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to provide air transportation. It is not a business susceptible to a fly-by-night operation.
Senator KENNEDY. So I gather you have considered the possibility that instability and disruption of service might occur, and you are satisfied that, on that point at least, there is no real difficulty with more competition.
Mr. Barnum. Yes. I am certainly satisfied in that respect. I am also satisfied that, given the economics of the air carrier industry, the likelihood of a fly-by-night operation and being able to skim the cream off a major market in the face of already entrenched competition from name carriers is not very realistic.
Obviously, it is something that needs to be watched very carefully. But I would not say that the activities, for example, of PSA and Southwest-going into the intrastate market at what was initially about a 40 percent cut below scheduled fares—demonstrate an undesirable result. I think it is a very good result. If that is the consequence of a fly-by-night entry, I would say that would be good.
Or, for example, where carriers operate in very high density markets, this kind of service is likely to be air shuttle-type service at which they have hourly service and they may or may not have a high load factor, depending on whether or not they have to add an extra plane is day. It is basically a no-frill service, and I would welcome that. But I would not be concerned about there being a fly-by-night entry into that market.
If another one of the major trunk lines saw a market that it thought it could impact and enter under our relaxed entry provisions and provide a shuttle from New York to Detroit, for instance, I think that would be very helpful.
Our air carriers are very concerned as to how they can keep their aircraft operating. Their goal is to get up to 11 or 12 hours a day. They will schedule aircraft not because of where people want to go to, but where they can move airplanes, where they can continue using them into the night. For example, if they go west at a particular time of day, do they get there in time to be able to fly on the west coast at a particular time? How do they position their planes? Those are very important considerations in the total operation of an airline.
To the extent you give carriers freedom of entry, or more entry than they have now, you will enhance their ability to use their aircraft and to react quickly as the market changes or, as indeed, as their competitors decide to move in or out of a market.
But I would not regard the possibility of a fly-by-night operation as derogating from the services of a scheduled carrier.
CAB'S THIRD MAJOR POWER: ANTITRUST IMMUNITY-CAPACITY
REDUCTION AGREEMENTS AND OTHERS
I would like to move on to the third area where regulatory practices can be improved.
One of the most objectionable features of present CAB regulation is the approval of capacity reduction agreements in our domestic markets. At present, under section 412 of the Federal Aviation Act, if the Board finds capacity, pooling and other anticompetitive agreements not adverse to the public interest, it may approve them; in so doing, it immunizes them from action under the antitrust statutes.
Capacity agreements were originally justified because of immediate, short term, severe financial distress. The Board has since permitted use of capacity agreements to resolve problems of unused capacity, fuel allocation, and low profits in certain markets. By apportioning capacity, such agreements effectively determine market share. As a result of Board actions, capacity limitation agreements have proliferated to the point where about 29 percent of the revenue passenger miles of the three largest carriers are now covered by capacity agreements. One economic effect is that, given the level of service provided, fares in covered markets are excessive. One can scarcely imagine agreements more anticompetitive in their effect. Such problems are far better resolved through market forces operating in a competitive environment.
DOT opposed the capacity agreements before the Board and has joined with the Antitrust Division of the Justice Department to oppose approval of the agreements before the District of Columbia Court of Appeals.
In contrast, some agreements arguably subject to challenge under antitrust laws do serve valid transportation objectives. These include interline agreements, airline scheduling committee agreements at congested airports, equipment leases, fuel supply agreements, reservation and ticketing arrangements and technical agreements with foreign air carriers.
We distinguish between the two types of agreements, the one anticompetitive in a way which contributes to economic inefficiency, the other which meets necessary transportation objectives. The Administration believes that anticompetitive agreements such as those for capacity limitation should be restricted or eliminated but that agreements which serve efficient transportation needs should be continued.
Senator KENNEDY. If the agreements are not in restraint of trade then they don't violate the antitrust law in any event. These areas that you have outlined seem to be reasonable agreements, so why do you need the exemption, in any event?
Mr. BARNUM. There are some agreements between carriers that we think are appropriate, that either arguably or clearly might result in litigation. They might be regarded as allocation of market or marketshare agreements. Some of the joint fare agreements they have could be regarded as price fixing or market-share agreements.
Senator KENNEDY. As I understand the lawyers, it is only if an intercarrier is unreasonable, that the exemption is necessary. If it is reasonable it does not violate the antitrust laws, even though it is an agreement ?
Mr. BARNUM. What constitutes reasonableness under the Sherman Act is a very tough test to pass. Even putting aide merger agreements, just agreements with respect to ticketing costs or even use of airport at a particular time could be regarded as an anticompetitive or an agreement in violation of the Sherman Act. What constitutes reasonableness in the Sherman Act is not what a non-antitrust lawyer
Senator KENNEDY. Would you be reassured by what the Department of Justice has said? Do you think they have a fair opinion in terms of the governmental policy, and that their input would be guided by the legal arm of the Government?
Mr. BARNUM. I would be very pleased to have their input. I do not think, however, you would find any disagreement between us as to the meaning of reasonableness insofar as agreements between competitors is concerned. So far as existing law requires, I think you will find there is agreement.
However, we distinguish the two types of agreements, and I will say we should continue antitrust immunity for certain types of agreements. In our judgement, however, the airline industry is strong enough to survive and prosper without blanket antitrust immunity.
Section 408 of the act authorizes the Board to approve mergers. Mergers may be permitted unless the Board finds that they will be inconsistent with the public interest, would create a monopoly and thereby restrain competition, or would jeopardize another nonparty carrier. In our view, the standard used by the Board in determining whether mergers or consolidations are approved should be changed to require that competitive principles be weighed against transportation needs.
In DOT's filings to date, we have encouraged the CAB to find less anticompetitive solutions to many of the problems I have discussed. It is now clear that more decisive reform is necessary. In times of inflation, recession, and energy difficulties, the Nation can ill afford the extravagances created by the present air regulatory system. The administration proposal will get to the heart of the difficulties in each of the areas discussed by changing the regulatory structure which helped produce them. The air regulatory reform bill which we will present will address each of these issues in detail and will implement the basic policy objectives which I have outlined in my testimony.
We look forward to working with the subcommittee to explore each of these areas in more detail. We share the desire to modernize our regulatory structure and let the fresh air of competition make our transportation industry operate more efficiently at lower cost to the consumers we serve.
Thank you very much, Mr. Chairman, and if I can answer any additional questions, of course, I would be more than pleased to try to
enator KENNEDY. Well, we want to thank you for your presentation, and I think it is really an indication of the desire of the Department of Transportation to carry forward what President Ford outlined in his state of the Union address in identifying the regulatory agencies as a matter of concern, and trying to make them more effective, and obviously, as far as your Department is concerned, you are willing to move ahead in these directions even prior to the time of the development of a commission to deal with it. I think that that is really a credit to the Denartment.
Mr. BARNUM. Thank you.
NEED FOR LEGISLATION
Senator KENNEDY. Let me ask you—are you satisfied these steps can be taken without new legislation ?
Mr. BARNUM. I think that new legislation would accelerate the steps that we have outlined. Most of the things that we have discussed could be done by the Board—to approach entry and exit, for instance—differently than it is done. Certainly, in our judgment, the Board has authority to provide greater price flexibility than it has in the past. I think in general they could do much of what we recommend under existing law.
Senator KENNEDY. Is there anything they could not do under their existing statute ?
Mr. BARNUM. No; I think they could adopt as Board practice, if you will, the time limits that we have suggested with respect to entry and exit and rate changes. They have not. As I stated, some of the proceedings have been unnecessarily protracted or put on the shelf, which has frustrated much of the innovation that we think is available to the industry.
I would urge this subcommittee—if you find the Congress is not prepared to make substantive amendments to the act—to point out ways in which you believe that the existing law and the practices appropriate under the existing law have, in fact, not been followed.
Senator KENNEDY. Why do you not think that the CAB has seen the problem the way that you have seen it here and moved on its own into these particular areas? You have no monopoly or expertise or understanding of these particular issues. What is your view about why they have not moved into these particular areas before?
Mr. BARNUM. Well, as I mentioned in my statement, the CAB evolved from an agency that was established to encourage a new industry as it was growing, an industry which required a certain amount of encouragement and protection, and which required a certain amount of regulation so that there would not result, in its early days, the type of cutthroat competition which you have described or the type of flyby-night entry into the marketplace. But I think now that the industry is stabilized. Nonetheless, many of the things we think the CAB should do differently it is continuing to do the same way it did when the industry was developing. The way they address a problem today is the way they addressed it 10 years ago. I think we have gone past the point where we should continue business as usual with respect to the air carrier industry.
APPOINTMENT OF CAB MEMBERS
Senator KENNEDY. Do you think part of the problem has been the appointment process, the selection of people that have been selected and have had a strong orientation toward the industry, perhaps?
What role, if any, does the DOT have in making recommendations for the CAB?
I am not trying to personalize this, but I am interested in what your impression would be, not limited to any particular administration, but just as a practice.
Mr. BARNUM. Well, I share your concern in this respect. I think that I would judge the CAB by its rules and not by its personalities.
I think that the Board could be a more effective instrument in the regulation of air transportation, and it may very well be that those who constitute the Board are an essential ingredient in making it more effective. I think it is, in part, the tradition into which each new member of the Board steps as he joins the Board and finds out the way they have done things in the past and the rules of the past. And I think
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the CAB is guided in part by stare decisis, its own decisions in the past. A new member has not been given a mandate by Congress to change what the Board has been doing in the past.
For someone to join the CAB, and to go in there and say, "No; that is all wrong, the statute means otherwise—I think he would be trying to upset a great deal that the courts have written about and the Board has written about, and certainly, as a newcomer he would feel he had better find out how the Board works.
I think also the Board has been concerned about continued prosperity in the air industry, and properly so. To the extent that it has put such great emphasis on that, however, I think that has been a mistake. I think making a goal of 12 percent return on investment as a principal guiding factor in Board decisions is a mistake. I would be much more interested in seeing the Board trying to focus more on increasing load factors in its pricing decisions and as a result both saving energy and making the carriers more profitable.
With respect to our role in the Department as to who goes on the CAB, we are consulted, of course, by the White House in connection with CAB appointments and asked for recommendations and asked to comment on people that have been recommended by others.
Senator KENNEDY. Are you listened to over there?
As the result of our November hearings, the staff made some suggestions with regard to procedures in establishing a minimum rate policy, and I understand you had some people looking at these recommendation and determining how they might be implemented. I am just wondering if you are prepared to say anything about that today?
Mr. BARNUM. Not at this time, sir. Senator KENNEDY. Will you let us know at the earliest possible time what are your reactions to those recommendations?
Mr. BARNUM. I would like to advise you promptly or as promptly as I can just what our timing is with respect to commenting on those recommendations.
[The comments referred to are contained in a letter from DOT to Senator Kennedy which is printed at the end of Mr. Kutkze's testimony on February 18, 1975. See below, pp. 691-92.]
Senator KENNEDY. I suppose on the matters that you have mentioned here this morning, which are extremely significant, that you will be developing those proposals and recommendations in greater detail?
Mr. BARNUM. Yes.
Senator KENNEDY. Will you keep us informed how those are being developed ?
Mr. BARNUM. We are in the process of discussing with the other agencies of the executive branch the various details of the three main areas that I have outlined to you. I would hope that we could continue to have the dialog between our several agencies and your staff and Mr. Ginther and the staff of the Commerce Committee. We want to achieve something that is meaningful and realistic in terms of positive enactment and that will address the basic issues that we see.
Senator KENNEDY. Well, we have enjoyed that cooperation in the past, and we have no reason to feel that it would not continue in the future. For that, we are very appreciative. I think it is a strong indication of the ability of the Congress to work with the administration