As shown above, the total estimated requirements for making payments to air carriers on claims to be submitted during 1955 is $67,163,706. The supplemental appropriation of $15.2 million hereby requested for 1955, together with the $11,963,706 reappropriation of 1954 funds and the $40 million provided in the annual appropriation act, will enable such payments to be made during 1955. In December 1954, the Board established reduced section 406 rates for the transatlantic carriers and reduced temporary service rates for all international carriers. As a result, Trans-World and Pan American are required to refund to the Board a net amount approximating $3.5 million. In arriving at the $15.2 million supplemental requirement, it is contemplated that such refunds will be made by March 31, 1955, if possible, and in any event by June 30, 1955.

It is considered essential that the monthly subsidy payments to which carriers are entitled under rates established by the Board pursuant to section 406 be made to such carriers on as nearly a current basis as possible. Delays in making such payments, in some cases of even a few days, present the carriers with difficult financial problems and in some cases require short-term financing with high interest charges. This is particularly true of many of the local service carriers, although not confined solely to that group, and in some instances the receipt of payment is necessary in order to meet the carrier's payroll.

PREPARED STATEMENT

Chairman HAYDEN. Do you have a statement you want to place in the record, Mr. Gurney?

Mr. GURNEY. Yes, sir.

Chairman HAYDEN. We will insert the statement in the record and you highlight it for us.

(The statement referred to follows:)

CIVIL AERONAUTICS BOARD

STATEMENT BY HON. CHAN GURNEY ON SUPPLEMENTAL ESTIMATES FOR "PAYMENTS TO AIR CARRIERS

There is before the committee for consideration a proposed supplemental appropriation to the Civil Aeronautics Board in the amount of $15.2 million to make subsidy payments to air carriers during the remainder of fiscal year 1955.

Approximately a year ago, as a result of Reorganization Plan No. 10 of 1953. there was presented to Congress for the first time, covering the fiscal year 1955, an appropriation estimate specifically for subsidy payments to those air carriers whose need for such support had been determined by the Board under authority of section 406 of the Civil Aeronautics Act of 1938, as amended.

That estimate (on an expenditure basis) was in the amount of $73 million. However, as you know, the Congress determined to appropriate initially only $40 million of the aforesaid amount. According to our understanding, that action was predicated primarily on the fact that the estimate of $73 million had been constructed prior to the issuance on February 1, 1954, of the Supreme Court decision in the Chicago & Southern case, wherein it was held that the need of a carrier operating more than 1 division should be determined from the standpoint of its system as a whole.

The revised estimate of appropriation required for 1955 is $55.2 million, which, together with the unexpended balance carried forward from the prior year of $11,963,706, will make a total available for subsidy payments during 1955 of $67,163,706.

Since appropriations for "Payments to air carriers" are of the expenditure type, any change in the amount of subsidy accruing to the air carriers during either of the fiscal years 1954 or 1955 will affect the amount of appropriation required for 1955. As presented to the Congress a year ago, the estimate of total subsidy accruing to the air carriers during the period October 1, 1953 (when plan 10 became effective), through June 30, 1954, was $60,491,250 and for the fiscal year 1955 the estimate was $80,252,000, or a total for the 21-month period of $140,743,250. The current estimates of subsidy accruing for this same 21month period total $121,331,922, of which $55,180,922 is for operations during 9 months of 1954 and $66,151,000 is for operations during 12 months of 1955. Therefore, the total subsidy accruing for the 21-month period is currently estimated at $19,411,328 less than the estimates of a year ago.

Relating these figures to the Board's cash requirements for 1955, we find first that $4,963,706 more of 1954 funds is available for payments during 1955 than previously estimated and this, together with the reduced level of subsidy in the current year, results in a total appropriation required of $55,200,000 rather than the $73 million originally sought.

In addition to the declining subsidy totals, another equally important development is revealed by analysis of the increase in mail volume compared with the total of service pay and subsidy combined. The current estimates of mail tonmiles (by which volume is customarily measured) for 1955 is 129,032,000, or an increase of almost 20 percent compared with 1954. The current estimate of total service pay and subsidy combined for 1954 is $129,176,329, and for 1955 is $125,108,000. Accordingly, although the increase in mail ton-miles is 20,837.000 (1955 compared with 1954) a decrease in total revenue to the carriers of $4,068,329 is forecast. This reflects the fact that under the rates on which the current estimates are based the average ton-mile yield for service pay and subsidy combined for all carriers, both domestic and international, declines from $1.19 in 1954 to $0.97 in 1955.

The current estimates with respect to mail ton-miles, service pay, and subsidy project the anticipated result of the following major developments, each of which I will discuss in more detail a little further along:

(a) The Board's decision in the transatlantic mail rate case, very substantially reducing the subsidy to Pan American and which is estimated to remove TWA from subsidy entirely;

(b) The movement of approximately 30 million ton-miles per year of socalled military mail across the Atlantic and Pacific by the commercial carriers:

(c) Reduced service rates applicable to all mail transported by the transatlantic and transpacific carriers;

(d) Reduction in service rates for the domestic trunkline carriers proposed under the Board's show-cause order of September 1954.

While the ultimate effect of these developments has been taken into account as fully as possible, there is still some uncertainty regarding the course of future events. The final service rates for the transatlantic and transpacific carriers are not yet settled and the volume of mail moving across those oceans can, at best, only be estimated. Both Pan American and TWA have filed petitions for reconsideration of the Board's decision in the transatlantic mail rate case, and, in addition, both carriers have appealed to the courts. The establishment of new final service rates for the domestic trunkline carriers involves an extremely complex proceeding with no certainty as to the outcome at this time. Before proceeding further, I should like to explain the current situation with regard to the Supreme Court decision in the Chicago & Southern case. Under the principle established by the Supreme Court decision in that case, the Board in fixing a mail rate for a particular carrier operating 2 or more divisions is required to offset against the need of the 1 division any excess earnings, if found to exist, of the other division or divisions. In summary the situation, insofar as the current budget estimates are concerned, is this:

There are 11 carriers currently operating 2 or more divisions and whose rates, therefore, would be subject to the application of the offset principle. With respect to 5 of these carriers-American, Eastern, National. Trans-World and United-the current estimates indicate that each of the carrier's two divisions will be subsidy free in both 1954 and 1955, and accordingly the current estimates include no subsidy whatever for these 5 carriers. With respect to 3 more of the 11 carriers-Alaska, Braniff, and Colonial-both divisions of each carrier are currently on a temporary open rate and the budget estimates provide what, on the basis of the best information available, will be the carrier's need, for its system as a whole, under the final rate. Since both divisions will require some subsidy, the question of excess earnings of 1 division to offset the subsidy need of the other will not arise. For Northwest, 1 of the remaining 3 carriers, its operating position is such that there is currently no indication that domestic earnings will be excess and hence available for offset against any part of the subsidy required for the carrier's international operations. For Pan American, the question of possible offset for the period prior to December 31, 1953 (back to 1946), is at issue in a proceeding now pending before the Board, and any offset that might ultimately be established would affect prior vear appropriations to the Post Office Department except for the part, if any, relative to the 3-month period October 1, 1953. to December 31, 1953. With respect to the period commencing January 1, 1954, the offset issue is likewise onen and the matter has not yet progressed to a point which indicates that any savings will result.

Accordingly, the budget estimates provide for payments to Pan American in accordance with the rates currently established, and it is the Board's view that the ultimate effect of the offset issue on these rates from January 1, 1954, forward, will be relatively minor if it has any effect at all. With respect to the remaining carrier, Delta, the rate for this carrier's domestic operations (which currently require no subsidy) and the rate for its international operations (estimated to require some subsidy for the years 1954 and 1955) are both open. There is reason to believe that for the period May 1, 1953, to December 31, 1954, earnings of the domestic division may be available in some amount to offset the subsidy for its international operations. The final rates for Delta will likewise be settled on the basis of the carrier's need for its system as a whole. Next, I would like to comment briefly on the Transatlantic Mail Rate case. On December 20, 1954, the Board issued its decision disposing of all issues in the Transatlantic Final Mail Rate case other than the offset issue. In this very important decision, the Board ruled on a number of complex problems, many of them for the first time in a litigated proceeding. At the request of the two carriers concerned, TWA and Pan American, the period for filing petitions for reconsideration in this case was extended until February 15, 1955, on which data petitions were filed by both carriers.

It is conservatively estimated that for the past period through December 31, 1953, the amounts claimed by the carriers in the Transatlantic Mail Rate case exceeded by $50 million the compensation fixed by the Board. For the future period (beginning January 1, 1954) the estimates here presented show, compared with previous estimates, a substantial reduction for PAA Atlantic division in total compensation as well as subsidy. For TWA, there is no subsidy projected for 1954 or 1955 compared with the previous estimate of more than $4 million for 1955. I would like to offer at this point a statement explaining this case in greater detail, which you may wish to place in the record.

On December 28, 1954, the Department of Defense formally announced a plan to shift approximately 30 million ton-miles of so-called military mail, moving across the Atlantic and Pacific, from MATS to the commercial carriers. Part of the shift took place during the fiscal year 1954 with the plan expected to be in full effect during the second half of 1955.

The current budget estimates with respect to volume of mail and the service rates for the carriers involved (PAA and TWA across the Atlantic; PAA and Northwest across the Pacific) reflect this plan. It is primarily the interplay of two factors; the Board's decision in the Transatlantic Mail Rate case; and the increased volume of military mail to be tendered the commercial carriers (although at substantially lower service rates as proposed by the Board), which so significantly reduce the estimate of subsidy for the international carriers as a group (from $32,539,000 in 1954 to $24,548,000 in 1955).

The increase in volume of military mail directly affects the level of the service mail rates payable to those carriers transporting such mail in the Atlantic and Pacific areas. The current service mail rate for each of these carriers (Pan American, Northwest, and Trans World) is open retroactive to April 1954. Therefore, in December 1954, the Board issued an order decreasing the service mail rates substantially for the Atlantic and Pacific operations of such carriers on a temporary basis pending determination of appropriate final service mail rates. Effective April 8, 1954, the service rate for the Atlantic area was reduced from 85 cents per mail ton-mile to 56.40 cents and on January 1, 1955, was further reduced to 55 cents. For the Pacific area, the former rate of 67 cents per mail ton-mile was reduced to 56.35 cents on April 8, 1954, and on January 1, 1955, was further reduced to 50 cents. Such decreased rates do not, however, necessarily coincide with the amounts contended for by the various interested parties, but represent merely an overall approximation of the levels at which such rates may be stabilized.

Based upon the current estimate of the volume of mail across the Atlantic and Pacific for fiscal years 1954 and 1955 and the estimated reduced service rates, the total service mail pay for the carriers operating in those areas will be $15,666,000 in 1954 and $20,192,000 in 1955. It should be borne in mind, however, that the reduction in subsidy reflected in the current budget estimates, depends in the final analysis largely upon the amount of military mail which is actually transported and upon final determination by the Board of the appropriate service mail rate levels. If the anticipated volume of military mail does not eventuate, or if the final service mail rates are lower than the temporary rates used in the estimates, there would be a corresponding increase in the subsidy.

Effective April 1, 1954, the Board reopened the service mail rates payable by the Postmaster General to all 13 domestic trunkline carriers in order to determine (1) whether and to what extent the existing rates might be excessive and, accordingly, might be reduced, and (2) to devise a new form of service mail rate structure which would provide like payment for like service for all air carriers serving the same pair of communities. Following intensive work during the early part of fiscal 1955, the Board issued on September 30, 1954, an order proposing to establish new service mail rates which would reduce the aggregate service mail pay for the 13 carriers on an annual basis by approximately $3,300,000. Such rates were embodied in a so-called multielement structure (consisting of a line-haul charge and a terminal charge) which would produce identical payments for all carriers serving a given pair of communities. Although the Board had hoped to finalize this order promptly, objections were filed by certain carriers as well as the Post Office Department, and accordingly, the Board was required to set the case for formal hearing. The prehearing conference was held in November 1954. Expedited dates for the further proceeding required by statute have been established. This case, if it should follow all the formal steps, will be one of the most complex to face the Board, involving not only the question of the proper rate level for the entire domestic trunkline industry, but also the question of adoption of a new form of rate structure. Nevertheless, the current budget estimates assume a reduction in service mail pay to the carriers derived by application of the proposed service rates.

It is significant to note that dependence on mail pay is declining and that considerable progress is indicated in reducing the subsidy need of the carriers. The percentage of mail pay in relation to the air carrier's total revenue has declined substantially over the years and is an indication of the extent to which the industry as a whole has progressed toward self-sufficiency. To illustrate this point, during the fiscal year 1940, mail pay (including subsidy) comprised 31.5 percent of the carriers' total revenue; in 1951 it was 12.7 percent; and in 1954 it had declined to only 9.5 percent. At the same time, the proportion of subsidy to the total of mail payments to all air carriers also indicates a healthy trend. In the fiscal year 1951, subsidy comprised 63 percent of the total mail pay; in 1954 it decreased to 57 percent; and is estimated to decrease to 53 percent in 1955. Most significant of all is the average level of total mail pay return to the cariers under rates fixed by the Board. This likewise has declined substantially as shown by the following figures which reflect the average ton-mile yield for subsidy and service mail pay combined for all carriers, both domestic and international: For the fiscal year 1951, the ton-mile yield was $1.55; in 1954, it was $1.19 and in 1955 it is expected to decline to $0.97 per ton-mile.

Previous estimates had forecast that subsidy for 1954 would be considerably higher than in 1953 with only a small reduction in 1955. Although current estimates still indicate that 1954 will be somewhat higher than 1953, it appears that 1951 will be the peak year at $75,783,000, with subsidy for 1954 estimated at $73,051,329; and for 1955 at $66,151,000. Contributing in important measure to the reduction in the level of subsidy is the increased volume of mail, up from 77,422,000 mail ton-miles in 1951 to 129,032,000 ton-miles projected for 1955. The highlight of the overall picture, however, would appear to be that while mail volume is estimated to increase by 67 percent in 1955 compared with 1951, total mail pay to all carriers, including subsidy, is estimated to increase, comparing the same years, by only 4 percent. Thus, although the value of the service in terms of speed, frequency, and regularity has greatly increased, the unit cost will have gone steadily down.

SUPPLEMENTAL REQUEST

Mr. GURNEY. Mr. Chairman, Senator Hayden, we have only had a new Chairman of our Board since the first part of March. Immediately after his taking the chairmanship he asked that I handle this appropriation item. I am glad to do that for him.

In addition to that fact, he is down in Albuquerque this morning where we had a bad airplane wreck on the 20th of February. I believe all of you have copies of a general justification statement of the request for the $15,200,000.

Chairman HAYDEN. That justification has been included in the record.

Mr. GURNEY. It is not my intention to take the time of the committee to read the entire prepared statement. I offer it all for the record.

I do want to cover some of the main points that were brought out by the House committee.

SUBSIDY PAYMENTS

Approximately a year ago, as a result of Reorganization Plan No. 10, of 1953, there was presented to Congress for the first time covering this fiscal year an appropriation estimate specifically for subsidy payment to those air carriers whose need for such support had been determined by the Board under authority of the Civil Aeronautics Act, as amended.

That estimate, on an expenditure basis, was in the amount of $73 million; that was for this fiscal year.

However, as you know, Congress determined to appropriate initially only $40 million of the $73 million which we asked for.

According to our understanding, that action was predicated primarily on the fact that the estimate of $73 million had been constructed prior to the issuance on February 1, 1954, of the Supreme Court decision in the Chicago & Southern case, wherein it was held that the "need" of a carrier operating more than one division should be determined from the standpoint of its system as a whole.

The revised estimate of appropriation required for 1955 is $55,200,000.

Chairman HAYDEN. That is due, if I understand it, to the fact that certain carriers engaged in carrying mail abroad made a profit and that profit then was deducted from the loss in internal operations. Mr. GURNEY. You mean that offset decision?

Chairman HAYDEN. Yes.

Mr. GURNEY. Well, that is a factor, yes, but not all of the story.

MILITARY MAIL INCOME

Possibly you have reference to the fact that the civil carriers now are going to carry the military mail, which gives them lots more mail income, which automatically cuts down the subsidy.

Chairman HAYDEN. Yes, that is correct.

Senator THYE. Mr. Chairman, do you mind if I ask a question at this point?

Chairman HAYDEN. Senator Thye.

Senator THYE. Some of the airlines have improved their earnings to an extent that they are subsidy-free on some legs of their flights. That likewise added to the amount of their total earnings and lessened the amount of subsidy.

The last report I had was that the airlines were all doing better. That is, all the major lines were doing better and they were requiring less subsidy.

Mr. GURNEY. That is true enough. As more mail is hauled, it cuts down the subsidy requests.

Senator THYE. They require less subsidy on most of the flights— the major lines.

Mr. GURNEY. Yes. The major carriers are showing better returns.