
aircraft for operational reasons. Also, the large size could mean
fewer operations and less noise overall.
D.
How should foreign flag carriers be treated under any financing
plan?
The application of noise regulations to aircraft in international service is
deferred to allow for the development of an international agreement on
noise control standards. It is the intention of the Department, however,
to require compliance of these aircraft within eight years and it will
institute a rulemaking procedure to achieve such compliance if ICAO has
not acted after three years. Those witnesses speaking to this issue
generally felt that it would be necessary to initiate any collections of
taxes or surcharges from international passengers simultaneously with
initiation of domestic collections.
The International Air Transport Association (IATA) representative
urged that funds collected from international passengers be put in some
form of escrow account pending establishment of international noise
regulations. LATA "would strongly oppose any
suggestion to use
such funds for domestic noise abatement. " Eventual use of the funds
should "be applied on some reasonable and non-discriminating basis
to both U.S. flag and foreign flag carriers." LATA's preferred way of
providing capital would be to "reduce the current $3.00 tax on inter-
national tickets to $2.00 and to retain the extra dollars" for a
Government administered fund.
Trans World Airlines, while not commenting in detail on the issue of
the treatment of foreign carriers, did urge "recognition of the need to
avoid placing U.S. international carriers at a competitive disadvantage." "
13
McDonnell Douglas supported use of a portion of the international
departure tax and proposed that "the tax be increased, if necessary,
to assure equitable treatment for U.S. international carriers. " It was
suggested that the Export-Import Bank " provide greater financing
assistance for foreign flag carriers purchasing "quiet" U.S. equipment
under the program. "
White, Weld & Co. proposed an approach which would:
1.
Subject all foreign aircraft which land in the U.S. to
the same noise standards as U.S. aircraft;
2. Allow foreign carriers to utilize the investment and
loan guarantee program of the Aircraft Replacement
Cooperative;
3. Restrict the use of entitlement funds for downpayment
financing (e. g., 25%) to U.S. airlines only and require
foreign airlines to self-finance this portion;
4. Work closely with the Export-Import Bank to extend
its guarantees from 10 years to a term of 12 to 15
years on new jet aircraft.
In the Statement of Issues for the hearing, the Department solicited
views on whether foreign flag carriers should be made eligible for in-
clusion in any financing provision, now or when the standards become
applicable. The witnesses did not treat this issue in much depth, and
not much light was shed on the problems of how to deal equitably with
the foreign carriers. A surcharge put on international passengers
by LATA agreement may be a workable mechanism. The Department
agrees that U.S. and foreign carriers should be treated equally, and
prefers to leave the question of financing the noise costs for inter-
national operations for resolution at a later date.
E.
Other non-financing issues raised at the hearing include:
(1) the timing of the implementation of the noise standard;
(2) the coverage of the noise regulations (i.e., whether the
two and three-engine aircraft should have to meet the standard);
(3) the rationale for the Government's involvement in helping
create a special financing arrangement; and (4) the budgetary
impact of a special financing arrangement.
FORD
14
Several witnesses took the opportunity to raise matters connected with
the noise reduction program that generally fell outside the scope of
financing.
1.
The Timing of the Implementation of the Noise Standard.
The ATA representatives argued that implementation of
the regulation should be deferred until the matter of
financing arrangements had been settled and it was clear
to all how the program was going to be accomplished.
Congressman Scheuer and certain citizens' groups ex-
pressed the hope that the noise regulations could be
phased in faster and a concern that implementation
might, in fact, be delayed if certain interests had their
way. One witness expressed the belief that the imple-
mentation schedule should be slipped so that the DC-8s and
707s could be replaced by aircraft even quieter than
what will be required by the new noise standard.
The question of the timing of the implementation of
the noise standard has been exhaustively explored by
the Department, and addressed all of the above argu-
ments. The schedule finally approved represents, in
the Department's judgment, the most judicious balance
of all the several, sometimes conflicting considerations
involved, and no retreat from this timetable should be
made.
2. Should the New Regulations Cover Two and Three-
Engine Aircraft? A number of witnesses (primarily
those representing airlines, manufacturers, or
lenders) took the opportunity to restate their opposi-
tion to retrofit of two- and three-engine aircraft.
While the Administration has already considered all
the arguments and decided retrofit of these aircraft
is in the public interest, these parties will obviously
continue to make it an issue. They contend that the
case against the two- and three-engine aircraft is
based on the cumulative effect of operations, any one
of which violates the noise standard by an amount so
small that the ear cannot detect the violation. They
15
dispute the validity of the cumulative measure, and
argue that people will not be able to notice any benefit
from the retrofit program. However, expert opinion
to the contrary is nearly unanimous.
3. The Rationale for Government Involvement in Helping
Create a Special Financing Arrangement to Assist
the Airline Industry. Another matter raised at the
hearing concerned the appropriateness of the Federal
Government involving itself in establishing special
financing arrangements to help the airlines meet
environmental standards when, it was implied, com-
parable assistance is not afforded other industries
similarly impacted by Governmental regulation.
Actually, the only monetary aid contemplated for
special financing of noise costs is the use of the un-
committed balance in the Airport and Airway Trust
Fund for the costs of retrofitting the newer planes.
Otherwise, any "aid" is limited to the enabling
legislation or regulatory authorization that would per-
mit carriers to develop and implement a plan to impose
a surcharge and redistribute the revenues among them-
selves. In any case, there is ample precedent for
government aid to help industries meet pollution con-
trol costs, and a special financing program would
not be inconsistent with Federal Government policy.
As a matter of fact,the Federal Government does
currently provide both direct and indirect financial
assistance to private industry in order to enable com-
pliance with environmental standards. Direct aid is
provided in the form of grants to private industry to
encourage development of pollution control technology
and equipment. Such grants are authorized by the
major pollution control statutes (see, e.g., Federal
Water Pollution Control Act--33 U.S.C. $1156, and
Clean Air Act--42 U.S.C. § 1857b). In addition,
numerous Government agencies are engaged in the
development of new pollution control technologies,
which are made available to private industry without
charge. For example, EPA has numerous research
projects in this area, and, in the aircraft noise area,
16
NASA has several projects aimed at the development
of quiet engines and aircraft. These programs use
federal funds to develop pollution control equipment
for private industry.
As important as the direct assistance programs are,
they probably shrink to relative insignificance when
I
compared to the indirect financial assistance rendered
through the federal tax laws. The Internal Revenue
Code explicitly authorizes greatly accelerated (i.e.,
five-year) depreciation of pollution control equipment
(26 U.S. C. $169). The investment tax credit is also
specifically available for pollution control facilities
for which accelerated depreciation is not taken (26
U.S.C. 846, 48(h)(12)). Both of these provisions
provide for the financing of pollution control facilities
out of what would otherwise have been federal revenue.
In addition to these provisions, it has become a fairly
common practice for state and municipal authorities
to issue tax-free industrial development bonds, the
proceeds of which are loaned either directly to local
companies for the acquisition of pollution control
equipment, and subsequently repaid at the lower tax-
free interest rate, or are used by the local authorities
to construct facilities which are then leased to private
industry. In either case, the cost of installing
the equipment is reduced because the bonds' muni-
cipal status provides an exemption from federal
income tax.
4. The Budgetary Impact of a Special Financing Arrange-
ment. Witnesses advocating a special financing
arrangement which involved a reduction in current
user charges were invited to address the question of
such a program's impact on the federal budget.
Clearly, in the present fiscal environment a reduction
in user charges from any source would have the effect
of increasing the federal deficit.
17
I am very sensitive to the fiscal impact which the re-
duction would have on the federal budget in future years.
However, I believe that the Congress is very likely
to reduce the tax in any event based on the air carrier
industry's contention that a two percentage point re-
duction is justified by the growing trust fund surplus
and the fact that DOT studies show that airlines now
pay more than their fair share of airway costs. Weigh-
ing all considerations, I believe that we should act to
harness the pressure for a user tax reduction to the
realization of the highly desirable goals of the noise
reduction financing program I originally proposed, but
in a way that minimizes the budgetary impact. To those
ends, I propose the following approach:
Legislation would be proposed to Congress which
would have these major elements:
-- An amendment to the Federal Aviation Act would
authorize CAB to approve intercarrier agree-
ments and pooling of revenues from a two percent
ticket and waybill surcharge in a fund which would
be used for purchase of replacement aircraft by
the participating airlines. The legislation would
also authorize the CAB to approve a special en-
vironmental surcharge of two percent on passen-
ger tickets and freight waybills to be effective
simultaneous with the two percent reduction of
present ticket taxes.
-- An amendment to the Internal Revenue Code to
reduce by two percentage points the present
passenger ticket and waybill taxes. Imposition
of the surcharge and the reduction in user
charges to occur simultaneously on a date set by
the CAB, provided that it had certified to the
Treasury that a satisfactory intercarrier agreement
had been concluded.
-- An authorization to appropriate from the Airport
and Airway Trust Fund monies to cover costs of
retrofitting two and three engine aircraft to meet
a new federal noise standard.
FOND
18
It is my judgment that if Congress enacts such a statute,
air carriers will be in a position, based on the assured
future flow of revenues, to place orders for replacement
aircraft in a timely fashion. In this connection, no fiscal
impact should be felt until some time in FY 1978, inasmuch
as the enactment of the required legislation and the subse-
quent CAB actions put the likely start up date of the escrow
fund some time after October 1, 1977.
In addition, however, without offsets my proposal to pay
the costs of retrofitting two and three engine aircraft
from the Airport and Airway Trust Fund could add as much
as $50 million in budget outlays in FY 1979. My draft
legislation to authorize waterway user charges, now pending
approval in OMB, if enacted, would yield revenues approxi-
mately $65 million per year (not currently reflected in
OMB's budget totals) and would more than balance the added
outlays in FY 1979 for the cost of quieting two and three
engine aircraft.
This proposal, in my judgment, meets much of our fiscal
concerns and will permit the airport noise program to be
carried forward on an effective basis.
Alternative Way to Implement Noise
Financing Surcharge to Avoid Budget Effects
in Fiscal Years 1978 and 1979
The proposed financial arrangement to enable carriers to meet the
new noise regulations through replacement envisions a reduction in
aviation user charges, probably after October 1, 1977. The probability
that a reduction in these taxes would occur even without the noise
financing program is recognized. If it is desired, however, to avoid
any budget effect in fiscal year 1979 and to allow the early accrual of
funds to enable carriers to replace their aircraft to meet the noise
standards, the following approach could be taken.
1. Amend the Federal Aviation Act (Section 412) to permit airlines,
by agreement subject to CAB approval, to establish a noise
financing fund from a two percent surcharge on passenger
tickets and freight waybills. Broadly, the authority granted
by this amendment would be limited to intercarrier agreements
whose purposes are limited to financial arrangements for the
acquisition of new aircraft that will meet federal environmental
standards.
2. Amend the Internal Revenue Code to authorize refunds to air
carriers of revenues from two percentage points of the taxes
on passenger tickets and freight waybills paid to the Treasury
in FY 1978 and FY 1979. These refunds would be made no later
than December 31, 1979, provided that by that date CAB certifies
to the Secretary of the Treasury that the airlines have entered
into an intercarrier agreement under the authority in the
amendment proposed above to the Federal Aviation Act for the
purpose of acquiring replacement aircraft which meet noise
standards and that the refunded taxes will be deposited in the
replacement fund established by the intercarrier agreement to be
used for aircraft replacement only; and provided that CAB certifies
that it has approved a two percent surcharge on passenger ticket
taxes and waybills effective October 1, 1979.
3. Amend the Internal Revenue Code to reduce the air passenger
ticket tax and waybill tax by two percentage points effective
October 1, 1979.
This approach has several solid advantages:
-- It avoids any revenue loss through fiscal year 1979.
-- Technically no appropriations would be involved since none is
required to tax refunds.