airport at Ontario, Santa Ana, Oakland and San Jose until Pacie Spur West Airlines (PSA) and Air California demonstrated the traffic generating Eities of those satellite airports during the late sixties. As important. Stuse 10pendices fail to indicate qualitative aspects of service. For example, er show that Pacific's regulated service at San Jose generated a maxim— fú 73,000 annual online origin and destination passengers to and from Los Ames throughout the many years Pacific provided the only single-plane services city-pair, while during its first full year of operation in this city pair 147 PSA carried 557,000 O&D passengers. Finally, these diagrams do pic sto such things as the California Public Utilities Commission (PUC) decis aut ordered Western to remove the discrimination in the fares it offered at (ukland and Long Beach relative to San Francisco and Los Angeles."

Mr. Mitchell mentioned that he interested Continental in serving the Los Azgeles and San Francisco satellite airports after he joined that company in September 1968. He states that "Continental began operations at Ontario in econection 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. . . ."" Of course, authorizations are one thing, actual service another. The Official Airline Guide shows that, during this past March, Continental provided no service whatsoever to half the satellite airports (Long Beach, Santa Ana and Oakland), and that is operated only a single daily round trip between Ontario and Chicago/Denver (but not to Kansas City), about 11⁄2 daily round trips between Ontario/Burbank and San Jose, and 3 to 3% daily round trips between Ontario/Burbank/San Jose and Seattle Portland. In total, it provided six daily departures at Burbank, just over seven at San Jose and eight at Ontario. This is in sharp contrast to the multiple dažy frequencies provided by Air California and/or PSA at all six satellite airports." Actually, it is misleading to emphasize the negative aspects of airline service within California. Overall, the rivalry between individual carriers, regardless of their regulatory classification, has resulted in an outstanding coverage and quality of service being provided by all airlines as a group. As far as the consumer is concerned it is this overall level of service that counts, and the airline consumer has been amply blessed in California. In addition, wherever intrastate carriers have operated the consumer has also enjoyed fares appreciably lower than those which would otherwise have been authorized by the CAB."

THE ROLE OF DEMAND

Mr. Mitchell asserts that without regulation airline entry and exit “would have little to do with public need for service," would be "unrelated to pressing market needs," and would “depend more on availability of excess, used equipment than on market demand." 18 The terms "public need," "market needs," and "market demand" are not defined, but it appears that they are synonymous and that they refer to the economic concept of demand.

An assertion that unregulated airlines would place little importance on the demand for their services when considering entry or exit would be surprising were it not consistent with the CAB's great emphasis on supply considerations when setting its "cost-based" fares." This common practice of regulators is inconsistent with economic reality and, certainly since the publication of Alfred Marshall's Principles of Economics in 1890, economic theory has recognized that the viability of an enterprise in an open market depends both upon the costs of providing a good/service and on there being adequate demand for that good/ service. It is the "scissors of supply and demand" that define economic viability and equilibrium prices. By and large, the California experience indicates that demand would not be ignored by unregulated air carriers when they sought to enter new markets, nor would they ignore the costs of operations.

12 William A. Jordan, supra, note 4, at 129-30. Also, PUC. Transportation Division, Traffic Data, exhibit submitted in application 52970, sheet 5 (Feb. 11, 1972).

13 PUC decision 67077 (Apr. 7, 1964).

14 James L. Mitchell, supra, note 1. at 3.

15 1 Official Airline Guide (North American edition, Mar. 1, 1975).

16 Id.

17 William A. Jordan, supra, note 4, at 113-14 and 131-33.

18 James L. Mitchell, supra, note 1, at 4, 11 and 13, respectively.

19 William A. Jordan, supra, note 2, at 28-29.

STABILITY

20

Mr. Mitchell feels that the recent experience of the air-taxi/commuter airlines is evidence of "a considerable lack of economic stability," and he quotes a U.S. Court of Appeals decision to support his belief. This subcommittee has been given a statement on this point with a different conclusion.

The proponents of entry and exit regulation in that case (the New England Service Investigation) argued, and the Board agreed, that there is a public interest in "continuity of service" which requires some entry and exit regulation. We question this result, in view of the Administrative Law Judge's uncontroverted finding that although commuter carriers had entered and exited several New England markets, there had been no significant lapses of service to the public because of this turnover. (Footnotes omitted.) "1 The difference is one of viewpoint. From the airline point of view there certainly is instability with open entry and exit. Many airlines enter and a large number of these exit. From the passenger viewpoint, however, service is quite stable, even during periods when a relatively young industry is testing and developing markets.

21

99 22

Mr. Mitchell notes that "[s]ome 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. . . Unfortunately, he fails to specify the numbers of air-taxi operators in each of these two categories, nor does he give the number of operators who have found stability in other circumstances.

A CAB study of the commuter air carriers for the year ended June 30, 1973, reported 201 such carriers filing required reports for one or more quarters, with 126 doing so for the entire year. Of the 201 carriers, 151 provided passenger service and accounted for 549 million revenue passenger-miles (RPM), which was 0.45 percent of the total 122,009 million RPM carried by the domestic trunk, local service and commuter carriers combined." This left the trunk and local service carriers with 99.55 percent of total RPM. If less than one-half of 1 percent of total RPM can support 100 or more carriers operating small aircraft having 19 seats or less, there is nothing surprising about 221 times that traffic supporting well over 100 airlines operating large aircraft with 50 to 400 seats, especially since California (and the Texas) experience provides evidence that full economies of scale can be achieved with around five aircraft of a type suited to the carrier's routes and traffic densities.25 Furthermore, with this much larger demand service would be even more stable for the passenger than what they have already obtained from the constrained commuter carriers.

FINANCIAL AND SAFETY PROBLEMS IN THE THIRTIES

Referring to the pre-1938 era, Mr. Mitchell notes that the carriers of that period were "in financial difficulty, and safety problems existed." 26 He does not mention that many industries had financial difficulties during the Great Depression and that the domestic airlines were a growth industry even during that period. Between 1930 and 1938 their RPM grew by 464 percent and passenger revenues increased by 242 percent (in a period of deflation), while mail revenue ton-miles expanded by 203 percent from 1934 to 1938.27

Safety then was certainly a greater problem than it is today, but airline, aircraft and air traffic control technologies in the thirties were rudimentary compared with the present time. As stated in my testimony, the evidence is unclear regarding whether or not economic regulation by the CAB (as distinct from direct operational regulation by the Federal Aviation Administration) improves airline safety. Even comparing passenger fatalities per 100 million RPM may be mis

28

20 James L. Mitchell, supra, note 1, at 5.

21 Thomas E. Kauper, "Testimony Before the Senate Subcommittee on Administrative Practice and Procedure Concerning Airline Regulation by the Civil Aeronautics Board," 21-22 (Feb. 6, 1975; processed).

22 James L. Mitchell, supra, note 1, at 6.

23 CAB, "Commuter Air Carrier Traffic Statistics, Year Ended June 30, 1973," 3 (June 1974; processed).

24 Id. at 1 and 14. Also, CAB, Air Carrier Traffic Statistics, 2 and 4 (June 1973). 25 William A. Jordan, supra, note 4, at 191-94.

26 James L. Mitchell, supra, note 1, at 5.

27 CAB Handbook of Airline Statistics, 23, 48 and 79 (1973 ed.).

28 William A. Jordan, supra, note 2, at 43-45.

leading. For example, to the extent higher fares resulting from CAB regulation have caused travelers to substitute more dangerous automobile travel for safer air travel the overall safety of the total traveling public has been decreased by CAB regulation, assuming airline safety standards would be maintained with larger traffic volumes. The question of safety is very complex and many factors must be considered explicitly or held constant, especially when making comparisons between different historical periods.

INTEGRATED SERVICES

Mr. Mitchell's statement regarding the lack of “an integrated pattern of service" by the intrastate carriers is surprising." The route maps given in his appendix E show that the services of Air California and PSA are close substitutes for each other rather than being complementary, thereby decreasing passenger demand for integration." Also, he fails to point out that a California passenger can easily obtain integrated services by going to a travel agent to purchase tickets and having reservations made on two different intrastate carriers should his travel plans warrant this. Finally, Mr. Mitchell has overlooked Air California and PSA's unsuccessful efforts to obtain the necessary authorization from the CAB to establish interline arrangements with the CAB-regulated airlines." If increased integration is desirable, it is within the CAB's power to allow it to happen. Much has been made of the desirability of the CAB-regulated airlines being able to issue tickets and make reservations for each other. While this is convenient for some, it has resulted in other passengers having to experience long and impatient delays at ticket counters while agents make reservations and issue multicarrier tickets for other passengers. My own travel experience has shown that it is very easy to fly to Los Angeles on American, United or Air Canada and then make reservations and purchase tickets for travel within California on PSA or Air California, especially with the widespread acceptance of credit cards. Each carrier sells a simple one- or two-coupon ticket. The only difference is that in Toronto the ticket may be written out by hand in considerable detail, while in Los Angeles it is issued more quickly as a cash-register receipt. I happen to prefer the speed of the latter method.

RELEVANCE OF THE CALIFORNIA EXPERIENCE

Mr. Mitchell, in common with other industry spokesmen, warns against generalizing too much from the California experience. "The area is limited geographically. The weather conditions, the mileages involved, and the high population density of the principal cities served present ideal operating circumstances.' ."32 Aside from occasional dense fogs at most airports and the heavy snow falls at Lake Tahoe and Mammouth, weather conditions in California are good, but so are weather conditions all across the southern U.S. The population densities of the principal cities are not unique; they are duplicated in many other cities in the nation. Finally, the mileages involved are far from ideal. The fact is that California is a relatively constrained geographic and economic area and this has served to harm the intrastate carriers that sought to survive under open entry. During 20 years of experience in CAB regulatory activities and related research, this is the first time I have ever heard route segments of 109, 340, or even 449 miles called "ideal." To the contrary, routes that allow nonstop flights of 1,000 miles or more are the ideal. Listening to airline spokesmen would lead one to think the CAB had done the California intrastate carriers a tremendous favor by not allowing them to risk introducing low-fare coach service to such cities as Phoenix, Seattle, Denver, Dallas, Minneapolis-St. Paul, Chicago, Detroit, Atlanta, Miami, Washington, New York, Boston and numerous large, medium and small cities in between. As the old saying goes, "with a friend like this, who needs enemies?"

There are indeed limitations to generalizing from the California (and Texas) experience, but these limitations are opposite to those indicated by airline

20 James L. Mitchell, supra, note 1, at 10.

30 William A. Jordan. "Air Transportation Markets: Definitional Confusion," Journal of Air Law and Commerce (forthcoming: nn. 18-25 of the manuscript).

31 CAB orders E-19655 (June 10, 1963) and 71-8-57 (Aug. 12. 1971). Also. PSA, "Responses to Subcommittee on Administrative Practice and Procedure," 16-17 (Feb. 3, 1975).

32 James L. Mitchell, supra, note 1, at 5.

spokesmen. With open entry nationwide, airlines could operate more efficiently and enjoy lower operating costs than experienced in constrained intrastate areas, demand for their services would be far greater, and there would probably be proportionally fewer failures than what occurred within California.

Critics of the California intrastate experience also emphasize that the successful carriers operated between Los Angeles and San Francisco which has the largest passenger flow in the world. Mention is never made of the fact that this was not the case in 1948 before the intrastate carriers introduced low-fare coach service to that city-pair. As pointed out in my testimony, in 1948 Boston-New York/Newark accounted for 550,000 true O&D passengers while only 297,000 such passengers flew between Los Angeles/Burbank/Long Beach and San Francisco/Oakland. An important reason for the large traffic densities in the present California city pairs is the existence of low fares for long periods of time. Had the same fares-per-mile been permitted throughout the U.S. during the past 25 years, other city-pairs would be challenging Los Angeles-San Francisco for the distinction of being the largest in the world.

33

BANKRUPTCY AND THE PASSENGER

9 34

At two points in his statement Mr. Mitchell points out that passengers "paid a significant price in the disruption caused by a large number of local air carriers going out of business," and that "[p]eople were left stranded in the midst of trips, and had no assurance of receiving reliable air service.' Surely, given the continuing services of PSA, United, TWA, Western, Pacific and other airlines, it is incorrect to say that passengers had no assurance of receiving reliable air service. Service terminations and carrier bankruptcies certainly inconvenienced passengers who had to make alternative air or surface travel arrangements, but this inconvenience was less than that caused by a foggy night when all airline services were suspended. In bankruptcy, the most extreme case of service termination, the main harm suffered by passengers was that, in common with other creditors, they suffered financial losses. It is worthwhile to investigate the likely extent of such losses.

35

The largest and most important airline to go bankrupt was California Central Airlines (CCA) on February 14, 1955. California Central was the true pioneer of low-fare coach service within California. It was the first to inaugurate such service in 1949 and over the next six years it consistently carried more passengers than any other intrastate carrier (a high of 169,000 in 1953). Let us consider the financial loss of a CCA passenger who purchased a round-trip ticket between Burbank and San Francisco just prior to February 14, 1955. At that time CCA's one-way fare in this city-pair for Martin 202 service was $13.50 (it was $11.70 for DC-3 service), so a round-trip ticket cost $29.70, including the 10percent federal transportation tax then in effect." Therefore, if CCA went bankrupt before the outbound portion of the ticket was used the passenger lost the full $29.70 (assuming no payments were made to general creditors when CCA's assets were sold by the court). If, however, the passenger had flown to San Francisco just before the bankruptcy he either lost $14.85, the extra price he had to pay United or Western to fly him back to Burbank, or $10.99, the price charged by PSA for this service." In addition, he may have had to incur such added costs as a phone call to his wife, one or two meals, an overnight stay in San Francisco, and a higher parking fee. Finally, he might even have had to buy a first-class ticket on United or Western for $24.26 in order to get back in time for the lodge meeting that night. Overall, our representative CCA passenger would have perceived his loss to have been between $11 and, perhaps, $35 because of CCA's bankruptcy. Certainly he would have felt aggrieved, especially since a dollar was worth more in 1955 than it is today. But, then, he would have been similarly aggrieved had he put a $35 down payment on a chair ordered from a furniture store that went bankrupt before delivery of the chair. In either case he might have written a complaint to his state legislator, but probably not.

38

33 William A. Jordan, supra, note 2, at 15n.

34 James L. Mitchell, supra. note 1 at 10 and 12.

35 William A. Jordan, supra, note 4, at 20 and 264.

38 Id. at 135 and 284-87. In early 1955. United and Western, as well as CCA, operated the majority of their nonstop coach service between San Francisco and the Los Angeles area through Burbank. PSA operated only through Burbank. 11 Official Airline Guide (Feb. 1955).

37 Id. at 135, 279-80 and 284-87.

38 Id. at 135 and 276-78.

While the above may have been the perceived loss of the CCA passenger, it is not the full story. Had CAB regulation been able to totally prevent intrastatecarrier service within California, one-way coach fares would have been higher than the $13.50 (or $11.70 or $9.99) that existed in this city-pair in early 1955. In October 1953 the CAB announced a new coach fare policy in conjunction with the short-haul coach fare case, so it is likely that by early 1955 some limited day-coach service would have been inaugurated between Burbank and San Francisco on long-haul flights at a one-way fare of $16.79 plus tax." Assuming coach service as a part of long-haul flights would have been convenient for our Burbank-San Francisco passenger, this means that he would have paid $36.94 for his round-trip ticket on a CAB-regulated airline, $7.24 more than the $29.70 he paid for his CCA ticket. Thus, this $7.24 saving due to the existence of intrastate carriers should be deducted from the $29.70 financial loss to obtain the passenger's true net loss of $22.46 had CCA's bankruptcy occurred before he began his trip. Similarly, $7.24 should also be deducted from the $11 to $35 estimated loss in the situation where the passenger was in San Francisco at the time of service termination. This reduces the overall range of possible loss down to between $3.76 and $27.76.

40

The above is the full story for the first-time intrastate air traveler, but not for the person who flew on intrastate carriers between Burbank and San Francisco at other times from 1949 to early 1955. In 1949, for example, because of CCA's innovative efforts such a passenger was able to make his round trip for $26.43 (including the 15-percent transportation tax) compared with United or Western's CAB-regulated charge of $48.42—a saving of $21.99 for this single trip would have covered most or all of his subsequent loss in 1955." Similar calculations should be made for every other trip taken at lower fares because of intrastatecarrier service. Overall, it is clear that the maximum loss suffered by a BurbankSan Francisco passenger due to CCA's bankruptcy was less than $30, and that almost any passenger who made one or more round-trip flights on an intrastate carrier between 1949 and early 1955 broke even or enjoyed a financial gain despite his loss when CCA went bankrupt.

42

Mr. Mitchell reports that Holiday Airlines, the intrastate carrier connecting Lake Tahoe with the major California cities, went bankrupt earlier this year. He did not elaborate on what effect this has had on Holiday's service, but the Official Airline Guide reports (perhaps incorrectly) that Holiday is still operating. Maybe Holiday's current passengers will suffer losses as a result of its bankruptcy. It should not be forgotten, however, that the first scheduled service to Lake Tahoe was inaugurated by an intrastate carrier on May 14, 1962, and that the first CAB-regulated airline (Pacific/Hughes Airwest) did not begin such service until October 27, 1963 and subsequently terminated service in May 1974.3 Thus, the harm done to passengers through Holiday's bankruptcy should be balanced by the benefits received by the same and other passengers through the earlier service inauguration and the continuation of service after Hughes Airwest's withdrawal.

MONOPOLY IN CALIFORNIA?

Was there an airline monopoly in California? Mr. Mitchell states that by 1965 the period of open entry in California "produced a single carrier monopolizing all of the (major) California markets." "He fails to mention that at that time, in addition to PSA, service was provided in major California city-pairs by American, Delta, National, TWA, United, Western and the three predecessors of Hughes Airwest (Bonanza, Pacific and West Coast). This was hardly a monopoly situation.

While Mr. Mitchell correctly points out that entry was no longer fully open after September 1965, he makes little mention of the information given in my testimony that it was not until 1969 that the PUC actually closed entry to new intrastate carriers operating large aircraft. During those four intervening years

39 Id. at 104-6 and 276-78.

40 In other words, one has to compare the passenger's outlay of $29.70 for the unused CCA ticket plus $29.70 for a ticket on United or Western, with the $36.94 outlay that he would have had to pay in the absence of intrastate carriers.

41 William A. Jordan, supra, note 4, at 135, 276-78 and 284-87.

42 1 Official Airline Guide (North American edition, Mar. 15. 1975).

43 William A. Jordan, supra, note 4. at 117 and 122-25. Also, CAB orders 74-3-105 (Mar. 25, 1974) and 74-5-75 (May 15, 1974).

44 James L. Mitchell, supra, note 1, at 7.