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In our view, therefore, an attempt by the Board in these circumances to regulate the level of the rates of a foreign air carrier by inditioning its license would represent an attempt indirectly to exerse powers which the Congress intended to withhold from the Board. Finally, even if the Board agreed with ATA that it had power to cercise some form of rate control under section 402, this power plus 10 ATA bill would still be unsatisfactory. Under the prevailing sysm of bilateral agreements, paragraph (f) would remain in effect and vreign countries would continue to be able to suspend the rates of our

rriers.

SUMMARY

In view of the length of my testimony and the complexity of this roblem, I would like to close with a brief summary: 1. Statutory authority for the regulation of rates in foreign air ansportation is necessary because of the need for more effective gov'nmental influence on rates to protect the needs of the traveler and le shipper. 2. The Board is virtually powerless at the present time to influence le level of rates because its indirect power of approval of rate agreeents of IATA carriers is ineffective. 3. Legislation cannot provide the perfect solution of all possible tuations, since no one government can expect to impose its will on her governments. 4. It is the opinion of the Board, and it has been supported in this pinion by the Senate in passage of S. 1540, that the prime need for ite control will continue to be protection of the American public com high rates by IATA carriers rather than protection of U.S.ng carriers from the low rates of foreign competitors. 5. Enactment of H.R. 6400, and the consequent activation of pararaph (e) of the Bermuda-type bilateral, would provide the greatest surance of obtaining fair and reasonable rates for the public and the rriers. Foreign governments would be unable to prevent the rates our carriers from going into effect, and economic forces would preade the foreign carriers from operating at higher rates. 6. The Board strongly urges, therefore, that favorable consideration given to H.R. 6100. Thank you, Mr. Chairman, The CHAIRMAX. Thank you, Mr. Boyd. This is obviously a rather complicated problem and it is somewhat icult to understand in its full import. Ve will, however, try to get a picture of the problem as we go along.

think that we will need further discussion of these proposals and at is offered and further explanation of what we are able to do, in trast to what foreign governments are able to do, and further exnation of LATA and perhaps more discussion on the so-called Ber. la-type agreements which have come into the picture as a result of agreements reached by the International Air Transport Associain 1917 or 1919. r. Boyd. The Bermuda agreement, I believe was signed in 1916, Chairman. he CHAIRMAX. 1916. r. Boyd. Yes, sir.

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The CHAIRMAN. This Bermuda-type agreement is the predomina program now insofar as international rates are concerned. I belie that is true, isn't it?

Mr. Boyd. Well, the bulk of the bilaterals the United States 19 are of the Bermuda type, and the bulk of the rates under which to je carriers operate are set by the International Air Transport Asaf tion which was given the blessings of the United States and the Unie Kingdom at the time the Bermuda agreement was signed. fo

The CHAIRMAN. But these rates which are finally arrived at in the to various IATA conferences from time to time are primarily insofara ca we are concerned, subject to the so-called Bermuda-type agreement!

Mr. Boyd. Well, if I understand your question correctly, Mr. Chair: man,

the rates as such are not subject to the agreement. The rates are to something separate. What is subject to the agreement is what has pens, after IATA has agreed on rates, if a government disapprovei That is where the Bermuda agreement comes in.

The CHAIRMAN. And then when that occurs—well now, there is out section of the Bermuda-type agreement, if they are approved, that comes into play, and if they are disapproved another section come 1 into play, isn't that right?

nol Mr. Boyd, No, sir. The CHAIRMAN. What is the difference between (e) and (f)? Mr. Boyd. The difference between (f) and (e) is what power

M Government has where the Government disapproves. Under The CHAIRMAN. If you get confused, you can imagine how confused

1 we are going to get.

Mr. Boyd. I can explain the difference, I keep forgetting which is J which. We are under (f) now, and this paragraph (f) - wohl like to read this in full into the record, if I may, Mr. Chairman

, he cause this paragraph (f) of the Bermuda-type agreement is based on the assumption that the Civil Aeronautics Board of the Unita) States will obtain from the Congress rate legislation,

The CHAIRMAN. Before you do that, let's get a little better picture the of the Bermuda agreements.

I am just assuming I don't know anything about it and it is a pretty good assumption, I would think, even though I have had the pleasure of attending one of these conferences in the past, and I think it might be helpful to the members to give a little, first, give a little background of this thing so we will know what we are talking about.

th Mr. BOYD. All right, sir. What we are talking about is an executive agreement entitled "Air

ha Transport Agreement. The Berinuda agreement was an agreement reached on the island of Bermuda by a delegation from the United States and a delegation of the United Kingdom, signed in the early boy part of 1946, after extensive negotiations throughout 1945, in an

effort to establish the future civil air transportation relations bet ween the two countries and hopefully to provide a model for other countries to follow,

The Bermuda agreement was essentially a compromise between two completely different points of view.

The CHAIRMAN. Between these two countries.
Mr. Boyd. Between these two countries.
The CHAIRMAN. Only?

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Mr. Boyd. Well, there were other countries on both sides of the

gument; but this is just bilateral between these two countries. I'hese differences became apparent at the Chicago conference in 44 when all of the nations of the free world were invited to a conrence by the United States to settle this matter of aviation relations ter the war. At that time the United States was a very strong proponent of eedom of the skies. In other words, that civil aircraft should be able

fly wherever they wanted to go on such frequencies and with such pacities as they chose, and with no rate regulation. The United Kingdom was at the complete opposite end of the scale. The United Kingdom wanted to have complete control over rates,

have complete control over capacity, to have complete control over -utings, and to have complete control over frequency of operation. Well, as you will recall, this was the irresistable force and the imovable object, so nothing came out of the Chicago convention, to ttle any of this, and it became apparent that there had to be a settleent. We just could not have a state of affairs after World War II where obody knew what the situation was. So the United States and United Kingdom got together with major legations at Bermuda, and they argued for, I think 2 or 3 months, r. Chairman, but I am not sure of myself. I know it was a long time, id they came out with the agreementThe CHAIRMAN. Major delegations. What are you talking aboutlegations from each of the two countries? Mr. Boyd. Yes, sir. The CHAIRMAN. Or delegations from each of the other countries? Mr. Boyd. Just from these two countries. The ChairMAN. All right. Mr. Boyd. And they came up with the agreement which has since en called the Bermuda agreement, which devised or developed rough compromise a series of principles which are called the ermuda principles Now, these principles as best I can enumerate them from memory, e, first of all, you have a route annex which is not a principle but this just deciding who gets what route over which the carriers can fly. Then there is the principle or policy of multiple designation which > United States insisted on, that is to say, that either country may signate one or more of its own carriers to operate on the routes it

been granted. This was because of the U.S. belief in the forces of competition. The second principle was on capacity, that the capacity to be offered the carriers of each country should be reasonably related to the fic to be carried between those two countries. Iowever, the carrier managements should have the freedom to ide how much capacity should be offered. nother words, in the first instance the carrier management makes a sion that “we want to put 10 flights a week on," and neither we the British can say, “No; you should only put 5 flights a week on.” hey have the right under the Bermuda agreement to do this. is to be reasonably related to the traffic moving between the two

atries.

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Now, that gets into definitions. Traffic insofar as the United States and the U.S. carrier is concerned is called third freedom traffic when that traffic moves from New York to London, that is third freedom traffic for a U.S. carrier.

When traffic moves on a U.S. carrier from London to New York that is fourth freedom traffic and this is the traffic on which the capacity is supposed to be based.

We also have another category or definition which is called fifth freedom traffic, and that is the traffic which moves from a third country to a country in the bilateral agreement.

For example, traffic which Pan American or TWA would haul from Rome to London or vice versa would be fifth freedom traffic, and the capacity is not supposed to be geared to carry that fifth freedom trafic under the concept of the agreement.

That fifth freedom traffic is supposed to be generally what is called fill up traffic.

I lave enlarged on this capacity quite a bit, Mr. Chairman, becaux then we come to the next policy

The CHAIRMAN. What is first and second freedom traffic!

Mr. Boyd. First and second, well these are not as far as passengers are concerned involved-passengers are not involved in first or second freedom traffic.

I have forgotten what first freedom is. I think second freedom is the right to operate a civil aircraft through a foreign country and to make stops for nontraffic purposes. I guess maybe the first is to overfly a country with a civil aircraft on peaceful mission. Two, is to stop in transit for fuel or something like that.

Now, getting back to capacity, a carrier under the agreement puts in a certain amount of capacity, a certain number of frequencies

. After a reasonable period of time the other country may say, “We think you have got too much capacity. We want to have a capacity consultation.”

This brings up, one of our cherished policies from the Bermuda agreement which is that of ex post facto review, and we say "OK, we can have a review of capacity after the service has been put in."

But the service must go in in the first instance, so ex post facto review is another one of the policies.

What else have we got? I have to call on Mr. Watson here. One of the other Bermuda phrases is fair and equal opportunity to compete. That is, the carriers of both countries under the agreement must have fair and equal opportunity to compete.

We construe this to mean there are no holds barred insofar as competing is concerned, that this does not mean reciprocity in the sense that reciprocity is defined by some to mean, “You run a flight and we run a flight."

This is not involved. It is that you can run as many flights as you want and we run as many as we want subject to the right to have capacity consultations.

In the capacity consultations the country, either country, may raise the question of undue effect, which is another one of the Bermuda principles.

That is to say that even though we have this more or less free competition, the agreement provides that the United States for example

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sofreut under the Bermuda agreement, cannot provide so much competition nind frete: that it has an undue effect on the operation of BOAC. This would

mean if there is sufficient traffic for everybody to make a living, the U.S. carriers cannot run BOAC out of business just by adding fre

quency and capacity, assuming that BOAC has got a fairly reasonodct able operation, fairly efficient.

If they are operating a dog, that is something else again, but assum

ing that the operations are comparable in terms of equipment, effie ciency, and so forth, then the United Kingdom under that situation

would be able to say, “Hold the phone. You cannot do this to us under the terms of the agreement.'

And we couldn't.

But they would have to show it was the action of our carrier in this instance that was creating the harm, the harmful effect on the British carrier.

Now, these are the major Bermuda principles, Mr. Chairman. The CHAIRMAN. In those then come these two provisions, the ones which

you were about to read. Mr. Boyd. These are in the rate article of the Bermuda agreement, and paragraph (f) of the rate article in the Bermuda agreement provides as follows:

Prior to the time when such power may be conferred upon the aeronautical authorities of the United States-parenthetically this power is the rate power by legislation to which I alluded earlier as being assumedif one of the contracting parties is dissatisfied with any rate proposed by the airline or airlines of either contracting party for services from the territory of one contracting party to a point or points in the territory of the other contracting party, it shall so notify the other prior to the expiry of the first 15 of the 30-day period referred to in paragraph (b) above, and the contracting parties shall endeavor to reach agreement on the appropriate rate.

Now, if I may interject here this provision means that if one of the countries disagrees with a proposed rate which has been filed 30 days before the time the rate becomes effective it must contact the country whose carrier published the rate within 15 days and say “Let's talk about this. We don't like this rate and let's see if we can reach an agreement."

That is this paragraph.

In the event that such agreement is reached each contracting party will use its best efforts to cause such agreed rate to be put into effect by its airline or airlines. It is recognized that if no such agreement can be reached prior to the expiry of 30 days the contracting party raising the objection to the 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.

That is paragraph (f) and that is the paragraph under which we are and have been living, Mr. Chairman, and that is why the foreign countries last spring were able to force our carriers to raise their fares over our stringent and violent objections, because they complained about our rate. We talked, they were dissatisfied, so in the words of the agreement they took such steps as they considered necessary, and

The CHAIRMAN. And that step was, “If you don't agree to the rate we suggest you don't get to land at our airport."

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