necessary, in the interest of separating fact from fiction, to refer to the complications involved in the rate provisions of our bilateral air transport agreements, and to set the record straight with respect to the power now possessed by the Civil Aeronautics Board.

OUR BASIC PHILOSOPHY ON RATE CONTROL AND ON THE NEED FOR THE PENDING LEGISLATIVE PROPOSALS

There is, we believe, a proper role for the U.S. Government to play in the field of international rate control, and that role is exercising the power to prevent the introduction or continuation of rates which are adverse to the public interest. in the full meaning of that term. The question with which the committee is faced is whether legislation actually is needed to exercise that power, and, if so, what kind of legislation would be suitable and effective?

Our basic philosophy on government international rate control covers two general points. The first is, we do not believe the Civil Aeronautics Board needs any additional authority to exercise the necessary control of international rates. In view of the fact that the persistent requests of the Board over the years for international rate legislation have been denied, it would appear that the Congress has taken a similar position. Nevertheless, I will explain our position in this regard in some detail later in this statement.

The second point is, we are opposed to international air transport price fixing by governments-and our opposition goes considerably beyond the question of self-interest. It involves, instead, the serious question of whether one government can impose its rate philosophies on other governments, or, in the alternative, whether it is in the public interest for a group of governments to decide rates through a mixture of political and economic compromise.

The airlines, therefore, have a deep interest in the three bills which are before the committee. Each of the bills sets out to give the Civil Aeronautics Board greater control over international air transport rates. Each has the public interest of the United States as it stated chief objective. We have already indicated our basic belief that no legislation is needed. But there are important differences in the three bills and I would like to comment briefly on these differences. H.R. 1716 was introduced at our request, solely to remove any doubts about the Board's authority to control the rates of foreign air carriers flying to the United States. We have never entertained such doubts ourselves, but the Government long has so we proposed this bill to authorize the Civil Aeronautics Board to suspend not only the rates of foreign airlines, if such rates are found to be contrary to the public interest, but the rates of U.S.-flag airlines as well. If the committee finds that some legislation to control international rates is needed, it will be seen that H.R. 1716 not only will provide the passenger and the shipper with the best possible guarantee that the rates charged will be fair, reasonable, and just-but, more importantly, the provisions of this bill can, in fact, be implemented.

The second bill. H.R. 6400, represents the legislative proposal of the Civil Aeronautics Board. While this bill purports to give the United States control over the rates and practices of foreign air carriers operating to this country, this would not be the actual effect of the legislation if adopted. Enactment of H.R. 6400 would actually divest the United States of rights which it has over foreign air carrier rates pursuant to intergovernmental agreements. In short. this bill would establish price-fixing authority which could never be fully implemented because the authority could not be applied to foreign carriers serving the United States. Moreover, such price-fixing authority would be wholly undesirable because the empty threat of unilateral action by the U.S. Government could serve only to further complicate the international ratemaking process. The third bill before you, S. 1540, is the amended version of the CAB's bill which the Senate passed on November 26, 1963, and referred to the House. Actually, it is identical to H.R. 6400 except for an amendment to section 2 whereby the proposed requirement of Presidential approval of the Board's international rate actions is deleted. In its stead is a requirement for reporting certain of these actions to the President before publication. The Senate amendment raises many questions, of course, but we think it is more important for us to point out the very basic objectionable features common to both rate-fixing bills.

While we support the view that the public interest requires the Civil Aeronautics Board to exercise effective international rate control, we are convinced that Government price fixing is not the way to accomplish this.

WHY GOVERNMENT PRICE FIXING IS OPPOSED

There are three reasons why we are opposed to international air transport rate fixing, either by the U.S. Government or by a group of governments acting together. The first reason is fairly evident--if the Civil Aeronautics Board secures, and tries to implement rate-fixing powers, other governments will claim the right to take similar action to protect what they consider to be their sovereign rights and interests. This will lead to intergovernmental negotiations where the pressure of political necessity will far outweigh economic requirements. We simply do not believe it to be in the public interest for a group of governors to determine in this manner the rates U.S.-flag airlines must charge U.S. citizens.

The second reason is more basic-the proposed rate-fixing legislation (H.R. 6400 and S. 1540) simply is impossible to implement. As I shall outline in detai later, obligations under international agreements between the United States and other countries will prohibit the Civil Aeronuatics Board from fixing or changing the rates of foreign carriers serving the United States, and the Board's complicated rate-fixing decision processes even will prevent any timely effort to fix U.S. carrier rates.

And the third reason is that unilateral government price fixing will stifle, if not destroy, the essential rate negotiating process. The successful development of acceptable and economically feasible rate levels requires that individual airlines have some flexibility in their positions (the antithesis of rate fixing by governments) in order that a compromise can be struck. In short, the airlines must be free to negotiate.

You will note that I have referred to airline negotiations, and not negotiations between governments. To be sure, in extreme circumstances, it may realistically be the governments negotiating. But, in the main, it is the airlines, as it should be. First, the expertise required for ratemaking lies with airline managements. It will always lie there under our free enterprise system, because it is recognized to be an essential exercise of management prerogative. And, practically speaking, to have these negotiations conducted by governments would be impossibly time consuming. Even more importantly, the U.S. Government would be placed in a position where it might have to make important political or economic concessions to achieve rate objectives. The conclusion was reached long ago that the basic machinery for international ratemaking should be a conference of carriers which works out the detailed rate schedules for submission by each member carrier to its respective government for approval. I refer, of course, to the International Air Transport Association.

This is not to say that the various governments concerned, including the United States, do not play a significant role even before the rates are settled upon by the conference. To the contrary, the United States through the Civil Aeronautics Board has always actively influenced IATA rate determinations. The Board makes its views known to American carriers in consultation prior to IATA meetings. After that, if the Board finds the agreement eventually reached in IATA inconsistent with the public interest, the Board, under section 412 of the Federal Aviation Act, disapproves the agreement-as it did last year.

It is important to keep in mind that rates must be negotiated by an international conference of carriers. There is simply no other way to handle the highly complex problem of ratemaking. We would hope that the committee in considering legislation will recognize that this is the case, and will make sure that no action is taken which will impair the carriers' ability to negotiate. Specifically, if our Government is given the power unilaterally to fix rates and if that power is exercised, it could easily lead to widespread adoption of the same practice on the part of other governments. This would make conference ratemaking impossible. Each carrier would come to the conference with its rates frozen by governmental order, and there would be little point in having a conference meeting. As I have indicated, the essence of conference ratemaking is the ability of the participants to provide some accommodation for the problems, the objectives, and the desires of their colleagues in other countries.

Compromise is as much an essential part of an IATA conference as it is a part of the operation of Congress. If each Member of Congress was forced to take an absolutely inflexible position, the work of the greatest legislative body on earth would come to a shuddering halt. This is the reason we stress particularly that the committe not follow the Senate's lead by carrying the United States further in the direction of governmental rate fixing in the international field.

THE INTERNATIONAL RATE PROBLEM

The need for consideration of international air transport rate legislation has been characterized by some as a need to solve a great international rate problem-the problem of unreasonably high international airline fares. While we find that characterization to be misleading, we do agree that rate problems have existed in the past, and that still others will arise in the future, and that the Board should exercise some form of rate control in these situations.

In 1962, the U.S.-flag airlines were confronted with one kind of an international rate problem-the increasing development of uneconomic and destructive ratecutting practices by certain foreign carriers. As indicated by the legislative history of the Civil Aeronautics Act of 1938, the Congress has long appreciated the fact that destructive rate practices create chaos and impair airline operational performance.

The Civil Aeronautics Board felt then that it lacked specific legislative authority to prevent such practices. We felt that American carriers should be in a position to charge established and approved rates without being undercut. The Board felt then that the only solution was rate-fixing legislation despite the fact such legislation could not be applied against most foreign carriers. We felt then, as we still feel, that the Board already had sufficient authority to act, but, to dispel any doubts that the Board could cope with this problem, we recommended the enactment of rate suspension legislation. Both legislative proposals were considered by this committee in 1962 but no action was taken. A different kind of international rate problem developed in early 1963 when a disagreement arose between the U.S. Government and other governments as to action governments might take to prevent disputed rates from taking effect. The dispute came about as a result of an international carrier agreement on the level of transatlantic rates which were to take effect in the spring of 1963. Although the U.S.-flag carriers were advocating a level of fares lower than a majority of foreign carriers were then willing to accept, the absence of carrier agreement in this respect prevented the most desirable level of fares from being introduced.

The low-fare philosophy of the U.S.-flag carriers has, however, subsequently prevailed. As a result of considerable international effort and cooperation, of compromise and negotiation, a substantial reduction in North Atlantic fare levels, among others, became effective April 1, 1964. This development was, in part. encouraged by the strong position taken by the Civil Aeronautics Board and by the support given by the Congress and the administration to the general proposition that a reduction in the level of transatlantic rates was in order. But it is significant to note that this development took place without he Board achieving any new or additional rate control authority.

And yet, during the height of the rate dispute last year, the Civil Aeronautics Board vigorously urged the enactment of its long-standing rate-fixing legislative proposal on the grounds that such authority would provide the only solution. But there was, and still is, a much more effective solution-airline negotiations, and through such negotiations the rate levels urged by this Government became a reality-somewhat agonizingly perhaps, but a reality nevertheless. Other governments may have aroused us, and even won temporary victories with threats of confiscating our planes, but those are substantially our rates which have been adopted the rates sought by our carriers and championed by our allegedly powerless Government.

The Civil Aeronautics Board, however, still advocates the enactment of ratefixing legislation to solve both the problem of unreasonably high rates, and the problem of destructive rate cutting. The Board takes this position even though it has been demonstrated that airline negotiations have achieved dramatic rate reductions without the Board having any rate-fixing authority, and despite the recognition that such authority cannot be utilized to prevent destructive ratecutting practices. As the Senate found in its consideration of S. 1540, and as reported on page 14 of Senate Report 473 which accompanied S. 1540:

"The bill (rate-suspension bill proposed by the airline industry) contained some features more desirable and advantageous than the bill reported, for example, of the question of destructive rate practices."

Frankly, we still consider the best solution to any international rate problem is the maximum use, by the Board, of existing powers under the Federal Aviation Act, together with the enactment, if such action is necessary, of legislation such as H.R. 1716 authorizing the suspension of any rate which is adverse to the public interest. This would prevent destructive rate-cutting practices, would prevent

the establishment of unreasonably high rates, and would preserve, for the reasons I shall now outline, the advantages of the most favorable of the two alternative rate clauses under which the United States is obligated by intergovernmental agreements.

THE BERMUDA AGREEMENT AND ITS TWO RATE CLAUSES

It is important to take note here of the two alternative rate clauses of the Bermuda-type bilateral agreements we have with most other nations. Despite the fact this always adds a certain amount of confusion to the international rate-making question, some basic understanding of the matter is necessary because the impact of these alternative rate clauses becomes significant in the consideration of rate legislation.

The basic problem is that one clause is more advantageous to the United States than the other, and those advantages will be maintained under the provisions of one of the pending bills, but will be lost under the provisions of the other two bills. As the Senate found in its review of S. 1540, and as reported on page 6 of Senate Report 473:

"The effect of subparagraph (e) (one of the alternative rate clauses which would be activated with enactment of S. 1540) is to remove the right of the aeronautic authority of either country to prevent the rate of a foreign carrier from going into effect. Thus, the committee was faced with the paradox that the very act of granting the Board control over foreign air transportation rates of both United States and foreign carriers deprived the Board of direct control over the rates of foreign carriers."

[Emphasis supplied.]

I would respectfully suggest that it is more than just a paradox-it is fatal to the stated purpose of S. 1540 (in the words of the Senate report) to "* * * give to the Board the same degree of control over rates and practices of foreign air carriers operating into U.S. territory as foreign countries now have." The paradox is the finding contained in the Senate report that "the bill (S. 1540) reported by the committee provides remedies where they are most needed—in the area of excessive charges imposed upon the U.S. public by foreign carriers and their governments." The actual effect of S. 1540 is completely the opposite, as the Senate report itself subsequently admitted.

When the Bermuda agreement was executed, the Civil Aeronautics Board had no direct authority over international rates. This concerned the British. They were fearful of the lower rate potential of American-flag airlines. The two Governments therefore agreed to two alternative rate clauses in the agreement (texts in attachment A): one, paragraph (e), would apply in the event the Civil Aeronautics Board received rate-fixing authority; and the other, paragraph (f), would apply if the CAB did not receive such authority. The chief distinction between the two clauses is whether or not, and under what conditions, a disputed rate may go into effect.

If the Civil Aeronautics Board receives the rate-fixing authority provided for in H.R. 6400 or S. 1540, paragraph (e) would apply. This clause provides that where one party objects to a new rate as being too high or too low, or for any other reason, the disputed rate could go into effect following consultations and pending a third party advisory report. This rate clause provides for no further courses of action in the event the dispute remains unresolved beyond the commitment of the parties to use their best efforts to put into effect the opinion expressed in a third party advisory report. In other words, the disputed rate could remain in effect indefinitely and, pending settlement of the dispute, no matter how long that may take, American carriers could operate at one rate level and foreign carriers at another without either Government being able to take action.

Thus, while enactment of H.R. 6400 or S. 1540 would permit the Civil Aeronautics Board to fix the rates of American international carriers, the resulting activation of alternative rate clause (e) would prohibit any control over foreign carrier rates, and this is the power which is stated to be the underlying purpose of the legislation in the first place, in order to protect the large numbers of American citizens who use the services of foreign carriers.

On the other hand, so long as the Civil Aeronautics Board does not have ratefixing authority, paragraph (f) applies. This clause provides that following consultations the party objecting to a new rate “* * * may take such steps as it may consider necessary to prevent the inauguration or continuation of the service in question at the rate complained of." Under this clause, such action can be taken without regard to any further efforts by the two Governments to

resolve the issue. Such action could include rate suspension or the conditioning of operating permits but, in either case, this clause of the agreement permits the taking of necessary action to prevent the disputed rate from going into effect. The Board and the Senate report argue that this clause permits foreign countries to prohibit the introduction of lower, more reasonable rates by American carriers. It is true that alternative rate clause (f) would enable a foreign country to prevent the introduction of a rate which it, for any reason, objects to. But alternative rate clause (f) is a two-edged sword. The U.S. Government could invoke it similarly against foreign carriers, and the exercise of such reciprocal power could, at least, encourage a settlement, by negotiation, more in keeping with the interests of both parties.

THE LOOPHOLE IN THE CAB'S CASE

Simply stated, with its forced abandonment of the objective to directly control the rates of all carriers operating to and from the United States, the Board's case now rests solely on the questionable theory that the fixing of U.S. carrier rates will eventually influence foreign carrier rates. This theory wholly ignores the realities of international political pressures and completely overlooks the persuasive and strong bargaining powers of foreign governments. It also ignores the complexities of the CAB ratemaking decision process.

Any legislation enacted should serve the public interest. But the public interest involves many factors, including the traveling and shipping public, the economic health of the industry, and the postal service and the national defense. Certainly, we can all agree that the objective is adequate control of international rates for the protection of the traveler and shipper. We believe, however, that empowering the Civil Aeronautics Board to fix international rates would not, of itself, accord the public any greater protection against unfair, unreasonable, or otherwise unjust rates and charges than would be the case if the Civil Aeronautics Board fully utilized its existing powers, or had the power to suspend rates contemplated by H.R. 1716.

A substantial segment of the American traveling and shipping public utilizes foreign-flag air carries, as was pointed out in Senate Report 473. Thus, the rates charged by foreign-flag airlines affect a considerable number of American citizens. If the Civil Aeronautics Board were given the authority to fix international rates, most of our bilateral air agreements provide that the Board could not prevent the establishment by a foreign air carrier of a new rate which was deemed to be adverse to the public interest, nor could the Board change any existing foreign carrier rate no matter how inconsistent such existing rate might be with the public interest. In other words, if either H.R. 6400 or S. 1540 is enacted, the Board could not protect those Americans using foreign-flag air carriers against being charged a rate which is unreasonable or unfair.

In addition, both H.R. 6400 and S. 1540 fail to recognize that international ratemaking must take into account literally thousands of individual tariffs and is clearly a multilateral endeavor. The recognized alternative systems for international ratemaking are: multilateral agreement among governments, or government-approved multilateral agreement among carriers. Our Government wisely chose the latter course some 18 years ago and has maintained this policy ever since. The decision to use an international conference of carriers to develop rates subject to each government's approval was reaffirmed by President Kennedy in his statement last April on U.S. international air transport policy. The policy statement indicated that "this multilateral mechanism, though it has some drawbacks, seems to be the most practical one we can achieve, and it should be maintained."

If the Civil Aeronautics Board's legislative proposal is enacted and implemented, it would conflict with, if not destroy, the conference system of ratemaking the system which the executive branch has concluded "should be maintained." Specifically, if the Civil Aeronautics Board were to fix and prescribe the rates to be charged between the United States and virtually all major foreign points, it would be academic to convene a rate conference to develop rates already fixed and prescribed by the United States and/or any other grovernment.

The Civil Aeronautics Board would also have to take into account every gov. ernment's view since no one government can unilaterally determine a rate if another government uses its full sovereign power to prevent the establishment of a particular rate. If our Government sought to obtain agreement from other governments on rates, the United States might well be placed in the position of