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additional seats. This provides them room for extra passengers on flights that would otherwise be sold out and not available.

Senator KENNEDY. From the consumer's point of view, there is no real problem with that, is there? If they want to give up lunch, for that hour's ride either from Los Angeles to San Francisco, or, from Boston to Washington, can't they?

Mr. SUMMERFIELD. No, I am merely trying, Senator, to explain the differences in cost structure between two different types of operation, and trying to explain why these costs actually exist. It has really nothing to do with the regulatory process is what I am saying. The differences result from the nature of the route structure in some cases or the nature of the geographical confinement of the system. In fact, if you had 100 to 200 different airlines, as Dr. Jordan suggested, many of them would have these short segments and some of these differences would appear.

INTERLINING

One of the problems, however, with these self-contained units like PSA and Air California is that, if they existed for the whole country, it would be terribly difficult to get around because of the point you brought out a minute ago. You can't make a reservation-you can make a reservation if you make a long-distance telephone call. You can't get a ticket here.

If we had many of these small intrastate operations the whole integrated system we depend on, not to get from here to Los Angeles or Washington, but from here to Podunk would fall apart. We would have a difficult time getting all these connecting services tied into the different carriers.

Senator KENNEDY. Is there any reason this couldn't be computerized in some kind of central agency? As I understand, in less than a minute, a Chicago policeman can call in an automobile license plate and find out who owns it.

Mr. SUMMERFIELD. That is correct.

Senator KENNEDY. Is it so difficult then to computerize ticket interlining?

Mr. SUMMERFIELD. Of the 58,000 city-pairs that are now served, many don't have fares quoted between them. For those with fares listed in the OAG there could be a retrieval process, though it might be expensive. But for the person who wants to go from here to Chicago, to Des Moines, and then down to Dallas and so on, the airlines have spent a lot of money trying to computerize this and they have found it really can't be economically done except for the relatively simple itineraries.

Senator KENNEDY. You mean everybody who is traveling from Boston to Washington is paying for computerized fare construction for the person flying from Fargo to Podunk, and if they are, we ought to know about it, shouldn't we? We are already paying too much in terms of energy underwriting for other areas of the country, and now we find that when we go from Boston to Washington we are paying for that integrated system as well.

Mr. SUMMERFIELD. But that part is not in the computer because it was just too expensive to do it. It is really the very simple routings that are in the computerized systems of the airlines. If you want to

ask these questions of representatives who operate these computer systems

Senator KENNEDY. Let me get back to another point, when you were talking about the route structure and about how it really wasn't the CAB, but it was the route structure that determined such considerations as food service. Isn't it really the CAB that develops those route structures? Couldn't they, by regulation, provide that there be a more efficient or lower cost service, in these particular areas?

Mr. SUMMERFIELD. Well, the CAB has, of course, no authority to set fares. Fares are recommended or applied for by the carriers based on their need to get a return on their investment. What I am trying to point out is that there are differences in the cost structure of the trunk and local-service carriers from the cost structure that exists in a small intrastate carrier. These differences make it difficult, impossible in many cases, to operate at lower fares for a larger system. There are other costs, and I am trying to review with you basically what those costs are.

Some of them are the result of having an integrated system, which makes it more convenient for the public.

LABOR COSTS SAVED BY PSA

There are some costs related to unionization, that is, the union rules. One of these has to do with productivity. The one reason that cost differences are narrowing is that as airlines get older, the unions organize the workers and get stronger. Although PSA pays its pilots about the same amount per hour as its competitors do, they have a different set of operating rules that enable PSA pilots to get maybe 20 hours a month more flying time within the same maximum time than trunk carrier pilots do. This is a matter of union regulations, not of the management of the airline. Dr. Jordan's speculation that PSA labor rates are going up is probably a reflection that the unions get stronger as the airline gets stronger and as the airline is older.

Mr. Guske pointed out that younger airlines have lower seniority structure and hence a lower wage-cost.

On the basis of the numbers that I was able to get from the relatively sparse data that was published with the public Utilities Commission, my estimates, Senator, are that if PSA operated in the same operating environment and with the same kind of route structure as the trunk and local-service carriers, their pretax profits would have been reduced on the order of $20 million.

Senator KENNEDY. As I understand this, PSA has about 612 million passengers so that $20 million in increased costs would mean about $3 additional fare per passenger. Yet PSA's fare from San Francisco to Los Angeles is $6 lower than the CAB carriers' intrastate fare and $18 lower than their interstate fare. Even taking the lower figure for the moment, how can you account for the other $3?

Mr. SUMMERFIELD. I don't have a complete answer to where the differences are, Senator, and there are other differences that I have not been able to get any data on. I have, for example, not been able to make any estimates of differences in the training costs that I alluded to earlier, or some of the other differences. The $20 million is based on

those things for which I was able to get data from the rather sparse amount of data available for the Public Utility Commission filings and PSA applications for fare increases.

Senator KENNEDY. Fine. Thank you.

Mr. Jordan, do you have any comments you want to make on any of these points that have been raised?

Mr. JORDAN. I agree with Dr. Summerfield that if PSA were allowed to operate in the manner of trunk carriers they would indeed have higher costs. My position is that trunk carriers operate the way they do not because they are bad people-but because they are regulated and they have certain rules they follow and this kind of game results in these kinds of outputs. PSA or nonregulated airlines do not operate in this manner. This is the whole point. They would operate efficiently in long-haul services as well as short-haul services. The only reason why PSA is a short-haul carrier is because it can't be a longerhaul carrier, it is limited to California. Part of the folklore of the airline industry is that long-hauls are good, not bad, yet intrastate carriers have been efficient even in short-haul operations.

In terms of the decreased profits, I would argue he is talking about increased costs, not decreased profits, because as you pointed out he is ignoring the revenue side of the interlining operation. But given his cost estimates, which I don't agree with, but they have given them, the difference is only $3 per passenger. I would assert that in the case of reservations, for example, even if PSA did have interlining reservations the person who called in Los Angeles for a ticket to San Francisco would say, hello, when is your next flight to San Francisco, fine, reservations for so and so, telephone number 893-1808, and hang up, that is a minute call. There would be no long 3-minute telephone conversations, I have things to do with my time and they have things to do with their time. It wouldn't change for those simple kinds of passenger trips. I see no reason why the cost would be inflated by a large degree.

The point is that without regulation you have specialization. You have carriers operating some type of aircraft in a very simplified manner. There are no excessive aircraft purchases or excessive aircraft. operations. This saves a large amount of money. A 747 now costs $30 million; that is roughly the cost of this building, I would guess, and when you start talking about 100, or 200, or 300 large aircraft we have important differences in cost. If you talk about differences in employee output as I mentioned in figure 5, differences in costs are very important, and this is due to regulation.

Senator KENNEDY. Thank you very much.

[The prepared statements of Dr. Jordan and Dr. Summerfield follow. During the hearing of February 18, 1975, the chairman of the subcommittee asked Continental Airlines to respond to Dr. Jordan's testimony. The response by James L. Mitchell of Continental Airlines, a reply by Dr. Jordan, and further remarks by Continental Airlines are all printed after the prepared statement of Mr. Harvey Wexler of Continental Airlines, which follows the testimony of the panel of airlines on February 18, 1975, pp. 587 ff., below. Dr. Summerfield's written responses to Dr. Jordan's testimony and to a subcommittee staff memo are included after his prepared statement.]

PREPARED STATEMENT OF DR. WILLIAM A. JORDAN

QUALIFICATIONS

My name is Willian A. Jordan, I am a professor of managerial economics at York University, Toronto, Canada. During the past 27 years I have been employed in traffic, sales, and research positions by four airlines (the Scandinavian Airlines System, Air France, Seaboard World Airlines, and Western Air Lines), have consulted on airline and airport matters, and have taught graduate courses and/or done research in economics and government regulation at Columbia University, Northwestern University, Stanford University, U.S. International University and York University. My Ph. D. in managerial economics is from the University of California, Los Angeles, and my research publications include the following: Airline Regulation in America: Effects and Imperfections, 1970; Producers Protection, Prior Market Structure, and the Effects of Government Regulation, 15 Journal of Law and Economics, April 1972: Airline Capacity Agreements: Correcting a Regulatory Imperfection, 39 Journal of Air Law and Commerce, Spring 1973; If We're Going to Regulate the Airlines, Let's Do it Right, in James C. Miller III, ed., Perspectives in Federal Transportation Policy, 1975.

I am a colonel in the U.S. Air Force Reserve and since 1959 have been assigned to Headquarters, Military Airlift Command. I was a member of the American Statistical Associaiton Advisory Committee for Statistical Research to the Civil Aeronautics Board from 1967 until it was disbanded this past year. My current professional memberships include the American Economic Association, Western Economic Association, Canadian Economic Association and Canadian Transportation Research Forum. Individually, or jointly, my wife and I own stock in the following airlines: Air California, Airlift International, Braniff International, Capitol International, Continental, Nordair, North Central, Pacifie Southwest, Sedalia-Marshall-Boonville, Southwest, United.

INTRODUCTION

A useful way to investigate the actual results of the activities of independent regulatory commissions is to compare the performances of firms regulated by such commissions with those of other similar firms operating beyond the commissions' jurisdictions. It is possible to make such cross-sectional studies of Civil Aeronautics Board (CAB) regulations because the CAB does not regulate all parts of the U.S. airline industry. The intrastate airlines operating entirely within California, and recently, within Texas provide the best examples of airlines not regulated by the CAB. Also, the CAB has exempted third-level/ commuter carriers from most of its regulatory control so long as they operate only small aircraft. Furthermore, comparisons with Canadian airline performance can be useful because, while Canada is a different country, it shares many geographical, demographic and social characteristics with the U.S.

Another way to measure the effects of regulation is to compare industry performance before and after a major change in regulatory policy. Time-series studies such as these provide less reliable results than cross-sectional studies, however, because considerable time often is required for the effects of specific actions to come to full fruition. In the meantime, other developments may impinge on or otherwise obscure the effects of the policy action under study. Occasionally, though, time-series evidence can be quite useful, especially when it corroborates evidence obtained from cross-sectional analyses.

A fundamental problem in using time-series data is estimating the effects of government regulation is that a change in a regulatory policy merely results in a relative change in performance under regulation. Unless the action to be studied results in a change from where regulation did not exist to one where it was implemented, there is no benchmark or baseline with which to determine the absolute effects of regulation per se. Without the benchmark of nonregulated performance, it is difficult, if not impossible, to determine whether some regulatory policy results in an additional deviation from non-regulated performance by 10 percent, or 20 percent or whatever. For example, a CAB action may cause the regulated trunk and local service carriers to raise their fares by only five rather than 7 or 8 percent. Thus, it might be argued that CAB regulation decreases the relative level or regulated airline fares. This may be true, but without knowing what fares would have been without CAB regulation one can not conclude from this that such regulation reduces absolute

fare levels. It may well be that the existence of CAB regulation since 1938 has resulted in fares that are substantially higher than what would have developed in its absence. If so, then any impediment the CAB now introduces to fare increases merely serves to reduce the degree to which regulated fares exceed non-regulated fares.

This testimony will present evidence from various cross-sectional and timeseries studies regarding the effects of CAB regulatory practices on the economic performance of the regulated airlines. Emphasis will be placed on entry and the number of airlines in existence, fares, and productive efficiency, with some mention also being made of safety and profits. The primary source of this evidence will be a comparative study of the California intrastate carriers and the CAB-regulated airlines, supplemented by additional evidence concerning the Texas intrastate carrier, Canadian airlines, third-level carriers, and the results of extending CAB regulation over military charter operations.

CAB REGULATION HAS DECREASED THE NUMBER OF AIRLINES

One result of CAB regulation has been the effective restriction of entry into airline operations. The only airlines so far authorized to provide trunk service were those who obtained their certificates of public convenience and necessity under the "grandfather" provisions of the Civil Aeronautics Act of 1938 (52 Stat. 988). Today, 10 of the original 16 trunk carriers remain-the others having been acquired by or merged with surviving trunk carriers.' The same is true for the local service carriers. With the single recent exception of Air New England, all of the existing local service carriers were among the 21 airlines the CAB allowed to enter the industry during the "local feeder" experiment between the end of World War II and October 1950. Again, acquisition by or merger with other certificated carriers characterized the means by which failing local service carriers have left the industry, and now only eight of the original 21 remain.2 The extent to which CAB regulation has effectively restricted new airlines from impinging upon the activities of the original trunk and the local service carriers can be seen by comparing the relative shares of the almost $13 billion of overall operating revenues earned systemwide in 1973 by all U.S. airlines operating large aircraft. The trunk carriers, plus Pan American, accounted for 84.2 percent of this total revenue while the local service carriers earned another 8.2 percent. Thus, these two groups consisting of 19 scheduled passenger/cargo carriers accounted for 92.4 percent of the $13 billion, leaving the remaining 7.6 percent for the Alaskan, Hawaiian, territorial, helicopter, intrastate, all-cargo, supplemental and other carriers (31 in all) that operated in 1973.*

This means that, combined, these 31 other carriers earned fewer operating revenues than the local service carriers and less than one-tenth the revenues of the trunk carriers and Pan American. One would think that the managers and employees of the trunk and local service carriers would be quite pleased with this situation and would feel that CAB regulation had been good to them during these past 36 years. Indeed, had the early airline pioneers been told back in 1938 that CAB regulation would result in this allocation of such large operating revenues one would expect they would have been quite pleased with the prospect. But present-day industry leaders appear to be dissatisfied with this situation and are endeavoring to increase their present dominant share. It should be recognized, however, that none of these leaders proposes the abolition of CAB regulation, merely its improvement.

In California, the California Public Utilities Commission (PUC) did not have power over airline entry within the state until September 1965. During the years from 1946 to 1965, at least sixteen airlines inaugurated scheduled service with large aircraft within the confined area of California, and entry occurred throughout these years rather than being concentrated in a single time period (as was the case under CAB regulation). Fourteen of these airlines subsequently terminated service after operating from only a few weeks to over six years. In not one of these cases, however, was a failing airline acquired by or merged with

1 William A. Jordan, Airline Regulation in America: Effects and Imperfections, 15-17 (1970). Also, CAB Handbook of Airline Statistics, 568-69 (1973 ed.). 2 Id.

3 CAB, Air Carrier Financial Statistics, 1-14, 98 (December 1973); Air California, Annual Report (1973); PSA Annual Report (1973); and Southwest Airlines Annual Report (1973).

The only carriers excluded from this compilation are the few third-level carriers who have CAB exceptions to operate large two-engine propeller aircraft.

51-146 76 pt. 1 31

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