Assuming that the CAB continues to function without the resources to hear all applications speedily, it must of necessity pick and choose some applications for prompt hearing in preference to others. This picking and choosing must be pursuant to some concept of public interest. We think it not unreasonable that the agency should, after appropriate public proceedings, indicate the specific public interest standards it intends to use in managing its docket. To the extent the Board's Domestic Route Study proposes that some standards be adopted after public proceedings, it is a step in the right direction. The difficulty, as noted above, is that the standards proposed by the staff would be such as to assure the de facto denial of most applications without hearings.

What standards would make sense? We believe that, at the outset, any standards fixed should be such as to allow for hearing the maximum number of applications the Board is physically capable of handling. Obviously, the standards must also be somewhat general in nature, and they must allow for unforeseeable circumstances. At a minimum, however, they must be objective in nature, dealing only with readily identifiable facts, such as: whether the market has competition; when service needs in the market were last considered by the Board; and historic traffic flows. As a general principle we do not beileve the determination of whether or not to hear an application should be made on the basis of a forecast, whether by a carrier or the CAB staff. In route cases, all forecasts are inherently controversial. The probing of such controversy is the function of the hearing. When the Board decides such matters before hearing, it robs that process of its principal purpose.

In concluding let me emphasize that we fully recognize that the job of establishing fair and reasonable standards for priority of hearing is not an easy one. The above comments represent only our preliminary observations on this matter. As you may know the Board has indicated that it intends to ask for formal comments at a later date on the priority standards suggested by its staff. North Central, possibly in conjunction with the other local service carriers, expect to direct more specific comments to the Board at the appropriate time. Meanwhile, however, we appreciate this opportunity to share at least our initial thoughts on this problem with the subcommittee, and we are hopeful that your consideration of this matter will help all of us think our way towards a sound and constructive solution to this most important issue of administrative procedure.

PREPARED STATEMENT OF HARVEY J. WEXLER

Mr. Thomas D. Finney, Jr., Washington counsel for Continental Air Lines and a member of Continental's Board of Directors, and I appreciate the opportunity to appear at these hearings. They could not come at a more appropriate time. We are at an important crossroads in the air transportation industry. The Civil Aeronautics Board has passed from the era of the sixties when it encouraged competition both in pricing and routes to a period of overly-protective action during the first half of the decade of the seventies. We at Continental believe that it is a time for a sharp change in direction-time to return to giving full force and effect to the competitive mandate of the Federal Aviation Act of 1958. Before proceeding with the issues before you and our suggestion for a positive plan of action to move forward in the public interest, let me note that we have submitted detailed comments to your committee's questionnaire of November 20, 1974. Our submission was sent December 20, 1974 and I would welcome the opportunity to expand on any of the answers we submitted as well as my testimony today. We have tried to respond as fully as time permitted.

It goes without saying that Continental will assist the subcommittee in any way in which it can. We recognize that the Congress has the ultimate responsibility for the regulation of interstate and foreign commerce. The major limitation on our comments today is that placed upon us by the Board's rules of conduct, namely not to seek any indirect interference-outside the public record-by members of Congress or its committees in pending CAB proceedings. Within that one limitation, I will seek to expose our basic thinking and to answer your questions fully.

Just about four years ago, Continental's president, Bob Six made clear our basic view that competition, in both service and rates, is absolutely essential to preserve a healthy, effective air transportation industry. On February 3, 1971, in his appearance before the Aviation Subcommittee of the Senate Commerce

Committee, Mr. Six warned against the airline prophets of doom and gloom and their anticompetitive proposals. Let me begin my discussion of the substantive issues before you by quoting from his opening remarks:

"I would be the last person to tell you that the airline industry doesn't have serious problems. The management of every airline is experiencing great difficulties and a profit is hard to come by. Times are admittedly bad. But the point I want to stress at this hearing is that the industry can survive without our radically altering the competitive structure of the industry or drastically revamping the regulatory framework.

"The real cause for worry is the disastrous impact on the industry and the public which would result from adopting some of the solutions being proposed by the "Big Four" and Pan American. We have serious problems today at Continental. But, frankly I am much more worried that the Government might accept some of the big carriers' proposals than I am about working my company out of the current economic slump."

The situation is not much different today. Then, we were in the midst of the 1970-1971 recession. Now, we are in the midst of the 1974-75 recession. There are only two differences. In 1971 most airlines had just finished a relatively poor year in terms of profitability because of a serious regulatory lag in considering fare increases to meet escalating costs. In 1974, the efficient carriers had a reasonably good year. Two of the biggest carriers, Delta and United, had record profits. However, now we face the prospect of further drastically escalating fuel costs. If the President's program of decontrol and import taxes goes into effect, we estimate that our costs would increase by $33.7 million this year. It would take a substantial fare increase to offset this expense. However, with fares already at a high level, such an increase is likely to drive a significant amount of traffic away from the airlines.

Even with these differences, our judgment has not changed. The real threat remains the anticompetitive remedies urged on the Board in 1971 by the Big Four and Pan American, most of which unfortunately have been adopted by the Board in the last four years. It is the continuation of these anticompetitive policies which threatens the health of the air transportation industry.

The principal remedies advocated by the Big Four in the 1970-1971 period, as discussed by Mr. Six were mergers, capacity agreements, controls on in-flight services, a moratorium on new route awards, and the imposition of further limitations on the supplemental carriers. He opposed all of these solutions then and we oppose them now.

A majority of the Board-and I emphasize majority because there has been a healthy disagreement among the members-have put into effect all but one of these solutions. Fortunately, the merger of health trunklines was denied in the American-Western and Northwest-National merger cases. We took a major role in opposing these mergers.

In addition to these anticompetitive remedies, the Board has stifled fare competition. It brought an end to the promotional fares, which were so successful in generating traffic in the mid and late sixties. Only recently has the Board realized that new promotional fares are needed to stimulate sagging traffic but it has approved them only on a highly restricted basis.

In addition, the Board now seeks to kill our economy fare. This is an unrestricted low fare available in all of Continental's markets-and only in Continental's markets on the U.S. mainland. The fare is presently 10 percent below coach and we have asked to increase the discount to 15 percent below coach to stimulate traffic in these bad economic times. Instead, the Board is seeking to force us to increase the fare to a maximum differential of $4 and eliminate it altogether on nonmeal flights. This would destroy the marketability of the fare and effectively force us to eliminate it entirely. We have appealed the Board's action to the U.S. Court of Appeals for the District of Columbia. We also presently have before the Court the issue of the Board's route freeze and its seating standards. We have raised the issue of the inconsistency of all three actions with the competitive mandate of the Act.

This brings me to the heart of the issues before you in this phase of your hearing, namely the Board's route policies. I have agreed to testify again in the phase dealing with the Board's ratemaking process. So I will direct my remarks today principally to the Board's route policies and the policy of "open entry" suggested by some prior Administration witnesses.

Continental firmly believes that the regressive policies adopted by the Board must come to an end. Specifically, we urge the following changes:

(1) Expanding service to the public. The Board has had a freeze on new route awards since 1969. This freeze was never justified and should be brought to an end. The oft-heard generalization that the economic problems of air carriers are the result of too much competition in the air transportation system is nonsense. The route awards of the 1960s were in no way responsible for the losses carriers sustained during the 19.0-1971 recession. During that period, the smaller, more efficient carriers pulled through with small profits. It was the big carriers who suffered. They simply couldn't respond to changed economic conditions with sufficient rapidity because of their size. Moreover, the two carriers which suffered the greatest number of new route awards to other carriers in their major markets, namely Delta and United, have remained highly profitable. The reason is that they are well managed and even the substantial new route awards of the late sixties are relatively insignificant in their economic impact on the incumbents or the carriers granted awards.

The prime beneficiary of new route awards is the public. New route awards are essential to assure the continued growth of a network of air transportation to meet the needs of all communities. New route awards also assure a competitive industry, responsive to the public needs. Carriers will provide effective service so long as the threat of additional carrier certification hangs over their head. Without that threat, we become lax and seek to extract maximum profits from our routes, often at the public expense. Moreover, new route awards are the proverbial carrot that keeps us pulling our carts. They are the incentive for efficient operation and a high quality of public service.

I might note that the recent study published by the Board's staff purporting to set standards for route awards in the future is no more than an outgrowth of the Board's recent regressive policies. The study proceeds from the wrong policy objective: the protection of carrier profitability. The underlying objective should be to meet the needs of the markets and to properly serve the public. For example, the study urges that competition not be certificated unless the incumbent has a 6 percent overall rate of return. That has nothing to do with need of a particular market. The study also urges that competition should only be certificated when the incumbent and the new carrier can each achieve a 12 percent rate of return in the market involved for the first year of competitive operation. This substitutes carrier profits for public service and the benefits of competition. The study also urges achievement of a 55 percent load factor before competition can be certificated. Load factor alone is not the test of whether a market needs or can reasonably support competitive service. These standards ignore years of Board precedents recognizing "the statutory need for competition as a stimulus to provide good service to the public and to develop a sound air transportation system."

As Congress and the Board have recognized in the past, competition is beneficial in and of itself. In the Board's own words, "competition invites comparison as to equipment cost, personnel, organization, methods of operation, solicitation and handling of traffic, and the like, all of which tend to insure the development of an air transportation system as contemplated by the Act." These important benefits of competition seemed to have been overlooked by the Board in the recent past.

(2) The Board should take immediate steps to liberalize carrier operating authority. Every carrier is hampered in its service by outmoded restrictions, imposed years ago. The justifications for many of these restrictions have disappeared, yet the restrictions hamper us in meeting public service needs and operating more efficiently. The Board undertook a program to consider restriction removal, but this program stalled out. The Board removed only a few restrictions that were non controversial. Others, to which there was opposition which required a hearing, were never set for hearing-a byproduct of the Board's route freeze.

(3) The Board should stop trying to manage carrier service policies. Its restrictive seating standards controvert the statutory mandate to leave schedules, equipment, accommodations, and facilities to the discretion of carrier management. At the same time, the Board should be encouraged to set standards of efficiency for determining rates. We supported the adoption of such standards and the expansion of the elements of carrier efficiency to be tested. The Board should, however, leave actual operating decisions to carrier management. Any carrier that fails to operate efficiently within these standards will sustain losses, but the public won't bear the cost of inefficiency. Any carrier that operates with a higher than average

degree of efficiency will be free to either profit from that efficiency, or offer the public better service or lower fares, or a combination thereof.

(4) The Board should give the carriers much greater freedom to experiment with promotional fares and to compete with lower fares. The Board's present policies are too restrictive and put a damper on experimentation which benefits the public and benefits the industry. We supported and continue to support fare flexibility within at least a zone of reasonableness, as urged by the Departments of Justice and Transportation.

(5) The anticompetitive, capacity restraint agreements should be brought to an end. These agreements were approved on an emergency basis due to the failure of the Big Three and i an Am in 1970 to respond with sufficient rapidity to economic adversity. They have been extended with the rationale of fuel conservation. Today, they have simply no justification. However, in the recent words of a majority of the Board, they have become the "status quo." All they do now is eliminate competition between the Big Three in their major competitive markets and give each of them tremendous new competitive power in other markets for use against smaller carriers. Surely, United Airlines with a record profit of $86.4 million in 1974 and $400 million in cash does not need the protection of these anticompetitive agreements.

None of these changes require any legislative section. In fact, all are consistent with the existing statutory requirements, key among which is the competitive mandate of section 102(d). All of these regressive Board policies requiring reversal presently are being tested before the U.S. Court of Appeals for the District of Columbia on the basis that they are contrary to the statute. We have three such actions pending, as I mentioned earlier. The Justice Department is contesting the capacity restraint agreements.

If the Board does not voluntarily change its direction soon, and is not required to do so by the Court, then legislative action might become necessary. Such action, however, need only reinforce the successful statutory scheme already adopted and should consist of the following elements:

(1) State clearly in section 102 of the Act that there is a statutory mandate in favor of competition. Section 102(d) directs Board action to promote competition. When enacted, Congress made clear that this was intended as a competitive mandate. The Board for years so interpreted it. But recently, a majority of the members have put the emphasis on the qualifying clause which states "to the extent necessary." The Board has gone so far as to thrust aside its own precedents recognizing the existence of a mandate in favor of competition and enunciating a presumption to the effect The mandate can be made even clearer, if the Board persists in its present position.

(2) State clearly in section 401 (e) that the Board cannot interfere indirectly with management discretion in schedules, equipment, accommodations, and facilities, through its ratemaking process. Again, the change should not be necessary. We believe the statute is clear and recent action by the U.S. Court of Appeals for the District of Columbia supports this position. But if the Board remains reluctant to permit needed competition, more explicit congressional direction may be required.

(3) State clearly in section 1002 (e) that in considering proposals for promotional fares or reduced basic fares, the Board must take into account the generative impact of such fares on traffic. Again the statute would appear to be clear enough, but the Board has taken the position that fares must be strictly costrelated, except for short-term promotional fares. If the Board persists in this position, it will need clearer congressional direction.

(4) Modify the Act to permit carrier freedom to set fares within a zone a reasonableness to be established by the Board. The Board could do this under its existing authority but rejected this approach, as recommended by the Departments of Justice and Transportation and a few of the carriers including Continental. If the carriers are to be free to set fares within a zone, legislative action is required.

There is one other statutory change that would materially improve the competitive climate. That is modification of section 414 of the Act granting antitrust immunity. We agree with the Department of Justice that this section needs to be changed. The Board unfortunately has not given adequate weight to the views of the Justice Department, which has actively sought to protect the public interest through this period of regressive agency action by participation in CAB

proceedings. One way to assure that this will not happen again is to remove the antitrust immunity created by section 414- at least to the extent that action by the CAB approving agreements would not preclude the Justice Department from bringing an action against the parties under the antitrust laws. Section 414 might be retained to protect parties to an agreement from subsequent private suits following a hearing and CAB approval.

Thus, it is our view that a significant change in direction is needed and can be obtained to a large extent under the present statute. If changes are necessary, they are largely changes to reinforce procompetitive provisions already set forth in the statute. The only change in the statute that is necessary is a mouification of the antitrust immunity.

This brings me to the issue of "open entry." We agree with the Departments of Justice and Transportation that a change in the competitive environment is necessary. I'm afraid, however, they would get rid of the bugs in the house by burning it down, rather than simply resorting to fumigation.

Open entry might work were we starting from scratch. I would note, however, that prior to the 1938 Act conditions in the infant air transportation industry were chaotic. There was a serious lack of safety and a large element or economic uncertainty, with many carriers in serious trouble and falling by the wayside. A cohesive system of transportation to serve the public was nonexistent.

More recently, contrary to the generally held view, open entry did not work among intrastate carriers in California. That experiment began over 25 years ago. Most of the carriers went bankrupt-14 in all. In fact, I understand that United and Western often found themselves faced with thousands of passengers who had a return ticket on a carrier that was no longer in existence. But for their generosity, the passengers would have had trouble getting home.

This is not to detract from the success of PSA or Air California. We at Continental have great respect for pioneers and innovators. Kenneth Friedkin of PSA was both. He did a great job. But his experience is hardly the basis for a generalization about our national air transportation network. He had a number of unique benefits.

Let me mention a few facts that are often forgotten in citing PSA's success story. First, PSA began in the high density San Francisco-Los Angeles-San Diego markets. San Francisco-Los Angeles is the largest market in the world-by a wide margin. PSA had no service responsibilities to smaller communities. Second, for many years PSA got a real benefit in operating costs-about a 25 percent edge over its competitors, by operating under visual rather than instrument flight rules into the congested Los Angeles and San Francisco International airports. The certificated carriers, all of which had agreed to operate under positive control, were subject to an average of 15-minute delay since they operated under instrument control. In contrast PSA was permitted to pop in and out of these approximately one hour flight segments, thereby saving substantial amounts in operating expense. Third, PSA had no unions and paid its pilots and crews on a piece-meal basis-a specified amount per trip. Fourth, PSA was free of regulation on ticket sales. It used hotel doormen and bellhops, noncoms at the San Diego and San Francisco Naval Bases and anyone who would peddle its tickets. Fifth, and of great importance, PSA and Air California are carefully protected from competition by new entrants by the California Public Utility Commission and have been so protected for almost 10 years. Thus, PSA is the example of how a specialist can enter the air transportation field, pick a few dense markets, and provide service on a highly profitable basis at lower fares. But, it is no argument for unregulated, open entry.

PSA has had a highly protected and special position. No other intrastate carrier has been permitted to compete with PSA and vice versa. Open entry also has not worked well in the air-taxi industry. A large number of carriers have gone in and out of business. The public served by them end up with uncertainty in their air service. Assuring such certainty to the public was a major reason for certificating Air New England to provide needed service to fill the gap created when Northeast was merged out of existence.

In considering this subject, I also ask you to bear in mind that our certificates confer an obligation as well as a benefit. We have good markets; we have mediocre markets; and we have poor markets. But, we must serve them all. And, we live in a fishbowl. If we don't meet our obligations, the Board will quickly hear about it. So long as there is a real threat of new competition being certificated