have spent almost all of my time preparing for testimony, and my role is really to monitor the efficiency of the application of the $1.3 billion to get the best supersonic transport airplane the United States can build.

Now, if I have to report to the committee on every little detailSenator PROXMIRE. I mean major changes involving say a half million dollars.

Mr. MAGRUDER. Major changes we will certainly report in the progress of our hearings, and the next set of hearings will probably start within 60 days.

Senator PROXMIRE. The answer is you object to informing the committee of changes?

Chairman ELLENDER. He did not say that.

Mr. MAGRUDER. I am willing to report any major changes as we go along.

SST VERSUS 747 PRODUCTIVITY

Senator PROXMIRE. I have just two more questions.

First, would you comment on Dr. Samuelson's statement this morning that the SST is not as productive as the 747, not as productive in fact less productive. Dr. Ruppenthal, another witness, made the same statement. I would like you to include in your response a recognition of the fact that the SST capital cost is double the 747, but the range is 4,000 miles, as compared to 6,000 miles, and that the fuel consumption is substantially greater in the SST. Give me your analysis recognizing those factors.

Mr. MAGRUDER. They are factors in the operating cost, and productivity equations. I don't know Dr. Samuelson, but I have the utmost respect for him. He is one of the few men who has won the Nobel Prize. Probably the softest science of the world is economics. It is as hard as jello compared to the physical science of the environment. You cannot get any economists to agree to any one subject.

I don't know where he got his facts. For him to say that the productivity, or the earning capacity of the SST does not meet what I said. He has not talked to my office, or Boeing or GE to my knowledge. Now, the direct operating costs on the charts, Senator Proxmire, of the SST, and the 747, are calculated by the 1967 Air Transport Association formula. That method is agreed to by the airlines throughout the world. We use that formula. It is pretty straight forward.

I read earlier a list of items that go into that formula, that are speed sensitive. That means that the slope of the SST is more shallow with time than the slope of the 747, just as the slope of the 747 is more shallow, that means less sensitivity to inflation than the slope of the 707, and if I had reciprocating engine planes, they would be much steeper.

Senator PROXMIRE. Did you add that into the cost of the plane. Mr. MAGRUDER. This is the total operating cost. It includes the capital cost of the plane.

Senator PROXMIRE. How is that included?

Mr. MAGRUDER. Through depreciation. I had read all of the things that are included. The direct operating cost elements are the crew,

which is speed sensitive, fuel, oil, insurance, maintenance, and depreciation. All of these are speed sensitive.

INTEREST CHARGES IN OPERATING COST FORMULA

Senator PROXMIRE. How about interest.

Mr. MAGRUDER. Indirect operating cost will include ground property equipment, aircraft servicing, aircraft control, cabin control, servicing administration, reservation and sales, cargo sales, administration.

Senator PROXMIRE. It might be helpful at this point if I asked, this is a $50 million investment, and I presume, typically very often, they would have to borrow money, or use their own capital, therefore, there ought to be direct interest costs included. It would be a substantial cost, and a great difference between the 747, which is the $22 million plane, and this one which is $50 million.

Mr. MAGRUDER. I don't know what is interest in there. I will have to supply that for the record. I should know that, and I don't. It is not part of the operating cost, but it might be part of the return on investment. It might fit in that formula.

TOTAL OPERATING COSTS

I am trying to get to you how we compute, in the industry, total operating costs. It is not correct to use only direct operating cost when you compare two airplanes at different speeds, and then you add on top the fares you use, and we use the same fares, because the fare yields minus total operating costs give us annual revenue. The SST is expected to earn more per year than the 747. Quite a bit more than any of the other jets, and therefore, it is a moneymaker.

Although it has about the same total operating cost as the 747. It probably will have some sort of surcharge put on it to prevent early obsolescence of airplanes like DC-8's and 707's. Just as we put a 15percent surcharge on the jets to prevent obsolescence.

If that is put on top of that, that would increase those costs up to $20 million, annual operating profit from one airplane.

Now, you asked the question, how can you pay for a $50 million airplane.

Senator PROXMIRE. I said the interest costs would be very great, and that is not included in there.

Mr. MAGRUDER. I will get that for the record.

(The information follows:)

DEFINITON OF INTEREST EXPENSE

Interest expense is classified by the airlines as a nonoperating expense item as prescribed by the CAB Uniform System of Accounts, and is not included in direct or indirect operating expense. The CAB computes airline return on investment on the basis of total investment or total capital, which is made up of debt and equity. The Examiner's Report in the Domestic Passenger-Fare Investigation recommended that the reasonable rate of return for domestic trunklines should be 11 percent after taxes consisting of a 60/40 debt/equity ratio, an interest rate of 7 percent, and a return of 17 percent on equity. Applying these rates to the prices and average investment in the SST and 747, based on the year 1978, would provide the following returns on the debt and equity portions of the investment:

1 Average investment will more nearly reflect the average asset value on the books of an airline, since the original aircraft cost is reduced through annual depreciation and the loan is reduced through repayments.

747 VERSUS 707

Senator PROXMIRE. I estimate that will be about $3 million or $4 million a year on a $50 million airplane.

Mr. MAGRUDER. This would be less on a $25 million 747.

Senator PROXMIRE. Yes.

Mr. MAGRUDER. Take a look at the 747, versus 707, and you will see why the airplane operators were attracted to the 747, versus the DC-8. It is a headache to take on new equipment, but look at the earnings, it will earn $10 million a year, and that means in 4, 5, 6 years, including interest, it pays itself off.

Also the SST pays itself off in 5 to 6 years. These airplanes are guaranteed for 10 years on structure, and they fly them for 15 years. Senator PROXMIRE. If we could accept all of the assumptions that everything will work out perfectly, that they have no overruns in producing a plane using a new and exotic metal, the whole history of aircraft production, with new planes, in the military, has been a record of overruns, averaging 50 or 60 percent, often 100 percent. If the SST has no overrun it will be the first one without a significant overrun.

Mr. MAGRUDER. This is the first one that is a prototype.

Senator PROXMIRE. It is not in production.

Mr. MAGRUDER. If you go back to the forties where we built prototypes, you did not see this kind of overrun. Go back to about 1952 where we flew them for 4 years before. Go back to where we had anything 5 or 6 years before we went into production, you will find a pretty good record on that.

Senator PROXMIRE. Once again, I thought that Senator Case made an interesting point in pointing out this prototype will be different. Mr. MAGRUDER. Could I clarify the interest thing? The reason interest is not equal for each airline is that all airlines get their funds from different sources.

GOVERNMENT RETURN ON INVESTMENT

Senator PROXMIRE. You said the billion dollar return from the U.S. Government from the sales of planes represents a 6 percent return. Last year, FAA told us this was a 4.3 percent return.

Mr. MAGRUDER. Can you tell us who it was in FAA?

Senator PROXMIRE. The witness who testified at that time.

Mr. MAGRUDER. That depends on the production rate. It could be as low as 4.3, it could be as high as 6 percent.

Senator PROXMIRE. They said flatly 4.3 percent.

Thank you, Mr. Magruder, I want to say I have always been very impressed by you. You and I had a debate on television one time and I was tremendously impressed. You are very articulate, extremely intelligent, and obviously dedicated to this program, and I think you are doing an outstanding job in your way, and I hope this colloquy, and the differences we have, that you don't feel that there is any personal resentment at all, because I have great respect for you. You are a fine man, and you are doing a very good job.

Mr. MAGRUDER. Thank you, Senator Proxmire.
Senator PROXMIRE. I have no further questions.

Chairman ELLENDER. We are glad to have all of you and we hope to see you in about 3 months. [Panel excused.]

Chairman ELLENDER. All right. We have two more witnesses. A Capt. Alex C. Bonner and Mrs. Kelly Rueck. Mrs. Rueck, have you a written statement?

Mrs. RUECK. Yes.

Chairman ELLENDER. I wonder if you would be kind enough to put it in the record, and if you think you ought to highlight it for us, we will listen to you.

STATEMENT OF ALEX C. BONNER, FIRST VICE PRESIDENT, AIR LINE PILOTS ASSOCIATION

ACCOMPANIED BY:

MRS. KELLY RUECK, VICE PRESIDENT OF ALPA STEWARD AND
STEWARDESS DIVISION

CAPT. DON MCBAIN, SST SAFETY TEAM

PREPARED STATEMENT

Mrs. RUECK. Negative. I would be happy in the interest of time to place these in the record. You have copies, I believe, of them, and if you care to, sir, we are here to answer questions.

Senator MAGNUSON. Mr. Bonner is here representing the airline pilots. He is the first vice president and President O'Donnell just could not be here; and Mrs. Kelly Rueck is vice president of the stewardesses. Mr. BONNER. From Baton Rouge.

Chairman ELLENDER. Baton Rouge?

Mr. BONNER. Yes, sir.

Senator MAGNUSON. And they wanted to express their opinion about their viewpoints on the SST and they should be very important. There are 31,000 of them and I think we could highlight this a little bit, 5 minutes or so.

Chairman ELLENDER. You may read your statement.

Mr. BONNER. Well, sir, on my right is Capt. Don McBain, from Los Angeles. Actually, I was prepared just to read the statement which will be a part of the record, which I could turn in.

I have received a letter from Capt. W. W. Betts, Chairman, Region IV Air Safety which I would like inserted in the record. Chairman ELLENDER. You may insert it in the record. (The letter appears on p. 557.)

STATEMENT OF POSITION OF AIR LINE PILOTS ASSOCIATION IN SUPPORT OF THE U.S. SST PROTOTYPE TEST PROGRAM

Mr. Chairman and members of the committee, my name is Alex C. Bonner, commercial airline pilot, and First Vice President of the Air Line Pilots Association. I am speaking on behalf of our President

J. J. O'Donnell who is unable to testify because of illness. He regrets his inability to appear before such a distinguished committee of lawmakers on such a vital subject as the SST.

With me here, on my left, is Mrs. Kelly Rueck of Baton Rouge, La., vice president of ALPA's Steward and Stewardess Division. On my right is Captain Don McBain of Los Angeles who is a member of our SST safety team.

We are truly honored in being asked to appear before your committee.

The Air Line Pilots Association membership encompasses 29 scheduled air carriers and 13 nonscheduled airlines, involving 31,000 pilots and 11.000 cabin crew members. Our creed is: "Schedule with safety."

A pilot, after years of prior training, begins his professional airline career under the super vision of capable and experienced command pilots. Normally, it will be 10 or 12 years before he is entrusted with the command of an aircraft, and earns the title of Captain; thus assuring you and your families that a true professional is guaranteeing-within all human capabilities-a safe arrival at destination.

Air Line Pilots Association's Board of Directors clearly endorses the development of prototype civil transports, and specifically the SST since 1966. Our pilot ranks include men of proven technical aviation ability, constantly to evaluate and monitor configurations and human factors important to flight safety. Nothing has occurred to change our endorsement of the SST program. We believe the prototype development and test programs for the SST must be completed. We urge necessary parallel research into economic, operational and environmental areas to insure that accurate and measureable findings are available at decision time.

Pilots know well that ours is a dynamic industry, historically one that has moved from low, slow, stick-and-wire, powered "kites" to high-flying 600 MPH-plus jets, within a matter of 40 years. Many airline pilots who pioneered the air routes of the world are today flying the most advanced and technical aircraft in existence. They, and their fellow pilots are prepared to move into the supersonic era with the same enthusiasm and dedication that built the air transportation industry to its present level as the foundation of world commerce. Senior and junior pilots recognize that continuing development and testing of advanced type aircraft and systems, such as the SST, are mandatory for continued growth and development of the industry. Failure to do so will seriously impair United States leadership in this vital field.

Contrary to some beliefs, the airline pilot is not motivated to support the SST, "because we will make more money." We believe that United States carriers will be obligated to buy SST's for competitive reasons. Our members will reap whatever benefits occur regardless of who builds the airplane. When it is realized that less than 5 percent of our current strength of professional airline pilots will ever fly the SST within the first decade of service, it is obvious that personal gain can hardly be accepted as a reason for our stand.

At present, there are two prototype SST's being flown and tested by foreign sponsors-one by the British/French combine, and one by the USSR. These aircraft are programed for world operational service. U.S. carriers have expressed interests in buying foreign built SST's, as well as the U.S. design.