same la true of schedules. An unregulated carrier stands to gain considerable ill will by wa keeping schedules, or, put another way, an unregulated carrier may tain a quod reputation by maintaining published soled.es. Certainly the exvenience of the intrastate airlines and the commuter airlines is inconsistent with the prediction of unstable rates and schedules under deregulated conditions."

APPROACHES TO REGULATORY REFORM

From the prior discussion, it should be apparent that the economic performance of the domestic airline industry would be significantly enhanced if economic regulation were liberalized or perhaps eliminated. Since one cannot predict with absolute certainty what would happen with complete deregulation, it may not be feasible to make a total commitment to such a course of action at this time. Fortunately, there is an approach which appears feasible, which leaves open the question of ultimate total deregulation, and which we would highly recommend. That is, we should move smartly in the direction of more liberal regulation; at the same time we will gain additional information about the efficiency of total deregulation and can make incremental decisions as needed. Such a regulatory reform proposal would be consonant with the following principles:

1. Entry. It should be easier for existing carriers to enter new markets and for new carriers to enter the business. At a minimum, the Board should consider the effects on economic efficiency of prospective new service when deciding entry cases. Also, it would be desirable to prohibit the Board from constraining entry on the grounds that it might adversely affect other carriers.

2. Exit. Carriers should be allowed to abandon markets where they cannot cover costs. Otherwise, implicit taxes on other travellers have to support such services and this is not only questionable as a matter of equity, but it tends to hide the real cost of serving these markets.

3. Rates. Fares should be flexible so as to allow price competition. One approach would be to institute a "zone of reasonableness," such as plus or minus 15 percent of existing fares, within which fares would be totally exempt from regulation. Retaining control over maximum and minimum fares thus guards against the possibility of monopolistic exploitation on the high side and alleged "cut-throat" competition on the low side. Over time the zone could be widened to allow for even more price competition, lower fares, and further differentiation in price-quality offerings.

4. Antitrust immunity. In order to assure that the basic thrust toward less regulation were not perverted, it would be necessary to limit the Board's power to grant antitrust immunity. Such a change would affect such things as agreements over fares, pooling of revenues, agreements to control capacity, et cetera. Not affected would be innocuous relationships such as baggage interchange, joint reservation facilities, and the like.

5. Subsidy. During an interim period, it might well be desirable to retain the Board's subsidy program. However, we would suggest that the whole subsidy mechanism be reexamined in order to determine ways of obtaining more results from each subsidy dollar, or, alternatively, of reducing the subsidy bill for any given results.

Legislative proposals for regulatory reform reflecting these principles are now being considered by the Administration. It is anticipated that the Administration will recommend to this session of Congress a comprehensive program which, if enacted, would significantly increase the efficiency of our air transportation system and provide consumers with improved transportation services at lower costs.

4 See, for example, Jordan, ibid., chapters 5-10.

It is important that this zone be wide enough to allow for meaningful price competition. Also, too narrow a zone would facilitate price collusion. Fifteen percent, plus and minus, would appear to be a minimal standard.

AIR TRAVEL

(From Economic Report of the President, 1975, G.P.O., pp. 154-5)

In the domestic airline industry, regulation has reserved primarily to bring about a nonoptimal choice of price and quality. Because the CAB had a fairly liberal policy during the 1950's and 1960's toward the entry of existing carriers into city-pair markets, the principal markets are now served by two or more airlines. However, since their fares are regulated by the CAB, the airlines tend to complete on the basis of scheduling, over which the Board does not exercise direct control. The result is "excess capacity," and efforts to raise the regulated fares in order to assure a return on investment greater than the industry's perceived cost of capital serve only to set the stage for further capacity augmentation.

Carriers as a group have consequently tended to earn neither excess profits nor losses, but the traveling public has paid higher fares because of the regulation-induced excess capacity. While excess capacity does yield some benefit in the form of more frequent departures, less crowding, and a better chance of obtaining a seat on the preferred departure, the value of this excess capacity is almost surely less than its cost. As evidence, in the relatively unregulated California and Texas intrastate markets the competitively determined higher-load factor service has historically been sold at prices some 40 percent below the prices of comparable interstate, CAB-regulated services. Moreover, a recent study reports that in 1969 domestic air passengers paid "excess fares" ranging between $366 million and $538 million, for which they received service quality improvements valued at between $118 and $182 million. The difference, between $248 million and $356 million, represents a deadweight loss to society.

In its recent domestic passenger fare investigation, the CAB established target load factors of 55 percent. Since the prevailing load factors were around 50 percent, this policy had the effect of reducing excess capacity and lowering fares. However, it would appear that a much higher load factor standard is justified especially in view of the recent increases in fuel prices. The Board's new policy of encouraging agreements among carriers to limit capacity is not an appropriate way of dealing with this problem. In markets covered by agreements, the passenger's total cost of service is increased because of increased delays, but the fare is not reduced.

Airline regulation imposes other costs, which are not generally well perceived. For instance, through the regulatory process, fares have tended to be set at levels and with a structure that maximizes total seat capacity, as opposed to maximizing total passenger traffic, the result being added congestion and environmental costs, as well as increased costs of airports and airways. By restricting the entry of new firms into trunk carrier service in order to protect less efficient incumbent firms, regulation has also penalized potentially more efficient firms and has resulted in higher fares for a given quality of service.

These costs of airline regulation could be reduced substantially or even eliminated if entry into and exit from markets were made easier and if ⚫ control over fares were liberalized so as to encourage price competition. Under such circumstances an individual airline could attract more passengers by lowering its price rather than increasing its total capacity.

Senator KENNEDY. Mr. Peck is our next witness, a former member of the Council of Economic Advisers.

Then Professor Noll, if you would be kind enough-Professor Noll received his Ph. D. in 1957, was on the senior staff, Council of Economic Advisers, through 1973, and senior fellow, and currently professor of economics at the California Institute of Technology.

Thomas Moore, would you come up? Mr. Moore is professor of economics, at Stanford University.

Mr. Peck, do you want to start?

STATEMENTS OF MERTON J. PECK, PROFESSOR OF ECONOMICS, YALE UNIVERSITY; ROGER G. NOLL, PROFESSOR OF ECONOMICS, CALIFORNIA INSTITUTE OF TECHNOLOGY; AND THOMAS G. MOORE, SENIOR FELLOW, THE HOOVER INSTITUTION ON WAR, REVOLUTION, AND PEACE, STANFORD UNIVERSITY

Mr. PECK. Yes, thank you, Senator.

I have a short statement I would like entered into the record, but I will not read it. The reason is that the testimony of the previous witnesses from the Department of Transportation, Council of Economic Advisers, the Federal Trade Commission and the Department of Justice have made many of my points. To read my statement now might seem to be preaching to the converted. Much of my statement would be cumulative.

I would like to indicate, however, that the economic literature in recent years has made two points: First, regulation is economically inefficient; it costs the consumer too much. Second, the solution to this inefficiency lies, in general, in more competition and less regulation to provide the consumer additional price and service options.

Those two points were made well, I think, by the preceding witnesses. Looking at their footnotes, I discovered an amazing fact. People do read economists' writings, and those writings are reflected in the testimony of the previous witnesses.

I would add three other points. First, we have all observed that airplanes fly half empty, and the numerous flights reduces waiting time but raises costs. A Yale student of mine, Michael Pustay, has calculated the value in reduced waiting time relative to the cost of more flights. He found that in 1969 the excess capacity flown, if waiting time is valued at $10 an hour, added about 10 percent to airline fares.

In transcontinental markets, it added even more to the costs. His results suggest the following conclusion: In 1969, the American airlines were flying the right number of flights for the $60,000-a-year man, to whom convenience matters more than cost. Everyone also was offered too many flights and too high fares.

Now I would like to turn to another point. I think congressional hearings are a highly desirable forum in which to raise the critical issue of regulatory reform. You mentioned earlier, Senator, the regulatory proceedings themselves as a way to change policy. I have appeared as an expert witness in regulatory proceedings. I have been impressed with the care and diligence of regulatory officials as well as their concern with the public interest. But I find the issues are too narrowly drawn to make regulatory proceedings a good place in which to examine broad issues.

I would add one final point made in my statement. I recall President Kennedy's transportation message of 1962, which was a forceful plea for deregulation. If one heard only the first day of the hearings on that message, with witnesses all in favor of it, one would conclude deregulation was going to come within a week or two. It turned out that the first day was not representative, and the legislation that accompanied that message did not do well in Congress.

It seemed to me then that President Kennedy's plea for deregulation was good economics. It may even be better economics today. Senator KENNEDY. Professor Noll.

Mr. NOLL. Senator, we have engaged in a little bit of collusive behavior of our own, and I think it would be more appropriate if Mr. Moore came before I did.

Mr. MOORE. Thank you, Senator. I would like to summarize my statement.

My research and other research all on the question of regulation is going to point to the same thing: regulation produces waste, higher prices, and often poor service. My research has been in the area of ICC regulation, regulation of trucking in Europe, regulation of electricity utility rates by State Commissioners, occupationally sensing, and the regulation of stock market margin requirements. I might indicate my study of ICC regulations has indicated in 1968 ICC regulations inflicted costs on the American economy in the order of $3.8 to $8.8 billion. Today the figure would be considerably higher

I would like to turn to my experience in vestern Europe, which I have just come back from, studying the regulations there.

transportation system. We do believe, however, that the present system removes the ability of the carriers to adjust services and realine the markets they serve as economic conditions warrant. This results in increased costs to the public.

The present system also does not recognize the importance of potential competition as an economic force. Thus, the carriers on an existing route need not be concerned about new competition unless the Board has a route case pending. In such circumstances, the existing carriers may be less diligent in providing the type of service and price and quality options desired by the public than they would be if they were aware that a competitor could enter at any time to provide new or better service.

CAB'S CHARTER RESTRICTIONS

Another way of improving competition is by liberalizing charter rules and thereby offering the consumer a broader range of price and service options.

Senator KENNEDY. Is your view consistent with the minimum charter floor the DOT was pushing last year?

Mr. BARNUM. I would like to clarify the minimum charter floor. I believe that as a result of the hearings you held in November, efforts were made to portray as much controversy within the administration as possible, and there was a good deal of confusion.

I think that what we were saying

Senator KENNEDY. Well, we are glad to get the real story, now. Mr. BARNUM. At that time we were talking in the context of Administration's seven point action plan that was directed to the international flag carriers. It dealt with the ways in which we could improve the economic climate and practices of Pan Am and TWA and those international carriers that were suffering from the economic circumstances of a flat or decreasing international market and huge fuel cost increases. We did consider among other things, the relationship between scheduled fares on the North Atlantic and charter fares. At that time there was still debate as to what the scheduled fares should be, and IATA had not yet come in with a total package for CAB approval. It was difficult for IATA to come in with a package for scheduled fares because they did not have any idea where charter fares would be.

We thought that to aid IATA agreement or at least to facilitate informed decision by the scheduled carriers, it would be useful if there were from the CAB some indication of criteria for a floor, if you will, at which charters would operate.

Now, what has been misunderstood here is that we were not talking about having a charter fare level that would permit all charter operators, efficient and inefficient, to make a profit. What we were talking about was some indication as to where charter rates would be so that the scheduled carriers could predicate their fares in relation to the charter floor.

There is a debate still raging as to the degree of CAB's authority to set a charter floor either by notice or proceeding, and that I think we best leave to the CAB and the courts to thrash out.

Senator KENNEDY. Senator Cannon has introduced the bill to make charter service more widely available, which I had the pleasure to join him on [S. 421]. Do you support that legislation?