and we are rewarded for good service and efficient operation by new route opportunities, we'll do our job well-serving the thin routes as well as the fat ones. We even have the incentive to undertake developmental responsibilities, such as Continental's pioneering service to Micronesia and our pioneering effort to develop service between Seattle-Portland and the so-called satellite airports in the Los Angeles and San Francisco areas. We perform these tasks with the hope that our good efforts will lead to new, significant route opportunities.

The theory of the present system is to create a total air transportation network-to bring fast, convenient service to every community that can possibly support it. At the outset, new services often are marginal or may even be operated at a loss. Some come around quickly; some get cross-subsidized for quite a while by our profitable operations. But the service is provided and a very complete network has been established. This permits the develompent of the economy of our smaller as well as our large and intermediate-sized communities. When you look at the results, the situation begins to come into perspective. We have established an unusually complete air transportation network, more complete than anywhere else in the world. Moreover, it is a relatively efficient operation. Our present competitive system has brought the lowest cost to the public of any air transportation system in the world. Illustrative comparisons are shown on appendix A.

Further, the assertion that there have been no new entrants is inaccurate. Use of numbers alone is deceptive. In 1938, there was no local service carrier industry as such. Today, there are 8 regional carriers. In 1938, there were no supplementals. Today there are 10 supplemental carriers. In 1938, many of the trunkline carriers were tiny and had limited responsibilities. For example, we served only 624 route miles and a geographic area covering 8 cities in 3 states. Today, as the smallest trunkline, we serve 17,020 route miles and 31 cities in 14 states, excluding Micronesia. In addition, there are today two new elements: the intrastate carriers principally in Texas and California and a large number of airtaxi operators. Compared to any other transportation system, this is a highly competitive system. And, the public is getting a high-quality service at reasonable prices.

We have given considerable thought to what would happen if we were to move from the present system of route security to a system of a generally uncontrolled open entry. I hope we haven't become so hide-bound in this industry as to lose sight of the need for innovation and change. After all, Continental under the leadership of Bob Six got to where it is today by bucking the system-pressing for new opportunities and greater competitive freedom. That's why we're fighting so hard today against what we regard as anticompetitive Board policies. We regard their overly-protective policies as contrary to the public interest. We want them changed. We want more freedom and are fully prepared to seek more freedom for others.

In our judgment, however, open-entry and freedom of air carriers to serve any market they choose would be a tragic mistake. Whatever theoretical studies may indicate, we believe the practical consequences would be disastrous.

First and foremost, I think we would risk losing many of the links in the network of air service that have been so carefully created, as each of us scurried to avail ourselves of what we believed to be the most profitable opportunities. Moreover, there would be a constant shifting of our service to improve our profits. The situation for the traveling public and shippers is likely to be chaotic. Smaller communities are bound to suffer from service gaps and, even more significant, uncertainties in their air service. The result would be to stifle the growth of these communities. Industry would tend once again to cluster around the major cities where transportation needs would more likely be met with some continuity. To get reasonably good service to smaller communities would probably require heavy government subsidization.

Second, the threat of oligopoly in this industry would increase. Without security of routes, smaller units would have difficulty surviving. There might well be a lot of small entities going in and out of business, as occurred in the California intrastate situation and in the air-taxi business. But the major elements serving the mass of the public are likely to be reduced to a very small number. Predatory practices by the biggest carriers would be difficult to control as carriers shifted from market to market. Consider for example the economic power of United Airlines with over $400 million today in cash and liquid securities.

In an open-entry situation, they could control markets at will. In a regulated situation, they are under much more significant restraints not to abuse their substantial power. You must remember that to operate larger jets substantial financing is required. Without security of routes, I can't imagine the bankers and insurance companies lending the millions of dollars needed for ground and air equipment required in our business. If I'm right you'd end up with a few large, high-cost operators serving most of the public. This would inevitably lead to higher prices and a lower quality of service.

Third, technological development might be stifled. Manufacturers won't build new aircraft without firm orders in advance of production from financially secure purchasers. There thus has been no significant development of new aircraft for the air-taxi end of our industry.

Fourth, is the impracticality of the free movement among markets presumed by the proponents of open-entry. No one suggests freedom in international routes. This means that only those carriers without international routes would be without any route security. This would put a carrier like Continental at a grossly unfair position vis-a-vis a carrier with a strong international route structure. We would have no anchor. They would. They could direct their attention to domestic markets feeding into their international routes, creating a strong economic base for their operations. We would be left to fend without such a base. This could result in a domestic route system principally geared to serve international routes.

The nub of it is that we have a reasonably successful air transportation system today. I urge that we try to make it work better before substituting another system.

Let me add that we don't oppose new entry into the industry. What's happened in New England, for example, justified new entry. Other new entrants may be called for to meet special needs or merely to assure the continued healthy spur of competition to the industry. We have no objection to congressional pressure on the Board to consider the applications of new entrants for certificate authority; but we must recognize that without the security of a certificate, financing necessary to success is difficult to obtain on a continuing and reasonable basis.

The Board has been lax in this area. They have been unwilling to consider the applications of new entrants even in good times. Maybe legis'ation is necessary to force them to do so. We would welcome the opportunity to work with Congress to suggest legislation to require such consideration. But this is a far cry from open entry and the unlimited freedom of carriers to choose which they will serve and which they will abandon.

Let me close on a positive note. The Civil Aeronautics Board in a 1950 decision stated that:

"An objective reading of the Civil Aeronautics Act leaves no doubt that the lawmakers considered competition to be a desirable objective which shou'd be established wherever it is economically feasible and will contribute to the development of a sound national air transportation system.”

It's time to return to this kind of positive orientation to permit continued growth and development of our air transportation system. It's time to bring an end to the recent period of regressive policies. I hope that this subcommittee and this Congress will bring its energies to bear to this end. But we have a basically sound system and good statutory framework. Let's try to make it work as the Congress intended in 1958 before radically altering it and destroying our excellent network of air transportation.

Note: Intra-Canada fares approximate those of the United States. The Canadian fare structure is more tapered than the United States, i.e., Canadian short-haul fares are higher than the United States.

DIALOG BETWEEN CONTINENTAL AIRLINES AND DR. WILLIAM A. JORDAN ON THE SUBJECT OF CALIFORNIA INTRASTATE AIRLINES

[On February 14, 1975, Dr. William A. Jordan testified concerning the low-fare air service in California provided by intrastate carriers not regulated by the CAB. See p. 452 ff., above. During the hearing of February 18, 1975 Senator Kennedy asked Continental Airlines to comment on Dr. Jordan's testimony. Mr. James L. Mitchell, vice president of regulatory proceedings, responded for Continental. Dr. Jordan replied, and Continental commented further. These materials follow in chronological order.]

PREPARED STATEMENT OF JAMES L. MITCHELL

MARCH 31, 1975

The purpose of this statement is to respond to the request made by Senator Kennedy to Mr. Harvey J. Wexler, senior vice president for international and governmental affairs of Continental when he testified before the subcommittee on February 18, 1975. The request was for any comments Continental might have regarding the analysis of the California intrastate situation presented to the subcommittee by William A. Jordan on February 14, 1975.

I have closely observed the California intrastate situation over my past 29 years in the air transportation industry. From March 4, 1946 to September 1, 1968, I held various positions in Western Airlines, dealing principally with airline scheduling, market research, route analysis, and the preparation of route and rate cases. I began in Western's Los Angeles ticket office. From mid-1947 to mid1949, I was manager of sales control and research. Two of my major functions were aircraft scheduling and the analysis of traffic and sales data to determine allocation of sales and advertising expenditures. On July 15, 1949, I became director of research and, later, vice president of research. My functions in this capacity included the responsibilities of my previous job together with the responsibility for the preparation, analysis and presentation of Western's route and rate cases before regulatory agencies, including the California Public Utilities Commission.

On September 1, 1968, I joined Continental as staff vice president of corporate planning with responsibilities for all economic planning projects, including such matters as fleet planning, schedule analysis and advanced route planning. On February 1, 1973, I became vice president of regulatory proceedings, where I have continued to work on advanced planning projects and have assumed responsibility for the preparation of all route and rate cases.

Throughout my almost 30 years in the airline industry, I have resided in the Los Angeles area and have maintained a close and continuing interest in the California intrastate air carrier operations. This was an important part of my job at Western, inasmuch as Western had and still has a significant operation in the California intrastate markets.

It was in connection with this activity at Western that Professor Jordan did much of the background work that led to his doctoral thesis on the "Economic Effects of Airline Regulation." In 1960, I hired William A. Jordan as an analyst in Western's research department. His functions were to aid me in the preparation of material for presentation in regulatory matters before the Civil Aeronautics Board and the California Public Utilities Commission. He worked for me in that capacity until 1964, spending part of his time at the University of California on his doctoral work. I am thus intimately acquainted with the material he compiled on the California intrastate carriers.

While at Western, I also worked closely with the California Public Utilities Commission. In fact, during 1949 and 1950, I provided considerable assistance to the staff of the Commission, to help them to learn about the regulation of air transportation. Up to that time, the Commission's activity had been focused on truck and rail transportation. During a portion of their learning period, the Commission staff worked out of my office.

Since moving to Continental, I have maintained my interest in the California intrastate air transportation activity on a personal and professional basis. Shortly after coming to Continental, I interested the carrier in serving the socalled "satellite" airports in the Los Angeles and San Francisco areas. Continental began operations at Ontario in connection with its Chicago-Kansas City-Denver-Los Angeles route, and later was authorized to provide service between the Pacific Northwest terminals of Seattle and Portland and all the satellite airports at San Francisco (Oakland and San Jose) and Los Angeles (Burbank, Long Beach, Ontario and Santa Ana).

Professor Jordan's studies, conducted largely during the period when he worked for me at Western, form the basis for his contention that free entry and exit in the domestic air transportation system would significantly benefit the public. His position, in turn, appears to provide a basis for the position on entry and exit taken by the Department of Justice. See particularly page 18 of Mr. Kauper's testimony of February 6, 1975, and page 7 of Mr. Baker's testimony of February 18, 1975.

I believe that Professor Jordan has accurately and quite fully set forth the history of the California intrastate situation prior to September, 1965. I depart from him, however, in the conclusions he draws from these facts. His principal conclusions from this experience are that: 1) the intrastate service pattern produced far healthier results for the traveling public than did the regulated U.S. domestic industry; 2) absent regulation, there would be 200-300 air carriers in the United States, and fares would be lower; and 3) the period of “adjustment" after the institution of free entry and exit would be in the order of 10 years. I believe that the history he has compiled refutes these conclusions and, in fact, establishes that: 1) there would be serious instability in the markets that are served, and many markets served today would not be served; 2) this insta

bility would not decrease after an initial period; 3) a large number of small carriers would enter and exit, and their entry and exit would have little to do with public need for service; 4) after a prolonged "shakedown" period which would exceed the 20 years experienced in the comparatively simple California situation, a small number of large carriers would eventually dominate our air transportation system; and 5) over the long term, fares would be higher and service would be inferior to that existing under a properly regulated system.

1. The Relevance of the California Intrastate Experience.-I agree that the only experience that exists on what has occurred with a free entry and exit system in the air transportation field is the California intrastate experience. At least for a 20 year period from 1946 to 1965, carriers were completely free to enter into and exit from service within this one highly populated area of the United States. However, there are some limitations on generalizing too much from this experience. The area is limited geographically. The weather conditions, the mileages involved, and the high population density of the principal cities served, namely Los Angeles, San Francisco and San Diego, present ideal operating circumstances.

The only other experiences with open entry are the pre-1938 era on a national basis and the air-taxi situation. Prior to 1938, there was no national regulation on entry or exit. At the time regulation was instituted, the carriers were in financial difficulty, and safety problems existed. One significant purpose of federal regulation was to provide route security in order to bring about greater financial stability in the air carrier industry. But commercial aviation was in its infancy. Certainly, it is fair to conclude from the circumstances that existed during this era that: 1) the lack of route regulation could not be said to have been beneficial, and 2) the lack of safety regulation was detrimental.

The air-taxi situation today indicates that large numbers of smaller operators will enter the air transportation industry if permitted to do so. They can serve in special market situations. But, they evidence a considerable lack of economic stability. As the United States Court of Appeals noted in Hughes Air Corporation v. CAB. 492 F.2d 567. 577, (D.C. Cir. 1973):

"In fiscal 1970 the entire commuter industry, numbering 126 firms, generated total estimated revenues of $70 million, or an average of $550,000 per firm. A 1970 study done for the Department of Transportation found that the commuter industry as a whole has been operating at a loss, with individual firms' performances ranging from substantial losses to only slight profitability. The failure rate among commuters is quite high and old firms leave and new ones enter the industry regularly." (Emphasis supplied.)

Some air taxi operators who have achieved stability did so either by concentrating in high-density vacation markets or by tying themselves to a certificated carrier through a commuter "feeder" agreement which passes on the route security enjoyed by the certificated carrier.

The Texas intrastate situation is of little relevance, since the sole intrastate carrier is regulated by the Texas Aeronautics Commission. Southwest Airlines now operates an intrastate monopoly, similar to the monopoly intrastate routes in California.

2. California Intrastate Service 1946-1965.-Set forth in appendixes A through C is the information on the California intrastate carriers operating during the 20-year-period of free entry, the cities served and the period of service both by carrier and service. The information is obtained from Professor Jordan's book. When this information is displayed, certain conclusions emerge:

First, while 16 carriers entered during this period, 14 of them exited. In essence, there was an 87 percent failure rate. There was little or no head-to-head competition at any time during the 20 years. One of the two surviving carriers provided only a specialized Saturday and Sunday service to Brown Field, a secondary airport 20 miles south of San Diego, on the Mexican border. This operation was conducted for the purpose of carrying passengers to and from the Caliente Racetrack on package deals for the operators of the racetrack. As far as truly scheduled service between the major California markets is concerned, the period of free entry produced a single carrier monopolizing all of the California markets. That single carrier had evolved as the only such carrier by February, 1965, eight months prior to the legislation.

Second, most of the carriers lasted only a short period of time. Nine carriers, or 56 percent of the entrants, stayed in business for periods of less than 1 year. Seven lasted 6 months or less, and the other two lasted only 7 and 9 months. Of the remaining 7 carriers which lasted more than a year, 5 lasted less than 2 years.