1946-48: Yale Law School, LL.B. (1948).

1943-46: Military Intelligence, U.S. Army, Private to Captain. China-BurmaIndia and Southwest Pacific Theaters.

1940-43: Princeton University. A.B. (1943), Magna cum laude, Phi Beta Kappa, President, Senior Class. Received M. Taylor Pyne Prize, Varsity football.

INDUSTRY RESPONSE TO CARD STUDY

STATEMENT OF KARL G. HARR, JR., PRESIDENT OF THE AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.

Mr. HARR. I am Karl G. Harr, Jr., president of the Aerospace Industries Association. On behalf of the Nation's major manufacturers of aerospace products, I appreciate this opportunity to present an industry overview on the joint DOT-NASA policy study on civil aviation research and development. With me is Mr. Kenneth F. Holtby, vice president-engineering of the Boeing Co., who will present our industry's views on specific aspects of the study.

I would like to commend the study group for an outstanding effort in response to the recommendations of your committee, Mr. Chairman, and those of the Committee on Aeronautical and Space Sciences of the U.S. Senate. Not only does the CARD study fully examine the status of research and development as it relates to civil aviation, it also puts into perspective the role civil aviation plays in our contemporary society and recommends policies and actions that will contribute significantly to the improvement of that society.

As we in the aircraft manufacturing industry perceive them, the principal conclusions reached by the CARD study are these:

1. Civil aviation is a vital element of our society and offers the promise of increased benefits to the Nation in the future;

2. This potential cannot be realized unless solutions are found to the many problems and constraints-both technical and nontechnicalcurrently being faced;

3. Civil aviation must become systems oriented with all elements, airplanes, airways, airports, and intermodal relationships, evolving in an orderly and interrelated manner;

4. An expanded R. & D. effort encompassing all elements of the system and all disciplines will be required to improve technology, to permit continued growth, and to make civil aviation more compatible with all demands of our society:

5. Continued Federal support of research and development will be required and, although military aviation research and development will continue to contribute to our technological base, changing requirements indicate a need for increased R. & D. emphasis on civil aviation needs. The CARD study thus found that the major problems and constraints confronting civil aviation-noise, congestion, low density short haul, handling increasingly productive aircraft, for example-could be resolved by technological advance. It cautioned, and I quote, "However, these future benefits of research and development may not be fully realized without increased attention to institutional factors such as regulatory constraints, social impacts, financial conditions, and organizational problems."

Since the CARD Study was released last March, it has been the subject of critical and thorough review by the aerospace industry.

Generally, we endorse its conclusions and recommendations and urge their prompt implementation. From our viewpoint two interrelated issues deserve special emphasis. These are the vital role of technological advance, which is dependent upon increased research and development efforts, and the vital role of the government-industry relationship in achieving that objective.

Our national investment in research and development since World War II-funded by both the public and private sector-created a technological capability that appeared to be unchallengable by any other nation on earth. Such capability was a major force in the dramatic growth of our economy over the past generation, which in turn produced an unequalled standard of living and an unparalleled degree of individual freedom.

Now that technological leadership is being heavily challenged. At home we find many who place the blame for today's societal problems on an unbridled technology, and who advocate significant reductions in the level of governmen-funded research and development. Abroad, other nations have recognized the progress we have made through technological advance and have dramatically increased their investment in this area.

One manifestation of the effect of this challenge is that in 1971, for the first time since 1893, the United States had a negative balance of trade. The causes of this deterioration are not difficult to identify, perhaps they have been most succinctly stated by Secretary of the Treasury John Connally:

The simple fact is that in many areas others are out-producing us, out-thinking us, out-working us, and out-trading us.

The only area in which we consistently maintain a substantial trade surplus is high technology-oriented products. Since 1964 we have shown a stable surplus on the order of $9 billion annually. The growth rate of our high technology-oriented exports has averaged 10 percent annually during most of the sixties, reaching a high of $22.6 billion in 1970. However, our leadership in this category is now also being seriously challenged. Of major concern is the fact that imports of these products have increased at a much higher rate-24 percent annuallyjumping from $3 billion in 1964 to $13 billion in 1970. A dramatic example of change taking place is reflected in the balance of trade in automotive products which long have been one of our best sellers. In 1967, we began to show a deficit that by 1970 had increased to $2 billion. And now to sharpen our focus on the very serious threat that this Nation now faces in the commercial transport aircraft market-a market directly related to the findings of the CARD study. For the past generation the United States has dominated this market, producing about 80 percent of the aircraft for the free world airline fleets. In the period 1965 to 1970 there was an aerospace trade surplus of nearly $10 billion of which jet transports were responsible for a major

part.

Today significant challenges to our transport aircraft position are being mounted in Western Europe and to a lesser extent in Japan. Further, it is even possible in the longer range that Russia with aircraft like the supersonic TU-144 will succeed in its determined effort to penetrate the market.

Each of the potentially competitive foreign nations-Great Britain, France, West Germany, Italy, Canada, and Japan-has taken several positive actions directed at obtaining a substantil share of this lucrative market.

For example, in Canada, companies receive grants equal to 25 percent of capital expenses on research and development. In addition, they can receive Government payments of up to 50 percent of the cost of the individual research and development projects. In Britain, companies can write off as much as 100 percent of their investments in new production facilities in the year they are made. In Germany, companies receive special tax write-offs of up to 50 percent of corporate research and development investment-plus a 10-percent cash investment subsidy.

In addition to these incentives, direct subsidies are being provided on high cost and high export market potential programs. The governments of Western Europe are presently investing about $4 billion in four major commercial aircraft programs aimed at a near term $30 billion world market. These are the British-French Concorde SST-totally financed by the governments involved-plus the A-300B airbus, the Dassault Mercure 2 and the VFW-614 which are receiving direct support of 85, 66, and 80 percent respectively, from the committed governments. These programs are largely oriented toward export rather than their own domestic markets and all count on making major inroads in the U.S. market.

By any yardstick these aircraft, which will become operational in 1974-75, constitute a major competitive threat to our transport aircraft manufacturing industry. I am confident that the compelling reason why our foreign competition developed these aircraft was that there were no competitive types being built in the United States: nor under present circumstances does it appear likely that we will be building competitive models in the near future.

There is one reason and one reason only why U.S. manufacturers are not competing: The availability of adequate financial resources. We still have superior technology, the management skills, adequate. plant capacity, a highly skilled labor force, and the other essential ingredients to compete succesfully; but we do not have the financial resources that would be required, nor are they available in the private money market.

To appreciate the magnitude of the stakes involved, let's take a brief look at the potential market for the period 1974 to 1985 and assess the impact on the economy if we compete and if we do not. During this period the aircraft market has been estimated at $148 billion, half of which will be purchases by U.S. airlines. This figure is in current dollars and assumes a 5-percent annual increase in costs, due to inflation and product improvement. There are three general market areas-long-range aircraft, including the SST; medium range, including the twin engine airbus; and short range, including the STOL aircraft.

First, let us make some assumptions about the penetrations of these markets if the United States decides to be competitive in all three categories. It is estimated that the United States would capture 90 percent of the long range, 80 percent of the medium range, and 70 percent of the short range market.

If we do not compete, however, the potential loss of business has been estimated at $77 billion. This translates into 1,479.000 man-years of lost employment, a $29.6 billion loss in payroll, and the loss of nearly $10.6 billion in Federal income taxes.

The impact on the aircraft balance of trade would be equally costly. By 1976, the positive balance we presently enjoy in aircraft exports will become negative and, in 1985, the negative balance will be an estimated $4.5 billion. The cumulative negative balance of trade during the 1974-85 period could reach a total of $18.3 billion.

Clearly, it is the An. rican people who are the ultimate beneficiaries of an improved balance of trade and the maintenance of a superior technological base.

A healthy, competitive aircraft manufacturing industry contributes to both.

It appears, therefore, that civil aircraft qualifies under one, or perhaps several, of the criteria for use of Government funds identified in the study. Under the criteria recommended, which bear repeating, use of Government funds for civil aviation R. & D. should be based on a determination that there is significant public interest related to public safety or general welfare and that one or more of the following conditions exist: (1) Government is the primary customer, operator, or beneficiary; (2) the technological risk is too high or the return on investment too low or unpredictable for private investment but the potential public benefit is great; (3) the size and duration of the financial risk exceeds the financial capability of any company in the private sector; and (4) the market opportunity is not clear to the private sector because of factors beyond its scope of activity.

Although the study goes on to say that "applying these criteria to the future in general warrants continued Government sponsorship of aeronautical research," it subsequently concludes: "Civil vehicle prototype development activity should still be largely a matter of industry initiative and sponsorship."

While endorsing this latter statement in principle, it is quite possible in practice, however, that the magnitude of the financial resources required and the risks inherent in developing major new aircraft programs may be such that financing will be unobtainable in the private sector. In that likely instance it would indicate that new mechanisms for industry-government interaction will be required. Among the various alternatives that merit consideration are R. & D. tax incentives, Government loan guarantees with or without reimbursement of interest, Government development funding with or without recoupment, accelerated depreciation allowances, Government purchase and lease, establishment of a technology development bank, and liberalization of antitrust laws.

As an industry, we are vitally concerned with the nature and impact of any changes that might occur in the industry-Government relationship and in any new mechanisms that may evolve. Civil aviation may well become one of the first areas for innovation and experimentation in these mechanisms.

Our industry has conducted considerable research into major Government-industry problems in the past year. Among those we offer for your consideration in conjunction with these hearings are our studies on national and international technology support, aerospace

profits versus risks involved, and the relationship of aerospace and the U.S. economy. We recognize that studies such as these and the CARD study are just the beginning steps toward satisfactory solution of mutual problems.

It is up to both industry and Government to continue to examine all aspects of the complex relationships involved and to shape, not merely accommodate, what the future will hold.

Mr. HECHLER. Thank you, Mr. Harr, very much. We will suspend with the testimony of the other two witnesses until members have an opportunity to answer the rollcall which is now going on. If it is agreeable with the committee, we will recess until 4 p.m.

(The following information was submitted by Mr. Harr for the record :)

The publications prepared by the Aerospace Research Center are:

1. International R. & D. Trends and Policies: An Analysis of Implications for the United States.

2. National Technology Support: A Study of R. & D. Trends and Their Implications.

3. Aerospace Profits versus Risks: An Analysis of Impact on Industry Viability.

4. Aerospace and the U.S. Economy: Its Roles, Contributions and Critical Problems.

Mr. HECHLER. The committee will be in order.

We will resume with the testimony of Mr. Kenneth Holtby, vice president-chief engineer of the Boeing Co. Mr. Holtby.

STATEMENT OF KENNETH F. HOLTBY, VICE PRESIDENT-CHIEF ENGINEER, THE BOEING CO.

(Biographical data on Kenneth F. Holtby follows:)

BIOGRAPHICAL DATA-KENNETH F. HOLTBY

Starting in 1945 as an Air Force officer assigned to jet bomber development, Mr. Holtby's professional career has paralleled and been closely associated with the development of large jet propelled aircraft. In 1947, Mr. Holtby graduated from Cal Tech and went to work for Boeing as an aerodynamicist on the XB-47. During this time he was active in the development of early analytical methods for estimating the aeroelastic stability and control characteristics of swept wings. As a result of this work, lateral control spoiler systems became standard on large flexible swept wing aircraft.

Between 1947 and 1961, Mr. Holtby held various positions at Boeing including chief of aerodynamics for the Wichita Division and chief of aerodynamics and later chief of technology research for the commercial airplane division. In the latter post he initiated SST studies at Boeing in 1958.

In 1961, Mr. Holtby was selected as a Sloan Fellow to spend a year at MIT in the Sloan Fellowship program along with approximately 45 other young executives chosen from all segments of industry. On completion of this program. he received a Masters Degree in industrial management.

Upon returning to Boeing in 1962, he was assigned as assistant program director-technical for large logistic transport aircraft and helped synthesize the C-5A concept and directed Boeing's technical proposal for the C-5A competition.

From 1965 through 1968, Mr. Holtby was director of technology for Boeing's commercial airplane division directing the aerodynamic, propulsion, mechanical, structures, and electrodynamic staffs and wind tunnels and associated laboratories. During this time, he was instrumental in advancing the level of technology incorporated into the Model 747 design.

In early 1968, the SST program was redirected to include a re-examination of all design criteria, technology and potential design alternatives. Mr. Holtby was