another carrier. This is in marked contrast to the consistent usage of these methods of exit by the CAB-regulated airlines. This implies "that the asset of an airline that is of unique value to other airlines is its CAB certificate of public convenience and necessity, not its aircraft, facilities, or good will, . . ."5

Not only does the California experience demonstrate that CAB regulation has effectively impeded entry into the interstate airline industry and has promoted exit via merger and acquisition, but it also indicates that this regulation has served to limit the number of airlines in existence at any point in time. Based on the system sizes and traffic volumes of the California intrastate carriers, it appears that without CAB regulation from 100 to over 200 airlines operating large aircraft would have existed at any one time in the 48 contiguous states from 1949 through 1965. This is in sharp contrast to the 35 to 24 trunk and local service carriers that the CAB actually allowed to operate during that period. Should this range seem unrealistically large, one should note that a total of 201 commuter air carriers operated under very constrained conditions during fiscal year 1973, and that 126 of these small airlines operated for the entire year. Implicit in the conclusion that CAB regulation serves to limit greatly the number of airlines in existence is the finding that there are no appreciable economies of scale in nonregulated airline operations, and that a high degree of specialization by airlines would occur without regulation.8

Effective entry control is a crucially important factor in protecting established airlines, their employees and their suppliers. Not only does it insulate the airlines from the results of honest errors in judgment and from possible managerial inefficiencies, but it also allows monopolistic or oligopolistic suppliers of inputs (such as labor, aircraft, petroleum products and airports) to charge ever higher prices for their products and services. All of these factors increase the operating costs of regulated airlines. Furthermore, market protection enhances the viability of charging higher prices so that the regulated airlines can seek to capture monopoly profits. Given entry control, cost increases and higher fares can persist because new, more efficient carriers paying lower prices for their inputs are prohibited by CAB regulation from entering the industry, offering lower fares for their services and, eventually, replacing or reducing the sizes of the existing airlines. Evidence on fare levels and operating costs will be presented in the following sections.

CAB REGULATION HAS INCREASED AIRLINE FARES

Evidence from California

10

Article XII of the California State Constitution has long empowered the PUC to regulate the intrastate rates and fares of all transportation companies, including the airlines. In practice, the PUC has controlled airline fare increases, but not decreases." Effective September 17, 1965, the PUC received authority from the legislature to regulate entry and exit to and from scheduled airline passenger service. It has exercised this power over entry with an enthusiasm comparable to that of the CAB. To date, it has issued to just five airlines certificates of public convenience and necessity to operate large aircraft (those carrying over 30 passengers) in scheduled passenger service. Four of these, including three “grandfather" certificates, were issued in the fall of 1966, while the fifth, and last, certificate was issued in early 1969 and then reissued in September 1971." All other applications for certificates have been denied.13

11

5 William A. Jordan, supra, note 1, at 17-14, esp. pp. 23-24.

6 Id. at 24-32.

CAB, Commuter Air Carrier Traffic Statistics, Year Ended June 30, 1973, 3 (June 1974). 8 William A. Jordan, supra, note 1, at 191-94.

9 Id. at 2-4.

10 Id. Also, State of California, Statutes and Amendments to the Codes, 1965 Chapters, A-3, 2145 (1965).

11 PUC decision 71310 (September 20, 1966) for Air California; PUC decision 71393 (October 11, 1966) for Pacific Southwest Airlines (PSA); PUC decision 71490 (November 1, 1966) for Mercer Enterprises, and PUC decisions 71648 (December 6, 1966) and 72560 (April 18, 1967) for Holiday Airlines.

12 PUC decision 75373 (February 25, 1969) issued a certificate to California Sierra Airlines which was revoked by PUC decision 78682 (May 18, 1971) when this carrier failed to inaugurate service. Essentially the same route to the Mammoth Lakes ski resort area was then awarded to Sierra Pacific Airlines in PUC decision 79166 (September 21, 1971). 13 For example, the applications of Air Metropolitan and Pacific Air Transport to operate between points in the Los Angeles and San Francisco metropolitan areas were denied in PUC decisions 74837 (October 15, 1968), and 76110 (September 3, 1969).

This change in California regulation provides some interesting comparisons with which to evaluate the effects of entry control on fares. Prior to 1965, it is possible to make a cross-sectional comparison between the fares of airlines operating within California without entry protection and the fares of CAB-regulated airlines who were protected from entry into their interstate city-pairs. Then a comparison can be made between the fares of the intrastate and CAB-regulated carriers after 1965 when both enjoyed closed entry. Finally, a time-series comparison can be made for percentage fare changes by the two types of carriers following the PUC's effective closure of entry after 1965. First the pre-1965 comparison.

14

One important aspect of PUC rate regulation was that the initial tariff of a new carrier had to be accepted providing it conformed to basic technical and publication requirements. Thus, there was no regulation of the fares introduced by new carriers. The first major period of entry by intrastate carriers occurred in 1949 when seven airlines (including Pacific Southwest Airlines) inaugurated coach service between the larger city-pairs and, in the process, introduced new low fares. Of these seven airlines, only PSA has survived so its fares will be used here, both because they are representative of those adopted by other intrastate carriers at the specified times and because they provide a continuous fare history for the entire period.

TABLE 1.-PSA'S COACH FARES COMPARED WITH CAB-AUTHORIZED 1ST-CLASS FARES FOR THREE MAJOR CALIFORNIA CITY-PAIRS, 1949

1 Coach fares effective May 23, 1949 to Mar. 27, 1951.

21st-class fares effective Sept. 1, 1948 to Apr. 29, 1952. From Feb. 1 to Oct. 14, 1949, the CAB authorized Western to offer a "no-meal" tariff which gave a 5-percent discount on all fares. Thus, during this 912-month period, Western's one-way fares were equal to 1⁄2 the regular round trip fares.

3 A 10-percent discount was given on the return portion of round trip journeys by CAB-regulated airlines. Source: William A. Jordan, "Airline Regulation in America," 276-78, 284–87 (1970).

Table 1 compares the 1949 coach fares of PSA in the three major California city-pairs with the first-class fares authorized by the CAB and utilized by United and Western airlines who were the CAB-regulated airlines serving all three of these city-pairs. It is necessary to compare coach with first-class fares in 1949 because CAB-regulated carriers did not offer coach service in short-haul citypairs at that time, making first-class their lowest available fare.

Table 1 shows that the CAB-authorized one-way fares ranged from 19 to 111 percent higher than the fares of PSA (and other intrastate carriers). The greatest difference was in the Los Angeles-San Francisco city-pair where a medium stage length (340 miles) combined with high traffic density resulted in low operating costs for the intrastate carriers. The smallest difference was for Los Angeles-San Diego where a short stage length (109 miles) and much lower traffic density yielded higher operating costs and, therefore, higher fares per mile. The lower fares introduced by the intrastate carrier greatly benefited passengers who preferred somewhat inferior service quality and low fares to high-quality, high-price service. These passengers, in turn, benefited the intrastate carriers by utilizing their services. In 1949, total traffic in these three city-pairs increased 34 percent and almost one-third of all passengers utilized the low-fare coach service of the intrastate carriers. At the same time, the CABregulated airlines' first-class traffic fell 9.4 percent from its 1948 level.18

As shown in table 2, this same fundamental fare relationship still existed in 1965 after over 16 years of open entry within California.

14 William A. Jordan, supra, note 1, at 114.

15 1949 total on-line origin and destination passenger traffic on all carriers in the three major California city-pairs were: LAX/BUR/LGR-SFO/OAK=459,400; LAX/BUR/LGBSAN=81,700; and SAN-SFO/OAK=29,200. Id. at 307, 311, 315.

16 Total on-line O&D passenger traffic for these three city-pairs grew from 426.000 in 1948 to 570,000 in 1949. Of the 1949 total, the intrastate carriers accounted for 184,300 passengers and the CAB-regulated airlines 386,000. Id.

TABLE 2.-PSA'S COACH FARES COMPARED WITH CAB-AUTHORIZED COACH FARES FOR THREE MAJOR CALIFORNIA CITY-PAIRS, 1965

1 Round-trip fares equal twice the one-way fares for all carriers.

2 Effective Apr. 20, 1965 to Aug. 2, 1969.

3 Effective Feb. 1, 1962 to Feb. 1, 1968. Applicable to interstate passengers making stopovers in these cities on journeys originating and/or terminating outside California. Also, the jet coach fares were approved by the PUC in April 1962 for intrastate passengers utilizing interstate jet flights.

Source: William A. Jordan, "Airline Regulation in America," 111, 279–87 (1970).

The lowest CAB-authorized coach fares for 1965 were 47 to 90 percent greater than PSA's coach fares. This somewhat decreased range in fare differences, compared with 1949, resulted from two developments. First, starting on May 14, 1950, the CAB allowed the interstate airlines to provide coach service and fares in California city-pairs so this 1965 comparison is based on coach fares for both categories of carriers." Second, since 1952 the CAB has promoted the adoption of an ever larger fare taper whereby short-haul fares per mile (such as for Los Angeles-San Diego) have been increased more than the fares per mile for longer-haul city-pairs. Generally speaking, given these developments, it can be concluded that had CAB regulation kept the California intrastate carriers from inaugurating service the coach fares in these three major California city-pairs would have been those authorized by the CAB and, therefore, would have been from 47 to 90 percent higher than they actually were.

Since the PUC has had the power to close entry since 1965, it would seem reasonable to predict that differences between CAB-authorized fares and those of PSA should now be less than before. To the contrary, as shown in table 3, even following the PUC's most recent fare authorization (effective January 29, 1975), the percentage differences between PSA's fares and those authorized by the CAB (effective November 15, 1974) have increased to a range of from 70 to 108 percent compared with the 1965 range of 47 to 90 percent.

The above findings are surprising, but it should be remembered that they reflect the effects of accumulated fare changes since 1949. Actually, since the PUC's decision to prevent new carriers from entering the major California citypairs was not fully implemented nor apparent until late 1969, it may be TABLE 3.-PSA'S COACH FARES COMPARED WITH CAB-AUTHORIZED COACH FARES, FOR THREE MAJOR CALIFORNIA CITY-PAIRS, JAN. 29, 1975

3 Effective Nov. 15, 1974. The CAB has authorized an additional fare increase and restructuring to become effective Apr. 29, 1975.

Sources: CAB orders 74-11-62 (Nov. 14, 1974) and 74-12-109 (Dec. 27, 1974). PUC decisions 83814 (Dec. 10, 1974), 83918 (Dec. 30, 1974) and 83939 (Dec. 30, 1974). Norman Richards, Asst. Chief, CAB domestic passenger fare section. telephone conversation (Jan. 14, 1975).

17 Id. at 78.

18 Id. at 64-65. Also, CAB Orders 74-3-82 (March 18, 1974) and 74-12-109 (December 27, 1974).

more meaningful to look for possible effects on fares from this action by comparing fare increases between 1969 and early 1975 than by comparing fare levels in 1975. It happens that the CAB-authorized two-fare increases in 1969the first significant increases since February 1, 1962-with the second resulting in a major increase and restructuring of coach fares that became effective on October 1, 1969.19 Similarly, the PUC also authorized PSA to increase its fares twice in 1969 with the second becoming effective on December 3; and it happens that these increases were the first implemented by PSA since December 12, 1960." Thus, the fares in effect at the end of 1969 provide like bases for a time-series comparison of the effects of CAB and PUC regulation under closed entry. This comparison is presented in table 4, and it indicates how PSA and the PUC, on the one hand, and the interstate airlines and the CAB, on the other hand, responded to such factors as inflation, airport security expenses and increases in petroleum prices, all under similar regulatory conditions.

20

TABLE 4.-INCREASES IN COACH FARES FROM LATE 1969 TO EARLY 1975: PSA COMPARED WITH CAB-AUTHORIZED FARES FOR THREE MAJOR CALIFORNIA CITY-PAIRS

1 Round-trip fares equal twice the one-way fares for all carriers.

Sources: Table 3. CAB order 69-9-68 (Sept. 12, 1969). PUC decision 76447 (Nov. 18, 1969).

The similarities between the percentage increases for the two categories of carriers in these three city-pairs are indeed remarkable. For the first time since 1949, percentage increases in PSA's fares have been almost the same as those for CAB-authorized coach fares. This is certainly not conclusive evidence that PSA's pricing practices under the new PUC regulator environment will be about the same as that of the CAB-regulated airlines, but it is consistent with the hypothesis that similar regulation does have similar effects on airline fares. Actually, it is much too soon to draw firm conclusions on this matter. It takes many years for the effects of an important change such as the imposition of entry control to work its way through the economy, but there appears to be a start in this direction.

Overall, the California experience provides strong evidence that one major accomplishment of CAB regulation has been to increase airline fares by large amounts. Since the CAB establishes fares on a nationwide basis, the sizes of these increases would vary with conditions in individual city-pairs. For shorthaul city-pairs, present coach fares are probably between 40 to 70 percent higher than they would be without CAB regulation-with the larger differences occurring in those city-pairs with the higher traffic densities." Thus, without CABregulation, current Boston-New York and New York-Washington one-way coach fares would probably be around $15 and $17 vs. the actual fares of $25.93 and $27.78.22 In medium-haul city-pairs (between, say, 250 and 1,000 miles), it appears that CAB-authorized coach fares range from 75 to over 100 percent higher than non-regulated fares. This means, for example, that absent regulation the BostonWashington coach fare would be around $21 instead of the current $41.67.23

19 Id. Also, CAB orders 69-2-98 (February 19, 1969) and 69-9-68 (September 12, 1969). The first of these orders increased coach fares by $2 in city-pairs 500 miles or less apart, and by $1 in city-pairs between 501 and 1,800 miles apart. The second order established a fare structure based on a $9 terminal charge and various line-haul charges starting at 6¢ per mile for the first 500 miles.

20 Id. at 285. Also, PUC decisions 75899 (July 8, 1969) and 76447 (November 18, 1969). Together, these two decisions yielded fare increases of 11.1, 16.2 and 5.5 percent in the three major city-pairs.

21 In addition to the Los Angeles-San Diego data, the fare experience in eight minor California city-pairs from 1951 to 1965 also support this conclusion. Id. at 115-33.

22 1 Official Airline Guide 143, 150, 716 (North American Edition, January 1, 1975). The distances between these two city-pairs are: BOS-NYC=191 miles, NYC-DCA=215 miles. CAB, supra, note 1, at 433.

23 Id. Boston and Washington are 406 miles apart.

Finally, extrapolating the California evidence in conjunction with our knowledge that average costs of airline operations decrease with distance, leads to the conclusion that CAB-authorized fares in the transcontinental city-pairs are also around 100 percent higher than they would be without regulation. That is, rather than paying $187.04 (plus tax) to fly from Boston to Los Angeles, one would pay only $90 to $100 for unregulated service.24

Differences of these magnitudes are startling to say the least, and they lead to the question of whether or not the California experience may be due to unique factors other than regulation. For example, it is correctly pointed out that California weather is milder than other parts of the country and that the three major city-pairs have extremely heavy traffic volumes. These arguments overlook the fact that the weather is also good in both Los Angeles and, say, Phoenix (358 miles apart) yet the high, allegedly cost-based, CAB-authorized coach fares have applied in that city pair rather than the lower California-type fares. Indeed, the Los Angeles-Phoenix coach fares have been identical to those in the ChicagoMinneapolis/St. Paul city-pair (344 miles apart) despite the differences in weather conditions in these two city-pairs. Similarly, if weather is so important, why isn't a lower fare formula applied to Los Angeles-Miami service than to Los Angeles-Boston service?

26

Regarding traffic density, it should be noted that in 1948, the year before the intrastate carriers inaugurated low-fare service, Boston-New York/Newark was the largest city pair in the U.S., with Los Angeles/Burbank-San Francisco/Oakland being a poor second accounting for about 35 percent fewer true 0&D passengers. Yet, as indicated in table 1, efficient intrastate carriers were able to survive in the then lower-density California city-pairs at much lower fares per mile than the CAB authorized for the major East Coast city-pairs and, remember, this was well before the days of airport congestion. True, due in part to the availability of low fares, by 1972 the Los Angeles-San Francisco "area" pair accounted for 5.6 million on-line O&D passengers compared with 2.1 million true O&D passengers in the Boston-New York "area" pair." It should be recognized, however, that the 5.6 million Los Angeles-San Francisco passengers were accommodated through eight airports and 13 separate airport pairs, compared with only four airports and three airport pairs for Boston-New York, and that low intrastate fares were available in all of the Los Angeles-San Francisco airport pairs even though four of them each accounted for less than 200,000 O&D passengers in 1972. No, possible cost differences due to weather and traffic densities come nowhere near accounting for the differences of 100 percent or more that have existed between PSA's fares and those authorized by the CAB.

28

Fortunately, supplementary evidence regarding the effects of regulation on airline fares is available from the Texas intrastate experience, Canadian regulation, and from U.S. military airlift procurement. Brief summaries of some of this evidence are presented in the following sections.

Evidence from Texas

On February 20, 1968, the Texas Aeronautics Commission (TAC) issued a certificate of public convenience and necessity to Southwest Airlines authorizing it to provide scheduled intrastate service between Dallas/Ft. Worth, Houston and San Antonio." Immediately thereafter, Braniff Airways and Texas International Airlines began over three years of litigation in the Texas and U.S. Federal courts, the CAB and the TAC to prevent Southwest from inaugurating service.

24 In April 1967, World Airways (a supplemental carrier) applied to the CAB for authority to operate scheduled nonstop service between California and the East Coast at a "thrift service" fare of $79.50 compared with the then existing coach fare of $145.10. 86 Aviation Week and Space Technology 27 (May 1, 1967). Similarly, applying the CAB's recently approved low-season seat-mile rate for charter operations with aircraft having more than 229 seats (2.4¢ per seat-mile) and assuming a 65-percent load factor, yields a $96.00 one-way fare between Boston and Los Angeles (2,600 miles apart). CAB regulation PS-57 (October 18, 1974) at 17.

25 See, for example, supra. note 22, at 201, 542. Note that the difference between origin and destination traffic for these two city-pairs is not great. In 1972, ORD-MSP-476,000 passengers while LAX-PHX=343.000. CAB, supra, note 1, at 433.

26 BOS-NYC/EWR=550,500 passengers, LAX/BUR/LGB-SFO/OAK=297,600. CAB, Airline Traffic Survey (March and September 1948).

27 CAB, supra, note 1, at 433; and PUC, Intrastate Origin-Destination Passengers of Scheduled Air Carriers. Quarter and Twelve Months Ended December 31, 1971 and 1972, 2 (Report 1511.33, 1974).

28 PUC. supra, note 27, at 4-6. Also, see appendix B.

29 Thomson & McKinnon Auchincloss, Inc., Prospectus, Southwest Airlines Co., 8 (June 8, 1971). Southwest was incorporated on March 9, 1967 (Southwest Airlines annual report, note 1, 1971).