from institutional lenders in participating in the debt portion of leases despite the preferential security implicit in this form of financing and (3) the fact that many airlines are approaching the prudent limits on leasing and beginning to hit restrictive covenants in their lending agreements. It is our opinion that leasing will not be as significant a source of financing in the future as it has been in the past. The substantial residual value, due to the long useful life which is anticipated for many types of existing aircraft could be a limiting factor. It is apparent that due to the lack of susbtantially advanced new technology aircraft on the horizon that the present generation of widebodied aircraft and the latest models of narrow body medium range aircraft will have a very long useful life with the fair market value at the end of the lease wiping out the earlier economies of the leasing vehicle. However, if the investment tax credit stays in place perhaps some portion of the requirements can be financed in this manner with the proper environment. Also H.R. 6 in its present form could have a detrimental affect upon future aircraft leases. As a result of the defections by the other segments of the financial community, the commercial banks currently find themselves as the primary source of industry financing. In 1966 bank debt accounted for approximately 16% of the total debt of the domestic trunks and Pan Am. By 1976 bank debt accounted for 27% of total debt down from 31% in 1975. Unfortunately, the same factors which make airline loans unattractive to the rest of the financial community are also impacting the attitude of commercial banks. Moreover, the National and State Bank Examiners have been particularly critical of many existing airline commitments. As a result, the banks have tended to restrict their new commitments to short term working capital type facilities rather than longer term equipment financings.

We anticipate that the required funds for the $5 to $9 billion of outside financing we contemplate through 1984 will have to come from the same sources as in the past but its availability depends upon an improved long term outlook for the airline industry. In order for the industry to raise the required funds, renewed support from these historic sources of financing is vital. Perhaps the most serious roadblock to achieving this support are the regulatory reform proposals currently before the Congress including Senate Bill 689.

The financial community's concern with the current reform proposal rests on the fact that the enactment of this legislation would make any new equipment financing for the industry extremely difficult. The factors which would argue against lending to the airline industry if the current proposal is enacted are: (1) the general uncertainty which would surround all the carriers' future operating results given the magnitude of the change in their business environment and (2) the general weakness of the industry's capital structure which would make it exceedingly difficult to design a prudent loan to all but the strongest carriers.

The uncertainty surrounding all the carriers' future operating results stems from the difficulty in predicting the nature of the competitive environment under the current proposal.

The inability to forecast with any accuracy the nature of the competitive environment after the enactment of the Bill would be a serious obstacle in lending to this industry, since the total environment in which the airlines operate would change dramatically. Thus, the financial community would have little ability to evaluate the relative strengths and weaknesses of the various carriers since historical performance could become a totally invalid measure of future performance.

The airline industry is a capital intensive business with a high level of fixed costs which cause the carriers to experience a high level of operating leverage. While it is normal for companies with high operating leverage to balance their business risk by maintaining a lower level of financial risk (i.e., conservatively structured balance sheets), this pattern has not been true of the airline industry. The rationale underlying the airline industry's current capital structure is that the risk inherent in the companies' high operating leverage is more than offset by the reduction in risk associated with the regulated nature of the industry's competitive environment. In fact, it has been assumed by the lenders to this industry that, given the lower level of competitive risk and in particular the assured nature of the carriers' route structure and fare levels, the inherent operating leverage in this industry could support a high level of financial leverage. As a result, the industry's ratio of total debt, in

doting capitalized amraft leases, to net worth has tended to be quite high. Even in the mid-19% when the industry was at its most prostable print, the ratio was at 2 to 1. The acquisition of new generatio widebodied aircraft. compled with the generally less favorable operating results of the last several years have kept the industry's financial leverage at 2 to 1 through 1975. Although the industry ratio declined to about 1.75 to 1 by the end of 1976, the ratios of the various carriers within the industry range from 3781 to 19:1 In the current regulatory environment, a max.am ieverage of 1751 is convidered prodent by some, although many lenders are not interested unless the leverage is under 15:1 Only five of the existing eleven carers iten dimestic trunks pins Paz Am, have ratios below 175:1 and only 4 under 15:1. In the chanzed competitive environment envisaged in the Regulatory Reform proposals, a somewhat lower leverage would be necessary to attract the additional capital required to finance the upcoming round of equipment parchases. A debt equity ratio of 1:1 probably represents the limit of financial leverage that lenders would consider for an airline under the Regulatory Reform proposals until the industry has operated under the new rules for some period of time, and the actual results of the new policies could be assessed. Unfortunately, it would require about 84 billion of new equity, debt repayment, or a combination thereof. to reduce to 1:1 the leverage of the eight carriers with ratios currently above that level. It is unlikely that these airlines would be able to affect a financial restructuring of that magnitude in time for the next round of equipment purchases. Moreover, even if the restructuring were accomplished, there would st be a limited capacity for additional debt financing for several of the carriers.

In summary, we feel that airlines with leverage ratios below 1:1 would have access to the short term capital markets and perhaps the long term markets although there are numerous long term lenders who would be unwilling to lend to any airline until the impact of the changed competitive environment is determined. However as many of the carriers in the industry (including the five largest carriers) have leverage ratios well in excess of a level prudent in the proposed competitive environment, the time required for the carriers to arrange the $4 billion of new equity or debt repayment to reduce their leverage to 1:1 is not available: thus it may be impossible for some carriers to arrange financing for new equipment. In light of the industry's equipment needs previously discussed, this inability to obtain the required financing would ultimately result in poorer service to the public. In addition, certain carriers would be particularly hard-pressed to restructure their balance sheets to the extent needed to meet the lower debt to equity ratios expected by the financial community. As a result of being shut off from all sources of external financing and unable to replace their obsolete equipment, these carriers would probably disappear either through merger or bankruptcy. The failure of these carriers. especially if accompanied by a loss of investment to existing lenders, would do little to counter the already strong apprehensions of the financial community toward airline investments in general.

In short we feel that the current reform proposal will accentuate the financial communities current distaste for airline investments and make the industry's impending re-equipment program very difficult. Moreover, we feel that the airline industry can again be made attractive to the financial community with less radical measures than are currently being proposed. We feel that what is required to make this industry attractive to investors is not a major change to the present regulatory structure. but a renewed commitment on the part of the regulators to support the industry's return to financial health. As in the past, future loan decisions will be made on the basis of the carrier's record of profitability, strength of capital structure and prospects for future profitable operations. An enlightened CAB policy of timely fare increases, coupled with the low level of new capacity on order and the strong traffic growth anticipated over the next several years should rapidly return the carriers to a period of long term profitability. This profitability, together with continuing repayment of existing debt and the low level of new equipment presently on order, would substantially strengthen the companies balance sheets. Since the current regulatory environment would still exist, the amount of financial restructuring required to place the carriers in a position to be able to finance future equipment purchases would be substantially reduced as compared to a changed competitive environment. As a result, fewer years of profitable performance would be required to prepare the airlines for the next round of equipment purchases.

In short, we feel that the proposed legislative changes would make future airline financings particularly difficult to structure. Given the high level of the industry's future equipment needs and the relatively short time available to return the carriers to a period of extended profitability, improve their return on investment, and restructure their balance sheets, we feel that the present proposals would result in a long period of uncertainty that is not in the best interest of the airline industry or the traveling public. In our view, a more realistic approach by the CAB to fare regulation under the present legislation and the recognition that the airlines must be permitted to earn an adequate return on their investment, would have a significant beneficial effect upon the financial community's attitude toward the airline industry. A dedication to profitability on the part of both management and the regulators is clearly the most important requirement to insure the availability of outside capital to finance the industries requirements over the next decade.

Mr. GINTHER. The next witness is Norman Weintraub, and Mr. Norman Goldstein, both representing the IBT.

STATEMENT OF NORMAN WEINTRAUB, DIRECTOR OF RESEARCH, THE INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS UNION, WASHINGTON, D.C.; ACCOMPANIED BY NORMAN GOLDSTEIN, ASSISTANT DIRECTOR OF ORGANIZING; AND BARTLEY O'HARA, LEGISLATIVE COUNSEL

Mr. WEINTRAUB. My name is Norman Weintraub, director of research of the IBT. I'm accompanied by Mr. Norman Goldstein on my right, assistant director of the organizing department of the IBT and Bartley O'Hare on my left, our legislative counsel.

As requested, we have submitted copies of the prepared statement of Teamster President Frank Fitzsimmons to the committee and additional copies were made available today.

We request that general president Fitzsimmons' statement be made part of the official record.

On behalf of the International Brotherhood of Teamsters, we appreciate this opportunity to appear here today and to summarize and expand on certain portions of Mr. Fitzsimmons' statement which we consider unusually important.

Mr. Goldstein will explain the impact of this proposed legislation on organizing activities in the air transportation and air freight industries and I will detail our recommendations for modern and adequate protective provisions for workers and unions.

Let me state as emphatically as I can; the International Brotherhood of Teamsters is opposed to deregulation of the air transportation industry. We oppose S. 689 "The Air Transportation Regulatory Reform Act of 1977."

However, we welcome this opportunity to bring before this committee and the Congress, our recommendations for legislation which will correct flaws in the present Federal Aviation Act, Railway Labor Act, and CAB decisions. We want fair and equal treatment for airline and air freight workers and unions.

The IBT has over 2 million members. Some 600,000 of our members are employed in the common, contract and private motor carrier motor freight industry-including the air freight and air freight forwarding industries.

We are one of the larger unions in the air transportation industry, with some 25.000 members.

We are the only union representing workers employed by all phases of the air transportation industry.

Certified Carriers: Scheduled, supplemental.
Commuter & Air Taxi, Intrastate carrier.

And we are the only union representing workers in all class and crafts: Pilots and flight engineers, flight attendants, clerical and office: largest union in this class and craft. Dispatchers, mechanics, stocks and stores.

S. 689 will have an adverse impact on the wages, benefits, safety and working conditions of workers in both the air transportation and air freight industries.

The key recommendations we wish to discuss today are:

(1) Trucking employees of airline carriers should be covered by the National Labor Relations Act and the National Labor Relations Board and not by the Railway Labor Act and the National Mediation Board.

(2) Congress should not raise the commuter or air taxi exemption as proposed in section 416(b)(3) of S.689. Exempting larger aircraft from CAB economic regulation by Act of Congress will have dramatic adverse effects on workers and unions in the air freight and air freight forwarding industries.

Any liberalization of the air taxi or commuter airline exemption should only be done after a full hearing by an expert agency, the CAB.

Congress should direct the CAB to consider the impact on workers and unions of any liberalization of commuter or air taxi exemption and adequate labor protective provisions must be imposed.

(3) Modern and adequate labor protective provisions, enforced by the Secretary of Labor must be imposed whenever actions by the Congress, the CAB or any other U.S. Government Agency or Department adversely impact airline and airfreight workers and

unions.

S. 689 does not provide for labor protective provisions of any kind. Present CAB LPP's are completely inadequate and obsolete. The minimum labor protective provisions for airline and airfreight workers must be no less than those enacted in the Railroad Reorganization Act of 1973-Conrail-and the Railroad Reorganization Regulatory Reform Act of 1973-4-R Act.

Now, Mr. Goldstein will explain the impact on the organizing activities.

Mr. GOLDSTEIN. Thank you.

I am the assistant director of Organizing for the International Brotherhood of Teamsters.

While we recognize that it is the right and duty of Congress to enact fair and appropriate legislation, we ask that it not create unfair and inequitable legislation which will affect the jobs and contracts of thousands of our members and untold numbers of unorganized workers who want to bargain collectively.

One: Pan American Airlines is a vivid example of our anxieties. We represent thousands of employees in the clerical, office, fleet,

ก

and passenger service unit at Pan Am. Many lost their jobs as a result of unfair foreign competition. These employees were not protected by legislation, as were others affected by foreign competition. Decisions were rendered informing us that the Pan American employees did not come under the Trade Act of 1974. I can only assume that no one thought then that such a matter could possibly affect airline employees. We feel it is our obligation to let you know that similar situations can arise in the future if the bill under discussion is passed as it is now worded.

Two: The bill as it is written has no provisions for the protection of workers affected by these changes.

Further, a no man's land in Federal labor regulation regarding workers' rights is created.

Three: There are two basic statutes regulating labor unionstheir organizing and operation. They are the National Labor Relations Act and the Railway Labor Act.

The Railway Labor Act covers employees of railroads and airlines engaged in interstate operation. Almost all other types of workers and the companies they work for are covered by the National Labor Relations Act, which includes the motor and airfreight industry

drivers.

For many years we have organized and negotiated contracts for workers in these industries, and this has primarily been done under the National Labor Relations Act, and have established decent union wages and working conditions.

The National Labor Relations Act offers workers and a union protection in their attempt to organize in that it will prosecute violations of law and prevent employers from denying employees their right to organize.

This is not so under the Railway Labor Act. The law is inadequate, has no teeth and there is no adequate forum to hear these matters and make decisions.

Under the Railway Labor Act, we must sign all employees in a given craft and class nationwide before we can get an election. This is not so under the National Labor Relations Act. We have the right to organize on a local level where employees have an identity of interest.

We now represent 10,000-15,000 drivers or couriers in the airfreight industry. They are involved in the pickup and delivery of airfreight. The companies they work for do not own their own planes.

An example of the weakness of the Railway Labor Act which concerns us greatly involves our recent effort to organize the mechanical employees of Federal Express in Memphis, Tenn. We signed up a majority of the mechanic unit. The employer discharged a number of employees shortly thereafter.

We charged that they were fired for protected union activities, such as wearing a button, et cetera. These actions, and the delay of the National Mediation Board in setting up the election, tended to chill our efforts, and after long delay, we lost the election.

In the interim, we attempted to get a temporary injunction to prevent such activity. After a series of futile hearings before the

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