Current Antitrust Problems

It just isn't true that our industry has enjoyed excess profits, particularly if you look at the story of the industry's net income after taxes as a percentage of operating revenues contrasted with the railroads, electric utilities, and even motorbuses.

The picture of air transport is a picture of instability and low earnings. In addition, you can see for yourself the basic nature of that instability of earnings of the 5 major airlines as compared with other regulated industries-20 railroads, the Greyhound Corp., and 20 operating electric utilities.

These are regulated industries. The electric utilities are in the 15 percent bracket which causes an investor, when he sees the kind of coverage they have, the kind of margin or drop they could have and still be in the black, to appreciate the stability of that industry. This stability enables them to go into capital markets and finance their expansion at favorable rates.

Even the railroads and buslines are more stable than we are. The chart shows we were the only ones in the red in 1947 and, in 1951, had a 72 percent net income as a percent of our operating revenues. In 1954, with the biggest boom in our traffic, we are below the 5 percent level. To the contrary, the railroads are at 7 percent and the buses substantially at our level-both in contracting phases of their business.

NET INCOME AFTER TAXES

AS PERCENT OF OPERATING REVENUES

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Another evidence of instability is the effect of passenger-load factor on the trunkline's net operating income. Load factor is a figure employed to show the percentage of space profitably utilized against space available-or the percentage of the product we sell. As our grosses increase, the rise or fall of load factor has a greater and more unstable effect on net income. In 1954, a 1 percent change in load factor-in either direction, up or down-would have meant a change of $14 million in our profits.

The air transportation industry is peculiarly susceptible to fluctuations in traffic and even relatively minor fluctuations can have a sharp effect on industry earnings. In 1949, the first reasonably normal period of airline operations since the end of World War II, the 16 domestic trunkline carriers earned less than $14 million after taxes and only $20,600,000 before taxes. A change of 1 percent in the average passenger-load factor of the trunkline carriers in 1949 would have decreased the operating income before taxes of these carriers a total

of $6,400,000 for the year. A change of 34 percent in the passenger-load factor would have wiped out trunkline profits in 1949. A 34 percent change in load factor in 1949, amounted to an average of less than 2 passengers on a 57-passenger Constellation aircraft. This would have meant, in effect, that a traffic decrease representing, for the entire industry, the equivalent of less than 2 passengers per Constellation schedule would have wiped out trunkline profits in 1949.

The industry, regarded as an entity and in the light of low and unstable earnings, has not the hallmark of excessive profits traditionally characteristic of monopoly or concentration.

V. UNRESTRICTED FREEDOM OF ENTRY WILL HURT, NOT HELP, THE DEVELOPMENT OF UNITED STATES DOMESTIC, INTERNATIONAL, AND TERRITORIAL AIR TRANSPORTATION Another approach which has been developed very recently suggests that there ought to be greater so-called freedom of entry in the certificated air-transportation field. The committee should not be misled by this approach.

Freedom of entry is a term of some currency these days in argument about the role and policies of the Civil Aeronautics Board in regulating the Nation's airlines. Applicants for new routes frequently claim that so-called freedom of entry should be a feature of the airline industry, and complain incorrectly that the Board has followed an ill-advised closed-door policy of not certificating new domestic trunklines.

But freedom of entry is only a catchword invented to advance particular interests who have no intention that it be given general applicability. In other words, what the exponents of so-called freedom of entry seek is just enough freedom of entry to get their own coveted route awards, limited to the most lucrative traffic centers, and then let the door close behind them.

The simple fact is that freedom does not mean freedom when used by the freedom-of-entry advocates.

No one seriously advocates freedom of entry in the sense the words would seem to imply: namely, that anyone could start airline service over any route at will. This is abundantly clear from the 4 months of hearings before the Senate Commerce Committee on the McCarran bill in 1954. When the committee staff searched the record of the hearings, it found frequent allusion to freedom of entry, but it could find no support for complete abandonment of the system of certificates of public convenience and necessity and return to a system of free and unrestrained competition.

But if freedom of entry does not mean freedom of entry, what does it mean? Some spokesmen for freedom of entry have used various qualifying words to preserve the emotional appeal of freedom of entry while not actually advocating it at all. Thus, they have used such terms as "regulated freedom of entry," "greater freedom of entry," "reasonable freedom of entry," "some freedom of entry." "some degree of freedom of entry," "some limitation of freedom of entry," "considerable freedom of entry," and "not absolute freedom of entry."

In terms of specific routes, the qualified concept of freedom of entry becomes even more restrictive. In terms of the coast-to-coast and New York-Chicago and New York-Miami routes, the number of carriers to be accorded freedom of entry would not be "15 or 20 or 30 * * * or anything like that" but "a number much nearer 3, maybe 4, or possibly even 2." Thus, this application of freedom of entry to the few principal traffic-producing routes would mean denial of entry to 95 percent or more of the 55 nonsked letter holders.

Those who have advanced the doctrine of unrestricted freedom of entry are interested in 1 and only 1 phase of air transportation-and that is the longhaul market to and between only the top cities and the top traffic segments. A single most outstanding example has been the application of 1 air carrier, a nonscheduled combine now participating in 4 pending route cases, whose application covers service to 21 cities, every 1 of which is in the top 30 revenueproducing cities in the United States. As indicated before, it is these strong routes which support the operations of even the largest carriers to smaller cities. But this is only part of the story. These sponsors of so-called freedom of entry who seek favor from the Civil Aeronautics Board and sympathy from the Congress have also kept away from short-haul transportation of any kind. This reflects the economic truth that even high-density short-haul routes have not been productive of profit.

It is axiomatic in transportation that the greater the trip length the lower the cost to the carrier and the greater its profit. The Civil Aeronautics Board submitted statistics to show comparative trip lengths for certain nonscheduled

carriers as contrasted with the average of the 13 trunks. In 1953, the trunks averaged 547 miles against the irregulars' 1,667.

What this all boils down to is the fact that freedom of entry is not the banner of any ideological crusade. It is not a realistic concept for the airline industry. It is merely a catchword employed for the age-old purpose of clothing personal aggrandizement in raiment of broader appeal. The question of having, or not having, one more air carrier on a given route should be decided on the merits of that route, not on sentiment about freedom of entry. Such a decision, on the facts of each particular proposal, is by law the Board's job and should be handled by the Board exercising its judicial functions after full hearing.

A most effective way to illustrate the specious nature of this doctrine of freedom of entry is to imagine the situation which would doubtless result if there were no regulatory limitation on entry. In order to be equitably applied, it would have to be uniformly applied.

On the day that concept was introduced, everyone would tear up his timetables, disregard his certificates, forget that he has franchise responsibilities, and do what business he corporately pleased in the interest of greater profits and not public convenience. Airlines who have filed applications for particular routes would just start flying those routes and not wait on Board action. Carriers who had sought for years to eliminate restrictions would just fly over the cities to which they have been restricted. The industry, in such a chaotic struggle for survival, would then have to abandon service to roughly some 500 of the cities to which it is now certificated and operate only between the 50 most profitable pairs of points.

Or, alternatively, if the Congress were to accept this thesis of freedom of entry, as it is represented in pending applications before the Civil Aeronautics Board, it would be urging the creation of one or a number of new systems draining the rich juice of the air-transport network from trunkline carriers who would continue to be forced to serve thin segments. This would create an extremely unfair and uneconomic competitive situation and dislocate the country's airtransport network. It would not represent any new or additional competitive opportunity, reflecting itself in public good, but only a chance for a favored few to really enjoy excessive profits.

The argument of freedom of entry is only an argument for favored privilege. Those who propound it have, in many respects, combined in their own field to squeeze out their own little competitors. That is a real manifestation of monopoly which might well deserve this committee's very careful scrutiny.

VI. CONCLUSION

I am grateful for the opportunity to have appeared before you. Essentially my purpose was to readjust the perspective of the competitive situation in air transportation today, which continues to be self-interestedly fractured by the few who seem temporarily disappointed in the operation and decisions of aviation regulatory agencies. Time does not permit a further analysis of this. It is necessary, though, to recognize the fundamental truth that the Civil Aeronautics Act of 1938 intended air transportation to be regulated as a public-service industry just like public utilities.

The average American, unfortunately, gathers some of his impressions from personal experiences which may be annoying but are not always enlightening. The increase in airline traffic is not a reasonable measure of the increase in airline profits. Busy telephones, standby counters, and personal inconveniences are not the indexes of economic health; certainly they are not evidences of monopoly or concentration. Beyond that they are not necessarily reasons for opening floodgates, the result of which might well be to engulf our present airline economy, overexpand competitive opportunity, unbalance systems carefully constructed, jeopardize future capital investment and the technological development which flows from it, and result in service patterns which reduce air service now provided to more people in more cities by more airlines than was ever imagined.

In 1954 there were 59 certificated airlines, compared with the 22 which existed in 1938. These airlines have served well the objectives of the act of 1938 in creating an airline system which today is the most efficient, most useful, and most competitive in the world. It serves our commerce, our postal system, and our national defense. It is a foundation of both our prosperity and our security.

(The following tables were accepted for the record to amplify and supplement Mr. Gewirtz' testimony:)

TABLE I.-Competition shown by the sequence in which air coach tariffs were filed by competing airlines for the same city pairs