Defense Logistics: DOD Needs to Improve Budget Estimates and Accuracy of Forecasts for Airlift Services

TRANSCOM reported spending about $81 billion flying personnel and cargo worldwide in fiscal years 2007-2017. TRANSCOM manages the Transportation Working Capital Fund (TWCF) to provide air, land, and sea transportation for the Department of Defense (DOD). TRANSCOM sets some rates it charges below costs to be competitive with commercial air service providers. The Air Force generally pays for expenses not covered by TWCF rates through the ARA.

A House Report accompanying the National Defense Authorization Act for Fiscal Year 2018 included a provision for GAO to review the ARA and the TWCF. GAO's report discusses the extent to which (1) ARA funds were requested, allotted, and expended for airlift activities; (2) the Air Force provided ARA information in its budget requests and informed its requests with information from TRANSCOM; and (3) TRANSCOM has implemented a rate-setting process for airlift services and uses workload forecasts to estimate the annual ARA funding request. GAO analyzed ARA funds and costs and revenues for airlift services for fiscal years 2007-2017; interviewed officials about the ARA budget preparation process; and analyzed TRANSCOM rate-setting and forecasting guidance and results.

For fiscal years 2007 through 2017, the Air Force requested $2.8 billion from Congress for Airlift Readiness Account (ARA) requirements, as part of its annual Operations and Maintenance appropriation. The Air Force allotted $2.8 billion (i.e., directed the use of the appropriated funds) and expended $2.4 billion of these funds for the ARA. U.S. Transportation Command (TRANSCOM) uses ARA funds to support airlift operations. Specifically, the Air Force requests ARA funds in its annual Operations and Maintenance budget request and subsequently provides these funds to TRANSCOM to assist in paying for airlift services (see figure). Amounts requested, allotted, and expended varied from year-to-year, in some cases by hundreds of millions of dollars, in part due to changes in the amount of airlift services provided by TRANSCOM.

The Air Force has not been including specific ARA information in its budget requests since fiscal year 2010. For fiscal years 2007 through 2009, Air Force budget requests explicitly stated ARA amounts. Air Force officials stated their budget presentation was changed to reduce the overall number of budget line items. In addition, TRANSCOM has not been providing cost estimates in time to support Air Force budget preparations. Specifically, TRANSCOM has been providing this information 2 months later than the Air Force needs it to support budget deliberations. The Air Force and TRANSCOM have taken some initial steps to address this issue, but these efforts lack substantive details regarding formalizing the necessary processes to ensure timely information. Until the Air Force and TRANSCOM resolve this issue, Congress will not have sufficient and complete information to inform its decisions on appropriating funds for ARA.

TRANSCOM has a rate-setting process, but faces challenges producing accurate workload forecasts. To provide information to its customers during the annual budget development process, TRANSCOM sets airlift rates in advance of the fiscal year of expenditure. Workload forecasts influence the rate-setting process. Inaccurate forecasts can lead to unreliable budget requests and hinder effective and efficient operational planning. GAO found that forecast inaccuracy (i.e., the variance between the forecast and the actual workload) averaged 25 percent and was becoming increasingly inaccurate since fiscal year 2007. GAO found that TRANSCOM has several workload forecasting challenges. Specifically, TRANSCOM lacks an effective process to gather workload projections from customers. It also no longer uses forecasting accuracy metrics and has not established forecast accuracy goals to monitor its performance. Furthermore, TRANSCOM does not have an action plan to improve its increasingly inaccurate workload forecasts. Taking steps to address these issues would enable TRANSCOM to improve the accuracy of workload forecasts.

GAO is making five recommendations to DOD, including improving the clarity and completeness of budget estimates, and taking steps to improve the accuracy of airlift workload forecasts. DOD concurs with GAO's recommendations.

For fiscal years 2007 through 2017, the United States Transportation  Command (TRANSCOM) reported spending about $81 billion on airlift  services to fly military and non-military personnel and cargo around the  world. TRANSCOM manages the Transportation Working Capital Fund  (TWCF) to provide airlift, sealift, and ground transportation in times of  peace and war in support of overseas operations, global security events,  and natural disasters. The TWCF conducts businesslike activities to  generate revenue from the sale of goods or services to customers, such  as the military services or combatant commands, to cover costs  expended in support of those services. The military services’ Operations  and Maintenance appropriations support their transportation needs, such  as airlift services provided by TRANSCOM. In fiscal year 2017, the TWCF  incurred costs of about $5 billion for airlift services, with the Air Force as  its largest customer.

TRANSCOM generally sets the rates it charges for airlift services at a  level lower than the costs it incurs. It does this to be competitive with  commercial air service providers and assure that the military services and  combatant commands use government-owned and contracted aircraft  and facilities to the greatest extent possible. According to TRANSCOM  officials, the use of government owned aircraft allows TRANSCOM to be  sure that mobilization capacity is maintained, helps air crews meet  training requirements, and supports readiness. When revenue is  insufficient to support the costs of maintaining airlift capability, the Air  Force provides additional appropriated funds through the Airlift Readiness  Account (ARA). The Air Force allots (i.e., directs the use of these funds)  to the ARA from its Operations and Maintenance funding appropriated by  Congress. According to TRANSCOM and Air Force officials,  TRANSCOM records the ARA amount as a funded order (i.e., the amount  to be paid by the Air Force is agreed to before the order is recorded).  The Air Force then provides appropriated funds to pay for airlift services.  A simplified depiction of this process is shown in figure 1 below.

House Report 115-200, which accompanied a bill for the National  Defense Authorization Act for Fiscal Year 2018, included a provision for  GAO to review the Airlift Readiness Account in conjunction with the  Transportation Working Capital Fund. Our report examines the extent to  which (1) Airlift Readiness Account funds were requested, allotted, and  expended by the Air Force from fiscal years 2007 through 2017, (2) the  Air Force provided Airlift Readiness Account information in its budget  request to Congress and informed its request with information from  TRANSCOM, and (3) TRANSCOM has implemented a process to set  rates for airlift services and use workload forecasts to estimate the annual  Airlift Readiness Account funding request.

To address the first objective, we analyzed Air Force budget request  documents and underlying supporting documentation, and information  from the Air Force’s Automated Budget Interactive Data Environment  Systems to determine the appropriated amounts allotted for ARA  activities. We also analyzed summary-level documents provided by  TRANSCOM detailing expenditures from TRANSCOM for fiscal years  2007 through 2017 to establish trends. Further, we reviewed  TRANSCOM’s procedures and supporting documentation for billing the  Air Force for payment of the ARA. Lastly, we interviewed DOD, Air  Force and TRANSCOM officials to gain an understanding of general  reasons for variances from year to year or between the requested and  expended amounts.

To address the second objective, we analyzed Air Force Operations and  Maintenance budget justification documents to determine the type of ARA  information (i.e. total amounts, changes from year to year, and other  information) provided in the President’s budget requests for fiscal years  2007 through 2017. To understand the differences, if any, between the  ARA information provided from year to year, we interviewed Air Force  budget officials to obtain an explanation for changes in the reported  information. Further, we analyzed Air Force Operations and Maintenance  budget justification documents, and TWCF budget documents to  determine the extent to which the ARA amount was based on available  information. We also discussed with Air Force and TRANSCOM officials  plans to change their procedures and the information considered in the  development of the ARA amount. Further, we compared TRANSCOM’s  processes and procedures against Standards for Internal Controls in the  Federal Government, specifically controls related to internal and external  reporting and mechanisms to enforce management directives.

To address the third objective, we analyzed the processes TRANSCOM  used to set rates it charges customers in various airlift workload  categories for fiscal years 2007 through 2017. We also reviewed  forecasting procedures and supporting documents provided by  TRANSCOM; interviewed TRANSCOM officials to gain an understanding  of how they implement rate setting and forecasting procedures; and  analyzed forecast and actual workload data provided by TRANSCOM for  the same timeframe. We compared TRANSCOM’s processes against  rate-setting and forecasting guidance and reviewed whether  TRANSCOM used quality information to establish workload projections,  established performance measures and goals for forecasting its workload,  and developed efforts to improve its forecasting of workload. In addition,  we interviewed TRANSCOM and Air Mobility Command officials and  reviewed supporting documentation to gain an understanding of  challenges that exist to producing accurate workload forecasts and the  relationship with the rate-setting and budgeting process.

We obtained revenue, cost, workload, and ARA data for this report from  budget documents, financial reports, and Air Force and TRANSCOM  records for fiscal years 2007 through 2017. We assessed the reliability of  the data by (1) interviewing Air Force and TRANSCOM officials to gain an  understanding of the processes used to estimate the cash, revenue, cost,  workload, and ARA data; (2) reviewing our prior work to determine if there  were reported concerns with TRANSCOM’s financial or budgetary data;  (3) comparing cash, revenue, costs and workload data provided by  TRANSCOM to the same data presented in the Air Force Working Capital  Fund budgets for fiscal years 2007 through 2017; and (4) comparing ARA  data to Air Force and TRANSCOM supporting documentation, or to Air  Force Operations and Maintenance budget execution reports to validate  ARA amounts for fiscal years 2007 through 2017. Based on our  assessment, these data were sufficiently reliable for the purposes of this  report.

We conducted this performance audit from August 2017 through  September 2018 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives. For more detail  regarding our scope and methodology see appendix I.

DOD uses working capital funds to focus management’s attention on the  total costs of carrying out critical business operations and encourage  DOD support organizations to provide quality goods and services at the  lowest cost. The ability of working capital funds to operate on a break- even basis depends on accurately projecting workload, estimating costs,  and setting rates to recover the full costs of producing goods and  services. Generally, customers use appropriated funds to finance orders  placed with working capital funds.

DOD sets the rates charged for goods and services during the budget  preparation process, which generally occurs approximately 18 months  before the rates go into effect. To develop rates, working capital fund  managers review projected costs such as labor and materials, as well as  projected customer requirements. The rates are intended to remain fixed  during the fiscal year in accordance with DOD policy. DOD’s stabilized  price policy serves to protect customers from unforeseen inflationary  increases and other cost uncertainties and better assures customers that  they will not have to reduce programs to pay for potentially higher-than- anticipated prices. Because working capital fund managers base rates  charged on assumptions formulated in advance of rates going into effect,  some variance is expected between projected and actual costs and  revenues.

The TWCF is dedicated to TRANSCOM’s mission to provide air, land,  and sea transportation for DOD in times of peace and war, with a primary  focus on wartime readiness. Specifically, TWCF is used to provide air  transportation and services for passengers or cargo in support of DOD  operations or along established routes. The TWCF is also used to finance  Air Force and joint training requirements. Examples of joint capabilities  supported by the TWCF are depicted in figure 2.

The TWCF uses rates for airlift services that do not cover the full cost of  airlift operations. The military services may choose between TRANSCOM  and commercial service providers along established routes. Thus, fund  managers set rates for some airlift services to remain competitive with  commercial airlift carriers, which historically, do not result in revenue  sufficient to cover the full cost of airlift operations. DOD must maintain  airlift capacity and must remain ready and available to support  mobilization for war and contingencies. Providing an incentive for  customers to use DOD airlift capacity helps TRANSCOM maintain military  airlift capabilities not available from commercial providers.

TWCF cash balances are managed as a component of the Air Force  Working Capital Fund. Although the TWCF is managed on a day-to-day  basis by TRANSCOM, it is part of the Air Force Working Capital Fund for  cash management purposes. The relationship of the TWCF to the Air  Force Working Capital Fund provides a cash management benefit.  According to Air Force officials, retaining the TWCF within the Air Force  Working Capital Fund for cash management purposes provides flexibility  while minimizing the need for additional funding. According to month-end  cash balance data, the TWCF has been able to operate using cash  available in the Air Force Working Capital Fund when no funds were  available in the TWCF. For example, the TWCF month-end cash balance  was negative fifteen times during fiscal years 2007-2017, but there was  sufficient cash in the Air Force Working Capital Fund to allow the TWCF  to continue to operate and execute its missions. For more information on  the cash balances of the Air Force Working Capital Fund and the TWCF  see appendix II.

Roles and Responsibilities for Managing the Transportation Working Capital Fund

Multiple DOD organizations have roles in managing various aspects of  the TWCF:

The Office of the Under Secretary of Defense (Comptroller)/Chief  Financial Officer is generally responsible for coordinating DOD budget  preparation, issuing guidance, issuing working capital fund annual  financial reports, and overseeing the implementation of working  capital funds across DOD. The Office of the Under Secretary of  Defense (Comptroller)/Chief Financial Officer is also responsible for  approving rates developed for the budget process and charged to the  military services.

The Air Force assumed responsibility for TWCF cash management in  fiscal year 1998 and the TWCF cash balance is included in the Air  Force Working Capital Fund cash balance. The Air Force is also  responsible for developing Operations and Maintenance budget  requests that include requests for funds to pay TRANSCOM for airlift  services financed through the TWCF and the ARA. The Assistant  Secretary of the Air Force (Financial Management and Comptroller) is  responsible for directing and managing all comptroller, programming,  and financial management functions, activities, and operations of the  Air Force.

TRANSCOM is responsible for the day-to-day financial management  of the TWCF and has financial reporting responsibility for the TWCF,  including setting rates for airlift services. TRANSCOM is also  responsible for providing defense components with transportation  services to meet national security needs; providing guidance for  forecasting; and providing guidance for the standardization of rates,  regulations, operational policies, and procedures.

Air Mobility Command is a major Air Force command and is  responsible to TRANSCOM for providing airlift services paid for by the  TWCF. To fulfill its responsibility for providing airlift services to  defense components, TRANSCOM and Air Mobility Command use a  combination of military and commercial aircraft.

Billions of Dollars Were Requested, Allotted, and Expended for the Airlift Readiness Account for Fiscal Years 2007-2017, and Annual Amounts Varied

The Air Force requested, allotted, and expended billions of dollars for  ARA for fiscal years 2007 through 2017. These amounts varied annually,  in some cases, by hundreds of millions of dollars. Our analysis of Air  Force and TRANSCOM budget and financial information showed that for  fiscal years 2007 through 2017, the Air Force requested $2.8 billion from  Congress for ARA requirements, as part of its annual Operations and  Maintenance appropriation. The Air Force allotted $2.8 billion (i.e.,  directed the use of the appropriated funds) and expended $2.4 billion of  the ARA appropriated funds). During this period, the total allotted  amount was about $400 million dollars more than the expended amount.  According to Air Force officials, this $400 million was used to pay for  other Air Force readiness priorities. ARA amounts requested, allotted,  and expended for fiscal years 2007 through 2017 are shown in figure 3.

In five fiscal years (2008-2009, 2013-2014, and 2017) the Air Force  allotted less than the amount ultimately expended for the ARA. In these  fiscal years, Air Force officials stated that they used available Operations  and Maintenance appropriations to support the ARA. For example, in  fiscal year 2013, the Air Force requested and allotted less than a million  dollars for the ARA. However, the Air Force expended $294 million for the  ARA in fiscal year 2013. According to Air Force officials, the Air Force  used Air Force Operation and Maintenance mobilization funding to  provide the ARA funds to the TWCF to cover this gap.

Furthermore, in five fiscal years (2010-2012 and 2015-2016) the Air Force  did not expend the total amounts allotted for the ARA, because the  allotments exceeded ARA funding needs. According to Air Force officials,  they expended amounts initially allotted for ARA requirements to support  other readiness priorities, such as training and sustainment requirements.  For additional information related to TWCF costs and revenues for airlift  services see appendix III.

Based on our analysis and interviews with Air Force and TRANSCOM  officials, we determined that the Air Force’s ARA budget request, the ARA  amount allotted, and the amount expended by the Air Force can vary for a  number of reasons. For example,

Workload variations occurred due to changes in the global  security environment, natural disasters, and force structure  changes: For example, in fiscal year 2010, airlift services workload  increased 8 percent over the previous year’s level and 39 percent  over budgeted levels as a result of force structure changes in Iraq and  Afghanistan. This occurred because during fiscal year 2010 the  number of U.S. armed forces personnel in Iraq declined by about  81,000, and the number of U.S. armed forces personnel in  Afghanistan increased by about 34,000. These changes required  additional airlift services, and resulted in more revenue than was  originally estimated for the TWCF. The TWCF also received additional  funding from the military services to offset increased fuel costs. As a  result, TRANSCOM did not issue a bill for the ARA for fiscal year  2010, and the Air Force used the $262 million allotted for ARA  requirements for other readiness priorities.

ARA budget requests and subsequent expenditures in the fiscal  year of availability may be affected by other revenue sources:  From fiscal years 2007 through 2017, the TWCF received $6.5 billion  from other revenue sources, such as amounts from cash recovery  charges, fuel supplement charges, and cash transfers from the Air  Force. For example, cash recovery charges were paid by the  military services, including the Air Force, using Overseas Contingency  Operations funding to cover cash shortages in the TWCF in the early  part of the Global War on Terrorism. TRANSCOM charged its  customers cash recovery charges in fiscal years 2007 through 2014,  with the exception of 2010.

ARA expenditures in the fiscal year of availability may be more  or less than budgeted: For example, in fiscal year 2015,  TRANSCOM did not receive revenue from other sources, resulting in  the Air Force expending $404 million dollars more from its Operations  and Maintenance funds than requested to cover the ARA bill for that  fiscal year. On the other hand, in the fiscal year 2016 Air Force  Operations and Maintenance budget request, the Air Force requested  $657 million for the ARA, and subsequently allotted $406 million to the  ARA—about $251 million less than requested. This occurred because  the cost of fuel declined in fiscal year 2016, and TRANSCOM did not  bill the Air Force for the full amount allotted for ARA by the Air Force.  As a result, the Air Force contributed $122 million of the $406 million  to the TWCF and used the remaining available amount for other  readiness priorities. DOD and its components have considerable  flexibility in using Operation and Maintenance funds and can  redesignate funds appropriated among activity and subactivity groups  in various ways.

Since Fiscal Year 2010, Air Force Budget Requests Have Omitted Complete Airlift Readiness Account Information and Have Not Been Informed by Estimates

Air Force Budget Requests Include Some Information on the Airlift Readiness Account but Omit Details Provided In Budget Requests Prior to Fiscal Year 2010

Air Force budget requests include some information on the ARA but omit  details provided in budget requests prior to fiscal year 2010. Air Force  budget officials stated the ARA budget information that was included for  fiscal years 2007 through 2009 was changed for the fiscal year 2010  budget request as part of a DOD initiative to reduce the overall number of  budget line items. For fiscal years 2007 through 2009 Air Force  Operations and Maintenance budget requests, the amounts requested by  the Air Force for the ARA were explicitly stated in the budget justification  documents as part of a separate subactivity group line item. For fiscal  years 2010 through 2017, the ARA amount was bundled with funding  requests for other training requirements in the Air Force Operations and  Maintenance budget justification documents, thus omitting specific details  with respect to the ARA.  Specifically, Air Force budget justification  materials included the amount the ARA changed from one fiscal year to  the next, but did not include the total ARA amount.

In the annual President’s budget request submission, DOD requests  specific amounts for Operations and Maintenance activities and includes  information about (1) amounts for the next fiscal year for which estimates  are submitted, (2) revisions to the amounts for the fiscal year in progress,  and (3) reports on the actual amounts allotted to a particular activity or  subactivity for the last completed fiscal year. The Standards for Internal  Control in the Federal Government state that management should  communicate the necessary quality information (internally and  externally).

According to Air Force budget officials there is no requirement from the  Office of the Under Secretary of Defense (Comptroller)/Chief Financial  Officer to separately identify the ARA amount and related details in the Air  Force Operations and Maintenance annual budget requests.  Nevertheless, officials from the Air Force and the Office of the Under  Secretary of Defense (Comptroller)/Chief Financial Officer agreed that it  would be helpful to include additional information in the budget, because  of DOD and congressional interest. Without establishing specific  requirements to present detailed ARA information in the annual Air Force  Operations and Maintenance budget request, DOD and congressional  decision-makers do not have sufficient information to make informed  decisions about the level of funding necessary to cover airlift costs not  recovered by the rates charged by TRANSCOM.

U.S. Transportation Command Has Not Provided Airlift Readiness Account Estimates in Time to Inform Air Force Budget Requests

TRANSCOM has not provided ARA estimates in time to inform Air Force  budget requests. Air Force officials stated that they need to have  TRANSCOM’s estimates by mid-June to be able to conduct analysis to  strengthen confidence in the ARA budget request and obtain senior  leadership approval. The Air Force submits its Operations and  Maintenance annual budget request to DOD in early July. However,  TRANSCOM was not providing its ARA estimate until August. As a result,  Air Force officials stated they have been developing their own ARA  estimate based on historical average trends because they have not  received information from TRANSCOM on time. TRANSCOM and Air  Force officials agree that TRANSCOM—as the provider of transportation  services—is in the best position to understand transportation workload  demands.

The Standards for Internal Control in the Federal Government state that  management should use quality information that is appropriate, current,  complete, accurate, accessible, and provided on a timely basis to achieve  the entity’s objectives. Furthermore, management should use quality  information to make informed decisions and evaluate the entity’s  performance in achieving key objectives and addressing risks and should  design control activities, such as policies, procedures, techniques, and  mechanisms as needed to enforce management’s directives.

In October 2017, Air Force and TRANSCOM officials told us they were  working on a memorandum of understanding to improve the timing and  communication of budgetary information from TRANSCOM to support the  Air Force ARA budget request. Officials stated that the memorandum of  understanding is expected to be completed by the end of fiscal year 2018.  However, in May 2018, the draft memorandum that the Air Force provided  for our review consisted of a 2-page template with a list of potential  topics, and no substantive details regarding formalizing processes.  Without developing sufficient detail on the formal processes and  subsequently finalizing the memorandum of understanding, the Air Force  and TRANSCOM will not be able to reasonably assure that the timing and  communication of budgetary information from TRANSCOM are sufficient  to support the Air Force Operations and Maintenance ARA annual budget  request.

TRANSCOM Has a Rate-Setting Process for Airlift Services, but Producing Accurate Workload Forecasts Is Challenging

TRANSCOM has a rate-setting process for airlift services, but producing  accurate workload forecasts is challenging. Our analysis of TRANSCOM  data showed that the airlift forecasting process produced increasingly  inaccurate projections of actual workload. Producing accurate forecasts is  challenging because TRANSCOM has not fully implemented: (1) an  effective process to gather workload projections from customers, (2)  forecasting goals and metrics and the review of its performance, and (3)  an action plan to improve workload forecasts.

U.S. Transportation Command Has a Rate- Setting Process for Airlift Services

TRANSCOM has a rate-setting process for airlift services that is generally  established to be competitive with commercial airlift services, according to  DOD guidance. Specifically, TRANSCOM operates five categories of  airlift services, and according to documents and TRANSCOM officials the  rate-setting process for each category is as follows:

Channel Cargo rates apply to military air cargo along established  routes. The rates for this category generally cover about 65 percent of  the cost to provide airlift cargo services, and do not vary based on the  type of aircraft used. Rates are benchmarked against commercial  prices based on the weight of cargo using the following step-by-step  process. Initially, International Heavyweight Air Tender price data from  the prior year are checked for commercial rates on various routes. If  no data are available for some routes, data from the closest country  are used to develop average country-to-country rates or a weighted  average when there is more than one country-to-country combination.  Once rates are developed they are adjusted based on budget  exhibits. The TRANSCOM Operations and Plans directorate is  responsible for Channel Cargo forecasts to inform rate-setting for this  category of service.

Channel Passenger rates apply when military and civilian passengers  are flying on established routes. The rates are benchmarked against  commercial prices, recover about 85 percent of costs, and do not vary  based on the type of aircraft used. Channel passenger rate-setting  guidance also uses a step-by-step process. General Services  Administration city pairs are checked for comparable prices. If no  General Services Administration rate is found, the Defense Travel  System is checked. If the Defense Travel System does not have a  rate, online travel websites are checked. If the online travel sites do  not have a rate, then a prior standard rate per mile for that route is  adjusted based on budget exhibits. The TRANSCOM Strategic Plans,  Policy, and Logistics directorate is responsible for channel passenger  forecasts to inform rate-setting.

Special Assignment Airlift Missions/Contingency rates apply for the  use of full-plane charters performing and providing exclusive services  for specific users. Rates are generally determined by the type of  aircraft and those rates recover about 91 percent of costs for military  aircraft and 100 percent of costs for commercial aircraft. Flight hour  rates for military aircraft, flight length (miles), and capacity used for  commercial aircraft are considered in the rate determinations. The  TRANSCOM Operations and Plans Directorate is responsible for  Special Assignment Airlift Missions/Contingency workload forecasts to  inform rate-setting for this category of service.

Joint Exercise Transportation Program rates apply to airlift services in  support of realistic operational joint training. Rates are generally set in  the same manner as the rates for the Special Assignment Airlift  Missions/Contingency category, except that the TRANSCOM  Operations and Plans Directorate is responsible for workload  forecasting for the Joint Exercise Transportation Program.

Training rates apply to those activities used to conduct programmed  flying training, which generally includes a required number of sorties,  flying hours, and aircrew training to support readiness. Rates are set  to recover 100 percent of the recorded costs because the Air Force is  the sole customer for these missions, according to TRANSCOM and  Air Force officials. Training rates are generally based on the type of  aircraft, and the cost per flight hour. According to TRANSCOM  officials, the Air Mobility Command Air, Space and Information  Operations Directorate is responsible for the flying hour model that  determines requirements for this category of airlift services.

Producing Accurate Workload Forecasts Is Challenging, and TRANSCOM Improvement Efforts Have Not Been Sustained

TRANSCOM produces a forecast of its airlift workload to inform the  development of the ARA budget request. According to TRANSCOM’s  guidance, workload forecasts are to be developed using future demand  derived from a combination of statistical methods and necessary  adjustments for expected operational conditions. The basic principles  used for workload forecasting are generally the same for all five  categories of airlift services. According to TRANSCOM officials,  forecasting methods are applied with some variation. This practice is  allowed under the forecasting instruction, depending on the category, and  which TRANSCOM or Air Mobility Command entity is responsible for  developing the forecast. For example, forecasts for the Joint Exercise  Transportation Program and Training are affected more by requirements to support readiness and funding constraints. On the other hand, the  basic forecasting process for Channel Cargo, Channel Passenger, and  Special Assignment Airlift Missions/Contingency are affected by the  transportation needs of the military services and combatant commands  and generally based on historical workload.

Based on our analysis, workload forecasts have been increasingly  inaccurate for fiscal years 2007 through 2017. Specifically, we found that  forecast inaccuracy (i.e., the variance between the forecast and the actual  workload amounts aggregated across all five workload categories)  averaged about 25 percent and was trending upward in absolute value for  fiscal years 2007 through 2017, as shown in figure 4.

In addition to the aggregate workload forecast being increasingly  inaccurate, the accuracy of the workload forecasts across each of the five  categories varies from year to year. For example,  In fiscal year 2008, channel cargo actual workload was about 17  percent lower than the forecast, and Special Assignment Airlift  Missions/Contingency actual workload was about 12 percent higher  than the forecast; and  In fiscal year 2016 Special Assignment Airlift Missions/Contingency  actual workload was about 116 percent higher than the forecast and  the Joint Exercise Transportation Program actual workload was about  45 percent lower than forecasts.

For fiscal years 2007 through 2017, the workload categories with the  largest absolute forecast inaccuracy include Special Assignment Airlift  Missions/Contingency, Channel Cargo, and the Joint Exercise  Transportation Program. Two of these categories (Special Assignment  Airlift Missions/Contingency and Channel Cargo) also have the largest  share of airlift services. However, all five workload categories had  forecast inaccuracy of more than 15 percent in at least three of the eleven  years we reviewed. The variance of forecasted workload from actual  workload by airlift service category is presented in figure 5 below.

Based on our analysis and discussions with TRANSCOM officials,  TRANSCOM has not taken sustained actions to improve forecasting  accuracy. Specifically, we found that TRANSCOM has not fully  implemented (1) an effective process to collect projected airlift workload  information from its customers (i.e., military services) to inform its  forecasts, (2) metrics and goals for measuring and reviewing forecast  accuracy, and (3) an action plan to improve workload forecasting.  Specifically,

TRANSCOM has not implemented an effective process for  collecting projected airlift workload information: TRANSCOM  officials told us they use historic workload data to establish a baseline,  and perform statistical analysis to estimate averages and trends  according to their instructions. Next, forecasters use information  from the military services and combatant commands that may affect  each category of workload, if available, and adjust workload estimates  as needed.

However, according to TRANSCOM officials, personnel conducting  forecasts have limited visibility over factors that may influence  forecasts, such as demand for transportation services, due to the lack  of information obtained from their customers (i.e., the military services  and Combatant Commands). Attempts to collect information from the  military services and combatant commands have been made on an ad  hoc basis. For example, in April 2016 TRANSCOM’s Commander  solicited information from the military services’ senior leadership  regarding their future transportation requirements, including airlift  needs. The message emphasized the importance of forecasting to  inform budget requests and management decisions to improve  operational efficiency. However, according to TRANSCOM officials,  the Air Force—who is TRANSCOM’s largest customer for airlift  services—was the only military service that provided the requested  information in response to the TRANSCOM’s Commander’s one-time  request. According to TRANSCOM officials, the other military services  have not provided the requested information for workload projections  because the services do not understand how they would benefit from  providing the information and TRANSCOM’s terminology and  processes are not familiar to the services. As a result, TRANSCOM’s  ad hoc approach has not obtained quality information from its  customers to use in forecasting workload.

Standards for Internal Control in the Federal Government state that  management should use quality information that is appropriate,  current, complete, accurate, accessible, and provided on a timely  basis to achieve the entity’s objectives. Furthermore, we found other  defense organizations have provided a mechanism for customers to  routinely communicate projected workload information. For example,  the Defense Logistics Agency and their customers work together to  evaluate historical demand data for spare parts and tailor forecast  plans for those spare parts based on projected future usage. To this  end, communications with customers are expected to be consistent  and to use terminology shared in common with customers. Options  are presented in a manner that is readily understood by customers in  a format determined by customers’ needs to encourage the most  efficient and effective solutions available.

TRANSCOM no longer uses forecast accuracy metrics and has  not established forecast accuracy goals: In 2012, TRANSCOM  developed a forecasting process, and according to officials started  providing forecast performance metric briefings to TRANSCOM senior  leadership on a quarterly basis in fiscal year 2014. TRANSCOM’s  overall forecast accuracy improved slightly in 2015. However,  according to TRANSCOM officials, these forecast briefings were  canceled after the first quarter of fiscal year 2016 because they were  viewed as minimally useful for budgeting, and were not used to  position airlift capacity to meet operational needs. In addition,  TRANSCOM officials stated that they no longer measure forecast  performance. We found that overall forecast inaccuracy was higher for  fiscal years 2016 and 2017 than any other year we reviewed, as  indicated above in figure 4.

However, TRANSCOM’s January 2015 forecasting instruction  requires forecast accuracy metrics to be developed to support  management decisions and forecast variance from actual workload to  be reviewed. Furthermore, the Standards for Internal Control in the  Federal Government state that management should define objectives  in specific and measurable terms to enable the design of internal  control for related risks, establish activities to monitor performance  measures and indicators, and assess performance against plans,  goals, and objectives set by the entity.

TRANSCOM does not have a corrective action plan for improving  workload forecasts: TRANSCOM officials acknowledge that workload  forecasting needs improvement, and told us that TRANSCOM does not  have an action plan to improve its forecasting processes to inform  budgetary and operational decisions. In October 2013, TRANSCOM  considered, but did not adopt, a process designed to help ensure senior  management has visibility over issues, including forecasting, known as  Sales and Operations Planning (S&OP). We reported that the Army  implemented this process in 2013 after Army officials concluded that they  could leverage commercial best practices to improve logistics  performance (see sidebar). We discussed the S&OP process with  TRANSCOM officials, and they told us that the possibility of adapting the  process to military logistics was not readily accepted at TRANSCOM  because of organizational resistance to change. Initial organizational  resistance to change was also experienced by the Army, as discussed in  our prior report. However, according to the Army, the benefits of  implementing S&OP resulted in a 50 percent reduction in forecast error,  and a decision was made to deploy the S&OP process for use across all  Army depots and arsenals by the end of fiscal year 2018. Adopting a  corrective action plan, or approach such as S&OP can help TRANSCOM  focus and improve planning efforts resulting in improved and more  accurate workload forecasting.

Furthermore, according to TRANSCOM’s January 2015 forecasting  instruction, opportunities to improve forecasts should be assessed.  Additionally, Standards for Internal Control in the Federal Government  state that management should complete and document corrective actions  to remediate internal control deficiencies on a timely basis to achieve  established objectives. Our prior work has also shown that organizations  benefit from corrective action plans for improvement.

TRANSCOM officials told us that producing accurate workload forecasts  is challenging, and we agree that there are some inherent difficulties in  accurately forecasting airlift workload on an annual basis. However, our  prior work on aviation forecasting has noted that forecasting is inherently  uncertain, but managing the risk related to that uncertainty is essential to  making informed decisions. Improved forecasting by addressing the  weaknesses identified could allow for more effective financial planning  and enable more efficient airlift operations. For example, TRANSCOM  estimated needing an ARA amount of $772 million for fiscal year 2016.  However, according to our analysis of TRANSCOM financial records, the  TWCF did not require support from ARA funds because actual revenue  from airlift services exceeded its costs by $148 million in fiscal year 2016.

Inaccurate forecasts can lead to unreliable budget requests and hinder  effective and efficient operational planning necessary to provide  customers with the service they need. For example, according to a 2017  Air Force Audit Agency report, flying channel passenger flights at 85  percent of capacity may result in estimated savings of about $30 million  over a 6-year period. Our past work also shows that underutilization of  cargo airlift capacity is a longstanding issue. Improving forecast  accuracy would help TRANSCOM manage airlift services more efficiently,  make better use of budgetary resources to maximize airlift capacity more  effectively, and result in an ARA budget estimate that is more accurate. In  response to our findings and discussions, TRANSCOM officials stated  they plan to begin reviewing TRANSCOM’s workload forecasting process  and determine a path ahead in June 2018. However, the outcome and  timeframes for this review are uncertain. Furthermore, TRANSCOM  leadership still must approve and fully implement changes to forecasting  processes, metrics, and goals.

Unless TRANSCOM fully implements an effective process to obtain  projected workload requirements from its customers on a routine basis,  uses forecast accuracy metrics and establishes goals, and develops an  action plan, airlift workload forecasting will not improve. We acknowledge  that eliminating volatility entirely in the ARA budget request is unlikely  given that there will be unexpected and unpredictable workload  adjustments due to changes in the global security environment or natural  disasters. We also understand improving workload forecasts through  the use of goals, metrics, and an action plan for improvement will not  eliminate the inherent volatility associated with the ARA budget request  amount. However, these improvements would allow TRANSCOM to  better manage the inherent risks associated with the accuracy of  forecasts and improve ARA estimates used to inform future Air Force  Operations and Maintenance budget requests.

Each year DOD spends billions of dollars on airlift services flying  personnel and cargo worldwide. The clarity of budget estimates and the  accuracy of forecasts for airlift services are essential for Congress and  DOD to make informed decisions. Accordingly, Congress would benefit  from detailed ARA information in its budget requests, and this information  would be improved by TRANSCOM providing timely information on the  annual ARA estimate to the Air Force. Additionally, TRANSCOM  continues to face challenges in forecasting its workload, which is a key  factor in estimating the ARA. Until TRANSCOM establishes a process to  collect projected workload information from its customers, uses forecast  accuracy metrics and goals to monitor its performance, and implements a  corrective action plan, forecast accuracy and ARA estimates are not likely  to improve.

We are making a total of five recommendations to DOD.

The Secretary of Defense should ensure that the Undersecretary of  Defense (Comptroller)/Chief Financial Officer establishes requirements to  present details related to the ARA in the annual Air Force Operations and  Maintenance budget request including (1) amounts for the next fiscal year  for which estimates are submitted, (2) revisions to the amounts for the  fiscal year in progress, and (3) the actual amounts allotted for the last  completed fiscal year. (Recommendation 1)

The Secretary of Defense should ensure that the Secretary of the Air  Force and the Commander, U.S. Transportation Command, in  collaboration, develop sufficient detail on the formal processes and  finalize their memorandum of understanding to improve the timing and  communication of budgetary information to support the Air Force  Operations and Maintenance Airlift Readiness Account annual budget  request. (Recommendation 2)

The Secretary of Defense should ensure that the Commander, U.S.  Transportation Command, fully implements a process to obtain projected  airlift workload from the military services and Combatant Commanders on  a routine basis to improve the accuracy of its workload forecasts.  (Recommendation 3)

The Secretary of Defense should ensure that the Commander, U.S.  Transportation Command, uses forecast performance metrics and  establishes forecast accuracy goals for the airlift workload.  (Recommendation 4)

The Secretary of Defense should ensure that the Commander, U.S.  Transportation Command, develops a corrective action plan to improve  the accuracy of its workload forecasting. (Recommendation 5)

We provided a draft of this report to DOD for review and comment. In  written comments, which are reprinted in appendix IV, DOD concurred  with our recommendations and stated that it plans to take specific actions  in response to our recommendations. DOD also provided technical  comments, which we incorporated as appropriate.

We are sending copies of this report to appropriate congressional  committees. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  Diana Maurer at (202) 512-9627 or maurerd@gao.gov, or Asif Khan at  (202) 512-9869, or khana@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff that made key contributions to this report are  listed in appendix V.

To determine the extent to which ARA funds were requested, allotted,  and expended by the Air Force from fiscal years 2007 through 2017, we  analyzed Air Force budget request documents and underlying support  documentation. We also analyzed information from the Air Force’s  Automated Budget Interactive Data Environment Systems to determine  the appropriated amounts allotted for ARA activities. Furthermore, we  analyzed summary-level documents detailing expenditures from the Air  Force and TRANSCOM for fiscal years 2007 through 2017 to establish  trends. Moreover, we reviewed TRANSCOM’s procedures and  supporting documentation for billing the Air Force for payment of the  ARA. Lastly, we interviewed DOD, Air Force and TRANSCOM officials to  gain an understanding of general reasons variances from year to year  occurred or between the requested and expended amounts.

To determine the extent to which the Air Force provided ARA information  in its budget request to Congress and informed its request with  information from TRANSCOM, we analyzed Air Force Operations and  Maintenance budget justification documents to determine the type of ARA  information (i.e., total budget request amount, changes from year to year,  and other information) provided in the fiscal years 2007 through 2017  President budget submissions. To understand the differences, if any,  between the ARA information provided from year to year, we interviewed  Air Force budget officials to obtain an explanation for changes in the  reported information. In addition, we analyzed Air Force Operations and  Maintenance budget justification documents, and Transportation Working  Capital Fund budget documents to determine if the ARA was based on  available information. We also discussed with Air Force and TRANSCOM  officials future plans to change their procedures and the information  considered in the development of the ARA estimate. Further, we  compared the Air Force and TRANSCOM processes and procedures  against Standards for Internal Controls in the Federal Government,  specifically standards regarding internal and external reporting and  mechanisms to enforce management directives.

To determine the extent to which TRANSCOM has implemented a  process to set rates for airlift services and use workload forecasts to  estimate the annual ARA funding request, we analyzed the processes  TRANSCOM used to set rates it charges customers in various airlift  workload categories for fiscal years 2007 through 2017. We also  reviewed forecasting procedures and analyzed supporting documents  provided by TRANSCOM; interviewed TRANSCOM officials to gain an  understanding of how they implement these rate setting and forecasting  procedures; and analyzed forecast and actual workload data provided by  TRANSCOM for the same timeframe. We compared TRANSCOM’s  processes against rate-setting and forecasting guidance and reviewed  whether TRANSCOM used quality information to establish workload  projections, established any performance measures and goals for  forecasting its workload, and developed any efforts to improve its  forecasting of workload. In addition, we interviewed TRANSCOM and Air  Mobility Command officials and reviewed supporting documentation to  gain an understanding of challenges that exist to producing accurate  workload forecasts, and the relationship with the rate-setting and  budgeting process.

We obtained revenue, cost, workload, and ARA data in this report from  budget documents, accounting reports, and Air Force and TRANSCOM  records for fiscal years 2007 through 2017. We assessed the reliability of  the data by (1) interviewing Air Force and TRANSCOM officials to gain an  understanding of the processes used to produce the cash, revenue, cost,  workload and ARA data; (2) reviewing prior work to determine if there  were reported concerns with TRANSCOM’s data; (3) comparing cash  balances, revenue, costs and workload data provided by TRANSCOM to  the same data presented in the Air Force Working Capital Fund budgets  for fiscal years 2007 through 2017; and (4) comparing ARA data to Air  Force and TRANSCOM supporting documentation, or to Air Force  Operations and Maintenance budget execution reports to support ARA  reported amounts for fiscal years 2007 through 2017. On the basis of  these procedures, we have concluded that these data were sufficiently  reliable for the purposes of this report.

To address all of our objectives, we conducted a site visit to U.S.  Transportation Command Headquarters and Air Mobility Command at  Scott Air Force Base, Illinois, and interviewed officials with the Office of  the Undersecretary of Defense (Comptroller)/Chief Financial Officer, the  Assistant Secretary of the Air Force (Financial Management and  Comptroller), the U.S. Transportation Command, and the Air Mobility  Command.

Appendix II: Air Force Working Capital Fund and Transportation Working Capital Fund Monthly Cash Balances for Fiscal Years 2007-2017

The Air Force Working Capital Fund maintained a positive monthly cash  balance throughout fiscal years 2007 through 2017. The Transportation  Working Capital Fund (TWCF) is a part of the Air Force Working Capital  Fund for cash management purposes. DOD working capital funds are  authorized to charge amounts necessary to recover the full costs of  goods and services provided. However, the TWCF is authorized to  establish airlift customer rates to be competitive with commercial air  carriers. Due to mobilization requirements, the resulting revenue does not  always cover the full costs of airlift operations provided through the  TWCF. To the extent customer revenue is insufficient to support the costs  of maintaining airlift capability the Air Force shall provide appropriated  funds. The Air Force Working Capital Fund and TWCF monthly cash  balances are depicted in figure 6 below.

Appendix III: Transportation Working Capital Fund Costs and Revenues for Airlift Services

Total costs for airlift services for fiscal years 2007 through 2017 were less  than revenue collected for airlift services. Revenue came from rates  charged to customers for services performed (workload related revenue),  the Airlift Readiness Account (ARA), and other revenue sources. For  seven of the eleven years we reviewed, revenues exceeded costs, and  for four of the eleven years, costs exceeded revenue. For the eleven year  period we reviewed, workload related revenue ($73 billion) was not  sufficient to pay for the full costs of airlift services. The remaining revenue  included $2 billion from the ARA and $7 billion from other revenue  sources.

Appendix IV: Comments from the Department of Defense

Appendix V: GAO Contacts and Staff Acknowledgments

Diana Maurer, (202) 512-9627 or maurerd@gao.gov, or Asif A. Khan, at  (202) 512-9869, or khana@gao.gov.

In addition to the contacts named above, John Bumgarner (Assistant  Director), Doris Yanger (Assistant Director), John E. “Jet” Trubey (Analyst  In Charge), Pedro Almoguera, John Craig, Jason Kirwan, Amie Lesser,  Felicia Lopez, Keith McDaniel, Clarice Ransom, and Mike Silver made  key contributions to this report.