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Senator KENNEDY. Mr. Peck is our next witness, a former member of the Council of Economic Advisers.

Then Professor Noll, if you would be kind enough-Professor Noll received his Ph. D. in 1957, was on the senior staff, Council of Economic Advisers, through 1973, and senior fellow, and currently professor of economics at the California Institute of Technology.

Thomas Moore, would you come up? Mr. Moore is professor of economics, at Stanford University.

Mr. Peck, do you want to start?

Mr. PECK. Yes, thank you, Senator.

I have a short statement I would like entered into the record, but I will not read it. The reason is that the testimony of the previous witnesses from the Department of Transportation, Council of Economic Advisers, the Federal Trade Commission and the Department of Justice have made many of my points. To read my statement now might seem to be preaching to the converted. Much of my statement would be cumulative.

I would like to indicate, however, that the economic literature in recent years has made two points: First, regulation is economically inefficient; it costs the consumer too much. Second, the solution to this inefficiency lies, in general, in more competition and less regulation to provide the consumer additional price and service options.

Those two points were made well, I think, by the preceding witnesses. Looking at their footnotes, I discovered an amazing fact. People do read economists' writings, and those writings are reflected in the testimony of the previous witnesses.

I would add three other points. First, we have all observed that airplanes fly half empty, and the numerous flights reduces waiting time but raises costs. A Yale student of mine, Michael Pustay, has calculated the value in reduced waiting time relative to the cost of more flights. He found that in 1969 the excess capacity flown, if waiting time is valued at $10 an hour, added about 10 percent to airline fares. In transcontinental markets, it added even more to the costs. His results suggest the following conclusion: In 1969, the American airlines were flying the right number of flights for the $60,000-a-year man, to whom convenience matters more than cost. Everyone also was offered too many flights and too high fares.

Now I would like to turn to another point. I think congressional hearings are a highly desirable forum in which to raise the critical issue of regulatory reform. You mentioned earlier, Senator, the regulatory proceedings themselves as a way to change policy. I have appeared as an expert witness in regulatory proceedings. I have been impressed with the care and diligence of regulatory officials as well as their concern with the public interest. But I find the issues are too? narrowly drawn to make regulatory proceedings a good place in which to examine broad issues.

I would add one final point made in my statement. I recall President Kennedy's transportation message of 1962, which was a forceful plea for deregulation. If one heard only the first day of the hearings on that message, with witnesses all in favor of it, one would conclude deregulation was going to come within a week or two. It turned out that the first day was not representative, and the legislation that accompanied that message did not do well in Congress.

It seemed to me then that President Kennedy's plea for deregulation was good economics. It may even be better economics today.

Senator KENNEDY. Professor Noll.

Mr. Noll. Senator, we have engaged in a little bit of collusive behavior of our own, and I think it would be more appropriate if Mr. Moore came before I did.

Mr. MOORE. Thank you, Senator. I would like to summarize my statement.

My research and other research all on the question of regulation is going to point to the same thing: regulation produces waste, higher prices, and often poor service. My research has been in the area of ICC regulation, regulation of trucking in Europe, regulation of electricity utility rates by State Commissioners, occupationally sensing, and the regulation of stock market margin requirements. I might indicate my study of ICC regulations has indicated in 1968 ICC regulations inflicted costs on the American economy in the order of $3.8 to $8.8 billion. Today the figure would be considerably higher

I would like to turn to my experience in restern Europe, which I have just come back from, studying the regulations there.

transportation system. We do believe, however, that the present system removes the ability of the carriers to adjust services and realine the markets they serve as economic conditions warrant. This results in increased costs to the public.

The present system also does not recognize the importance of potential competition as an economic force. Thus, the carriers on an existing route need not be concerned about new competition unless the Board has a route case pending. In such circumstances, the existing carriers may be less diligent in providing the type of service and price and quality options desired by the public than they would be if they were aware that a competitor could enter at any time to provide new or better service.

CAB'S CHARTER RESTRICTIONS Another way of improving competition is by liberalizing charter rules and thereby offering the consumer a broader range of price and service options.

Senator KENNEDY. Is your view consistent with the minimum charter floor the DOT was pushing last year?

Mr. BARNUM. I would like to clarify the minimum charter floor. I believe that as a result of the hearings you held in November, efforts were made to portray as much controversy within the administration as possible, and there was a good deal of confusion.

I think that what we were saying-
Senator KENNEDY. Well, we are glad to get the real story, now.

Mr. BARNUM. At that time we were talking in the context of Administration's seven point action plan that was directed to the international flag carriers. It dealt with the ways in which we could improve the economic climate and practices of Pan Am and TWA and those international carriers that were suffering from the economic circumstances of a flat or decreasing international market and huge fuel cost increases. We did consider among other things, the relationship between scheduled fares on the North Atlantic and charter fares. At that time there was still debate as to what the scheduled fares should be, and IATA had not yet come in with a total package for CAB approval. It was difficult for IATA to come in with a package for scheduled fares because they did not have any idea where charter fares would be.

We thought that to aid IATA agreement or at least to facilitate informed decision by the scheduled carriers, it would be useful if there were from the CAB some indication of criteria for a floor, if you will, at which charters would operate.

Now, what has been misunderstood here is that we were not talking about having a charter fare level that would permit all charter operators, efficient and inefficient, to make a profit. What we were talking about was some indication as to where charter rates would be so that the scheduled carriers could predicate their fares in relation to the charter floor.

There is a debate still raging as to the degree of CAB's authority to set a charter floor either by notice or proceeding, and that I think we best leave to the CAB and the courts to thrash out.

Senator KENNEDY. Senator Cannon has introduced the bill to make charter service more widely available, which I had the pleasure to join him on [S. 421]. Do you support that legislation?

Mr. Barnum. We are going to be testifying before Senator Cannon next week. We are in the process of developing our position on that bill. There is much in it that we have supported in the past with respect to ITC's and other forms of charter. We have opposed the CAB proposal to drop affinity charters, and I am glad to see the CAB has delayed its decision in that respect.

We do think, particularly at a time when we are interested in getting more people into fewer planes, that the charter business is one way in which we should be able to increase low-cost transportation with substantial savings in energy. We are, therefore, encouraged to see Senator Cannon and yourself and others focusing on this very important issue, and we will address it specifically in the next week.

Senator KENNEDY. Mr. Ginther is here, who is the staff director of the aviation subcommittee. So you will be seeing a lot of him next week.

Mr. BARNUM. The Administration believes a fundamental shift is? required away from over-protection of existing carriers to one which focuses on consumer needs and requires that more weight be placed on competitive principles in evaluating new applications for entry. We also believe that the CAB should not be permitted to delay decisionmaking as a means of limiting entry.

SMALL TOWN SERVICE (CROSS-SUBSIDY) Route exit has in some cases also been restrained by the CAB. While we recognize the importance of service to communities of varying sizes, carriers should not be forced to lose money or operate on the assumption that other routes will subsidize those producing inadequate revenue. Cross-subsidies are inefficient economically and in practice do not work.

Where communities deem service essential, the carriers operate at a loss, and the route does not justify Federal subsidy, alternatives must be considered. These alternatives include replacement services by another carrier or subsidies by the community itself.

In this regard, I should note that we will not propose any immediate changes in the local subsidy program. However, we believe the CAB has an obligation to identify the cost of such subsidies by route and by city. This has not been done.

The Administration strongly supports liberalization of entry into the air carrier industry and our forthcoming proposal will provide for substantial entry and exit liberalization.


Senator KENNEDY. How do you respond to the point that this is going to let a lot of fly-by-night outfits come in and skim the cream off the top on the most heavy traveled routes, and lead to instability in these major market areas?

Mr. BARNUM. Putting aside the safety question, I think that my comments earlier about threshold prices are my first answer.

My second answer is you really can't startup an airline overnight' and start providing the kind of cutthroat, cut price service that you are talking about. The CAB, of course, is going to have to certificate them as a carrier and the FAA authorize them to operate. I think it would be a rather fool-hardly enterprise for someone to invest, even on a lease basis, in the expensive equipment that would be required

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 a 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.



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

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