Where is that money to come from, particularly in the light of the competitive nature of an industry for a common carrier market which is declining and which will be harder to penetrate? Certainly, equity funds will not be readily available if there is a continuing dilution of present markets, if the Board were inequitably to create a new class of carriers privileged only to drain the rich revenues from a few top traffic-production points, and if earnings are to stay at levels too low to attract this equity capital.

One of the best indexes of stability and profitability, on a sound continuing basis, is the place airline securities hold today in the capital markets of the country. Even after 17 years of regulated operation, airline securities are not attractive to the institutional investor, to whom, in large measure, the airlines will have to look for their financing. Basically, the standards of the institutional investor are established by law or by investment committees; and the airlines, as a result of their record of instability (measured by dividend payments, among other things), cannot today meet these standards.

The current Security and Industry Survey of Merrill Lynch, Pierce, Fenner & Beane (May 1955) categorizes no airline securities as "investment type" or "liberal income" type, cites only 2 as "good quality," and classifies 9 others as "speculative." In discussing market prospects for the airlines as "relatively favorable" for the future, the report has this to say:

"The outlook for the air transportation industry is less beclouded, looking ahead to the summer months, than for a good many years past but despite this fact most airline securities must still be regarded as inherently speculative holdings. The reason for this lies largely with (1) the high leverage factor inherent in airline operations as reflected by the fact that relatively small shifts in the 'load factor' (number of available seats occupied) bring about wide variations in the profitability of operations; (2) the speed of technological developments which makes for relatively quick obsolescence of equipment and requires substantial capital investments at relatively short intervals."

If the industry had enjoyed excessive profi's, analyses of this type would not be made. Even if industry earnings had been stable over any period of time, the problem of external financing, to meet our needs, would not exist. The domestic trunklines constitute the most profitable segment in the industry. The money they keep out of gross is particularly important in a business which has grown so quickly and in so short a period of time and has been constantly subjected to the vicissitudes of an inflationary spiral almost since its inception. We measure most of our economic data in air transportation from 1938, the date of the passage of the act. Our greatest development, however, has been since 1946.

Since 1938, general cost trends have had, as previously indicated, a significant effect on air transportation. At the outset, in order to compete in the travel market, we had to value our product within the range of the then present and prospective consumer. With costs for supplies (soft goods and, to an even greater extent, durable goods), food, and labor rising-92 percent in consumer goods and 128 percent in average airline pay checks since 1938 our basic fares have remained at the same low stable level and, in fact, our yield is going down, due to the increasing amount of coach scheduling. Airlines have kept the price line stable since 1938, as contrasted with rail and bus fares.

240

INDEXES CONSUMER PRICES, AIRLINE AVERAGE PASSENGER-MILE RECEIPTS AND AVERAGE PAY

240

INDEXES OF AVERAGE PASSENGER-MILE RECEIPTS COMMON CARRIER INTERCITY TRAFFIC 1938-1953

150

These economic trends have been general in nature. They apply to air transportation as a part of the general industrial and marketing economy, just as they apply to steel, automobile production, rail transport, electric and gas utilities, and other fields of industrial enterprise. The significant fact is that in few, if any, areas have products-particularly the better product the airlines sell today-been available to the consumer in 1954 for substantially the same price as they were available to the consumer in 1938. A good part of the reason for this was, as I explored briefly before, the necessity that air transportation, from the outset, be made available and attractive to consumers wih a choice of transportation media in an effort to penetrate the travel market in both the business and vacation-pleasure fields.

These general economic trends have been up-in terms of the things we buy, the wages we pay, the State and Federal taxes assessed against us-as the value of the dollar declined. Essentially, these cost trends are outside the control of the industry, but it must be emphasized that the upward spiral before and since the war has undoubtedly hit us harder than other industries, as specific instances will reflect.

Measuring the air transport industry from the date of the initiation of its regulatory controls, there has been little opportunity since 1938 to develop any healthful financial reserves.

Let me talk briefly now about how these cost trends have affected the industry directly.

The key to the industry's inability to provide for the proverbial rainy day is the picture of our inability to finance reequipment programs out of depreciation reserves, surplus, or, finally, a combination of these and equity money. Equipment is our single biggest element of fixed cost. We are not suggesting that, in a technologically dynamic industry, depreciation should or could pay all the bill for progress. Unfortunately, though we have looked elsewhere for the financing, it has been hard to find the equity dollars to pay for the reequipment and, in more instances than have been healthy, the industry has been forced to borrow to purchase this new equipment-equipment costing more each year, as witness the $2 million DC-7's and Super-G Connies contrasted with the relatively inexpensive DC-3 of pre-World War II years. Of course, in addition to the acquisition of new aircraft, coincident with that, there is always the necessity to acquire new airborne electronic devices and modern up-to-date ground equipment, which also have been affected by the inflationary spiral.

From 1946 to 1954, we had an excess of capital expenditures over depreciation of $268 million. That had to come from somewhere, either internally or externally. Internally, the most important source was retained earnings. Even that is misleading, since many of the companies didn't have retained earnings. Actually, even with all retained earnings added to depreciation, there was still a total of $100 million over and above both of them, which had to be drawn from external sources. This total would have been larger if the industry had, over the years, paid out the dividends normal for a growing industry at about 40 percent of net to its stockholders.