It is clear from the history of the California experience that the CAB-certificated carriers provided two significant public benefits. First, they provided a stable base of air service on which the public could rely when confronted by the financial failures of the intrastate carriers. Second, the very presence of the CAB-certincated carriers, as well as their competitive response, spurred PSA to offer low fares and frequent schedules in the primary corridor markets between San Diego, Los Angeles and San Francisco. PSA had to offer these benefits in order to succeed in the marketplace in competition with the CAB certificated carriers.

The competitive battle between PSA and the CAB-certificated carriers is described in a 1966 article published in the Journal of Air Law and Commerce." That article, which is a portion of a prize winning paper at Yale University, describes PSA's entry into the Los Angeles-San Francisco market with low fares and frequent service and the competitive response by TWA, United and Western with similar fares and even better service. For example, Western responded to PSA's Electra service by undercutting PSA on price and using DC-6B's. United introduced pure jet aircraft with a fare only $1.05 higher than that charged by for Electra service. United and TWA both offered commuter service. This varied competitive response by the trunklines reduced PSA's market share and spurred PSA to improve its own service by upgrading its equipment to pure jets and increasing its schedules. PSA was then able to recapture its lost traffic. The public was the obvious beneficiary of this competitive struggle: "Thus PSA, through vigorous competition in fares, equipment, and scheduling, has been able to succeed in this important market. The trunks have recently met the competition, and the advantages to the consumer are evident. . ." (Id., p. 609.)

Had the trunklines not been serving the market, PSA would not have felt the pressure to improve its service, and the public would not have been presented with the variety and range of service and fare offerings that were made available. Projected to a national scale, this experience indicates that the public would benefit by new entry into air transportation, just as it was benefited by PSA's entry into the prime California corridor markets. Indeed, that has been Continental's position, as expressed by Mr. Mitchell: "

"In fact, we believe that new entrants maintain vitality in the industry. They bring innovation, which means public benefits. Moreover, the threat of new entrants being permitted into the industry spurs the incumbents to better serve the public ..

But, as Professor Jordan concedes by his own arguments, the California experience also makes clear that the public is better served, if, in addition to receiving service and fare benefits from new entrants, it is assured of continuing, reliable air service from certificated air carriers. The California experience shows that competition works in both directions-the new entrants spur the incumbents to react with improved service which, in turn, spurs the new entrants to improve their own service. At the same time, the public can rely on continuing service by the certificated carriers if new entrants should fail.

Viewing the California experience with caution-because, after all, that experience is related to very high density commuter markets-one nevertheless can conclude that the CAB should undertake to certificate qualified new entrants who would provide new service and fare benefits to the public and stimulate a competitive response by existing air carriers. However, one cannot use the California experience to leap to the conclusion that there should be open entry. Indeed, there is no historic experience to support the concept of open entry in nationwide air transportation. The arguments for open entry, however wellintentioned, are only arguments which reflect the proponents' judgment that open entry will work. The implementation of open entry carries with it the risk that their judgment is wrong. Professor Jordan is certainly entitled to his opinions, but the subcommittee should consider these opinions in the context of what actually happened in California and how that experience can be used to improve what is generally regarded as the best air transportation system in the world. Given the fact that a good national air transportation system does exist, albeit with deficiencies. it would seem a better approach at this juncture improve the system by introducing healthy doses of competition rather than tear

2 Atwood. J.R., "Intrastate Carrier-Competitive Impact-Pacific Southwest Airlines," 32 J. Air Law & Comm. 607, autumn 1966. 3 Supplementary Statement, pp. 15-16.

ing the system apart and risking the possibility that needed public service will be lost.

PREPARED STATEMENT OF EDWIN I. COLODNY, EXECUTIVE VICE PRESIDENT, MARKETING AND LEGAL AFFAIRS, ALLEGHENY AIRLINES, INC.

Allegheny Airlines was pleased to be included in the list of companies invited wo participate in these most vital hearings concerning the future course of regulation of the U.S. domestic air transport industry.

My statement will be directed primarily to the subcommittee's interest in route regulation.

The Federal Aviation Act of 1958 and its predecessor statute has been, by and large, a success. The ability to move by scheduled air carrier on a convenient basis throughout the United States speaks for itself. The safety record of this industry is remarkable, and will undoubtedly continue to improve.

But despite how good we believe the system to be, we know it can be improved upon. There is opportunity for needed service improvements, without amending the statute. Before commenting on this, however, I believe it would be helpful for the subcommittee to know why Allegheny believes the basic statutory approach of the Federal Aviation Act should be left alone.

Let me use Allegheny as an example of the growth and service possible under the existing statute.

Since 1964, Allegheny has grown from a small local airline which served about 1.5 million passengers in 1965, to a large regional carrier which served about 11 million passengers in 1974. Our commercial revenues grew from $27.5 million to $366 million in this period. Assets of the company increased from $45 million to $290 million. Earnings have grown at a less dramatic rate though they reached over $6 million in 1974. Retained earnings at the end of 1974 were minus $578,000. The shareholders have received only two cash dividends in the company's history-5 cents per share in 1965 and 6 cents per share in 1966. Allegheny received no federal subsidy in 1974. Management of the company has remained essentially unchanged for over 20 years.

This record was made possible by three key achievements sanctioned by the Act:

1. Route grants issued pursuant to section 401(a) of the Act;

2. Mergers with two other local service airlines, Lake Central in 1968 and Mohawk in 1972, pursuant to section 408 of the Act; and

3. Approval of the Allegheny commuter agreements pursuant to which the CAB permitted Allegheny to suspend service at loss points in favor of independent commuter operators utilizing smaller equipment.

Allegheny has exercised the authority resulting from the foregoing actions in a vigorous manner, providing service in large and small, as well as competitive and monopoly markets. The Allegheny history is the product of the administration of the Federal Aviation Act by the Civil Aeronautics Board (CAB) which, as an institution, has reflected a wide range of philosophies over the years.

Prior to 1965, the CAB had denied most applications by the local service carriers to serve heavily traveled short or medium-haul markets served by trunklines. Then, the Board shifted its policy and encouraged local carriers to improve their route structures to fit the jet age which was then upon us. To assist in this transition, the CAB adopted a procedure for expediting applications to remove restrictions on local carriers to permit service in competition with trunklines in short- and medium-haul markets, where such services were needed and could be shown to be profitable and subsidy-reducing.

Allegheny applied for and received authority in several large markets, such as New York-Pittsburgh, Chicago-Pittsburgh and St. Louis-Pittsburgh. Allegheny's share of these markets in fiscal year 1974 was 43, 26 and 55 percent, respectively. We have concentrated our jet fleet on 100 passenger, twin-engine DC-9-30 aircraft in single-class configuration at coach fare levels. We emphasize convenient service with necessary amenities. No first-class compartments. No free liquor.

Today, Allegheny is a strong competitor against large carriers such as United, TWA, American and Delta.

We offer a wide variety of discount fares: weekend excursion at 25 percent off, group 10 travel at 33 percent off, tour basing fares at 20 percent off, as well as clergy and military reduced rates.

And we have requested CAB approval to expand the new Bicentennial excursion fares to all markets on our system.

We also have pending a new group fare for small groups between 4 and 9. This new fare would reduce the cost of travel to family and other groups by 20 percent. Because of our strong discount fare program, we are able to promote Allegheny as the No. 1 money saver in a large number of important markets.

While developing as a major factor in the dense short- and medium-haul markets, Allegheny was at the same time developing a new way of providing better service at no cost to the Federal Government for many small cities.

In 1967, the CAB permitted Allegheny to commence the first experiment with a commuter replacement program at Hagerstown, Maryland. The success of the Allegheny commuter experiment is well-known. Under this program 27 cities now receive service from 12 independent air carriers under contract to Allegheny. These carriers operate at a profit with no Federal subsidy support. In 1974, operating small aircraft such as Beech 99, Twin Otter and Nord 262, these carriers generated over one million passengers primarily to and from smaller cities which, prior to the Allegheny commuter, supported only limited frequency and required heavy subsidy support. The consumer benefits at the small cities involved are obvious. By and large, these are the kinds of communities which have received limited benefit from a policy of free entry which already exists under part 298 of the CAB's regulations.

The success of the Allegheny commuter story lies in its integration of small city service to the mainline air transport network of this country. A prime example is Salisbury, Maryland, which enplaned over 31,000 passengers in 1974. These passengers travelled all over the United States and internationally, many of them on Allegheny Airlines through connections at Baltimore/Washington International Airport (BWI), Washington National Airport, and Philadelphia International Airport. This could not be achieved without having the benefit of an integrated system to ease connecting travel and encourage use of the local airports instead of driving 2 hours to BWI to board aircraft.

Furthermore, these passengers have had the benefit of a fare structure similar to that of the local service industry, including joint rates to our Allegheny cities and many offline cities, as well as the discount fares.

I appreciate the concern of the subcommittee as well as the concern of some persons both within the government and outside, with the proposition that our regulatory scheme, by restricting freedom of entry or exit, has led to higher cost air service than need be paid by the travelling public. As stated by one of the earlier witnesses, the Chairman of the Federal Trade Commission, we have the most comprehensive, stable air transport network in the world. In his opinion, however, the cost has been a fare structure on many routes which is higher than would prevail if the industry were characterized by price competition and free entry.

In my opinion, freedom of entry would do nothing to reduce the price of air travel at the small and intermediate cities in this country. I also believe that freedom of entry in the larger markets would ultimately seriously impair service to the small and intermediate cities.

As the subcommittee knows, under part 298 of the CAB's regulations, any individual has been free to start an airline and operate at any city in the country on an exempt basis, provided he utilizes smaller aircraft not exceeding a 30 passenger capacity. Freedom of entry is available, therefore, at smaller and intermediate size cities and has been for years. However, the fares charged by most commuter carriers serving such points is generally higher than certificated carriers charge.

The public interest in markets of this type is less likely to be related to the price of air transportation as it is to the availability. The citizens of northern New England-Vermont, New Hampshire and Maine-have recently concluded years of effort before the CAB in an attempt not to get cheaper air travel, but to get adequate air service. Had freedom of entry been a success in northern New England, it would not have been necessary for the CAB to certificate Air New England to provide new services at the many communities involved, at a substantial cost in Federal subsidy.

I have speculated as to what might have been Allegheny's policy toward small, loss points had we had freedom to exit without CAB approval. It is questionable whether the Allegheny commuter concept would have been created, and most of these 27 points would have simply disappeared from the scheduled airline map. The CAB has permitted deletion of certificated service at many small points without replacement services being provided, where poor traffic generation

high subsidy were found to warrant such action. While the Board has tended to require that service be retained in some marginal situations, on balance we do not believe the present statute requires amendment to liberalize dropping of points.

So much for the smaller city side of the question.

What about the larger communities and city-pairs with greater traffic density? The CAB recently released a staff study on domestic routes. This study contains much valuable information on the character of the present system. Particularly significant is the data which shows that relatively few of the 58,000 city pair markets generate the bulk of the traffic. Of total revenue passengermiles 70 percent are flown in fewer than 1,000 pairs. Of the revenue passengermile potential 30 percent is found in only 70 city-pairs.

Of Allegheny's total system passengers 50 percent enplane and deplane on just 39 pairs of points-11 percent of the total of 369 pairs of points served on a single-plane basis (exhibit 1).

It seems to us that a change in direction which permitted freedom of entry would in effect be directed toward larger markets and not the balance of the system.

Some of these larger city-pair markets are served by Allegheny. For example, Pittsburgh-Chicago, New York-Indianapolis, Pittsburgh-Philadelphia, BostonPhiladelphia, Pittsburgh-New York, Buffalo-New York, and Rochester-New York are all in the top 100 ranked passenger markets over 200 miles distance. There can be no question about the ability of these markets to support competitive services. These markets are competitive on all fronts, including price competition.

Each of these markets is not only served by an aircraft schedule serving the specific city-pair, but is part of a traffic flow on schedules which provide beyond service to other points. For example, Allegheny's Chicago-Pittsburgh services go beyond to Allegheny points such as Wilkes-Barre/Scranton, Harrisburg and Allentown, Pennsylvania. The flights which service the Philadelphia-Pittsburgh segment also serve cities such as Albany, Hartford and Providence to the east, Erie, Columbus, Dayton, Louisville and Indianapolis to the west.

In scheduling the system, flight evaluation is keyed to the profitability of the flight as a whole, since the traffic flows are made up of a series of individual markets. Thus, a flight serving the Pittsburgh-Philadelphia market may well serve four, five or six other city-pairs, e.g., a flight from Providence to Hartford. Philadelphia, Pittsburgh and Columbus, would serve 10 individual city-pairs. The ability of the flight to be scheduled, however, frequently is dependent on the load factor on the critical segment between Philadelphia and Pittsburgh.

Exhibit 2 reflects a profile of the traffic over the Pittsburgh-Philadelphia segment. Of the 47,391 passengers carried over the segment in July 1974, 33,736 or 71 percent were local Philadelphia-Pittsburgh on and off, and the remaining 29 percent were through passengers. This 263 mile segment, which is also served by TWA, received 29 daily flights by Allegheny in July, 1974 at an average load factor of 60 percent over the segment. It is conceivable that if restrictions were eliminated on entry, this segment could be attractive to a person investing in a small fleet of jet aircraft, perhaps two or three units to get into business, slash the price, and attempt to drive Allegheny and TWA out of the market. Allegheny and TWA would then have to choose between meeting the competition by a combination of price and/or service adjustments.

Exhibit 3 reflects a similar profile of traffic over the Chicago-Pittsburgh segment. In this case, over 50 percent of Allegheny's passengers come from other than the local market.

Without question the availability of reasonable, frequent air service between many other points which are served on a single-carrier or single-plane basis because of Allegheny's ability to schedule frequently over this segment, would be destroyed. The benefits to local travelers between Philadelphia and Pittsburgh are questionable when viewed against the disservice to the large volume of travelers which are dependent on this segment to support their services. This subcommittee should pause and reflect before imposing a solution in an effort to lower prices for some consumers which will in effect destroy the system or tend to increase the prices paid by others.

It is conceivable that a few large concentrations of traffic in this country would benefit by freedom of entry. I have no doubt that long-haul transcontinental markets such as Los Angeles and San Francisco to New York, or perhaps a few of the Chicago markets could conceivably benefit by open entry and a rate war

between competing carriers. But I do not think we need expose the system to competitive destruction in order to achieve some of the results which are desirable.

We should all be wondering whether under a freedom of entry concept certain large trunk airlines would find markets of other carriers sufficiently inviting to warrant a raid.

And we should ask ourselves what the "domino" effect would be. Carriers forced to withdraw from their markets would look for other piaces to fly the aircraft in which they have invested. There is obviously no answer to this Pandora's box.

We urge the subcommittee to take note of the fact that a major reason for the recent increased demand for low cost air service in the domestic air travel market has come about because of decisions by the Federal courts which forced the CAB to review the legality of the youth and family plan fares.1 These decisions ultimately led to a finding by the CAB that youth fares and family plan fares were unlawful under the present statute. Allegheny opposed that decision and believed the CAB couid have found such fares lawful, but the CAB found otherwise.

A significant reduction in the cost of air travel can be made by the reinstatement of youth and family plan fares under guidelines which would ensure their being economically viable. This may require legislation by the Congress to permit the airlines to offer these reduced rate services. Hearings on the Low Cost Air Transportation, S. 421, introduced by Senators Cannon and Kennedy, will provide a forum for reviewing this subject. It will also provide an opportunity to consider offering reduced rate travel to our senior citizens. Allegheny supports these objectives.

A major burden on the traveler is being imposed due to the tremendous increase in the cost of jet fuel. Allegheny's projected 1975 fuel costs per gallon are approximately 110 percent higher than 1973 levels. Fuel accounts for 14 percent of our operating expenses. With the magnitude of increases now being experienced, there is no way to maintain the price of air travel at a lower level by adding more airlines. The auswer is for the federal government to control the price which is paid for the fuel. As a matter of fact, we see a rather serious incompatibility between the government's fuel conservation effort and the push for freedom of entry and exit in public transportation by air.

We also understand that you will be considering other possible ratemaking policy matters later in this hearing which could increase the ability of scheduled carriers to adjust fares to meet market demand.

Improved efficiency at Federal, State and local governmental levels in the operation of the ground portion of the air transport system could be a direct contributor to reducing the price of air travel. Airport maintenance and operating costs as well as capital plant costs have risen rapidly as a result of inflation and environmental impact problems. The airlines are expected to support these increased costs through their use fees. Additionally, airport operating delays continue as a result of still-to-be-achieved efficiency in the air traffic control system and this directly impacts airline operating costs.

Obviously, there are things the airlines themselves must do to control the cost of air travel. We must reexamine the technological side of our business to avoid premature obsolescence. While unit cost improvement which came about through the jet development obviously has been a tremendous boon to the country, future development must proceed on the theory of improving the productivity of the aircraft without necessarily increasing the size of the machine.

If the Congress adopts a program which looks toward allowing freedom of entry, the airlines will be faced with the impairment of the stability of its invested capital and the ability to raise long-term funds to permit orderly growth. Such financial instability would be totally inconsistent with the funding of our air transport system by private capital. While those who advocate freedom of entry are honing for more free enterprise, more competition and lower prices, the fruit of this effort could well be a system of nationalized air transportation funded by the Government for which the country would pay an enormous price. The Congress should be extremely concerned that this constant searching for a lower priced product may have an extremely adverse impact on the ability of

1 Transcontinental Pus Sustem. Inc v. C.A.B., 383 F.2d 466 5th Cir., 1967 (youth rares): Trailways of New England, Inc., et al. v. C.A.B., 412 F.2d 926, 1st Cir., 1969 (family fares).