Certificated Trans-Pacific Airlines (formerly nonscheduled) to operate alongside Hawaiian Airlines in the Hawaiian Islands;

Granted a blanket exemption to the Air Freight Forwarders against the solid opposition of the trunkline carriers;

Required the lowering of airline fares to 41⁄2 cents per mile in 1945; Suspended certain proposed coach fares of trunklines in 1948, thus preventing them from meeting nonscheduled fares for a considerable period of time;

Adopted increasingly drastic policies of disallowances in determining mail rates, resulting in the payment of lower mail rates to air carriers; Imposed severe labor protective conditions on carriers involved in mergers and consolidations;

Disapproved acquisition of small carriers by large carriers in the cases of American-Mid-Continent; United-Western;

Increased the amount of territorial and international competition among United States carriers so that today there are 2 across the Atlantic; 2 across the Pacific; 5 into Latin America, including 1 all-cargo operator; 3 to Puerto Rico from the United States, including an all-cargo line; 4 to Alaska; and 3 from the mainland to Hawaii.

In contrast to these and many other actions which were usually taken contrary to the opposition of the certificated carriers in general or of the larger carriers in particular, conclusions as to "monopoly" are based on the isolated and misleading factor that the Civil Aeronautics Board has not certificated a “new trunkline."

What the allegation, that the Civil Aeronautics Board has never certificated a new domestic trunkline carrier, means in final analysis is that the CAB has not certificated a new carrier to duplicate the existing competitive services between the 6 or 8 greatest traffic-producing cities in the country. Certainly, this does not prove, as has been alleged, that the Civil Aeronautics Board is, in any sense, monopoly-minded or "industry-dominated."

If the CAB has fostered "monopoly," how do we explain the fact that it authorized 4 former nonscheduled carriers (1 of whom found it unprofitable to continue to operate) to operate scheduled freight services between all of the major freight-producing cities in the country, 1 to operate to Puerto Rico and the other with extensive routes to Latin America? This was done over the bitter opposition of the certificated carriers on the basis of a record which barely sustained the finding of public convenience and necessity. Operating results have proven the premuturity of the unbelievable optimism adduced in the Air Freight case which led to these certifications; data can be readily supplied to support this statement. Even before this certification, the larger trunklines had explained air freight and, today, are still devising and initiating new devices to penetrate this market to a greater extent.

And how do we explain the hundreds of other decisions where the_Civil Aeronautics Board has authorized competition with the so-called Big Four? Certainly, National (then the smallest air carrier) held no hypnotic control over the Board when it was extended into New York to compete with Eastern. Many other cases can be cited where the smaller, less powerful carriers were certificated for new routes by the CAB over the objection of the larger carriers.

The most significant factor in this whole debate of alleged "monopoly" is the fact that the Board inherited an air-transportation network which was very much unbalanced in terms of size and economic opportunity. A few carriers had the better routes, including the biggest cities and long hauls. Continuance of that situation would have meant the sentencing of the small carriers to a permanent subsidy status where they might be ripe for annexation.

Faced with this situation, the Board generally developed regional carriers into trunklines, selected the smaller trunklines to operate the new competitive routes, and created a new class of regional carriers known as local-service airlines. At the same time, the Board was constrained to grant some route extensions to the large carriers, because they were in a position to provide a large amount of one-carrier service in the public convenience.

The net result of the Board's actions during the 17 years under the act has been to build up substantially all of the trunklines to a position where, although by no means wealthy, they are at least currently self-sufficient.

At the same time, the Board has established a system of competitive service over just about all of the major air routes of the country.

After the war, the addition of new carriers, many of them former nonscheduled operators, took the form of granting certificates for which they applied to institute scheduled local service systems.

IV. THERE IS NEITHER MONOPOLY NOR CONCENTRATION IN CERTIFICATED AIR
TRANSPORTATION

In support of the contention of alleged monopoly and the necessity for greater "freedom of entry" is advanced the argument of concentration. This argument is based on the fact that, over the years, the original trunkline carriers have participated in an air-transport economy which has expanded some 40 times. Pie charts and bar charts are used to show the extent to which a few of the larger trunklines have been getting bigger and bigger and sharing, it is said, disproportionately in the total amount of available commercial revenues. Industrial concentration, even in unregulated businesses, is a work of art, Such concentration manifests itself in certain noncompetitive results which simply are not evident in our United States commercial air-transportation system today. Some of these factors are elemental, and it may be worthwhile to look at them very briefly and superficially to appreciate better the nonconcentrate situation in certificated air transport.

Thorstein Veblen noted 50 years ago some significant factors about consolidation:

"In great measure the saving effected is a saving of the costs of business management and of the competitive costs of marketing products and services, rather than a saving in the prime costs of production. * * * The amount of 'business' that has to be transacted per unit of product is much greater where the various related industrial processes are managed in severalty than where several of them are brought under one business management. *** The greater the parcelment in point of ownership, the greater the amount of business work that has to be done in connection with a given output of goods and services. * It is in doing away with unnecessary business transactions and industrially futile maneuvering on the part of independent firms that the promoter of combinations finds his most telling opportunity."

Accordingly, you find as hallmarks of concentration: reduced efforts to sell and consequent reductions in expenditures in sales promotion; markets are not expanded; prices are maintained at a particular level and, in fact, increased; ingenuity and imaginativeness are static; little inventive progress takes place; mergers, consolidations, and acquisitions are extremely evident; excessive profits are created.

In air transportation, there have been only 3 trunkline mergers since 1938 and, once the local service lines were shaken out of the formative stage as a going business, only 1 consolidation. This is in sharp contrast with the many mergers effected before the passage of the Civil Aeronautics Act, and in the Board's rejec tion of a number of proposed mergers.

Competition in the air-transport industry is violent. A way to measure it is in results, and not in any statistical delineation of whether 2, 3, or 4 carriers between a pair of points is adequate competition.

In air transport today, you have competition which benefits the public both in service and price. Further, the operating results of the domestic trunkline carriers, admittedly the most profitable segment in the industry, do not reflect that these airlines have enjoyed excessive profits or that their stockholders have received even a satisfactory return on their investment.

Let us take them one at a time. In connection with service, let us look at what has been done as a result of the competition created by the Board in this business.

A. Better air service

Our service is reflected in the aircraft in use. Since the war, $848 million has been spent in the purchase of aircraft and operating equipment in buying and developing the finest transport airplanes. Anyone who has reviewed the whole picture will see what is causing it. One carrier will buy a fleet of then modern equipment. Soon, with technological advances, he will find that his competitors have acquired or improved aircraft to outcompete him. He then buys newer, faster, more economic aircraft. That has gone on in rapid succession until we now have, with the new DC-7's and Super-G Constellations, transcontinental nonstop service, with aircraft specifically designed for that purpose, which is probably the most outstanding mark of service improvement in our business in recent years. Soon we will have similar aircraft flying nonstop over any ocean and between any continents. One airline is about to institute operations with British-made turboprops and another has just announced a $65 million purchase of new American-manufactured turboprop aircraft. Through these improvements in equipment, we have reflected improvements in reliability to the public.

B. A better product at the same or lower cost to the consumer

Now let us turn to price. Notwithstanding the fact that every cost an airline pays has gone up markedly since 1946, the actual prices charged by the airlines, unlike any other business that I know of, have held steady and are now going down.

In the discussion of prices, we cannot overemphasize the introduction of coach service, because the price to the consumer is set at actually a lower unit price than was being charged back in 1938. We have maintained that level and in that class of our service, which forms about 37 percent of the total service offered today, the price is considerably lower.

I propose to discuss, further along, the contention that the airlines have enjoyed excessive profits-as another index of the nonmonopolistic character of the industry.

C. The airlines have not enjoyed excessive profits

It really makes very little difference what measures are used to assess the bigness of air transportation; this alleged bigness is not reflected in the profits turned by the airlines or in their operating results over any respectable period of time. The United States certificated airline industry grossed over a billion dollars in 1954, to be sure, but that, large as it may appear, is but a recent development. In addition, that billion-dollar figure is merely a gross income picture and not a more proper portrayal of the industry's earning capacity, even in one of our most profitable years. Against our total sales gross of $1,412 million in 1954, our industry showed a profit of only $69 million, which was about 4.8 percent of the total product sold.

The industry's affirmative financial operating results for 1954 are not symptomatic of equally beneficial data over a very substantial period. Not so long ago, in 1946, the domestic trunkline industry suffered a net loss after mail pay of almost $6 million.

By 1947, conditions in the industry had become even more serious; losses after mail pay amounted to $20 million. The earned surplus of the domestic trunkline industry fell from $58,600,000 on December 31, 1945, to $10,300,000 on December 31, 1947. Long-term debt increased from $24,400,000 or 16 percent of domestic trunkline industry net worth to $161,700,000 or 90 percent of net worth. Several carriers formerly on a compensatory (or nonsubsidy) mail-rate basis were in so dangeorus a financial position then that emergency subsidy relief had to be granted in the form of increased temporary mail rates. A total of 13 emergency mail-rate orders were issued during the fiscal year 1947. The Board's report to Congress indicated concern over the precipitous drop in net earnings of the industry. In the Board's own words in its 1947 annual report:

"There followed, in the wake of these losses and changed capital structures, aggravated financial difficulties in the case of some carriers, resulting in petitions for higher mail rates, drastic retrenchment programs, cancellation of equipment orders, incurrence of large amounts of debt, and, in one instance, the sale of a route."

So critical was the situation that the Civil Aeronautics Board instituted investigations of the operations, management, and route structure of five of the domestic trunkline carriers. The CAB's purpose was to determine whether there should be any major amputations in the industry (which the Board had just expanded so rapidly and so extensively) by elimination of routes or mergers or consolidations or otherwise.

It was not until 1949 that there was some improvement in the financial condition of the industry; but it was still not on a financially solid basis. The domestic trunklines in that year operated at a modest profit after mail pay but would have suffered a loss of $31,600,000 without mail pay.

The simple fact of the matter is that, up until recently, the overall record of earnings of the domestic trunkline industry, the most profitable segment in the industry, has been poor. Were it not for mail payments in the years up until 1950, the record would have been abysmal.

Happily, the 1954 figures of net operating income and profit for the domestic trunklines can be regarded as almost wholly without subsidy since, in 1954, the subsidy paid to the trunklines amounted to only four-tenths of 1 percent of their total revenues-or about $4,600,000 in subsidy of total revenues of over $980 million.

It may seem that the industry has settled down. It seemed this way in 1946 but, following that, came the airline recession. Even if the industry has settled

down, it has some time to go before it attains a stability which will find recognition in the financial markets of the country, who look at financial results over 10-year periods before accepting an industry as stable.

An example of an expansion which may or may not be healthy is illustrated by the fact that, since 1951, the domestic trunkline industry alone has increased its usefulness to the public by 60 percent, in terms of revenue passenger-miles flown. Yet the net operating income of the domestic trunklines-the most profitable segment in the industry-in 1954 was substantially the same as it was in 1951. Or, to put it differently, we have sold 60 percent more of our product over this period, and netted no additional profits.

The industry must accumulate some reserves out of its earnings. This applies equally to the big airlines as well as the smaller airlines. In the next 10 years, it has been conservatively estimated that our industry will spend no less than $1,750 million on new capital expenditures; likely this figures will be anywhere from 30 to 50 percent greater.

That money will be needed for the following capital expenditure programs: substantial replacement of the reciprocating engine fleet with a turboprop fleet; the introduction of a specially designed cargo fleet or a major conversion of the existing fleet to cargo types; the addition to, and-to a limited extent-the replacement of, the existing fleet with the helicopter or a convertiplane; the addition of a substantial fleet of jet aircraft; major capital expenditures for accompanying ground, flight line, and airways equipment and facilities.