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Financial Management: Assessment of the Airline Industry's	 
Estimated Losses Arising From the Events of September 11	 
(05-OCT-01, GAO-02-133R).					 
The airline industry will incur losses resulting from the	 
terrorist attacks of at least $5 billion and possibly more	 
through December 2001. While it is reasonable to assume that	 
overall industry losses will amount to at least $5 billion,	 
carrier-by-carrier losses are likely to vary significantly from  
the formula-derived allocations of $5 billion. Therefore, some	 
carriers may experience losses higher than their individual	 
formula amount, while others' losses may be lower.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-133R					        
    ACCNO:   A02156						        
  TITLE:     Financial Management: Assessment of the Airline	      
             Industry's Estimated Losses Arising From the Events of September 
             11                                                               
     DATE:   10/05/2001 
  SUBJECT:   Airline industry					 
	     Business assistance				 
	     Emergency loans					 
	     Losses						 
	     Terrorism						 
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GAO-02-133R
GAO- 02- 133R Airline Industry Emergency Assistance
United States General Accounting Office Washington, DC 20548
Comptroller General of the United States
October 5, 2001 Congressional Requesters Subject: Financial Management:
Assessment of the Airline Industry?s Estimated
Losses Arising From the Events of September 11 In the wake of the September
11, 2001, terrorist attacks on the United States, the airline industry 1 has
estimated significant losses resulting from the temporary shutdown of the
nation?s airspace and the severe drop in passenger traffic since the
attacks. In response, on September 22, 2001, the President signed the Air
Transportation Safety and System Stabilization Act, 2 which provides $5
billion in emergency assistance to compensate the nation?s air carriers for
these losses.
Specifically, the law stipulates that an amount equal to $5 billion will be
made available to compensate air carriers for direct losses incurred
beginning September 11 as a result of any federal ground stop order issued
by the Secretary of Transportation, and incremental losses incurred
beginning September 11 through December 31, 2001, as a direct result of the
terrorist attacks. Additionally, the law allocates the $5 billion between
passenger- only or combined passenger and cargo carriers (passenger
carriers) and cargo- only carriers (cargo carriers) and establishes a
maximum level of compensation for each class of carrier. Passenger carriers
were allocated $4.5 billion while cargo carriers were allocated $. 5
billion. The law also directs that the maximum amount of compensation paid
to each carrier may not exceed the lessor of (1) its allocated share of the
$4.5 billion (passenger carriers) or $. 5 billion (cargo carriers) or (2)
the actual direct and incremental losses incurred by the carrier as a result
of the September 11 terrorist attacks.
In letters dated September 26 and 27, 2001, you asked that we (1) perform an
analysis of the data and methodologies used by the airline industry to
estimate the losses through December 31, 2001, stemming from the terrorist
attacks to determine whether there is a reasonable basis for the estimate
and (2) assess the overall reasonableness of the $5 billion compensation
package. This letter summarizes the information we provided during our
September 28, 2001, briefing pursuant to these requests. The briefing
slides, which provide more details about our analysis, are attached.
1 The airline industry estimates were prepared by the Air Transport
Association, a trade organization representing the principal U. S. airlines.
2 Public Law 107- 42.
GAO- 02- 133R Airline Industry Emergency Assistance Page 2
Results in Brief
Overall, our analysis indicates that there is a reasonable basis to assume
that the airline industry will incur losses resulting from the terrorist
attacks of at least $5 billion and possibly more through December 31, 2001.
The airline industry?s ?best
case? scenario, prepared by the Air Transport Association (ATA), estimated
losses of $10.1 billion by the end of the calendar year. 3 Our high- level
analysis, 4 using various revenue and cost savings assumptions, indicates
possible losses in the range of $6.5 billion to $10.5 billion. The key
differences between our estimates and ATA?s relate primarily to
! ATA including cargo and passenger carriers in their revenue base, whereas
we only included passenger carriers;
! ATA assuming greater reductions in ?other revenue? than we did; and
! ATA assuming lower cost savings relating to fuel and labor. While it is
reasonable to assume that overall industry losses will amount to at least $5
billion, carrier- by- carrier losses are likely to vary significantly from
the formuladerived allocations of the $5 billion. Therefore, some carriers
may experience losses higher than their individual formula amount, while
others? losses may be lower. Because of this, the Department of
Transportation (DOT) is initially disbursing only 50 percent of the
allocations, and is currently assessing how best to provide for any
necessary adjustments to the amounts paid to each carrier. At present, there
is no provision in the law to reallocate any portion of the formula amount
for an individual carrier that is in excess of actual losses incurred by
that carrier to other carriers whose actual losses may exceed their
allocated amounts. There is also no provision to reallocate any amounts
between cargo and passenger carriers should one group?s actual losses not
reach its total allocated share of the compensation. As you requested, we
will be assessing the actual losses incurred by the major carriers compared
to their allocations and report to you by July 1, 2002.
Scope and Methodology
We analyzed the ATA?s estimate of the losses expected as a result of the
terrorist attacks to determine the basis for its estimate. We also prepared
a high- level independent estimate of these expected losses using various
revenue and cost savings assumptions. Our analysis focused on passenger
carriers and did not attempt to estimate losses of cargo carriers. We know
that cargo carriers experienced some losses as a result of the events of
September 11. At the same time, cargo volumes should not be subject to the
same downward influences as passenger volumes (i. e., passenger apprehension
to fly). The data and assumptions used in our analysis were
3 This estimate is based on revenue projections versus cash projections.
Cash projections were used in the industry?s earlier estimate of losses,
which were higher. 4 Our analysis was based on aggregate passenger carrier
data for key revenue and expense items that are most likely to be impacted
by the events of September 11.
GAO- 02- 133R Airline Industry Emergency Assistance Page 3 derived from a
number of sources including the DOT?s Bureau of Transportation
Statistics (BTS) and airline 10Q Securities and Exchange Commission filings.
In addition, we interviewed a number of airline industry analysts and
discussed their assessments of the airline industry?s projected revenues and
losses following the attacks. Lastly, we monitored press releases put forth
by the airline industry and various analysts related to the estimated loss.
We did not independently verify the information provided by ATA, BTS, or the
various industry analysts. We caution that many of the assumptions used in
our analysis (e. g., those for revenues, industry layoffs and fuel costs)
can change rapidly thereby significantly affecting our estimates of the
airlines? losses.
We conducted our review during the week of September 23, 2001, in accordance
with generally accepted government auditing standards.
We are sending copies of this letter to interested congressional committees.
The letter is also available on GAO?s home page at http:// www. gao. gov. If
you have any questions about this letter, please contact Linda Calbom,
Director, Financial Management and Assurance, at (202) 512- 9508 or by e-
mail at calboml@ gao. gov. Key contributors to this assignment are listed in
enclosure II.
David M. Walker Comptroller General of the United States
Enclosures
GAO- 02- 133R Airline Industry Emergency Assistance Page 4
Congressional Requesters
The Honorable Robert C. Byrd Chairman Committee on Appropriations United
States Senate
The Honorable Ernest F. Hollings Chairman Committee on Commerce, Science and
Transportation United States Senate
The Honorable John D. Rockefeller IV Chairman, Subcommittee on Aviation
Committee on Commerce, Science and Transportation United States Senate
The Honorable Ron Wyden Subcommittee on Aviation Committee on Commerce,
Science and Transportation United States Senate
The Honorable Lloyd Doggett The Honorable John J. LaFalce House of
Representatives
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 5
September 28, 2001, Briefing to Congressional Requesters
Assessment of the Airline Industry?s Estimated Losses Arising From the
Events of September 11
Briefing for Congressional Requesters September 28, 2001
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 6
2
 On September 22, 2001, the President signed the Air Transportation Safety
and System Stabilization Act (P. L. 107- 42) to compensate air carriers for
losses incurred as a result of the terrorist attacks on September 11.
 Section 101( a)( 2) of the law stipulates that $5 billion will be made
available to compensate air carriers for
 direct losses incurred beginning September 11 as a result of any federal
ground stop order issued by the Secretary of Transportation and
 incremental losses incurred beginning September 11 through December 31,
2001 as a direct result of the terrorist attacks. 1
 Section 103( b)( 2) indicates that the maximum compensation for passenger-
only or combined passenger and cargo carriers (? passenger carriers?) is $4.
5 billion and the maximum for cargo- only carriers (? cargo carriers?) is
$0. 5 billion.
Background 1 For purposes of this briefing, we refer to both of these types
of losses as ?estimated losses.?
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 7
3
Objectives You requested that we
 analyze the data and methodologies used by the airline industry to
estimate its losses through December 31, 2001, stemming from the September
11, 2001, terrorist attacks to determine whether there is a reasonable basis
for such estimates and
 assess the overall reasonableness of the $5 billion compensation package
compared to our high- level estimates of industry losses.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 8
4
Scope and Methodology To meet our objectives, we
 performed an analysis of Air Transport Association 2 (ATA) information to
determine the basis for its loss estimates,
 prepared a high- level independent estimate of the amount of losses for
the period from September 11, 2001 through December 31, 2001 based on
analysis of aggregate passenger carrier data for key revenue and expense
items that are most likely to be impacted by the events of September 11,
 conducted interviews with industry analysts to obtain external assessment
information about industry revenues and loss estimates,
 monitored press releases of industry members and analysts that relate to
estimated losses, and
 provided draft pages of ATA- attributed information to ATA and
incorporated it?s clarifying changes as appropriate.
We conducted our review during the week of September 23, 2001, in accordance
with generally accepted government auditing standards.
2 ATA is a trade organization representing the principal U. S. airlines.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 9
5
Scope and Methodology The following should be noted.
 The data used in our high- level analysis were derived from various
sources including the Department of Transportation (DOT), airline press
release information, discussions with industry analysts, and airline 10Q
filings with the Securities and Exchange Commission. We did not
independently verify any of this information.
 Many of the assumptions used in our analysis are subject to rapid change
(e. g., those for industry layoffs, load factors, and fuel costs), which
could significantly affect our high- level estimate.
 Our high- level analysis focused on passenger carriers only and thus did
not consider estimated losses of cargo carriers.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 10
6
Industry Estimate Industry Estimated Losses for Passenger and Cargo Carriers
(In millions, pretax) Optimistic Projection 1
Source: ATA. Analysis is based on revenue projections versus cash
projections. Cash projections were used in ATA?s earlier loss estimates,
which were higher.
(1) Per ATA, this is considered to be its ?best case? estimate of industry
losses through 12/ 31/ 01.
Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total
Revenue Decrease $1,320.0 $2,904.0 $7,756.0 $11,980.0
Net Cost Savings 0.0 0.0 (1,853.0) (1,853.0)
Net Estimated Loss $1,320.0 $2,904.0 $5,903.0 $10,127.0
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 11
7
Industry Estimate Key Industry Assumptions: Revenue: Used a daily industry
total operating revenue number of
$330 million as a baseline, 4- day revenue decline - 100% of baseline 16-
day revenue decline - 55% of baseline 4th quarter revenue decline - 25% of
baseline
Cost Savings - 4th Quarter: Personnel - No net cost reduction anticipated
through
December 31. Fuel savings - 15% of capacity reduction (about 3% of revenue
reduction). Other variable costs - 25% of revenue reduction for passenger
carriers. 10% of revenue reduction for cargo carriers. No anticipated
increases in fuel prices, security, or interest
costs. Source: ATA
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 12
8
GAO Estimate GAO Estimate of Losses for Passenger Carriers (In millions,
pretax)
Scenario #1 (Assumes 4th Quarter Revenue Decline of 25%) Source: GAO
analysis of DOT Form 41 data .
Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total
Revenue Decrease $1,163.1 $2,129.7 $5,669.9 $8,962.7
Net Cost Savings Fuel (174.9) (144.4) (830.5) (1,149.8)
Personnel 0.0 0.0 (396.6) (396.6)
Other 0.0 (255.6) (680.4) (936.0)
Total Cost Savings (174.9) (400.0) (1,907.5) (2,482.4)
Net Estimated Loss $988.2 $1,729.7 $3,762.4 $6,480.3
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 13
9
GAO Estimate Key GAO Assumptions: Revenue: Baseline calculated using
passenger carrier revenue for the same
period last year adjusted for year- over- year change from previous quarter.
4- day revenue decline - 100% of baseline total operating revenues. 16- day
revenue decline - 50% of baseline passenger revenues plus 25% of
selected other revenues. 4th quarter revenue decline - 25% of baseline
passenger revenues plus 25%
of selected other revenues. Cost Savings:
Fuel - 4- day period based on 100% reduction in flight schedule adjusted for
fuel dumping and repositioning of aircraft. Other periods based on 20%
reduction in flight schedule. Personnel - No savings assumed for the month
of September. Staggered
layoffs (a total of 78, 000 full time equivalents), adjusted for assumed
severance packages, projected to become effective during November and
continue through December. Other - Includes landing fees, passenger
services, commissions, and other
variable costs. 4- day period assumed these costs were offset by additional
costs incurred by airlines related to stranded passengers, etc. Remaining
periods assumed variable cost savings would amount to 12% of revenue
reduction.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 14
10
GAO Estimate GAO Estimate of Losses for Passenger Carriers (In millions,
pretax)
Scenario #2 (Assumes 4th Quarter Revenue Decline of 35%) Note: Other than
revenue decline, all assumptions are the same as scenario #1. Source: GAO
analysis based on DOT Form 41 data.
Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total
Revenue Decrease $1,163.1 $2,129.7 $7,937.9 $11,230.7
Net Cost Savings Fuel (174.9) (144.4) (830.5) (1,149.8)
Personnel 0.0 0.0 (396.6) (396.6)
Other 0.0 (255.6) (952.5) (1,208.1)
Total Cost Savings (174.9) (400.0) (2,179.6) (2,754.5)
Net Estimated Loss $988.2 $1,729.7 $5,758.3 $8,476.2
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 15
11
GAO Estimate GAO Estimate of Losses for Passenger Carriers (In millions,
pretax)
Scenario #3 (Assumes 4th Quarter Revenue Decline of 45%) Note: Other than
revenue decline, all assumptions are the same as scenario #1. Source: GAO
analysis based on DOT Form 41 data.
Sept 11 - Sept 14 Sept 15 - Sept 30 Q/E Dec 31 Total
Revenue Decrease $1,163.1 $2,129.7 $10,205.8 $13,498.6
Net Cost Savings Fuel (174.9) (144.4) (830.5) (1,149.8)
Personnel 0.0 0.0 (396.6) (396.6)
Other 0.0 (255.6) (1,224.7) (1,480.3)
Total Cost Savings (174.9) (400.0) (2,451.8) (3,026.7)
Net Estimated Loss $988.2 $1,729.7 $7,754.0 $10,471.9
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 16
12
Summary Industry Estimates versus GAO Estimates of Losses (In millions,
pretax)
1) Industry estimates include both passenger and cargo carriers. 2) GAO
estimates include passenger carriers only.
Sept 11 - Sept 14 1,320.0 $ 988.2 $ 988.2 $ 988.2 $ Sept 15 - Sept 30
2,904.0 1,729.7 1,729.7 1,729.7 Q/E Dec 31 5,903.0 3,762.4 5,758.3 7,754.0
Total Estimated Loss $10,127.0 $6,480.3 $8,476.2 $10,471.9
Scenario #3 GAO (2) Industry (1) optimistic Scenario #1 Scenario #2
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 17
13
Summary Differences in Key Assumptions: Revenue: ATA included cargo and
passenger carriers in their
revenue base whereas we only included passenger carriers. ATA also assumed
greater reductions in other revenue than did we. In addition, ATA used
somewhat more pessimistic projections of passenger traffic for the latter
half of September.
Costs Savings: ATA used lower projections of fuel cost savings. In addition,
ATA assumed effective dates for labor savings due to layoffs (after
adjusting for severance) would be after December 31, 2001 and therefore, did
not include any cost savings for labor. GAO assumed savings from layoffs
(after adjusting for severance) would begin to take effect in November.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 18
14
Analyst Estimates Analyst Estimates - Passenger Carriers Only
Estimated Loss thru December 31, 2001
(pretax)
Paine Webber $5.1 billion Deutsche Banc $6 billion SalomonSmithBarney $8.5
billion
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 19
15
Conclusions Conclusions
 While the industry may be somewhat pessimistic in its optimistic estimate
of losses, which totals $10. 1 billion through December 31, 2001, our
analysis indicates that there is a reasonable basis to assume that at least
$5 billion in losses will be incurred through December 31, 2001.
 Because we did not assess cargo- only carrier estimates of losses, it is
unknown whether such losses will equal or exceed their $0.5 billion
allocation.
 Carrier- by- carrier actual losses on a relative basis are likely to vary
significantly. Therefore, some carriers may experience actual losses
significantly higher than their allocated portions of the $5 billion, while
others may be lower.
Enclosure I GAO- 02- 133R Airline Industry Emergency Assistance Page 20
16
Conclusions Conclusions, continued
 At present, there is no provision in the law to reallocate any portion of
the formula amount for an individual carrier that is in excess of actual
losses incurred by that carrier to other carriers whose actual losses may
exceed their allocated amounts.
 There is also currently no provision to reallocate any amounts between
cargo and passenger carriers should one group?s actual losses be less than
its total allocated share of the compensation and the other group?s losses
exceed its allocated share.
Because of this inherent uncertainty, DOT is initially disbursing only 50%
of the allocations, and is currently assessing how best to provide for any
necessary adjustments to the amounts paid to each carrier.
As you requested, we will be assessing the actual losses incurred by the
major carriers compared to their allocations/ payments received and report
to you by July 1, 2002.
Enclosure II GAO- 02- 133R Airline Industry Emergency Assistance Page 21
GAO Contacts and Staff Acknowledgments GAO Contacts
Linda M. Calbom, (202) 512- 9508 John C. Fretwell, (202) 512- 9382 Steven C.
Martin, (202) 512- 3389
Acknowledgments
In addition to those named above, Triana Bash, Alan Belkin, Mark Connelly,
Joseph Kile, Phillip McIntyre, Ruth Sessions, and Peggy Smith made key
contributions to this letter.
(190035)
*** End of document. ***



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