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In fact, with a surcharge of 25 percent, or even half that, the demand for SST's would be reduced far below the FAA's projection of 500. Alternatively, the SST could make money without a surcharge if fares were kept artificially high but if this were done—and it is obviously a very real concern--the traveling public would pay excessively high fares, and curiously those airlines that had the fewest SSTS might well make the most money.
Now, let us consider how some of the uncertainties interact. Even if the SST makes its specifications, it is likely to be a more expensive aircraft to fly than say the 747, and a much more expensive aircraft than the next generation of subsonic aircraft with which the SST should more properly be compared. If the costs are higher, a substantial fare premium will have to be charged. With such a surcharge, the demand for supersonic flight would be reduced very substantially. This will mean that few aircraft will be sold, resulting in a further increase in the cost per aircraft, and so on.
The problems will be made much worse if there will have to be an increase in structural weight, in drag, and in fuel consumption in order to reduce noise. This could well reduce payload by 20 to 50 percent (or greatly increase the weight and capital cost of the aircraft).
Because the SST is such a marginal aircraft, almost anything that goes wrong can have a catastrophic effect. We have already seen this once when, with the old swing-wing design, it proved impossible to keep structural weight low enough so that a reasonable payload could be carried. If licking the noise problem imposes significant penalties on weight and performance, as seems likely, there could well be similar problems with the present design.
Much has been made of the fact that the present plan is to build only two prototypes and that there is no commitment at this time to series production. Prototype production and experience might well make sense if, with the prototypes, the critical uncertainties could be resolved. In fact, the prototypes will be only marginally useful in this regard.
Because the engines will be different and will not include the required noise suppression devices, we will not learn very much about the penalties associated with noise reduction, and, of course, flying the prototypes will throw no light whatever on the other very critical uncertainty-projection of future demand.
Moreover, Mr. Ruckelshaus, head of EPA, indicates the prototypes are unnecessary and insufficient to learn about environmental effects
. Most of what we need to know we ought to be able to learn from the flights of the SR-71 and other military aircraft. Even if we fly the prototype SST's, the engine emissions will differ somewhat from those of the production model.
Finally, let me turn to the question of the Government's return on its investment. Time and again, Government spokesmen have asserted that the Government will get repaid-full repayment when the 300th aircraft is built and an additional billion dollars by the sale of the 500th aircraft. There is little basis for believing that the 300th, much less the 500th
, aircraft will ever be sold, but even if it were, straight repayment of the Government's $1.3 billion hardly seems an adequate return considering the cost to the Government of borrowing money.
By the time of the 300th sale, the Government will have paid $2 billion or more in interest in addition to its investment of $1.3 billion. Even if 500 aircraft are sold, the Government's return on its investment would be only 4 percent--a much lower figure than the cost of borrowing money. In fact, there is no way that the Government can realize a decent return on its investment.
The question is raised, however, as to whether we should not continue with the program, having gone so far. Obviously if it is stopped now, we will lose what has been put into the program, and it is certainly fair to ask whether the probable returns in the event of the program's completion do not justify additional governmental expenditures.
It is my feeling that if we now knew that the aircraft would meet its specifications, if we were sure that private financing would be available beyond phase III, if we were confident that between 300 and 500 aircraft could be sold during the royalty period, and if we could have some assurance that improvements in subsonic aircraft design would not make operating the SST economically noncompetitive, an affirmative decision would be economically sensible: the return on the Government costs yet to be incurred would be in the range of 5 to 12 percent. In fact, of course, there is extreme uncertainty about all of these "f's.”
It is unlikely that a 750,000 pounds gross weight aircraft will be able to meet the range-payload objectives; and, even if it could, it is unlikely that further Government financing could be avoided and the sales objectives reached considering the unhealthy state of the airline industry.
Finally, it is most unlikely that there will not be further improvements in subsonic efficiency during the next 8 years.
At best, it is hard to see how the Government can realize a return on money yet to be expended greater than the cost of borrowing; and it is very likely there will be no return.
Thus, in terms of narrow economics the venture seems an unwise one from the perspective of the Government, from that of the air transport industry, from that of those who might fly in the SST, and, above all, from that of the many more millions who would contribute to subsidizing the program but who would never fly in the aircraft.
In conclusion, I see no urgency about going ahead with the SST. It is not a requirement for national security and the decision is not one which, if deferred, will result in irreparable damage as is the case with some other public programs that cry for funds.
I urge that the Federal Government cut its losses and view the SST as it has other civil aircraft development programs-exercising authority with respect to certification and regulation, but leaving it to the market economy, which is our strength, to decide when the potential payoffs and risks are in balance.
WITNESS' FAMILIARITY WITH PROJECT ECONOMICS
Dr. RATHJENS. I really can't claim that I have ever made a terribly thorough study of it. I became familiar with the problem when I was with the Institute for Defense Analysis, during the period 1965 to 1968, when some of my colleagues made a study of it.
Chairman ELLENDER. Did you oppose it, before now!
Dr. RATHJENS. I have never publicly opposed it. I have never spoken before a congressional committee, but from the first, from my first exposure to the economic analysis, I have seriously questioned whether it made sense.
U.S. MANUFACTURE DEVELOPMENT INVESTMENT AND AIRLINE PRODUC
TION AGREEMENT AND GOVERNMENT ROYALTIES
Chairman ELLENDER. The evidence produced during these sessions has shown that the companies furnish 24 percent of the cost of construction, and the Federal Government will pay 76 percent. There was a contract entered into between the companies and the Government, whereby after the prototype was flown, and shown to be acceptable
, that the companies would take over and construct these newly tested planes; and the contract further provides, as you indicated a while ago-you evidently must have read it somewhere that by way of royalties, the Government is going to be repaid all of the money that it has put in, and they stand to make a profit of $1 billion.
MARKETABILITY OF AIRCRAFT AND PROBABILITY OF GOVERNMENT NONBECOVERY
Now, whether that is true or not, I don't know. But, since we have invested over $800 million up to now, would it be foolish for us to stop now? Dr. RATHJENS. Senator, I think it would be very wise to stop now. Chairman ELLENDER. Why?
Dr. RATHJENS. Because, even if you forget about the money that you have already lost, and you worry only about the money that is yet to be spent, it looks like a bad proposition to me. At most, I submit, you could make a return on the money yet to be invested of perhaps 7 percent, and I think that is very unlikely.
My judgment is that, in fact, the Government will never recover any of its money, and I say that because it is my understanding that there will be no recovery, probably be no recovery, until the 101st aircraft is sold, and I, frankly, doubt whether we would ever sell that many.
Senator MAGNUSON. You say 100 ?
Dr. RATHJENS. The 101st aircraft, I believe, is when the first royalty payments are required.
CONTRACT MORE FAVORABLE TO MANUFACTURERS THAN TO GOVERNMENT
Chairman ELLENDER. Well, let me ask you this: Do you think that the companies would have invested as much as 24 percent of the cost of these two prototypes, if they didn't feel that it may be possible to construct a plane of the character that has been described by the proponents of this program?
Dr. RATHJENS. I assume that they made that judgment, but I must say that from my perspective, this whole contract looks like a very
much better deal for the Boeing Co. and for General Electric than it does for the Government of the United States, in that they will make a much better return on their investment than the Government will, and they will
Chairman ELLENDER. How do you figure that? If you say we ought to stop now, won't they lose their money?
Dr. RATHJENS. They will, indeed.
Chairman ELLENDER. Well now, most of your testimony is, as I view it, speculative.
Don't you think it would be a good idea for us to try and see whether or not it will do what you say?
PROTOTYPE AND PRODUCTION AIRCRAFT VARIANCES : RESOLUTION
Dr. RATHJENS. Senator, I think the whole project, not only my projections, but I think the whole project is an extremely speculative one, and I think that when you fly those two prototypes, you will resolve very few of the uncertainties that have to be resolved before one can really establish whether or not this makes sense.
The prototypes will not be like the production aircraft, so that many of the uncertainties in terms of technical performance won't be resolved, and the major uncertainty, which has to do with projection of demand, is totally unresolved, in terms of developing prototypes.
RISKS INVOLVED IN DEVELOPMENT OF SUPERSONIC JET AIRCRAFT AND
Chairman ELLENDER. I think the evidence further shows that the same arguments were advanced on modern airplanes for construction, when they were developing the Boeing 707 and later the 747.
People at that time thought that none would be sold. But yet, they were sold. And the airplane companies of our country have sold abroad over $10 billion worth of these airplanes. So the record shows.
Don't you think it is necessary for us, for our country, to keep up with that, and to retain the supremacy in this kind of aircraft?
Dr. RATHJENS. Senator, I would like to make three observations in that regard.
Chairman ELLENDER. Okay.
Dr. RATHJENS. First of all, I am unfamiliar with the projections that were made at the time of the decisions to go ahead with the 707 and the 747. But, let me make the following points:
First of all, in those cases, there was a much greater margin for error, in that those aircraft are less sensitive to some of these factors that I have discussed. Unfortunately, failures in terms of making structural weights, fuel consumptions, and that sort of thing, wouldn't have hurt those aircraft nearly as much as they will the SST.
The second point I would make is that on the basis of the projections we can now make for the SST, it appears to offer very little, if any competitive advantage over the 747. Those aircraft, particularly
the 707, offered an enormous advantage, compared with the piston aircraft that were then flying at that time.
Finally, and I think this is the most important point that I would have to make in this whole session this morning: I would favor going ahead with the SST, if there were no environmental problems, if they could be resolved, and if the private capital community of this country could make the decision that it was a good risk, and finance it on the same basis that we financed the 747 and the 707.
If it is as attractive an aircraft as those were at the time the decisions were made, I do not see why the Government should be in the business at all. The Government did not subsidize those two aircraft
, and I do not see why it should subsidize this one.
UTILIZATION OF GOVERNMENT TECHNOLOGY BY MANUFACTURERS
Chairman ELLENDER. Well, the evidence shows that a good deal of the information that was used by Boeing to make the 747 and 707 was gained through the construction of airplanes that were built for the military.
Dr. ŘATHJENS. I have no objection to the Government-as a matter of fact, I would strongly urge that it make available to the aircraft industry all of that information which it derives, that is relevant, provided that information is derived for what I would regard as legitimate national security or other purposes.
We should have, and I assume we did make available to the Boeing Co. and the Lockheed Co. the information that was developed in, say, the B-70 aircraft.
ENVIRONMENTAL POLLUTION Chairman ELLENDER. Now, in respect to your contention that this may affect our environment, and as far as I can recall, I didn't encounter much opposition to the construction of this plane until the ecologists got busy, and spread around a lot of propaganda. It strikes me that we ought to try it out and see whether or not the results that you contend will occur will really occur.
Don't you think that the only way to find that out is by constructing the prototypes and trying to work it out, if possible, rather than stop now, when over two-thirds of the total cost of this project has been invested?
Dr. RATHJENS. No, Senator; I do not.
Now, my feeling on it is that I did not know that the aircraft will be an environmental hazard. My suspicion is that it will not be, in terms of its effect on meterology, and in certain other respects. But there is uncertainty. And I think one must be careful, because of those uncertainties. But, beyond that, nothing will be learned from building these two prototypes that will resolve those uncertainties, again, and here, I am not only speaking for myself, but as in my prepared statement.
STATEMENT OF RUCKELSHAUS
I cited Mr. Ruckelshaus of the EPA as agreeing with that. We don't need these prototypes to find out about
Senator MAGNUSON. Will you put his statement in the record ?