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what additional traffic he can pick up by including
the segment (he doesn't particularly care whether this
is local Tucson-El Paso traffic or whether it travels
beyond El Paso it is the revenue he is concerned
about) and what additional costs American will incur
by serving the segment. This additional cost may or
may not be related to what the CAB terms "direct
operating expense." "Direct operating expense" is
merely an accounting convention. If attributable
revenues exceed attributable costs, the segment is
included. If not, it is deleted.

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Deleting such a segment on a given flight would only require CAB approval if it represented the carrier's only service at either of the two cities under authority of a given "route segment." It is important to note that CAB approval often is not required either to add the first nonstop or delete the last nonstop in a given city-pair market. For example, nothing in American Airlines' certificate currently compels it to offer nonstop service in any of the Arizona city-pairs mentioned in the ATA simulation. Indeed, during July 1973, American eliminated, without seeking CAB approval, the Palm Springs segments from Flights 159, 221, and 622, thus ending nonstop service by American between Palm Springs, on the one hand, and Phoenix and Tucson, on the other.

To see how widespread this carrier authority to add and delete service currently is, I had Mike Roach check the certificates of the carriers serving the Arizona markets. He informs me that, perhaps with the single exception of Frontier's Phoenix-Tucson service, the carriers involved are currently free to terminate service over all the indicated segments. In other words, American, under its current certificate, has no obligation to provide service in any of the six city-pairs where it currently is certificated (it does not hold a certificate allowing it to fly between Kansas City and Tucson).

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This brings me to my final point service reauctions on segments that the ATA model predicts would be retained. As you can see, in many cases, the hypothetical reductions indeed would be massive. ChicagoPhoenix service would be cut from 18 to 8 flights per day. Again it is vital to be clear about what is and is not being simulated by the ATA model. As I indicated

in my April 29 memo, the ATA model simulates the response of a monopolist. I am not surprised that a monopolist, if free to drop all flights he didn't wish to offer, and protected from entry by other carriers, would choose substantially to curtail service. He might even drop the amount of service that the ATA model indicates.

However, the current air transport system is not a monopoly. It is a competitive system where carriers face controlled prices, are free to determine the amount of service they wish to provide at these controlled prices, and are even free to exit from many city-pairs without explicit permission of the CAB if they find their operations unprofitable. The fact that they currently choose to operate large numbers of flights and routes which the simulation indicates are "unprofitable" indicates not that there is crosssubsidization in the system, but that the simulation is faulty in the way it determines whether a particular route or flight if "profitable" or "unprofitable.

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Appendix A

Thorar

SCHEDULED Daily HIR SERVICE PROVIDE TO PHOENIX AMD Tuscan, frizend

As of July 1, 1973
Tatak HARKET SERVICE INPULAPUAL CARRIER SERVICE
City-Chip Market EKGNS E415XF FLIGNE

CARRIERS Number

FLEKTI TINERARY

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MEMORANDUM

To:

Honorable Edward M. Kennedy, Chairman
Subcommittee on Administrative Practice and Procedure

United States Senate
From: Dr. John W. Drake, Professor of Air Transportation

School of Aeronautics and Astronautics
Purdue University

West Lafayette, Indiana 47907
Subject: Comments re: A.T.A. study of Consequences of Deregulation

of the Scheduled Air Transport Industry Date: 15 May 1975

Summary
· The ATA model misapplies costs in such a way as to

make more segments appear unprofitable.
• The ATA model probably understates short and thinly

travelled segment yields, thus making more appear
unprofitable.
The ATA model leaves out all aircraft less expen-
sive to operate than a DC-9-10, thus making more
segments appear unprofitable.
The $50 billion spent on the Interstate system has
indeed succeeded in providing superior alternative
service over many of the segments enumerated. This
should not be viewed as a catastrophe.

The model used is very questionable for this appli-
cation, for both reasons of oversimpTification and
For more fundamental reasons of methodology.

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