In order to effectively administer the subsidy program the proposed administrator should be authorized to ascertain the fair and reasonable level of subsidy payments, after which he would enter into negotiated contracts with the carriers involved, based upon such terms and conditions as would be desirable to protect the interests of the Government and to promote the purposes of the Civil Aeronautics Act. The legalistic mechanics governing such functions appear to be basically set forth in both S. 308 and S. 1119. In pursuing the program, it also is assumed that the contract would clearly indicate that the subsidy payments are designed for the purpose of promoting the development of the Nation's air transportation system, as set forth in the statutory declaration of policy, and not necessarily for compensation covering a particular segment, such as the carriage of mail. As a practical matter, there should be no particular necessity for a detailed and extensive study at the outset of the negotiation period; however, the contract amount initially arrived at should be based upon a maximum figure consistent with the carrier's forecast of operational needs during the contract period. Thereafter, and at stated intervals during the contract period, a thorough and comprehensive review should be made of the carrier's entire operations covering the period involved in the light of the statutory requirements of honest, economical and efficient management, * * *. Mr. SWEENEY. That would be done by this subsidy director? Mr. NEWMAN. Yes, if the amendment was adopted, by using the auditors and various personnel information available. You see, we have auditors out in the field now. Mr. KELLER. For the Board. Mr. NEWMAN. For the Board. Mr. SWEENEY. Does that mean the contract would not be a final contract? Mr. KELLER. I do not think it could be final. Mr. NEWMAN. I do not see how you would protect the Government's interests by making it a grant in the future. We look at it like the Department of Defense does. They wanted, suppose, to buy some airplanes from Boeing that costs $100 million. That is only an estimate. You make a contract to give him $10 million a year. Then with improvement, et cetera, he may only need $8 million the first year, if you have contracted with him for $10 million a year, he has $2 million profit. and As a result of the annual appraisal by the auditor, he would operate currently more or less like the Department of Defense does. Mr. SWEENEY. It becomes a cost-plus contract, does it not? Mr. NEWMAN. Yes, but under this legislation, he would come home whole and we would allow enough for stockholders, which we think is necessary. That is all after income tax. You see, one of the big things we have to consider at the moment, gentlemen, is the fact that CAB determines a rate. That particular rate at the moment includes everything-subsidy and mail; just one rate under the present act. However, for administrative purposes, the Civil Aeronautics Board has determined and is continually determining what the mail portion of that rate is and what the subsidy rate is. Mr. SWEENEY. They make that distinction down there now. Mr. NEWMAN. They will look over it, and see the rates of 1.85 cents and 1.45 cents to transfer the same mail you may send out from your office, for instance. The point is, I would say, they are constantly working on getting that mail rate down. For instance not long ago it was the 45-cent rate for the trunklines; they are now working on a 38-cent rate, and grad ually they are getting the water out of that; so we have at the moment a clear separation. But here is the thing we are troubled with at the moment-and we cannot protect the Government's interests on this subsidy-when that rate is determined it is final. The airline goes out and operates. There are certain things that happen in the course of the operation that cause additional revenue in, and there is no way of recouping. There is no way the Civil Aeronautics Board can recoup unless there is a show-cause order to open the rate. The moment the rate is opened, the actual cost is considered under a contract basis. You could have a contract for 3 or 5 years, and he would make an overall estimated figure of what his need was, and as he became more efficient, we hope that he will not need that maximum but each year could determine what he needs and he would come out whole. He would be guaranteed to come out whole. That is why we do not see any reason why there should be a bonus at the end, if there is any. Senator MONRONEY. Do you envision a uniform mail pay rate for domestic service, for example? Mr. NEWMAN. They are striving to do that now; for instance, have a rate and have another immediate supplemental rate for the handling at various stations. They are more and more getting toward it. Mr. KELLER. I think it could come pretty close to that. Mr. NEWMAN. Then the subsidy might take care of the rest of it. Senator MONRONEY. Would there not be one line on which there would be a very high domestic traffic in mail and always going out fully loaded on mail; and the actual mail-carrying cost would be substantially different from someone that has got a milk run that has to get up and down and serve smaller areas. I do not think the Post Office Department or the Government could expect the two different types of airlines to be carrying the mail at the same degree of compensation. Mr. NEWMAN. That may be, but after all from a cost standpoint, salaries are pretty much the same, the cost to fly the plane is pretty much the same, except on the shorter hauls, the cost of handling the mail is practically the same on all. When you are talking about a little boost, it is more or less like a subsidy. Senator MONRONEY. But you are paying for the mail and certainly there must be a quantity of mail that can be carried cheaper than a very small amount if you are on an economy basis. In other words, a plane not fully loaded with mail is going to carry this mail at 50 cents or 40 cents. If you have just got three little bags, it could never hope to make money off the carriage of the mail. Mr. NEWMAN. They are taking that into consideration at the various stations, how much mail goes out, and they are getting it down to the individual rates. Senator MONRONEY. That is right, but the point I gathered that you meant was that you could establish practically a uniform ton-mile rate for all the airlines in the country and expect everyone to fly the mail on that uniform rate. Mr. KELLER. I doubt if it would ever come to a uniform rate throughout the country, but I think you would have a lot more consistency. 62505-55- -12 It might vary in certain instances, but to boil it down, it might be pretty close, but there should be some leeway to make adjustments for their actual costs. Mr. SWEENEY. Mr. Chairman, do I understand that the compensatory mail rate would be a final rate as it is now? Mr. KELLER. Yes, sir. It is the subsidy that we would like to divorce from the mail rate. Mr. SWEENEY. That would be a contract that would be subject to negotiation? Mr. KELLER. Yes. The bill on the subsidy contract feature provides that it can be reopened at any time by either party, either the carrier or the Government. Mr. SWEENEY. What would you envision would be the relation between the new subsidy administrator and the Civil Aeronautics Board? Mr. KELLER. I think he should be given some degree of independence in that he should be given by the Board and under the Board authority to go ahead and make a final contract with the carriers but subject to, if there is a disagreement they cannot get together on the subsidy rate the Board. If you had to have the Board approve each one of them or go into each one of them, then I doubt if we would have gained very much or be in any different situation than we might be today, of having to have the Board go into all of these. I would suggest that if the committee is going to give consideration to that feature, that the amendment which was offered on March 23 probably should be clarified as to just what is expected of this subsidy administrator. It just says, there shall be a subsidy administrator, and he shall be administratively responsible for a set period. Senator SCHOEPPEL. Before this bill goes out of here, if I have anything to do with it, if in the majority of the committee there is going to be one set up, there are going to be some yardsticks and some measuring standards put in there, and unless we do that, in my judgment, you are just solely adding another embellishment to those things. Mr. KELLER. As I pointed out, the legislation does not say what he is supposed to do and who he is responsible to other than he is administratively responsible to the Board. Senator SCHOEPPEL. In that respect, with all due respect, I think it is too loosely drawn. Senator MONRONEY. Senator Bible? Senator BIBLE. No questions. Senator MONRONEY. Thank you very much for your helpful appearance, Mr. Keller. The report of the Comptroller General will be filed in the record at this point. Mr. KELLER. Thank you, Mr. Chairman. (The above-mentioned document is as follows:) COMPTROLLER GENERAL OF THE UNITED STATES, Hon. WARREN G. MAGNUSON, Chairman, Committee on Interstate and Foreign Commerce, United States Senate. DEAR MR. CHAIRMAN: Further reference is made to your letter of January 13, 1955, requesting the comments of the General Accounting Office concerning S. 308, entitled "A Bill To Amend the Civil Aeronautics Act of 1938, as amended, and for other purposes." Subsequently, there was received a copy of S. 1119 with your letter of February 21, 1955, followed by additional amendments thereto with your letter of March 24, 1955. Since that time there have been brought to our attention numerous other bills proposing to amend the Civil Aeronautics Act; and, since it is assumed that all proposed legislation will be considered simultaneously by your committee, the following comments primarily will be addressed to those provisions contained in S. 308, but with such reference to the individual bills as might be deemed appropriate. At the outset, it may be stated that during July 1954 representatives of the General Accounting Office were assigned to conduct a comprehensive audit of the Civil Aeronautics Board. Such audit included an initial survey to ascertain the kind of information being made available at the Civil Aeronautics Board in the way of evidence and supporting documents used in determining the subsidy payments to be made, and other background material. Since that time a review has been made covering a few of the areas dealing specifically with those functions relaing to air carrier economic regulations and, while such survey is far from being complete, there presently has been accumulated considerable information so as to enable a fair degree of intelligent appraisal of the workings of the Board and its staff in the administration of the Act. In this connection, it may be pointed out that a preliminary report encompassing our findings will be forthcoming at an early date. Prior to the enactment of Reorganization Plan No. 10, effective October 1, 1953, there was forwarded to this Office a request for comments concerning S. 1360, 83d Congress, 1st session, which provided for the separation of subsidy from air-mail pay, and for other purposes. In response thereto, by letter dated April 7, 1953, the then Comptroller General took the position that he could not emphasize too strongly his wholehearted approval of legislation separating payments of subsidies from payments by the Government for services rendered or goods received. He pointed out that such separation of payments was the only real means of providing full disclosure to the Congress and the public as to the extent of Federal subsidization and the actual cost to the taxpayer. He also observed that legislation separating such payments would provide a practical statutory basis for curbing any overgenerous administrators who might feel that it is their job to promote and protect subsidized industries at the expense of the Government. As you are aware, S. 1360 failed of enactment, but the same objective was accomplished by Reorganization Plan No. 10, made effective on October 1, 1953, which was accepted as having been a step in the right direction toward the end it was designed to attain. The present bill purports to enlarge upon the separation of such payments and, in addition, is designed to strengthen other features of the basic act. Therefore, since one of the functions of the General Accounting Office, as an agency of the Congress, is the duty to review the financial transactions of the Government and to advise and assist the Congress on all subjects relating to public expenditures, we appreciate the opportunity at this time of presenting certain views concerning the proposed legislation. While our comments will be directed primarily to those sections relating to rate and subsidy features, in which both the Congress and the General Accounting Office have a paramount concern, additional observations will be made with respect to such other amendments as may be deemed appropriate. Also, there will follow certain recommendations regarding suggested amendments which are not embodied in the subject bill or other bills. It appears that S. 308, consisting of approximately fifty amendments, is based to a large degree upon the omnibus aviation bill which was introduced during the 2d Session of the 83d Congress, and which was assigned the number S. 2647. That bill proposed to bring into one independent agency, to be named the Civil Aeronautics Authority, the functions now divided between the Civil Aeronautics Board and the Secretary of Commerce, who directs the work of the Civil Aeronautics Administration. It also was designed to combine all aviation regulatory functions, except accident investigation, into a single agency-a seven-man Board. Such features, however, are not present in S. 308, it apparently having been concluded that the mixture of executive with quasi-legislative and judicial functions would adversely affect the performance of both; therefore, it was decided to permit such functions to be separated as established by Reorganization plans III and IV. Furthermore, the committee report indicates that the weight of evidence adduced at the hearings supported the retention of the present organization, particularly in view of the unquestioned disruptive effect of the drastic reorganization as was therein proposed. A review of the voluminous hearings on S. 2647 indicates that the basic scheme of regulating civil air transport as a public utility is sound, and that the series of amendments now proposed are intended to clarify and bring the basic act in line with present-day transportation conditions. Section 13 of S. 308 proposes to amend section 2 of the act by incorporating general regulatory policies with respect to air contract service, the latter being the subject of an entire new section, and by also directing the Board to consider as being in the public interest "the maintenance by the United States of the greatest possible influence at all times in world aviation." With respect to these proposals, we have no comment to offer. However, at this juncture, it is deemed advisable to suggest the inclusion of additional legislative policies, particularly with regard to the duration of the subsidy to be afforded the aviation industry. In this connection, attention is invited to the President's Air Coordinating Committee report entitled "Civil Air Policy," issued during May 1954, which contains many constructive recommendations, and which warrant consideration in the adoption of basic policies designed to lessen the Nation's airline subsidy expenditures. We wholeheartedly concur in that portion of the report wherein it is recommended that a policy should be established for dealing with those carriers or groups of carriers who, for one reason or another, have no foreseeable opportunity to achieve self-sufficiency. Of paramount importance at this time is the advisability of expediting a program adjustment in the route structures and certificates of the various local service carriers so as to provide the maximum opportunity to improve their economic position within the general scope of their intended type of operation. In particular, routes should be promptly amended to eliminate points which have demonstrated an inadequate traffic potential to justify scheduled air service. There may also be some opportunity to develop improved route systems through mergers between local carriers, or between local and trunk carriers. With such adjustments, the carriers should be required to meet a definite schedule for an orderly phased reduction and eventual elimination of subsidy support; and, in the absence of exceptional circumstances, if any local service carrier does not continue to make significant progress toward selfsufficiency, in accordance with such schedule, such carrier's operating authority should be terminated. Also, we agree with the proposition that there is no sound reason why air transportation, any more than any other industry in the Nation's economy, should enjoy permanently the contingent protection against future loss that is afforded by an eligibility to seek resumed subsidy payment. Such protection is not conducive to maximum vigor and economy of the industry's management and may, in fact, retard the long-term progress of the industry. Therefore, to ease the transition to a subsidy-free status for air carriers, temporary financial relief, including loans, loan guaranties, or other interim measures may be justified in lieu of outright subsidy grants to meet situations in which these carriers face temporary financial difficulties, and are unable to obtain private credit on reasonable terms. Hence, we agree with the further recommendation within the committee report that the Government must have sufficient flexibility to adjust its subsidy program to current conditions, and to withdraw subsidy support where it is no longer warranted in the national interest; and, certainly, the Government should not be obligated to furnish subsidy indefinitely merely because a route certificate remains in force. From our review of the Board's procedures to date, it is observed that only in individual rate cases has there been an enunciation of any established policies which might be utilized by the industry as a whole. Therefore, it is believed that much confusion could be avoided were the Board to establish and announce certain definite rules of policy for the guidance of the air industry as a whole, with special emphasis upon those items which would or would not be allowed for rate-making and subsidy payment purposes. It is admitted, of course, that the Congress should not be called upon to enunciate detailed administrative practices to be followed; however, it is believed that a more specific declaration of congressional policy covering those areas mentioned above would serve as an invaluable guide to the Board in clarifying many of the issues which heretofore have been resolved in rate cases which may or may not have been given general application. S. 651, S. 1081, and S. 1109 all propose to amend section 401 (e) of the act by inserting at the end thereof a provision for the issuance of certificates of |