The more extensive statement we have submitted to this subcommittee, under separate cover, deals with the concept of regulated competition in air transportation, with the objectives we understand are sought through regulatory reform investigations, with the achievements of regulated competition in the air transportation industry since 1938, and with the likely adverse impacts of many of the concepts of regulatory reform that are being proposed. Our statement also makes recommendations for some improvements in present air transport regulation. I would now like to summarize the principal points made in our statement. ADVANTAGES OF REGULATED COMPETITION The system of air transportation, since its inception as an effective force in the American economy in 1938, has been founded on the principle of regulated competition. This has been necessary because of the special position of public transportation in the economy. In the spectrum of economic activity, from a natural monopoly to perfect competition, transportation falls in between. It is unlike specific public utilities in which embedded costs are immense and therefore economies of scale are apparent. But because of the need and value of providing a public service to a vast interlinking network of cities and communities, air transportation cannot be placed in the so-called perfect or workable competitive environment either. Further, it has characteristics that under deregulation would quickly lead to a high degree of concentration. These characteristics include the complexity of aircraft operations, the increasing expense of individual aircraft, the need for extensive maintenance facilities, and the fact that an inordinately high percentage of the passenger markets are between points of low traffic density. The present national air transportation system is characterized by stability, speed, reliability, and above all a vast network of the interlocking air routes involving 58,000 city-pairs. Its value to the Nation and to the public is derived from all of these essential features which would be seriously compromised, if not lost, through deregulation. We believe it is essential that in the deliberations today, and in those which will follow, special care should be taken to ensure that it is the real world of air transportation which is the subject of scrutiny. Hypothetical models alone-based as they are, not on the actual demonstrated needs of the traveling and shipping public, but rather on theories applicable only in an insulated theoretical environment-may be helpful as a guide to thinking. But their application beyond the classroom or the textbook must be carefully considered in the light of existing, real circumstances. Senator KENNEDY. How do you say that; what is the basis of that statement? Dr. JAMES. I do not believe anybody was recognizing that we have 58,000 city-pairs, a stable environment in which that system is now operating, that we have met the test of keeping prices down, that we have a system built in through the Civil Aeronautics Board now in which the consumer interests are being represented and the prices that we might seek are being penalized by the fact that we may not be meeting certain of those standards, and many other points that I will bring out in my testimony in answer to your question in a moment. Senator KENNEDY. Why would not the Department of Transportation understand that? POTENTIAL ABANDONMENT OF SMALL TOWN SERVICE (CROSS-SUBSIDY) Dr. JAMES. The Department of Transportation, through the submissions they made and the Domestic Passenger Fare Investigation, was not taking as what I would consider a practical position regarding load factors, load factor standards, and the realities of service to this 58,000 network that we now serve. The implications contained in many of the submissions they made would have the load factors and load factor standards beginning abnormally high, and the only way to accomplish this would be to cut out service to many of the communities now serviced. thousands of them, as a matter of fact. Senator KENNEDY. Can you submit a list of which ones that would be? Dr. JAMES. Of the communities? Senator KENNEDY. Yes. Dr. JAMES. We can attempt to do that, Senator. That is a computerized answer that we would have to develop, and would involve millions of calculations. It is a difficult thing to obtain, and we would have to obtain it. Senator KENNEDY. How can you be sure that you know and the Department of Transportation does not know? Dr. JAMES. I know the size of the problem and that is what we are attempting to define. Senator KENNEDY. I have asked you for specific testimony since you have discredited the witnesses, saying they were speaking through their hat. That is a gracious way of putting it. Then, I asked you the basis of it and you say they do not understand this particular problem. I ask you the basis for your information and you say you have not got it. You supply it and I will ask the Department of Transportation to do the same thing. Let the record speak for itself. Dr. JAMES. Let me put it this way, Senator. What we have is aggregate information, and what you are asking for is detailed information. The aggregate information is that if we were to attempt to get to a 65percent load factor today we would have to cut 25 percent off of these 58,000 city-pairs. I understand your question to be which of the 58,000 would be cut. Senator KENNEDY. That is right. Dr. JAMES. We have nothing that far. We have gone as far as to say one-fourth of them would be cut. I do not believe the Department of Transportation has thought of it in those terms, sir. Senator KENNEDY. Well, I will ask them the same question, to submit information, as I am asking you, so if you can supply information on that and be as specific as possible I will ask them the same question. [In a letter dated February 7, 1975, the chairman of the subcommittee made more explicit his request of Dr. James for a list of routes that would be eliminated under the conditions discussed above. On April 3, 1975, the Air Transport Association submitted its reply which totaled more than 200 pages. The chairman then requested independent eval uations of this ATA study from five leading economists and several Government agencies. The ATA study and the evaluations, together with relevant correspondence, are printed at the end of Dr. James' prepared statement following his testimony of this day, p. 139 ff., below.] Senator KENNEDY. Let us continue. RELATIVE DECREASE IN AIR FARES SINCE 1938 Dr. JAMES. The objectives sought by the theorists or the critics of the present system have been accomplished in a regulated competitive environment. Those who have found fault with the regulatory environment in which air transportation now operates seek to achieve a laudatory goal: air transportation service at minimum and cost-based prices, providing a maximum efficient quality of service. We believe we have accomplished that goal. Today average scheduled airline passenger fares, in 1938 dollars, are 64 percent less than 37 years ago, when Congress passed the Civil Aeronautics Act. Moreover, if one wishes to switch to current dollar comparisons, from 1948 to 1974 the air fare between New York and San Francisco rose 21 percent. At the same time the price of a pound of roundsteak increased 100 percent, a pair of men's shoes 120 percent, a Chevrolet automobile 220 percent, and, though perhaps not commonly purchased, a year's tuition at Harvard over 640 percent. Air freight rates have similarly experienced a decline relative to costs of all U.S. goods and services in the period 1946–1974. Senator KENNEDY. With all due respect, what has that possibly got to do with it? Television has gone down, the cost of radio has gone down, wristwatches have gone down. So what sense does that particular comment make-how does that prove your thesis? I can give as many examples as you have given that have gone the other way. I am not an expert in this, but Dr. JAMES. The only point I am making, Senator, for every one you can give I can give one above the average. We are standing with a small group of services and products which have actually declined in this time period. We are 64 percent below the average, so obviously there are larger numbers that have gone up than have gone down relative to our performance. Senator KENNEDY. Maybe that is convincing to some people, but what we do not know without competition is how much further it would have gone down. I would think that would have been the important question. If this is satisfactory to you as an explanation we will be glad to receive it. Dr. JAMES. We also can compare ourselves with consumer price index and the wholesale price index, and we will have outperformed those. REGULATED AND UNREGULATED FARES COMPARED Senator KENNEDY. I do not suppose you could mention that the PSA has gone down further than you have, or Texas, so therefore they demonstrate Dr. JAMES. Senator, I think PSA would be delighted to say that, but they cannot. From 1967-1973 their prices went up 23 percent. Ours went up 17 percent. Since 1973, PSA has increased their prices 25 percent and is applying for 10.5 percent more. Since 1973, our gen eral fares are up 15 percent. Our price record against PSA is very competitive and we beat them. Senator KENNEDY. Which makes the point that competition does not make much Dr. JAMES. They are probably within a 12-cent yield away from our average, and we have three or four fares that we offer today that are less than what PSA offers on a yield basis. Senator KENNEDY. Well, the fares, as I understand, are close to half the price. Dr. JAMES. They are not, sir. Their yields are close to 6 cents a mile and ours are running close to 7 cents a mile, including the charges that have just been made. Senator KENNEDY. Well, give me, just to clarify for a layman, what the fare is from San Francisco to Los Angeles for CAB regulated and then the PSA. Dr. JAMES. Well, I see the frame of reference in which you are speaking. Senator KENNEDY. Can you answer that question for me? Dr. JAMES. I have the airline guide here and I can probably pull out that fare for you, if you wish. Senator KENNEDY. OK. Dr. JAMES. The yields I am quoting to you are the average of all of our fares against PSA. If you would like I would also like to elaborate on that in a moment as to the differences of the kind of service that PSA is offering and the different cost against our own carriers. I can do that if you wish while we are attempting to find Senator KENNEDY. The point that I was making is, I did not understand the relevancy of the increase in Harvard's tuition, and then we got diverted on this other situation, so whatever you like, we will just put those in the record and you can continue. Dr. JAMES. Senator, there is a spectrum of fares on that route between Los Angeles and San Francisco. PSA, for example, has a fare $20.25. TWA has a fare for $19.50. Air West has a fare for $18.37, Continental $17. Senator KENNEDY. Are those the intrastate passengers? Dr. JAMES. Between Los Angeles and San Francisco, yes. Senator KENNEDY. Say someone took a plane from Boston, San Francisco, Los Angeles, what would be the cost of the San FranciscoLos Angeles rates? Dr. JAMES. Those would be larger. Senator KENNEDY. Give me those. Dr. JAMES. I will submit that for the record later. I do not have it with me at this time. Senator KENNEDY. Well, it must be in the airline guide. You are the experts on it. You can continue in your testimony. Dr. JAMES. All right, sir. Senator KENNEDY. Counsel informs me that it is $38.89. Dr. JAMES. The airline offers the public a wide range of available fares, and extensive use has been made of these. For the year ending September 1974, for example, use of lower than full fares accounted for almost one-third of all each remen te passenger miles icva. Be ganing “ale monta andres croat based isert fare has been intropromde an attractive ondge between harter and se spermum of fares that we offer has been used emnendively by low home groupe in the United States. Last year one of every seven ada racitg less than $7000 annually few on a scheduled airline. Grazzi e pement of all adults taking one or more trips by air made Less than KKK. This prising performance, at an adequate level of reetter in the long Tin or in the short mon could not have been matched of prorg in a deregulated en vironment. In fact, in the long muruas esidenced by the 2 perfor mance of the U.S. economy as a rush, deregulation of the air transport industry would have placed prices and fares at a much higher level than now exists. Serator Kar aor. Why is that? Dr. Java, Basing that on the pricing performance of the U.S. soororor as a whole, which was much higher in constant dollars in 13h than our own performance, which was 64 percent less. THE DOMESTIC PASSENGER FARE INVESTIGATION More recentiv, we believe that the Civil Aeronautics Board has taxen procentent-setting steps, through the results of its Domestic Passer ger Fare Investigation, to assure that the airline industry operates at standards of efficiency responsive to consumer interests. The initiation of the investigation came from Members of Congress in late 1969. The investigation began in January 1970, and that portion of it covering fare level rate of return procedures produced its first results in May 1973. The resulting CAB standards of efficiency assure that no automatic fare increase is charged to consumers for so-called industry cost mistakes of purchasing excess equipment, of misestimating a market and hauling too few people, or for giving away business through discounting. The CAB standards of efficiency adjust for all of these, and no fare change is made until these adjustments have been made. Each fare increase granted to the industry since 1973, including the 4 percent increase granted last November, has been based on meeting these standards. These CAB fare level procedures, resulting from open public hearings, are not arbitrary, were not developed from clandestine meetings, and have a clear and comprehensive public interest platform built in. Yet the opposite and misleading impression is often given by critics as an emotional appeal to consumers. As we have shown, in fact, it is the consumer who is the primary beneficiary of these procedures. Let us turn our attention to the question of load factors, a concept grossly misunderstood and misused. Continually our industry is told two things: (1) we are not providing adequate levels of service, and (2) our load factors should be higher. For our industry these objectives are contradictory. I believe I can make my point by referring to the statement that Senator Kennedy made on the Senate floor on December 16, where he referred to the difficulty a student in Boston might experience in returning to his home in Detroit because of a lack of available seats on that route. Keeping in mind that the Civil Aeronautics Board's |